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

Welcome to the FLYHT Aerospace Solutions Fourth Quarter and Year-End 2022 Results Conference Call. [Operator Instructions] Due to the volume of questions expected on today's call, we ask that you please limit your questions to 3 to allow time for others in the queue. 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 Matt Chesler, Investor Relations. Please go ahead, Matt.

Thank you for joining our fourth quarter and full year 2022 earnings call. On the call with me today are Kent Jacobs, President and Interim CEO of FLYHT and Alana Forbes, FLYHT's Chief Financial Officer. On our website, flyht.com, we posted a press release covering the information we'll review today as well as a webcast of today's conference call. An archived version of the call will be posted on the Investor Relations section of our website as soon as it is available from the conference call provider. Before we start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we have included in our 2022 annual report. Certain of the statements made today may constitute forward-looking statements, and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEDAR filings, including our annual report, which should be filed today, which is already filed. During the course of today's call, we will also discuss certain non-GAAP financial measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the 2022 annual report. With that, I would now like to turn the call over to Kent.

Thank you, Matt. Good morning, everyone, and thank you for joining us today. My name is Kent Jacobs. And late in 2022, I was appointed to the expanded role of President and Interim CEO of FLYHT. Bill Tempany, our CEO, passed away unexpectedly on December 20th of last year. It is with both a heavy heart and an unwavering commitment to his vision and legacy that I speak to you on this regular earnings call. Bill is deeply missed by everyone at FLYHT and by me as a colleague, a mentor and a friend. When Bill returned to FLYHT as our CEO in 2020, we set the tone for our software focused vision and informed the team that successfully continues its work today. I am proud to meet that to you. But this is an ordinary time for FLYHT. 2022 was a year of exciting accomplishments and opportunities. As I consider my 20 years at FLYHT, I have never been more optimistic about our current state and future opportunities. With the strong execution of our strategy, we delivered record revenue of nearly $24 million, representing a doubling of our 2021 revenue, while also generating positive EBITDA in the second half of 2022 and on a full year basis. The continued recovery of the airline industry, coupled with FLYHT approach have placed us in a strong position to benefit from the ongoing robust demand for our legacy products and surging interest for our new and innovative solutions. FLYHT vision to become a global for in providing innovative aviation and environmental solutions for our customers is coming to fruition. We are on the verge of obtaining the initial supplemental type certificates of our new innovation debater's edge. The 5G enabled [indiscernible] utilized cellular, Iridium Certus and Wi-Fi capabilities to provide powerful fluctuation awareness by delivering data in real time. If lightweight form and versatility bridge the end-to-end digital divide to make narrowbody connectivity a reality. Our FTC rollout strategy is the first [indiscernible] Airbus A320 and Boeing 737 around the world. By focusing on these narrow-body fleets, we're targeting roughly 70% of the commercial aircraft worldwide. We envision an addressable market of approximately 25,000 aircraft with the AFIRS Edge to become the dominant avionics of choice for wireless quick access recorder and aircraft interface device function, thereby enabling operations in finite airspace and in a progressively carbon-free environment. Building upon the AFIRS Edge infrastructure, weather and environmental services are becoming an increasingly important component of our staff operating model. As presented in FLYHT's recent testimony to the subcommittee on environment of the United States House of Representatives to make on science, based on technology. FLYHT WBFF2-water-based offenses a bolt-on aircraft with an AFIRS Edge is a critical component of weather, aircraft-based observations for metrologists and airlines. Weather is constantly changing, making real-time ABO a prime source of recurring revenue in support of weather forecasting model and aviation operations. As part of the global focus on environmental impact of Aviation, researchers have projected the cloud form from Contrail that Contrail [indiscernible] Cloud are responsible for approximately half of aviation climate effect, making Contrail detection and avoidance programs a priority. The FLYHT WVSS-II sensor provides accurate water vapor detection, thus providing valuable data and services regarding aircraft in due Cloud [indiscernible] Contrail avoidance. Initially, these services are expected to support the research community and government with airline and military operational applications to follow. Validation of FLYHT's environmental strategy was removed last year as the United Kingdom Metrological office announced their intent to purchase FLYHT WVSS-II Water Vapor Vendor System. While the acreage edge is our new flagship offering, demand for the complementary acreage 228 satcom demand at an all-time high. In 2022, FLYHT landed and fulfilled our single largest licensing order totaling more than $7 million. The success of Airbus A220, A320 and A330 aircraft means we fully expect additional orders to continue from our licensing agreement with Altera. Additionally, with a proven track record, the AFT has allowed us to maintain our base of loyal customers. Over the years, we have developed a library of more than 100 STCs, which we continue to expand in concert with new airliner development, including the Airbus Neo and Boeing MAX fleet. In addition to the ACSA and the AFIRS Edge, both supporting all our products and services, we have also developed stand-alone staff offerings as part of our recurring revenue strategy. The recent introduction of ClearPort our aircraft turn management tool represents FLYHT's latest stand-alone at product as we expand into artificial intelligence and machine learning models and further develop either our data warehouse capability, we look forward to reaching our full fast revenue potential. As in any year, 2022 is all about the people who make it happen. As we move forward from development to market introduction, we brought on board 4 new members with a combined 75-plus years of skill and experience in the aviation industry. These team members bring with them a terming track record of success as an elite professional network, thereby enhancing FLYHT's reputation and improving our time to market. Our innovative technologies and vision were paramount in attracting such talent to our organization. Their impact has been immediately felt and will be reflected in future results. I'd also like to highlight key changes to our Board of Directors, which we announced this morning. I am privileged to announce that Captain Mary McMillan, a current independent directors on the Board has been named as Non-Executive Chairman of the Board. Captain McMillan replaced Nina Johnson, who is feeding the role of Chair due to external commitments. Based on Virginia Mary a true pioneer of women in aviation with decades of leadership experience at major companies such as Inmarsat. For knowledge of airlines, aircraft products and aviation safety makes it a key part of the FLYHT family and helping CRS to solutions that are attractive to airlines and related service providers. She is currently President of Casual Aviation, a consulting company dedicated to the development and implementation of aviation safety and environmental strategy. Captain Mary --[indiscernible] began 1982 and has over 12,000 hours light time under the belt. I also want to extend my heartfelt gratitude to longtime Board member, Jack Wolcott, who has stepped down after 15 years of service. 2 periods of rapid growth and challenges such as COVID-19, is deep understanding of business aviation and steady guidance to Bill Tempany and more recently to me, have helped to build FLYHT into the leader that it is today. Thank you, Jack. As we accelerate out of COVID-19 and honor Bill's legacy, we remain steadfast in our execution of FLYHT's vision. I would like to thank our dedicated staff for their hard work in preservers, our loyal shareholders for your continued support and our customers for allowing us to continue to provide service in value. I'd now like to turn the call over to Alana for a review of our financial performance.

Thank you, Kent. I will begin by reviewing fourth quarter and full year 2022 results, and then will discuss key operating metrics and highlight the tremendous operating leverage our company enjoyed this past quarter as revenues grew much faster year-over-year than expenses. Looking at Q4, we achieved record high revenue of $7.2 million, representing a 186% increase over the $2.5 million reported in Q4 of 2021. All of our operating segments contributed to this growth. SaaS revenues increased 50% year-over-year to $2.3 million, which was in part due to the addition of cross consensus SaaS revenue. Hardware revenues doubled to $1.2 million from $591,000 reported in Q4 of 2021. We shipped 16 kits in Q4 of 2022 compared to 9 in Q4 of 2021. Licensing revenue increased 751% to $3 million compared to just $356,000 reported for Q4 2021 due to increases in the number of modems and associated license fees ordered for delivery in comparative periods as we delivered on the largest licensing order we've received to date. That order was valued at over $7 million and was received in Q2 of 2022. As of December 2022, we have completed all shipments for this quarter. Technical Services in Q4 increased over 800% to $740,000 as a result of the addition of cross-consent services to this revenue category. In terms of profitability, we reported another strong quarter of margins, with Q4 gross margin of 67%, increasing 1,700 basis points year-over-year compared to 49.5% reported for the same period in 2021. The increase in licensing, our highest margin revenue line drove the margin expansion again this quarter. Operating expenses increased 24% to $3.9 million as 2021's fourth quarter did not include cross -consent. With revenue scaling faster than OpEx, we, therefore, reported an operating profit of $900,000 in 2022 fourth quarter compared to a loss of $1.9 million reported in Q4 2021. EBITDA was $1.2 million compared to a loss of $1.7 million reported in the same period of 2021, which was an increase of $2.9 million. Likewise, net income was positive in Q4 of 2022 at $700,000 compared to a loss in the prior year or in the prior year's fourth quarter of $2.4 million, which was an improvement of $3.2 million. I would now like to turn our attention to full year 2022 results. For the full year, we achieved record revenue with a 111% increase year-over-year to $23.9 million compared to $11.3 million reported for 2021. Growth again came from all of our operating segments. SaaS revenue increased 36% year-over-year to just over $8 million compared to $6 million reported in 2021. The cross-consent acquisition closed at the end of quarter 1 in 2022, so its SaaS revenue has contributed to our consolidated results for a little more than 3 quarters of 2022, which has provided a boost to our SaaS revenue. Hardware revenue increased 39% year-over-year to $4.7 million as compared to $3.4 million reported in 2021. This was a result of a total of 69 installation kits being shipped in 2022 versus 54 in 2021. Licensing revenue jumped by 487% for a total of just over $9.1 million compared to $1.6 million in 2021 due to the previously mentioned delivery of our record licensing orders. Technical Services revenue increased almost 400% year-over-year to $1.9 million from $380,000 as a result of the addition of cross-consent services to this revenue category. In terms of profitability, full year 2022 gross margin was 63.7%, an increase of over 650 basis points compared to 57.2% reported for 2021. Operating expenses increased by 33% to $15.6 million in 2022 compared to $11.7 million reported for 2021. The largest contributors to this increase were the addition of cross-consent personnel and associated expenses, multiple 2022 sales hires, as Kent mentioned, to support our growth initiatives and increased associated costs to support hardware product development and certification processes and development of new SaaS solutions to support our customers in their post-pandemic recovery efforts. 2022 EBITDA was a positive $250,000 compared to a loss of $4.5 million in 2021, which was an improvement of $4.8 million. 2022 net loss was $1 million compared to a loss of $5.9 million in the prior year, also an improvement of $4.8 million. Looking at the balance sheet. We generated $900,000 in cash from operations in Q4, ending the year with $2.6 million in cash and equivalents compared to $1.8 million reported in Q3 2022. Our receivables balance at year-end showed some impact from our Q4 delivery, which should come in, in the early part of 2023 and which has contributed to healthy cash generation in our first quarter. You will also notice increases on the balance sheet in the goodwill, intangible assets and contract liabilities categories, all of which relate to the cross-consent acquisition in March of 2022. And finally, it is worth noting that revenues from all of our major geographic regions increased year-over-year with the exception of China, the Middle East and Africa. As the recovery of the airline industry in those regions has lagged the Western world, our mix of revenue shifted to 51% from the U.S. and Mexico in early 2022 compared to 39% in the same period last year. The large licensing order delivered in the second half of 2022 accounted for most of the year-over-year increase in U.S. revenue. We expect over the coming years, Edge platform sales will drive increased hardware sales and with the recovery ongoing in China, the Middle East and Africa that SaaS revenue will likewise show continued growth. A second phase of fast growth should curve as the installed base of Edge platform increases and customers recognize the tremendous value our software solutions provide to their operations. Looking ahead, we expect continued growth in our business, driven by the ongoing recovery of the global aviation industry as well as the execution of our strategy. Last week, the International Air Transport Association, IATA, announced continued strong growth in air travel. February 2023 Revenue Passenger Kilometers or RPKs, rose 56% compared to February 2022 and now stands at 85% of pre-pandemic levels measured as opposed to February 2019. Domestic travel rose 25% year-over-year, representing 97% of pre-sediment level and international traffic rose 90% year-over-year, representing 78% of pre-sediment levels. According to IATA, despite uncertain economic signals, demand for air travel continues to be strong across the globe and in particular in the Asia Pacific region. At FLYHT, our backlog, which includes contracted business of $25 million at the end of Q4 2022 gives us good visibility on revenue over the coming quarters. Additionally, our pipeline, which includes uncontracted opportunities for newer offerings such as the Edge FLYHT [indiscernible] more than $70 million and is the most robust we've ever experienced. As we obtain STCs on our edge platform, we expect our type of opportunity will continue to grow over the course of time. And with all of that said, we'll answer the questions that have come in via e-mail to investors@flyht.com.

Now that the modem order is delivered, should we expect to see licensing revenues go back to the level they were running at before?

We expect continued licensing revenues. Our agreement and our cooperation with [indiscernible], we don't expect it to go away. We supply that product to support the Airbus family of aircraft is more successful line of aircraft on the planet. We expect it to continue, and we expect it to grow.

Might there be additional modem orders that would result in this list in licensing revenues again.

Kind of the same question, yes, we are expecting continued growth there.

In terms of the FTC, can you talk about the sequences of approval? Is Canada first and which airframes would that cover? Will it go something like Airbus model 1, 2, 3 and then the same for Boeing models? Or is it more of a blanket.

And different companies to build Avionics and get FCC before they could put those products on the trade, approach the challenge of getting FMC in different ways. The FLYHT is taking the approach for the edge of completing the A320 and the 737 at the highest -- at the most modern level of the airline that began. So for the 737, we're completing it on the MAX model as quickly as possible. That will cover us on the lower models, such as the 737 NGs and the 737 classics. We can then take those STCs and familiarize them into other jurisdictions such as the [indiscernible] into Europe. So we've got a very structured strategy for dealing with the SEC process. It's a challenge, we have the same challenge with the AFS 220. We have challenge with 228 and now with the Edge. It's just a matter of getting to the taper, getting the government agencies to support us and get those initial information.

What is the process to get the Canada STCs approved in the U.S. and Europe? And how long does that take?

It's a process [ calculization ]. So there are bilateral agreements between groups like agencies like Transport Canada and the FAA. Transport Canada and the other and once we have a complete SCC in a jurisdiction like Canada, we can familiarize that package, familiarize that FPC into those other jurisdictions. We would gather up all the documentation once the STP is completed in Canada, we gather all the documentation, all the test results, everything that went into the approval and Transport Canada will submit that on our behalf into the FAA. It then becomes an exercise between Transport Canada and the FAA, we don't play a large role in it. We support any kind of additional resume come along. But it's primarily then a government agency to government agency. We don't have any control over the time that, that takes. Right now, the FAA is running quite slow, much more than they were before COVID. In Europe, it's much better. So as we get those FCC done in Canada, we will familiarize the [indiscernible] as quickly as possible. There's a bit of an element there where we don't control the time.

New aircraft today, are they rolling off the line with the AFIRS 228 [indiscernible] product.

Well, if it's an Airbus A320 family or A330 aircraft is a very, very good chance of rolling off line with an [indiscernible] product provided to the [indiscernible] agreement. That is our only lift opportunity right now our engagement that we have, but it could be in a one line of aircraft on the planet that the one I would want the most successful aircraft. So that's the line that's rolling off of the [indiscernible].

And a follow-on, who else is offering a competitive option to situate?

Well, from a [indiscernible] on standpoint, there is competition in that space. The Collins Rockwell Avionics they have competing [indiscernible] products, not only with Iridium, but also with the satellite networks like Inmersat. But that's not new. FLYHT has been in that competing in the apps for 10 to 15 years. So nothing new there. We do very well in that space.

In terms of the Edge product, can a customer -- no, we answered that one. Do the contracts for the SaaS offerings have price escalation options for inflation over the term [indiscernible]. Those escalations clauses are in all of our contracts. Over the long term, do you expect to launch additional software and data applications that would ride on top of the Edge SAP platform that would result in additional SaaS revenue opportunity?

Yes. That is exactly the model that we are taking, not the approach that we are taking. The edge is the platform that provides the access to the data on the aircraft. We have the most efficient way to get that data off the aircraft and then we have the ability to analyze to do what we will with that information, that data, turn it into knowledge, turning into actionable intelligence. That is the vision to build brought the company 2.5 years ago. That is what we are focusing on.

Will the Edge FTCs be received in Q2?

The answer is yes. We have provisions on the A320. We're expecting provisions on the 737 MAX, very, very easy. That will allow us to then do those initial roots and turn those into activation SEC. I just want to clarify something. Sorry, I read that wrong. I thought that said in 2023 in Q2, we still expect to have the provisions in Q2 absolutely.

Has there been any presales at the edge ahead of the ceding SEC?

Not yet. Can I -- Sorry. We don't have any presales. We're in active discussions with several airlines about this right now. Look, there's a challenge and there are additional steps that the airline has to go through if they're the first airline to put the product on their aircraft and to provide the FLYHT in the round down. And that's the stage that we're at right now. The product becomes much easier to sell, much more attractive to an airline. So the moment those STCs are available. We have experience with the 220 on this with the API-2 with A28 and now with the Edge the same thing. We're just going through those initial bases with them.

Great. Has there been any sales of the partnership product with MBS? Will it work with Edge as well as [indiscernible]?

The partnership with MDS is on the data loading, airborne data loading functions. There have been no sales yet. We're in fashion with the 1 airline regarding that capability right now and that partnership that MBS and FLYHT would have. Will it work with the [indiscernible] as well as the Edge. That data loading functionality works with the Edge only at doesn't work with the [indiscernible]. So it's a delay for edge and an NB combined solution.

Can be said that FLYHT's actionable intelligence software is presently producing that?

Absolutely. There are -- when Bill made the decision and brought the vision, we were going to focus on that maximum intelligence, we tweaked and we completed some of the programs on the AFIRS-228 platform that allow us to provide axial intelligence. And we are doing that right now [indiscernible]of our customers. The new products, such as ClearPort they're rolling out now. They'll just be adding to that a opportunity.

Great. What are the expectations for AFIRS L3Harris Airbus licensing in 2023?

It's a little bit tricky to answer that. That revenue is very lumpy. Those orders come in, in big toner and then we can go up to 1 or 2 quarters where we don't have any additional sales or additional into revenue there. It is the A320 line of aircraft, and we absolutely expect more orders to be coming in. The popular airplanes, most aircraft that are coming off the line or dating the dotcom product while the successful product.

Have there been presales at the WQA version -- let me answer that one. Where does the sale of the WVSS-II sensor [indiscernible]stand?

We're in contract negotiations right now like today.

Can you provide updates for the activities with the ECP only Environment Canada and with Sweep?

So yes, we're continuing to provide efficacy with AMDAR data from our aircraft need in Canada. We expect that relationship to continue and grow as we add new aircraft and as we bring the WVSS-II online.

Those are all the questions that we received in advance. [indiscernible], I'd like to turn the call back to you now, and we'd be pleased to take questions from callers.

[Operator Instructions] The first question comes from Jaeson Schmidt from Lake Street.

I know you guys don't provide guidance, but just curious if you could comment on what you're seeing from an order pattern standpoint year-to-date here.

We see an increasing -- the pattern is increasing. It's something that we monitor and it's the recovery. The recovery of the industry is demonstrating that.

And curious if you could provide color on what your expectations are for -- from a supply chain standpoint? Are you expecting any significant friction or headwinds there?

No. That has been something that we have been constantly monitoring over throughout COVID and spend into the following year. Right now, we're very confident that we're in a very good brand for our supply chain. It's something that we are actively working continuously in the organization, making sure that we're not caught off guard.

I would also say, we did take extra time to redesign several portions of the edge to account for anticipated supply chain issue. So we've increased -- we've spent a lot of time and effort in increasing the resilience of that product in particular. And the supply chain for the other product lines are pretty [indiscernible].

And then just the last one for me, and I'll jump back into queue. Gross margin was obviously strong in Q4. I assume partly that was due to [indiscernible], but how should we think about gross margin trending here in 2023?

I think it will all depend on if we are able to receive further licensing orders through 2023. The gross margin for that product line is in the 80% range. So it really increases our gross margin when we have a significant portion of our revenue derived from licensing. SaaS revenues are increasing. The bigger they are, the more lift we get off of our fixed costs in that category. And we're seeing around 60% for that category. Hardware is a bit more challenging. We do take lower gross margins just to get the real estate on the aircraft so that we can start the SaaS pipe and start providing data services to our customers. Hardware revenues are carrying about 30% gross margins at this time.

Next question comes from Dick Ryan from Oak Ridge Financial.

Congratulations on the strong finish to 22 days. If I can, when you look at the -- and there's a lot of commentary on STCs, but I guess I just want to go back to the 228 STC on the MAX. You've got a launch customer there. With the Airbus side, you've got the relationship with L3 that pulls that through. Do you need an L3 version on Boeing to help pull that through? Or will that be more direct between just you and Boeing and the airlines?

Look, having a relationship with Boeing, similar to the one that we have with Airbus would be great. But you mentioned the 2 to 8 and the MAX. It's not -- we're not going to get that relationship with the 228 on the Boeing, please, if that's what you're asking. That opportunity for the line [indiscernible] is over on the Boeing product. The 228 MAX STC that we just received was to take provisions on a MAX aircraft and install the satcom system directly into those provisions. Not sure.

You announced a couple of Boeing openings? What's the process and where do you stand to fill some Boeing seats? Or are you going to leave it at the current configuration?