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 2023 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 email to investors@flyht.com. I would now like to turn the conference over to Matt Chesler, Investor Relations. Please go ahead.

Thank you for joining our second quarter 2023 earnings call. On the call with me today is Kent Jacobs, President and Interim CEO for 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 An archived version of the call will be posted on the Investor Relations section of FLYHT's website as soon as it is available from the conference call provider. But before we start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we've included in our quarterly 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 quarterly report, which is filed on SEDAR. During the course of this morning's call, we'll discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the quarterly report. And with that, I'd like to turn the call over to Kent. Take it away, Ken.

Thank you, Matt. Good morning, everyone, and thank you for joining us. I'm looking forward to the opportunity to review our Q2 results, and I appreciate your time and interest in FLYHT. Half way through 2023, FLYHT's future is looking brighter than ever. After persevering to the pandemic and the loss in December of our former CEO, Bill Tempany, our team remains deeply committed and focused as we -- as the demand for our solution continues to grow. Our entire organization is energized as we are on the cusp of delivering on 2 of our most promising incremental initiatives, the AFIRS Edge and our weather opportunity. I will begin by discussing some macro factors in the global aviation industry, then I'll discuss many of the positive developments that occurred in our second quarter. Global air passenger demand recorded solid growth in May, with industry-wide revenue passenger kilometers increasing more than 39% year-on-year and reaching 96% of pre-pandemic level. For the second month in a row, domestic RPKs outperformed their pre-COVID levels rising 5.3% above 2019 values. Internationally, revenue passenger kilometers continued to increase in May, growing by nearly 41% year-on-year and restoring 91% of their 2019 level. All regions experienced a positive trend in international traffic demand, while Asia Pacific continued to stand out with more than 156% annual growth. Carriers in the Middle East and North America fully recovered their international passenger traffic with RPKs of 17% and 1.8% above 2019 levels, respectively. Moving on to FLYHT. Our flagship product, the AFIRS 228 continues its proven track record with more than 4,000 aircraft utilizing the Iridium Satcom solution. And this quarter, we reached a major milestone with over 5 million cumulative flight hours being reached. This speaks volumes to the longevity of our solution at our -- this speaks volumes to longevity our solutions have with over 20 years supporting global aviation industry. Importantly, our long-term AFIRS 228 customers continue to renew with us for multiyear commitments and are increasingly doing so with expanded fleets. Our licensing business remains strong as we received an additional large order from this customer over the past 3 years with an aggregate value of over $11 million. The commercialization of FLYHT's 5G enabled wireless quick access recorder, the AFIRS Edge, is making significant progress as we recently announced our first contract with the Edge to be installed on a fleet of Boeing 737 MAX aircraft. Interest continued to grow for FLYHT's WVSS-II water vapor sensor system in conjunction with either an AFIRS Edge or an AFIRS 228 to provide aircraft-based observations. Real-time aircraft-based observations containing relative humidity data from the WVSS-II sensor provides critical data to weather forecasting model. This presents us with a unique opportunity to support airlines in the world's major national meteorological agencies in their efforts to enhance weather forecast needs, improve airline operations and reduced aviation's impact on the environment. Our conversations with U.K. Met continue to advance in a positive direction as we ready ourselves to further scale the business and accelerate towards these new and exciting opportunities. FLYHT posted a number of notable achievements in the quarter. In May, we signed 2 new commercial agreements; the first is Sichuan Airlines, the largest airline in western China and the second is Bahamasair, the national airline of the Bahamas. These agreements are for Satcom hardware and for recurring software services and we believe these 2 contracts, they will be ongoing recovery of global aviation. In June, FLYHT announced an agreement with Flair Airlines, Canada's leading independent ultra-low-cost airline, to purchase AFIRS Edge hardware and Actionable Intelligence services for a Flair fleet of Boeing 737 MAX aircraft. This is particularly meaningful for us as this is the first agreement for FLYHT's AFIRS Edge product, and it includes the SaaS offerings of ClearPort and FuelSense. Also in June, FLYHT announced we received a USD 1.4 million purchase order through the Iridium modems and license fleet fee from a long-time OEM partner. This partner license with FLYHT technology and delivered the AFIRS 228 system to their European airframe customer to have the AFIRS directly installed on aircraft as they're manufactured. Additionally, I would like to publicly welcome our 2 outstanding new directors that joined the company at the AGM in May. Nancy Young is a globally recognized sustainability and environmental attorney and consultant with over 25 years' experience in climate change, aviation, environmental matter, environmental social governance and sustainable aviation fuel. Pete Large is the Senior Technology Executive with years of experience spanning transportation, aviation, space, civil infrastructure and construction, including specific expertise in transforming how work is done through data-driven digital technologies that provide better business insights, decision-making, efficiency, safety, first-time quality and sustainability, adding proven technology and sustainability expertise, the FLYHT's Board helps validate the progress we have made in establishing our company as a leader in using real-time data and insights to improve aviation in the world around them. With Nancy and Pete on our team, we're extremely well positioned to continue to address the important and complex issues of technological change in aviation, operational efficiencies and environmental necessity. 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 second quarter 2023 results, then will discuss key operating metrics. FLYHT delivered a robust 24% year-over-year and 27% sequential increase in total revenue to $6 million in Q2. All 4 of our revenue categories, staff, hardware, licensing and technical services increased from Q2 2022 to 2023. First off, SaaS revenue increased by 25% to $2.7 million, a post-pandemic recovery of the company's customer base, together with an increase in weather data being provided to meteorological organizations contributed to this increase. Hardware revenue increased 28% to $1.2 million in Q2 2023 over Q2 2022. A total of 15 installation kits were shipped in the quarter, equaling the 15 shipped in last year's Q2. Revenue per ship set will vary based on the aircraft type in combination with the AFIRS variant chosen for install. Licensing revenues increased by 2% to $1.4 million in the quarter due to increases in the number of modems and associated license fees orders for delivery in comparative periods. Technical Services revenue increased 81% to $747,000 in the quarter compared to the same quarter last year as a result of data migration project work delivered on as well as an increase in customer requests for certification services. The addition of CrossConsense services to this revenue category started in late Q1 of 2022. In terms of profitability, we reported a strong quarter of margins with Q2 gross margins coming in at 59.6%, increasing 380 basis points year-over-year compared to 55.8% reported for the same period last year. This year-over-year increase in gross margin was driven primarily by our growing SaaS revenue, which, as previously mentioned, increased 25% year-over-year. Total operating expenses decreased by 4% to $3.6 million in the quarter compared to $3.7 million reported in the same period last year. Distribution expenses increased 19% over last year, mainly due to the effect of COVID-19 related government grants received in 2022 that were no longer available in 2023. This was offset by year-over-year decreases in both administration and research and development expenses. Administration expenses decreased 22% year-over-year, mainly due to a reduction in salaries and benefits and contract labor. R&D expenses decreased 9% year-over-year due to a variance in specific project requirements. EBITDA rebounded to a positive $168,000 compared to a loss of $906,000 during the same period last year. Net loss was $169,000 compared to a loss of $1.1 million reported in the same period last year, representing a positive variance of $972,000. Our results showed positive income from operating activities in Q2. At June 30, the company had working capital of $2.3 million compared to $4.3 million as of December 31, 2022, a decrease of $2 million. The company ended the quarter with balances of $1.7 million in cash and cash equivalents and an undrawn credit facility of $2 million. It is the company's intention to continue to fund operations by adding a higher margin revenue and its resulting cash flow, including from the recent large OEM licensing order, which certainly bolsters our near-term cash position, particularly in the third and fourth quarter. We are really fortunate to have a suite of existing services that generate cash flow, which allow us to invest for the future. And our team is always considering our pricing strategies, payment term options and ways to reduce our costs where possible without negatively impacting our ability to deliver quality product, ensuring that we continue to have the financial resources at our disposal to move swiftly as we go after these large and exciting opportunities. Now 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. We expect over the coming years, Edge platform sales will drive increased hardware sales and that SaaS revenue will likewise enjoy continued growth. A second phase of SaaS growth should occur as the installed base of Edge platform increases and customers recognize and expect the tremendous value that our software solutions provide to their operations. And with that, we do have several questions that have come in at investors@flyht.com, that we'd like to address.

So the first is due with STC. So which STCs are currently in the process of acquisition? For which aircraft types in which jurisdictions? At what stage are they in the process? Are any contract announcements pending receipt of an STC? Will WestJet be taking the Edge along with AFIRS SatCom for its entire fleet? That's a big question. Kent?

There's a lot to that. So I'll try and knock it off one part of the time. Which STCs are currently in process of acquisition? We're actively working on the 737 MAX and the NG and the A320 STC. The jurisdiction that we're completing those STCs in is Canada. And the idea is that we will familiarize those once we've completed them in Canada to the other jurisdictions like the U.S. through the FAA and the APA. The stage of those is that we've completed the provision STC and we're doing the installations so that we can get the activation STC. It's a 2-stage process. We're more than halfway through, we've done the provisions. We're in the process of doing the installation. The aircraft type is as mentioned are the A320 and the 737 NG and MAX. Our jurisdiction is in Canada where we're starting. There are no direct contract announcements pending in STC. And with WestJet, we're hoping to work with them on the sale of the Edge along with the AFIRS SatCom that we've been providing them for years.

Okay. The next theme is weather, one of our favorite topics. Has Loganair the performing tests of the WVSS-II with the Edge for U.K. Met? I think that's probably in answers to Loganair's support for our STC work that we posted on social media recently. Will their fleet be the 30 aircraft that will fulfill that contract? Has the deposits been received towards installations as of yet? when will FLYHT start paying actual revenue from the agreement of the 5-or-so global metrological offices that FLYHT sees as being similarly interested, which is likely to be next? At what stage or talks with them after about 3 years now, where is the ECCC in Canada on their trial, ECCC being the U.K. equivalent in climate Canada. Kent, do you want to address some of that?

Yes. Again, it's a great question, and there's a lot there. Look, FLYHT has been working very hard with U.K. Met and with airlines that will be taking the WVSS-II -- the FLYHT WVSS-II sector. And so we do need the contract with U.K. Met. With Loganair, we've been able to do an investigation on their aircraft, their aircraft type. And that Loganair is a possibility for us to be able to work on that contract with U.K. Met. When we're going to start seeing actual revenue from the agreement? Once the agreement is signed and we have the product on the aircraft, it's a SaaS opportunity and we'll be pushing for that and we'll be generating the data of the aircraft-based observations, the moment the installations are complete. Of the 5-or-so global metrological office, FLYHT is working very closely with U.K. Met, but also with NOAA. NOAA is a customer of ours right now. They receive our data. And we're looking to expand the relationship not only with U.K. Met but also with NOAA. The other agencies around the world, the other primary weather agencies around the world are very much waiting to see how the process with U.K. Met and NOAA falls out. So as we complete those deals with U.K. Met and NOAA, we expect other agencies to definitely pay attention, and we think it's a huge opportunity for us moving forward. What are the stages to talk to them? We're always in talks with the various weather agencies around the world. As I mentioned, there's an element of waiting to see how the 2 flagship ones U.K. Met and NOAA respond with FLYHT. And with regards to Canada on their trial, FLYHT has been supplying the environment agency in Canada with data for years. There is no trial there. We're supplying them with aircraft-based observations have been for a long time, and we don't see that changing.

And that's under contract, that's a paid arrangement. Yes. The question. Okay, the next batch of the major commercial aircraft types, what is the preferred make or model for the installation of the Edge or WVSS-II and why? What's commercial FLYHT characteristics are the most appealing to the Met offices to gather the data they want?

When it comes to the preferred make or model for the installation of the Edge of the WVSS, we're happy to supply the Edge product or the AFIRS 228 with WVSS on any aircraft type. We don't have a preference other than to say, we're focusing on the A320 and the 737 NG, MAX fleets right now. So they would be great aircraft. And we like those because they have -- they're the most popular aircraft on the aircraft on the planet and they give us that best opportunity. But a preferred maker model, something that we have the STC for would always be would be preferred. When it comes to commercial FLYHT characteristics that are most appealing to the Met offices, if the location where the aircraft is flying that is the primary driver for the data that the Met offices would like. So if Met office has been looking for information in parts of Africa or Met offices are looking for information from certain regions in China or anywhere on the world. That is the best largest factor for those Met agencies. Having said that, it is the sent -- the departure and the defense of the aircraft that are also the most valuable. The on-route data that is collected while the plane is in cruise is very valuable, but not quite as valuable as the information as the aircraft goes up and down through the atmosphere. Yes.

Okay. Is the WVSS-II seen as preferred over the TAMDAR sensor? Do they accomplish different tasks? Would both ever be installed on the same aircraft?

You would never install the TAMDAR probe and the WVSS-II on the same aircraft. It could be done, but it wouldn't -- there's no benefit to it. The primary parameter that is gathered from the TAMDAR probe and the WVSS-II, that is a value to the Met agencies is the relative humidity. The TAMDAR sensor does have independent collection of some data that allows for aircraft-based observations to be captured off aircraft types that don't have a rich data bus to provide that other core information, things like wind speed, wind direction and temperature. But the aircraft that we're dealing with, especially with the A320, 737 NG and the MAX and the other aircraft that we're targeting with our STC, they have that information from the aircraft. So you wouldn't install the 2 products on the same aircraft. The preference is for the WVSS-II, it's a different technology, it's a more advanced product.

Great. So those are all of the questions that we received in advance. Ashea, we'll turn the call back to you, and we'll be pleased to take questions from callers.

[Operator Instructions] The first question comes from [ Bruce Krugel, ] a private investor.

Seeing that the expenses are being quite nicely controlled. What is of note in the current quarter is R&D declined sequentially? Would that suggest that Edge 228 and Actionable Intelligence development is starting to tail off?

I would say that it's varying quarter-over-quarter for several reasons. Each of the products that are in development have different needs at different points in their development. Our Edge product, what the focus is for that product right now is on STC activity mainly, although there is some -- in particular, software development that is still required, but the hardware development is approaching its final piece on the flange side anyway. The 4 MCU variant will require more hardware development and some software development. But our focus right now is on the STC work.

Bruce, there are always fast opportunities for us to continue on with the data that's collected specifically off the Edge. And so that R&D activity will always remain, but we do ramp up and bring that up and down as quickly as much as needed. But from the hardware standpoint, as Alana mentioned, we're well on the way, especially with the flange.

Yes. We're trying to be really careful with our expenses and cash flow. And that is -- there are several levers that we have at our disposal and one of those is where exactly to push our R&D dollars in any quarter.

Okay. Maybe these 2 questions are related. So SaaS revs increased quite nicely on a sequential basis. And European revenues increased on a sequential basis. I know you mentioned weather in your narrative. I'm just wondering, if an additional contribution to the increase in sequential SaaS revs is nice fractional decent growth coming out of CrossConsense?

I would say about 1/4 of it was resulting from an increase in the CrossConsense business.

So the balance or weather, which would suggest that weather's starting to get traction back. And the reason I'm asking is in my analysis, the weather SaaS -- the SaaS revs from weather were quite substantial. Are you starting to see a recovery back to historic levels in that regard?

We are. Yes. Yes, we are.

In addition, right?

Yes, it is.

Okay. Okay, sorry. And then my final question. The WVSS device can interface with both the 228 and the Edge box. Are you seeing any preference from customers what their inclination is? Do they prefer the 228 or are they just waiting for the Edge device development to be completed?

First of all, you're absolutely correct. The WVSS-II sensor can interface directly with AFIRS 228 or the AFIRS EDGE. And no, we're not seeing the preference. The value to many airlines when they incorporate the WVSS with an Edge or an AFIRS 228 is the combination of not just the information gathered for ABOs but also for all the other services that the AFIRS products provide. So no, we haven't seen a leaning one way or another towards the AFIRS 228 with the traditional SatCom or the new Edge with the 5G capability. Both are capable and both are being considered by our airline partners.