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 First Quarter 2021 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [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 first quarter 2024 earnings call. On the call with me this morning are Kent Jacobs, President and Interim CEO of FLYHT, and Alana Forbes, FLYHT's Chief Financial Officer. We have posted a press release covering the information we'll review today as well as a webcast of today's conference call on the Investor Relations section of our website, flyht.com. Additionally, an archived version of the call will be posted on the website as soon as it is available from the conference call provider. Before we begin prepared remarks, 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 Q1 2024 report. Certain of the statements made today may constitute forward-looking statements, and these statements are the company's present expectations. Relevant factors that could cause actual results to materially differ are listed in our earnings materials and in our SEDAR filings, including our annual report, which is filed on SEDAR. During today's call, we will also discuss certain non-GAAP financial measures. You can find the reconciliation to the nearest comparable GAAP measures in the first quarter 2024 report. With that, I'd now like to turn the call over to Kent.

Thank you, Matt. Good morning, everyone, and thank you for joining us on this call. It's only been a few weeks since I last updated you on our progress, but there is no shortage of energy across the FLYHT organization as we go to market with our innovative 5G aviation and weather solutions. This excitement is fueled by having completed substantial development on the Edge and Edge+, having physical product in-hand and having STCs for additional aircraft types on the way. We can now be out in the market aggressively telling our story and that is exactly what we're doing. I'd like to share with you some of the more visible activities and engagements of our senior team working around the world with our customers, partners and investors that are fueling my excitement. We are completing a very active calendar of industry shows and events. At the Aerospace Tech Week Forum in Germany that was on April 17 and 18, we brought strong representation from both our North American and European teams. Highlights of that event included Murray Skelton, our VP, Business Development Weather Solutions, presenting about FLYHT's role in contrail detection and advoidance, being front and center at an event like this, where we can present and further promote our FLYHT-WVSS-II sensor and related weather products. Additionally, Axel Christ, Managing Director at CrossConsense, represented FLYHT in some very interesting conversations, which will further strengthen our already competitive and growing AMOS tech support offering. Having both Axel and Murray in Munich at a show like this helped to further our European presence in both the MRO-related activities that CrossConsense provides and in our Edge and weather business. Just before the Munich show, FLYHT was presenting in China at the China Aviation New Tech Forum in Hangzhou. That was on April 11th and 12th. Willie Cecil, our Director of Aircraft Data and Edge Solution, presented on the AFIRS Edge+. Following the success of this New Tech Forum, Willie and Michael Fang, Vice President in China, began a 10-day China sales trip. Our team met with 5 of the country's largest 11 airlines who represent a combined fleet of nearly 900 A320 aircraft. China's mandate for wireless post-flight transmission of QAR data is the country's largest -- large commercial aviation industry, an attractive market for our solutions. Both the Munich and the Hangzhou events were precursors to the high-profile 2024 [ AWC ] Aviation Maintenance Conference in Phoenix, which concluded last week. The AMC brings together aviation industry experts from around the world. FLYHT again had a large presence this year at the AMC and showcased both the Edge and Edge+ in full operation in our hospitality suite. On the investor front, and not to be missed, is FLYHT Board member Nancy Young's upcoming fireside chat at the Jefferies Aerospace ESG Summit on June 20. Nancy will sit down virtually with Jefferies U.S. Aerospace and Defense and Airlines team, along with other thought leaders from around the world, to discuss how our weather solutions could play a role in the industry's sustainable aviation goal. Webcast details will be available on FLYHT's website closer to the event. 2 weeks ago, I was at the Rivemont MicroCap Technology Special in Montreal, where I delivered our corporate presentation in person to a group of technology and growth investors. Since my last update, we have continued our excellent progress on the Edge+ development and certification and on the STCs for our family of products. We have now completed aircraft certification testing for the Edge on the Boeing 737 NG aircraft. This certification testing covered both the wireless QAR features and the AID capability. The next step is the submission for the activation FCC approval. The Edge+ is now successfully -- additionally, the Edge+ has now successfully passed [ conforming ] inspections at our Calgary office and after careful review with our design and manufacturing partner OSS, we are formally in the qual testing phase. Actual qual testing -- this is the environmental testing where we make sure that the box is a safe product to be on the aircraft -- is expected to be completed in about 3 weeks with reports finalized and written by the end of July. The FLYHT-WVSS-II sensor is under production in our Calgary facility, and we are tracking and scheduling with Loganair to synchronize aircraft maintenance schedules so we can complete our first installations later this year. Through these actions and accomplishments, FLYHT is following through on our plans to complete our certification efforts for the Edge and the Edge+ on the 2 most popular aircraft types, the Airbus A320 and the Boeing 737 families of aircraft, these 2 aircraft types representing roughly 70% of the commercial fleet that is available for flight. In these regards, I hope you share my enthusiasm. This is an important and exciting time for the industry and, more importantly, an important and exciting time for FLYHT. Turning to the first quarter financial performance, we returned to growth as we have now cycled past the large OEM order in 2022 that made for difficult comparisons in the second half of last year. Our SaaS revenues are continuing to increase at double-digit rates, representing over half of the company revenue at 60% plus gross margin. Growing traction by CrossConsense drove continued strength in technical services, which grew 128% to $1.3 million, making it our highest ever quarter for that revenue category. We significantly narrowed our EBITDA loss to $594,000, demonstrating the operating leverage potential of our new -- of our recurring revenue model. With the financing transaction announced alongside our financial results, FLYHT has the capital it needs to support our growth plans and specifically to complete the development and certification of our new Edge solutions and to let us more aggressively pursue our commercialization efforts. Besides providing a capital source at a key inflection point for FLYHT, this investment demonstrates strong confidence in our future and, in particular, the potential value of our 5G Aviation and Weather solution. I look forward to updating you on our continued progress throughout the year. And as always, I would like to thank all of our loyal shareholders for their continued support. I'd now like to turn the call over to Alana for a review of our financial performance.

Thanks, Kent. Financially, Q1 revenues increased from Q1 2023 total, driven by double-digit increases in our high-margin SaaS sources of revenue, which aligns with our objectives, and Technical Services, which together made up the ground lost in lower Hardware revenues as Q1 2023 Hardware revenues were larger than usual due to a large WestJet order last year. Technical Services continued to increase each quarter as CrossConsense continues to deliver quarter-over-quarter increases in data migration services and as we also see an increase in demand from customers in support for regulatory or supplemental-type certification work. Our sustaining business, including past generations of AFIRS hardware, our existing weather business and CrossConsense continues to provide healthy margins that support our investments in both Edge and WVSS-II product lines. Total operating expenses decreased from Q1 2023, showing the results of the cost constraints we have implemented over the past several quarters and also our evolution as development on the Edge product line winds down to more of a focus on obtaining required regulatory approvals and accelerating sales now that we have both completed units and our first Edge STC in-hand. From a balance sheet perspective, although, in recent quarters, we have been focused on cash constraints to strike the appropriate balance in investing the net income from our sustaining business into our newest product lines, it has not allowed us to move as fast as we believe is required to capture as much of the available market for the Edge as possible. Our strategy in choosing a debt vehicle at this time was to allow for us to access more capital in 2024 with repayments more in alignment with our anticipated time line of Edge revenue being recognized starting in Q4 2024. The recognition of these revenues aligns with our recent deferral of WINN repayments, as discussed on our Q4 earnings call, as those payments were moved out of 2024 and into 2025 and beyond. We evaluated many options in coming to this solution as we wanted to arrange for funding that would allow us to accelerate our commercialization efforts as we move from a development focus to focusing more pointedly on regulatory certifications and in boosting our sales and marketing efforts, but that would also minimize solution for our current shareholders. We also carefully evaluated the amount of debt we are agreeing to, as we conservatively modeled our anticipated needs and getting us through to a time frame where revenues from the Edge and the WVSS-II would kick in so we could be comfortable that this vehicle will get us to a profitable, stronger financial position. Looking ahead, we are looking at a growth here. We are confident in revenue increases in 2024 over 2023, but it is still early in the execution of our plan and we have all kinds of variables to consider, including sales execution and regulatory agency timing, among others. We are feeling optimistic about capturing a significant portion of the large TAMs in front of us for both Edge and weather, and we continue to drive forward as fast as we can. Yesterday's financing announcement will ensure we have the financial support we need to execute this plan and to be creative in evaluating all aspects of our approach in getting us to that finish line. This phase of execution requires that we take a closer look at all aspects of our business as we become more focused on accelerating sales. We expect growth in our business, driven by the execution of our strategy with Edge and our weather technologies driving growth on top of our sustaining business. Our contracted backlog remains strong at $37.5 million, of which over half is in recurring services. Our near-term pipeline is promising with the team pursuing contracts totaling over $200 million. We remain diversified in our sales focus with about 45% of that pipeline focused on the Edge product line, 10% on weather and the remainder on our second-generation hardware, the 228 program, which has been going strong since 2012. We expect that, over the coming years, both 228 and 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 we begin generating Edge and WVSS-II hardware sales and realize the recurring revenues associated with the weather observations that will be generated for the Met agencies. Our solutions continue to be in demand as the aviation industry recognizes the need for improved efficiency, profitability and a more sustainable environment. And now, on an administrative note, the audit delays we experienced in finalizing our full year 2023 statements trickled into our Q1 time line and our AGM date, both being held later than our usual schedule. So I want to thank you all for your patience. We'll see you on June 19 for our AGM, and we expect to recover back to our typical time line in time for our Q2 results, which we plan to finalize in early August. With that, I would like to turn the call back to Carl, and we would be pleased to take questions from callers, after which we'll address the questions we received in advance at investors@flyht.com. Carl?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bruce Krugel of KRC Insights.

You mentioned progress with regards to China. So I've been reading a lot about increased interest on the C919 in China. And you seem to have went around and visited a number of airlines, which would suggest the existing fleet as well. So in terms of interest for the Edge device, is it sort of C919 related? Or is it the existing airlines' aircraft that you're seeing interest for?

Yes, Bruce, that's a good question. The C-- just a really quick note about the C919. The program in China for that aircraft is still advancing, it's progressing, but I think it is progressing much -- sometimes slower. It is progressing slower than we sometimes are led to believe when you read articles about that program and the COMAC aircraft. The trip that FLYHT was on just recently with Michael Fang and with Willie, that focused on airlines that are primarily flying the A320 aircraft. So we actually hit the 5 airlines with a combined fleet of 900 aircraft. It was a focus on the Edge. And that's where it was in, in China. We were directing it directly at that A320, 737, those fleets in China. The 919, we're ready for it when it comes along. We're absolutely ready for it, not only with the Edge, but also with the AFIRS 228, providing a Satcom option on that aircraft. But that trip, the tech week in China when the -- associated sales trip was focused on A320 operators.

Okay. And then you mentioned the progress on the 737, the STC. Do you have any idea on timing?

Yes. So in my opening, we discussed the fact that we've done the certification testing on it. So that means that we've -- let me explain a little bit about that. That means that we've been on the aircraft. We've installed the product. All the wiring is complete. And we demonstrated the functionality. And that lets us then go ahead and make the next step being the submission to Transport Canada, the TCCA, for that activation approval. So we're expecting that this year. We're expecting it actually even in Q3.

And any update on your familiarization process in Europe for the A320 Edge device?

No updates on it right now. The familiarization process is underway. So once we get feedback from Transport Canada and the ASA, we'll be sure to share that. But beyond that initial application being made and the process being kicked off, no, nothing to report.

Our next question comes from Dick Ryan of Oak Ridge Financial.

Kent, looking at just a couple of the revenue buckets, hardware's, let's say, struggled the last couple of quarters. Can you give us a sense of what you're seeing there? Also, in the technical services bucket, over $1 million each in the last couple of quarters. But then there was a comment about completing a data migration project. Can you give us kind of a sense of what you're going after, what data migration means? And what's the pipeline look there? Was this just a onetime project coming through? Or is there more projects behind the last couple of quarters' performance?

The data migration program and the projects that CrossConsense takes on, they are -- they're onetime projects, but they lead to several things. And so I'll talk about that in a second. But CrossConsense consent is recognized as an expert in the field of data migration from multiple different systems into the AMOS system. Just to be clear, they've also done migration programs to other maintenance MRO software platforms as well, but they focus on migrations into AMOS. The migration effort involves taking information and data from disparate sources of an airline and third parties and bringing it into a format that can be profitably ingested into AMOS. Once that's done, the migration for that part is over. But it leads to 2 other areas where CrossConsense is experts. One is it tends to lead to -- it often and most often leads to hosting opportunities where CrossConsense will host application AMOS and run it for the airline, providing the technical support to keep the application operational and running. They also have the opportunity then to provide support for the AMOS users in the airline. So in addition to migrating the data, running the hosting for it, they also then get contracts, multiyear contracts, to provide the support whenever somebody has a question about AMOS, if they make a mistake with AMOS or if there are problems with the actual application. So CrossConsense begins with the migration and then it leads -- tend to lead to hosting and support contract. And CrossConsense has an AMOS backlog right now of CAD 3 million with the work that they're doing.

So that's a pretty good sticky business once you get in with the initial data migration work.

It's a great business. Yes, it's very sticky. And the beauty of doing the data migration -- this comes directly from Axel. The beauty of doing the data migrations is they can take multiple years. These are not easy programs to do. And because they take time, you build a relationship with the airline, you build a relationship with the people that are going to be running and using the system and it becomes a natural fit to provide the hosting and the support afterwards.

Great. And then just visibility on the Hardware side over the next few quarters, what do you see there in that pipeline?

I think our Hardware revenue has historically been lumpy, not quite as lumpy as our licensing revenues. But the decrease in quarter-over-quarter was more about last year's Q1 included a large hardware order from WestJet. So that was somewhat unusually large. However, you're right, [ CAD 6 million ] is low when you look at our average Hardware revenues quarter-over-quarter. We are subject to our customers' installation schedules. We do have a large segment still of our backlog that is the AFIRS 228 hardware. It's about $7 million of our current backlog. And I think you'll see it be -- continue to be lumpy heading into the future. And what we're really looking forward to is Q4 Hardware revenue being increased by the addition of Edge and WVSS-II sensors.

Okay. Maybe, Alana, maybe to tie that in with the design refresh with the OEM, what's the timing of that? And would that kick in this year? Or is that more of a '25 story?

The effort is occurring this year. The revenues that we -- we'll see some Technical Services revenue from that redesign effort in 2024. But the real results from that effort will be licensing revenues in the future from between '26 and as late as into 2029, perhaps beyond, but that's the visibility that we believe we have.

Our next question comes from Kris Tuttle of IPO Candy.

Just a couple of quick ones. Tech Services was really -- was strong. And I wanted to understand, is the nature of that business one that we can expect to be consistent? We all know licensing is going to bounce around and you can't really forecast that. But is Technical Services the kind of business that we can expect this, let's call it, $1.3 million level in the quarter to be somewhere in that neighborhood and possibly growing as we go through the next several quarters?

$1.3 million was a really good quarter for Technical Services, primarily driven by CrossConsense. I think $800,000 a more realistic kind of steady number. The Tech Services, though, Technical Services is -- it really is proving to be part of CrossConsense's strength. And it leads to -- as we kind of discussed with a previous question, the Tech Services are leading very much to other contracts and other opportunities where we can actually start to use that data. So yes, consistent, maybe not quite at the $1.3 million.

Okay. Yes, that's helpful, Kent. And then just to remind me, I just want to understand the timing of flows as the business develops, as you get sort of familiarization, harmonization, STC spread. Once you get a firm order that you can fulfill, that is the FCCs and the quality testing and everything is done, what -- how long does it take for you guys to be able to recognize revenue on the hardware sale? And then subsequent or coincident with that, the SaaS portion of that, based on whatever the attach rate is for that piece of hardware, just like round numbers in terms of is it a few weeks? Is it a few months? Just so I understand the flow a little bit.

Yes, a good question. I'll talk a little bit about the installation and the process is getting the box on the plane and then turn it over to Alana. The AFIRS 228, AFIRS 228 family of aircraft, can take quite a while to install on a aircraft, 120, 130 hours, because we're punching holes in the aircraft for antennas and things. The Edge product, a little bit less because we don't have quite as invasive of an installation on the aircraft. And then the 4MCU product, that's a 5-minute plug-and-play. Remember, if we got the provisions from the Teledyne product already on the aircraft, it's a very quick, very easy installation on the aircraft.

And so from -- I think your starting point was from qual testing? Or was it once we obtain the STC, how long will it take to installation? Can you just clarify, Kris?

Yes, sure. I apologize, I'm not an expert in some of the areas that you guys are operating in. But if I'm an airline, and let's say I'm waiting for the U.S. version of the STC to be familiarized, I'm like, great, I want to get X number of Edge devices installed on my Airbus fleet, let's say 20 airplanes, how does that -- you guys have to -- how does the revenue flow on the Hardware side and then the SaaS part of that as you actually fulfill that order for that new -- that customer who's presumably in the -- maybe they're just in the pipeline or the backlog?

Okay. So once we have an STC in-hand, if we have hardware contracted for it, that's entirely dependent on our customers' installation schedule. So if it's for an AFIRS 228 or the flange version of the Edge product, we have to wait until they can take it down for usually a C-check. They're generally taking it out of operation for other reasons, and we piggyback on that timing. So that is -- that can vary widely. If it's the, as Kent alluded to, the 4MCU 5-minute replacement version of the Edge, then it's much more quick. If the customer is ready, we are ready. When we ship the hardware is when we would recognize the hardware revenue. SaaS revenues that are associated with those hardware revenues and with those installs on the AFIRS 228, they flow pretty quickly. It's usually within 2 months. Some of the services, like voice and flight tracking, will be available to our customers immediately. So SaaS will start to flow from those services on day 1. If the customer requires some customization to incorporate our products, our SaaS products, into their operations, then it can take as much as 4 months or so following hardware installs. So it does vary significantly, but they are tied.

Can I just add to that really quickly? Yes, Kris, as Alana mentioned, those initial installations, regardless of whether it's a [ special ] installation or even the quick plug-and-play one, there can be effort to incorporate that into the operations of the airline. But that effort to incorporate the data, the SaaS revenue -- the SaaS products into the airline, it happens once and it happens on those initial installations. The follow-on installations actually shorten the time then, again, from the actual installation of the box to the revenue.

I see. So the first one, if customization is required, it could be a little extra. But then once that's completed, subsequent installs can flow more quickly.

Correct. That's the point I'd take away. Yes. Correct.

Yes, that is very helpful. I appreciate that. That's all I've got. So I'm looking forward to talking to you guys soon and I'll look for that fireside chat that's coming up too. Thank you.

[Operator Instructions] Your next question comes from Samuel McColgan of Breakout Investors.

Yes, I had a few questions. The first one was about kind of gross profit. Just I was just kind of looking through kind of your revenues and kind of historical margins from each stream and just kind of guessing where I thought the gross profit would be. And it came in kind of much higher than I expected. And I just wondered if there was anything in particular that was driving kind of a higher gross profit to pop out this quarter. And also just kind of along those lines, the kind of revenue, I suppose, per unit shipped was -- the Hardware revenue per unit shipped was quite high, quite a lot higher than usual. So I just wondered if there was anything there in particular that you could share.