NextNav Inc. (NN) Earnings Call Transcript & Summary

Okay. Thanks, everybody, for coming. I'm Lance Vitanza, TMT analyst at Cowen. And our next company is NextNav. I'm actually very intrigued by this company. I don't cover them. However, I find them very interesting. They're taking GPS literally to the next dimension as the name might suggest. And with us from NextNav today is Chris Gates, the CFO. So without further ado, Chris?

Thanks, Lance. All right. Okay. Right. So welcome to the next generation of GPS. NextNav is a company -- and actually, I should start with the standard disclaimer on forward-looking statements and future events. I hope everybody's had a chance to review that, and we can move on. That's me. All right. So GPS has an economic impact in the United States approaching $1 trillion annually. It's between $700 billion and $800 billion based on estimates developed by the U.S. federal government. It impacts and is a part of nearly every segment of the U.S. economy from telecommunications to finance, to consumer, to automotive, to aviation. It's in literally everything. It's got a tremendous impact. On the other hand, it's also a single point of failure. If GPS goes out, then all of the services and industries that depend on it, generally don't have a backup. So cellular networks will degrade and eventually cease to function. You won't be able to navigate. Aircraft can't rely on GPS for navigation and have to rely on legacy techniques. In their case, they do have a backup. But in general, it represents a single point of failure, and it's extremely vulnerable. There have been an increasing set of incidents for GPS interference, and it's increasingly under threat. In part, this has been illustrated by the events in the Ukraine and the Russian invasion there. GNSS interference, it's a very easy signal to block. GPS satellites are in an orbit that allows wide area jamming to occur terrestrially. And the Russians have been doing that vigorously in the Ukraine, which impacts not just Russia but also their neighboring countries. So if you're in Eastern Europe right now, you're being victimized essentially by operations that are focused on the Ukraine. And there have been warnings about spoofing and jamming incidents. There have been a number of relatively high-profile public incidents where GPS has been compromised in one way or another that have resulted in different things. For example, there was -- in addition to the events in the Ukraine, one can think about some of the events in the Persian Gulf over the past 10 years in Iran and Afghanistan, various GPS exploits have been used. It's an unencrypted signal, at least the civilian version of it. So it's relatively straightforward from that point of view to commence cyberattacks upon it. And even consumer applications, to some extent, are subject to different types of GPS spoofing. You can fake, like in Pokémon GO, you can fake your location, and there's software available to do that. So collectively, there's an increasing acknowledgment that services that increase the robustness to GPS spoofing and jamming are increasingly important. GPS was created conceptually in the 60s. It's an old technology, and it was designed primarily for military applications in open sky or white space conditions where there's no clutter to clean environment, you want to guide your cruise missile or your aircraft or your ship it in the open ocean. But today, most people who use GPS live in urban environments, and they use it for urban applications. So we need technology to bridge beyond what was originally envisioned for the GPS satellite constellation. Now some of the vulnerabilities have begun to be addressed by the U.S. federal government. The Congress has appropriated money for Department of Transportation, both to study the issue and begin allocating resources for GPS resiliency. There are executive orders that are in place to deal with PNT resiliency for government acquisitions as well. We've been participating not only domestically in various programs to illustrate what we're capable of. In fact, the Department of Transportation published a report in the first part of 2021, and we were the only technology that participated in the program that could provide all of the services that GPS provides. And we also are the leading technology across each individual service, whether it's positioning while static, moving positioning, precision timing indoors and outdoors, all those sorts of applications. And recently, we've expanded some of those efforts to Europe. In fact, our CEO was in Europe last week discussing some of these issues with various countries in the European Union and the United Kingdom as the focus on this has really increased. Now our view on this is that it's a tremendous market opportunity across a number of both important but also easily addressable verticals for us, both in the U.S. and internationally. We look at mission-critical public safety in E911 location, mass market, mobile apps, gaming, augmented reality in the metaverse as requiring better positioning to bring contextual experiences to users, autonomous vehicles, eVTOLs, drones, all require not only resilient positioning but they also require lightweight positioning in cluttered environments where GPS is less effective. And then finally, you can think about critical infrastructure, enterprise and IoT applications, everything from power distribution again to telecommunications networks and finance rely on precision timing from GPS to provide services. Now this is especially interesting when you think about 5G and future telco technologies. All require precision timing amongst the base stations, amongst the infrastructure that gets deployed. And they all share -- they all attempt to share a common clock, and they use GPS for that. But as you start densifying and moving equipment down and into buildings, it becomes more and more difficult to get a reliable GPS signal to the point where it can be very expensive to put a GPS antenna on a roof and run a timing cable down to a $200 small cell. They'll spend way more in labor and citing that antenna and that piece of equipment to bring that timing and we can do it wirelessly with our signal. And I'll talk a little bit about what we do -- what our technologies are. So we deployed 2 technologies to realize this market opportunity. Our Pinnacle service is an altitude service, and it's backwards compatible with most smartphones that have been in service for the past 5 years or so. And it allows precise Z-axis or altitude determination. Now this service was adopted and rolled out with AT&T for FirstNet, which is the public safety first responder network. And it allows the sort of pinpoint vertical accuracy of a first responder, but in fact, we're also free to sell this, of course, to the entire market. And the applications for this are vast. And I'll talk a little bit more about how it works in a subsequent slide. Our TerraPoiNT services are full 3D positioning, navigation and timing network. It's a terrestrial network. We have an initial deployment in 50 U.S. markets, including a fairly extensive pilot in the San Francisco Bay Area. And it's essentially a terrestrial version of GPS operating on our own licensed spectrum. So we have an 8 megahertz contiguous spectrum asset, covering about 93% of the U.S. population, including most major urban centers. And I'll talk a little bit about that spectrum asset as well because we think that's an important part of the asset base that forms our business. Now our Pinnacle network was deployed through 2020 and went in service in the first half of 2021, initially with the launch customer of AT&T FirstNet. And it covers 90% of the buildings that exceed 3 stories in the U.S., entirely to the New York Metro, Chicago, L.A., all the areas that you can think about as high density, high economic activity areas in the U.S. And all it requires to get access to this capability is software on your smartphone. That software communicates with or an IoT device or a drone or what have you. And that communicates with our cloud services platform, which communicates with our network. We actually have physical network installed across the country to bring this service and to make it actually work. It's based on barometric pressure. Most devices have barometric pressure sensors in them. And by leveraging that capability, we can deliver a very precise Z-axis. Now there's an FCC mandate to provide this capability for 911 calls. And we announced in January that we signed up one of the largest U.S. carriers to provide this service to them on an annual recurring basis from a subscription point of view. So they pay us a fixed fee and a recurring fee for a period of time to provide this very accurate Z-axis service to their smartphone customers. So when they call 911 from a place like this one, the first responders know how high in the building they need to go. That can be critical when times of the essence in an emergency. And you can also think about the service that we've launched with AT&T FirstNet through the response for FirstNet application. This allows first responders to have a much better situational awareness when they're responding to an incident because now they know where in the structure the other responders are located. This can be critical for a fire, to be critical for police response and so forth. And you can think about the multitude of consumer applications for which this could be valuable. Our TerraPoiNT service, again, is the full 3D service that leverages a network of broadcast transmitters that we deploy in a market, we typically will lease space on towers just like cellular operators do. But it uses an omnidirectional antenna, so the leasing costs are substantially lower. And this service is really the future of our company in many respects. We view this as we set out to solve this sort of terrestrial GPS problem. This really is the core of what we provide. So we're doing a sequential build. We have our Pinnacle network already deployed, and then we're bridging into our TerraPoiNT service as we bring a full 3D PNT capability to the U.S. and actually beyond, and I'll talk a little bit about some of what we've been up to internationally in a couple of charts. As I mentioned previously, in DOT testing, it really is the best solution for backup to GPS, an alternative to GPS. And in many cases, a primary service where GPS doesn't work well, indoors and urban canyons. You want to land your urban air mobility vehicle in a dense urban environment where GPS satellites are blocked, you want to bring your 5G small cell indoors. This service works exceptionally well for those types of applications. It's actually been -- it's been used by NASA at their Langley Research Center for a couple of years as well as part of their urban drone operations research program. So we're very excited about this capability. Now we have a sequential go-to-market plan. We started with our Pinnacle service. It's a lighter CapEx. We don't have any future CapEx planned for this business. It's fully deployed. And we don't have any operating costs associated with it either because we're co-located at AT&T cell sites. So we're not responsible for rent, power, telemetry. Essentially, we have a free network. We're very excited about that because, of course, the contribution margin from a broadcast network where we're not paying rent on is substantially higher than it might be otherwise. And we're in the process of proliferating that service across all these terrific verticals with anchor customers and platform distribution partners like Unity, Epic Games' Unreal Engine, AT&T FirstNet, of course, and a range of others. And we're beginning to look internationally. Now when we talk about early customer traction, these are a list of -- the logos on the page represent some of the names that we've been working with. One of the important things that we've been trying to do is reach as many customers as possible as quickly as possible. So our business model generally involves licensing access to our service for usage of subscription fee. There are millions of applications that utilize location today. And our view is about 1/3 of all the apps in the Google Play store based on their metrics. And our view is all of those are addressable and all of those are potential customers for us in addition to all the great critical infrastructure and enterprise and IoT applications that we see. And to reach those, we've been very focused on platform partnerships that maximize our exposure to potential customers. So we don't necessarily want hundreds of salespeople running around. We have a relatively focused business development team. And we try to forge relationships, for example, with Unity, we're a verified solution partner, and we appear in their asset store. So customers can click through on the Unity asset store and get access to our software, to build our Pinnacle capability into their applications. And this is increasingly important. This sort of improved location that incorporates altitudes increasingly important for metaverse applications where user context is critical to content presentation. And so we're very excited about those types of relationships. On the 911 side, of course, you can think about relationships with Qualcomm and on public safety, CRG, 3AM, AT&T, FirstNet and a growing list of customers there. This is a chart that we presented at our first quarter earnings release. These are some of the recent partners that we've announced: Widow Games, echo3D, GeoComm provide situational awareness in the emergency response center. So when a first responder has an application, and they want to present that information back into the command center, they can do so. So we're excited about relationships like that. The Widow Games relationship is one we're very excited about. I mentioned earlier that GPS can be faked in consumer applications. If you think about mobile advertising, for example, CPMs, cost per thousand, in Manhattan, New York are much higher than they are in Manhattan, Kansas. And so there's a tendency for a little bit of cheating to occur or you want certain content that's only available in certain physical locations, and you're not in that physical location you want to travel there. So our technology allows us to verify exactly where someone is on an encrypted basis with a mechanism that's very difficult to fake or to spoof because it's based in part on our network, which only we have access to. And so by looking at measurements from our network, looking at measurements from mobile devices, we can provide a location verification capability that we think is going to be very exciting in that industry, both for content and for kind of proof of monetization. That last mile technology is our first IoT announcement. We're excited about that as well. This involves locating assets indoors from an altitude point of view without any localized infrastructure because our network is wide area. So we cover thousands and thousands and thousands of square miles. We don't cover necessarily specific locations. We don't put a little device in every corner of the room or anything like that. We try to cover an entire area. And we think there's a lot of potential for that sort of precision location across large geographic areas without lots of infrastructure. Our opportunity set we believe is global. Of course, we've been working with the Joint Research Center in the European Commission, the United Kingdom, we've looked at the Middle East, and we have a joint venture in Japan with a company called MetCom that's backed by Sony and Kyocera. They're in the process of securing spectrum to deploy from the ministry in Japan to deploy our TerraPoiNT technology and our Pinnacle technology in that highly vertical, highly urbanized, very dense market. So we're very excited about bringing our technology, not just to Japan but also worldwide when we think about half of the economic opportunity for our business is outside the United States, excluding China and Russia. Now we've developed over our company lifespan, a fairly deep competitive moat, both in terms of intellectual property, existing network deployment and also a spectrum asset. And a spectrum asset can't be replicated. Once you have a license to operate on a piece of spectrum from the FCC, that kind of gives you a position on that spectrum. And we think that's very powerful, and we just wanted to illustrate that. Virtually nationwide, it's about 2.4 billion megahertz pops. You can see it's right between the 2 Anterix bands, which are labeled as 900 megahertz broadband on the chart. We have great power limits. Again, it's a wide contiguous band of spectrum. We're using that now with our TerraPoiNT service, but there may be the possibility for us to use a portion of that spectrum for additional services as well. We may be able to operate our TerraPoiNT service, for example, in 5 megahertz, and capture 3 megahertz of spectrum for alternative services. And that's something that we're thinking about. Obviously, we think our TerraPoiNT services is a great application right now, but this does gives us an asset base that sits behind that, that we think is very -- it's scarce, it's powerful, and we think it's extremely valuable. So when you kind of think about NextNav, we're answering a very important problem. We're a next-generation GPS solution. We already have substantial deployed assets that are revenue generating today across the United States. We've begun to operate internationally through our joint venture partner, MetCom. We have a deep competitive moat of growing list of great customers, terrific board, just a tremendous market that we're looking after. And one of the things that's not on this chart is probably worth emphasizing, we have a very strong balance sheet, relatively low cash burn. And in this market, I think most investors looking at us know that we went public via a SPAC in October of last year. We're debt free, and we went public with a significant cash position north of $100 million. And in fact, we finished the first quarter with about $93.8 million on the balance sheet and the cash utilization in the first quarter of about $9.1 million. Now our costs will go up a little bit as we augment our team and look to expand our business, both domestically and internationally. But we think that the financial flexibility we have and the very robust asset base we have kind of sets us apart as an investment opportunity as a company really, and what can only be characterized as a fairly turbulent time in the markets. We weren't one of these companies that kind of came out with the expectation of raising additional capital 2 quarters after we were public. Our idea was to actually operate our business and then we look at capital at the appropriate time. So with that, I think I can open it up for questions?

Yes, sir. Yes. Okay. Great. So...

Do you know how GPS works?

Radiates timing signals that get received.

Exactly like that. And in fact, one of the things that we did when we designed the signal, we're obviously 900 megahertz, we're not L band or one of the other GPS bands. One of the things we did when we designed the signal was to make it similar to GPS. So the 2.046 of course, GPS signal. And we actually have a 5 megahertz signal that's somewhat similar to Baidu. So if you want to integrate this into a GPS receiver, then it's a software modification that we've actually done with a number of different vendors in prototype form and we're commercializing aspects of those right now. So we're very excited about that capability. So it's literally -- it's a spread spectrum CDMA, GPS time-based signal. The sites, of course, are organized for location -- the transmitter sites. And that typically sort of build squares because you need to see 4 to resolve the equations for that. And they're sort of self-synchronous that the sites can talk to each other, so they can operate completely independently of any external timing reference. And they have extremely high precision site-to-site time synchronization, which results in sort of very high system resolution and to think about it that way. And this DOT report actually gets into some of the lower level details and how some of the performance characteristics laid out in some detail, it's a 500-page report or something that's publicly available, and it's also on our website. Now our Pinnacle service is differential barometric pressure. And that leverage is the $0.35, $0.50, $0.25 however much they cost. Baro, that's in your smartphone or could be embedded in an IoT device. People have been using differential barometric pressure for aviation for a long time, but it doesn't have to be super accurate. And the higher up you go, the less accurate it has to be. We need it to be accurate down to about 3 meters or 10 feet that we can discriminate between floor levels. And we figured out a few different -- we do a few different things to accomplish that.

[indiscernible]

Yes. Yes. So its differential barometric pressure. One of the aspects of that is the high precision network. So the network of sensors that we deploy, what we call our altitude stations, are extremely precise. And then we also have developed software to deal with irregularities and the measurement may get from your smartphone. The devices on your smartphone tend to drift, there's noise, they have a lot of different characteristics that make -- and they're getting better, by the way. We've been working with all and we have a certification program with the different vendors that manufacture these very accurate MEMS devices. But their accuracy is absolute and altitude is relative and the weather changes all the time. So in fact, if you were to take a baro and put it on -- a barometric pressure sensor and put it on the table, it would appear over the course of just a normal day with weather fluctuations to move up and down by hundreds of feet. And that, of course, doesn't work for an emergency response scenario or a 911 call. And so we've kind of figured out how to work with that and generate reliable altitude measurements. It's been heavily tested. Yes...

[indiscernible]

We're not aware of any broadly deployed technologies that have the same level of performance. So in theory, one could take a pressure measurement and then use some arbitrary set of measurements to create an altitude. But in the testing that we've done, we're the only ones that meet the FCC's 911 location requirements. In fact, we exceed those by a fairly significant margin. And we're not aware of any other vendors that have produced a system with similar performance. Yes, sir.

[indiscernible]

Yes. That's a good way to think about it.

[indiscernible]

It's essentially correct. There may be maintenance activities that we pursue, but it's not -- I wouldn't characterize it as material.

[indiscernible]

Well, we have operating expenses, we have R&D, we have sales, we have SG&A, we have all the exciting public company compliance expenses. The -- so all of that stuff, of course, is for our account. And so if you look from the time we went public to the end of the first quarter, we spent approximately $10 million over that 5-month horizon. But we also collected -- we did collect some money from some of our customers -- as part of our -- especially as part of one of our E911 integrations. So when we do -- if you want to build this into a game or to a mobile application or to something like that, we license you an API or an SDK and you can build it in and it takes a fairly short period of time. We don't have to do very much to support that. For 911, there's a wireless carrier interaction and wireless carrier, especially 911 stuff is relatively complicated, and each carrier kind of has their own idea about how they want to integrate. And so for that, we do charge integration fees that we're able to build in advance of the commencement of service. And you saw some of that kind of flow into our balance sheet in the first quarter.

[indiscernible]

Well, our Pinnacle service is deployed nationwide today. So that's -- we've shouted that from the rooftops. The -- in terms of cash flow breakeven, we haven't gone into detail around when we expect that. We have not been giving revenue guidance to this point because we're offering a new service, and we just launched it. We want -- we expect lumpiness. We've been very focused on signing up platform relationships and customer relationships that we believe will lead to substantial revenue growth, but we've been cautious about more concrete signaling.

[indiscernible]

Oh, the TerraPoiNT system?

No...

Sure. Yes.

[indiscernible]

Well, if we go -- we've seen a lot of customer adoption. And actually, it's worth talking about -- it's actually, we're talking about the specifics of the launch cycle. So we worked with response for FirstNet to launch product, AT&T is selling it. In fact, right now, they're giving it away and then they pay us as part of their effort to bring customers over to 5G. So as they sell new 5G lines on FirstNet, they provide response for FirstNet to participate in departments and then they pay us for those -- for that enablement at the adoption. But it took response a few months to integrate the capability. So from the time the license was issued to the time they launched the product. And that had to do with UI changes and workflow changes within their application. It's kind of -- you can think about it as an enterprise worker management application. So depending on who the customer is, the time from license to product launch can vary. It can be a simple, very short period of time or it can take a longer period of time if they're designing a new product around the new capability, if that makes sense. And so essentially, what happens is we'll write a license, customer will integrate the software, they'll launch the product and then with usage, then we'll get paid. 911 is a little bit different than that. With 911, we typically get an integration fee and then we get just a fixed annual fee. You can think of that as fees in the millions of dollars. I don't think we can be much more specific than that, but that's how we think about that service.

[indiscernible]

Yes. So we anticipate a modest increase in cash burn as we augment headcount through the course of the year, but we're not looking at major -- we're not looking at major CapEx programs right now or what I would call multiples of where we are today. So we're not going to go from $3 million a month to $10 million a month in terms of cash burn. We're doing -- we're trying to be pretty smart about hiring, especially into this market as we look at revenue growth potential, turbulent market and really kind of growing into a really robust business. There were -- there are different ways to think about hiring, and I think we're fairly conservative in that direction. And frankly, we don't -- there are a couple -- I guess there are a couple of elements to that, that are worth mentioning. Our products are -- don't require a huge amount of development, I guess, like our Pinnacle service is actually -- it's in development. It's out there right now. So we're looking at customer support feature augmentation as opposed to whole [ cloth ] creation. So you can look at a lot of companies, I think they have come out, focused on building capital to actually create new stuff. We're actually -- we formed capital debt-free balance sheet to really begin to monetize our stuff. And that's a fundamentally different way to sort of think about it. So we're not overly concerned about those sorts of considerations given the amount of flexibility we have right now. All right. Thanks very much.