Space42 PLC (SPACE42) Earnings Call Transcript & Summary

[Operator Instructions] Today's presentation, together with the full release and supporting materials is available in the Investor Relations section of our website at space42.ai. Please also note that today's discussion may contain forward-looking statements, which should be read alongside the disclaimer in the presentation. A replay of the podcast will be posted to the same section shortly after we finish. With that, I'll hand over to Karim.

Thank you, Boji, and hello, everyone. Andrew and I are delighted to brief you on our H1 '26 results. Let's move to Page 5. Thank you, Boji. So as noted in my comments in the official press release, we delivered an exceptional performance for the first half of this year. Page 5, please, Boji, the summary slide. Thank you. We executed to the mark on our four-pronged strategy. Every core pillar was in full production in terms of delivered services, which is the first time since the formation of Space42 back in October '24, and this is the point that we have been working towards for the past 20 months. Now equally important is the demonstrated operational resilience and business continuity that Space42 has demonstrated during the first half of this year, ensuring uninterrupted execution despite a dynamic operating environment as we experienced earlier this year. In fact, the new environment that has emerged has raised the baseline for our services going forward, that is our dual-use remit has grown in relevance and scale, and we consider this as the new baseline in terms of market requirements. Concretely, we delivered a top line of USD 260 million, representing a 15% year-on-year increase with a normalized EBITDA of USD 116 million, representing a 12% year-on-year increase. And we continue to benefit from a strong cash position, certainly to sustain our investments in the four strategic pillars while also maintaining a strong balance sheet and securing a backlog of USD 6.3 billion. Now moving to Page 7, so I can walk you through a quick update on our strategy execution. Starting with Pillar 1, our Foresight Constellation for Earth observation is now five satellites strong and in production mode, i.e., we are delivering near real-time situational awareness data for global customers with the highest resolution commercially available. Now to note that Foresight 3, 4 and 5 were assembled, integrated and tested at our AIT facility in Abu Dhabi, marking the first ever such milestone for the UAE. In parallel, Mira Aerospace, which focuses on HAPS, our high altitude platform, is currently conducting over the course of August an EU-based test flights for an important NATO country, and this is a super important milestone for us. Moving to Page 8. Our GIQ and GIX, geospatial intelligence platforms under Pillar 2 have entered full production mode this year, and they present global ambitions. Now as a reminder, GIQ and GIX are among the most advanced system worldwide for the acquisition of sensing data from earth and space, aggregation and federation of such data to serve specific use cases, analysis, interpretation as well as simulation, whether for civilian or defense and security applications. Now what is quite important is that the GIX development, which represents a more advanced and sovereign platform, benefited from an accelerated runway in light of recent events and entered full production well ahead of schedule. Moving on to Page 9. Our mobile satellite services are gaining momentum. First, Thuraya-4 is gathering pace with the benefit of the past 9 months of commercialization. And we haven't reached yet the full potential of serving more customers in the expanded geographic area of Thuraya-4 versus the legacy Thuraya-2 and Thuraya-3 spacecraft. And again, as a reminder, Thuraya-4 was designed to cover a much larger geographic footprint, so we can expand the reach of our services, and that's pretty much the effort that we're putting in place to make sure that we fully bring to bear the capability of this new asset. This new asset, i.e., Thuraya-4 is also on pace to start benefiting from the momentum of direct-to-device messaging services, and we recently announced the successful demonstration of such service with Skylo in the UAE and the idea is now to be able to ramp up and offer this service commercially across the globe. Second, and under the mobile satellite services sort of umbrella, our work on Equatys is in full speed. As a reminder, we're working with Viasat on jointly launching the Equatys layer-based system in the 2028, 2029 window with a goal to deliver full mobility services to modified, unmodified devices across the globe and where terrestrial networks do not or cannot reach. Now the Equatys differentiation, as a reminder, is based, one, on a fit-for-purpose system design that delivers a space resource unit economics comparable to terrestrial network. And often, this message is lost because the emphasis or the narrative in the public arena is on the number of satellites or how much is being spent, et cetera, et cetera. But what really matters is, a, what user experience are you creating, and b, at what unit economics can you deliver that experience. And that has been our emphasis with Viasat from day one. Two, as a point of differentiation is that the system was designed as a constellation that can grow organically over time as we densify the system with the ramp-up of demand, but also we densify the system by enabling other subsystems such as sovereign system to join our constellation, and also spectrum holders to also contribute or pool their spectrum into the spectrum that Equatys is bringing to bear. So it's a truly scalable model or platform that we are building. Three as a point of differentiation is our unique ability along with Viasat to bring to bear from day one more than 100 megahertz of globally coordinated spectrum dedicated for mobile satellite services in L-band and S-band. On top of they intend to be able to accommodate other terrestrial spectrum in the future, working in tandem with MNOs, which brings me to the fourth and last point of differentiation, specifically our neutral approach for teaming with MNOs and OEMs, which, in our mind, would be truly complementing their business and positioning Equatys more as a multi-stakeholder platform than a stand-alone solution. Now moving on to Page 10. Our Pillar 3 -- or Pillar 4, thank you, focusing on secure communication through space-based resources, specifically the development that is underway with Al Yah 4 and Al Yah 5. Now this development is unfolding on time, on spec and on budget with a business that is already underwritten by the UAE government to the tune of USD 5.1 billion. Now in parallel, we're progressing the plan to augment our geostationary SATCOM capabilities with non-geostationary capabilities, whether for civilian or defense and security applications, and we expect to make a first announcement on this matter over the course of Q3 this year. Now moving on to Page 11. The Autonomous Mobility thematic priority is benefiting from a renewed momentum through our partnership with A2Z, the South Korean-based autonomous technology provider. Our capabilities can deliver autonomous -- or let me say, our combined capabilities can deliver autonomous mobility through a greenfield platform as well as and equally important, the ability to retrofit legacy platform, which is particularly relevant for organization with established large fleets. Now finally, and moving to Page 12, we will activate starting in Q3 of this year, our share buyback program following its approval by the Space42 shareholders back in April 2026. We are in the process of clearing the regulatory requirements. And as a reminder, our share buyback program targets up to 2.5% of the issued share capital, and this underscores our confidence in the long-term value of Space42. This concludes my opening remarks. Over to you, Andrew.

The strongest we've had since the date of merger. Now for some of you -- for those of you who followed us, the first quarter results were quite -- I would characterize them as solid. You will recall that our revenue profile was slightly ahead of the prior year. Our normalized EBITDA was broadly in line. Well, the second quarter has been a bit of a turnaround. The actual Q2 revenues were up 29%. The Q2 EBITDA was up 28%. And overall, as Karim has alluded to, our H1 revenues of $260 million was up 15% against the prior year with both of the businesses contributing. Now Space Services, that saw its fifth consecutive quarter of year-on-year revenue growth, and that actually delivered a record H1 revenue performance. So even if you go back in time premerger to the Yahsat days, never has this business delivered such a strong first half revenue performance, and it is on track to deliver a record full year performance. Meanwhile, Smart Solutions recorded first half revenue of $35 million, and that's an increase of 14%. And from a Q2 perspective, that's more than double the Q2 revenues achieved last year, so certainly a strong second quarter, a rebound in Smart Solutions and a very pleasing top line profile. At the same time, as you will see, we continue to maintain strong margins. Our normalized EBITDA margin of 45% was pretty much bang in line with the prior year. The normalized EBITDA itself was up by double digits by 12%. And as Karim has alluded to, we continue to maintain very strong levels of contract backlog, so $6.3 billion which is equivalent to about 11x our prior year annual revenue, just to put it in context. $1.1 billion of cash on our balance sheet, that's 16% higher than it was at the start of the year, negative net debt of $0.6 billion and a negative net debt-to-EBITDA ratio of minus 2.8x. So we've got very good first half revenue and EBITDA profitability performance. But at the same time, we're ideally positioned now with the strength of our balance sheet to execute on our growth strategy and indeed initiate the share buyback program. If we go to the next page, we can then take a bit of a deep dive into the income statement. Now the top line of the revenue, I will touch on in a moment as a separate page on that. As I said, it grew by 15% year-on-year. The next three lines comprise the group's cost base, so we've got cost of revenue, staff costs and other OpEx. Now if you aggregate those, it's $147 million in the current year, up $25 million versus the prior year, so that's a 20% increase. So the first question one would ask is, well, why is that going up higher than the revenue profile? Well, the simple reason is that the two periods are not entirely comparable because in the prior year, there are a number of costs which we did not have, which we have in the current year, such as, for example, the satellite insurance cost for the new Thuraya-4 satellite, which wasn't operational last year. And indeed, in the prior year, we actually had some bad debt provision releases, which is quite unusual, that but we did, which meant that for the prior year bad debt provisions were zero, and we had some bad debts in the current year. So it's items like that, which kind of swung the profile. If you strip those out, then actually the increase in the cost base is certainly less than the increase in the revenue profile. The other income that you see just above EBITDA, this kind of sweeps up items which don't sort of conveniently fit in any other line, and the only item there significance relates to the prior year in which we received $8 million of insurance proceeds following an anomaly in the Al Yah 3 satellite. This was offset against a few costs elsewhere. But of course, the receipt of the insurance proceeds is clearly one-off. We didn't have that in the current year. But notwithstanding that, nevertheless, the reported EBITDA was still up, and comfortably up by $6 million versus the prior year. And on a normalized basis, and I'll show you how we get to the normalized numbers in a minute, but on a normalized basis, it was up $12 million or 12%, which you see at the bottom of the table. Now below EBITDA, we've got depreciation, which was higher, which is entirely expected because we are now depreciating a brand-new satellite, Thuraya-4 for the first time. Don't forget Thuraya-4 only became operational in the second half of last year. We also have lower net finance income. Again, it's linked to Thuraya-4 because before the satellite was operational, we were able to capitalize finance-related costs associated with that satellite. And now that it is operational, we cannot do so. So the net profit which is lower than prior year was expected. It's not a surprise to us. But it's a trend that we expect to reverse probably by the end of the year. Now on the next page, if we could go to the normalized results, so just to explain what we mean by normalized, this is where we strip out one-off items from either period, which would otherwise distort the comparability of both sets of results. So what we stripped out here are restructuring costs, which are typically one-off in nature as well as the Al Yah 3 insurance proceeds. So when you do that, as I already intimated, then the increase year-on-year in EBITDA it actually increases. So we're up $12 million or 12% in normalized EBITDA. In normalized net profits, you go further down to the bottom of the income statement, we are lower, but that is simply because of the higher depreciation and lower net finance income, which was anticipated. We then come on to revenue, the revenue split. Now overall, you can see that we have an increase of 15% year-on-year. Now the largest segment by far was Space Services. So that increased its revenues from $196 million to $225 million. The majority of that increase came about from the Thuraya-4 satellite and the new $700 million government contract, which is over 15 years, which relates to that. So we had full 6 months of that, which we didn't have, obviously, in the prior period. It makes up 87% of the total revenues to Space Services. At Q1, it actually made up 95%. So what we're seeing is as the Smart Solutions business starts to ramp up, it is beginning to make a larger relative contribution to the total revenue profile of the group. Smart Solutions itself had a very good second quarter at $29 million second quarter revenues, more than double the Q2 2025, which meant that for the first half of the year, it increased its revenues to $35 million, up 14%, which is very much driven by increased demand for data acquisition, earth observation, geospatial analytics. Now on the next page, we then look at the same profile but normalized EBITDA. So from an EBITDA perspective, as I said, we were up 12%. It's dominated by the Space Services business, which increased from $124 million to $131 million. Now Space Services continues to have a robust margin of 58%. Meanwhile, Smart Solutions EBITDA was negative, it was minus $15 million. But for those of you who were present at our Q1 presentation, you will notice that at Q1, it was minus $15 million. So what this actually means is that Smart Solutions from an EBITDA perspective, not just from a revenue perspective, has certainly rebounded strongly, recording a breakeven, if not slightly positive Q2 performance in Smart Solutions. Overall, you can see that the normalized margin of 45% is pretty much in line with the prior year. Now on the next page, we have the rollout of our contract backlog, $6.3 billion. It extends all the way out to 2043. It's largely dominated by two or three government contracts in the Space Services business. You see there's been an increase during the period in the Smart Solutions business as well, and what this does is it provides significant visibility and security over our future cash flows. And when you combine this with the strength of our balance sheet, it really positions the group in an excellent position to deploy capital and to execute its growth strategy. On the next page, you can see our cash position, which is strongly up since the start of the year. It's up 16% to over $1.1 billion. We had solid operating cash flow. We continue to invest in our growth programs, in particular, at this stage in Al Yah 4 and 5, and we expect quite a bit more CapEx in the second half of the year. And we also did the initial drawdown of the ECA backed financing facility for the Al Yah 4, 5 program. The first drawdown of that took place actually right towards the end of H1. And offset against that was the ongoing repayment of our other debt obligations. The final slide is our balance sheet, strong and stable, I think, is how I would characterize it. You'll see that the fixed assets, the capital work in progress have remained really remarkably stable. Obviously, items switch from one bucket and going to the other. The cash and swaps and deposits has gone up, as I just explained, because of the drawdown -- the initial drawdown on the Al Yah 4, 5 ECA backed financing. And of course, you would expect, therefore, a corresponding increase in the borrowings, which you see a bit further down. Contract assets have come down as we have really strengthened and accelerated collections of our outstanding unbilled revenues and receivables. So in summary, I think we would certainly present these as a very strong set of results. We had a solid Q1, like I said, but really accelerated in the second quarter. Second quarter revenues up 29%, second quarter EBITDA up 28%. Space Services certainly set a record H1 and is on track for a record for the full year. And Smart Solutions, I think it's fair to say, has rebounded strongly, right, since the first quarter. And of course, on top of all of that, we've maintained rigorous control of our costs. We've got double-digit growth in the EBITDA and a very strong balance sheet. So thank you very much for listening, and I look forward to receiving any questions you might have.

Thank you, Karim and Andrew. We will now turn to questions. Several have already come in through the Q&A panel, so let me start with those. You have a couple of questions from Pandidurai Marimuthu. The first one being, what's the borrowing cost on the first tranche of USD 338 million out of USD 686 million ECA-backed financing facility.

Okay. So this relates to the first drawdown of the Al Yah 4, 5 ECA-backed facility, which we drew down actually on the very last day of the period, on the 30th of June, so in the current financial results, there is no borrowing cost because we've just drawn it down. But going forward, this particular borrowing has an all-in rate of around 5.66%, okay? So it's a combination of a number of different components, a software, a margin, a BPI premium which is charged, which is quite typical for an ECA as well as commitment fees. So it's in the region of 5.6% on an annualized basis.

The second question is the transaction cost pertaining to the recent borrowing is very high at $46 million against the gross borrowing of $338 million. Can you please explain?

Yes. So this is a characteristic of ECA-backed financing. For those of you who are familiar, this is the BPI, the French export agency, which essentially guarantees the debt, the repayment of the debt to the syndicated banks, and in return, we get a -- we have to pay a lower margin to the bank. So all in, the overall cost of 5.66%, which includes the annualized component of the premium, we believe is actually very competitive, okay? So it's just really how you structure the cost components of the overall debt.

And the last question from Pandidurai, should we assume the applicable tax rate for the company is 15% going forward?

Yes. So 15% indeed, but we do -- we are eligible for certain tax reliefs, okay? And this is something which we are requiring confirmation on. But we do believe we are entitled to certain tax reliefs, which will pull down the effective tax rate to below 15%, closer towards 9%.

Okay. So we have a question from Shahrukh Nawaz, is the company planning to increase the revenue mix towards Smart Solutions like 30% in the remainder of 2026? And are there any contracts in the pipeline?

Yes. So we absolutely are expecting the revenue mix to increase in favor of Smart Solutions between now and the end of the year. As I said, in Q1, the revenue mix was simply 5% Smart Solutions. At the end of H1, it's 13% by the end of the year, yes, I can -- I mean, I won't give a precise figure, but I can certainly see this increasing significantly above 13%. And indeed, this is kind of our long-term ambition to increase the overall contribution of Smart Solutions towards that 30% figure that you quote, so yes. And there are a number of ongoing projects, which are in the course of being delivered and a number of pipeline opportunities, which are in the course of being pursued. So the answer to that is yes.

The second question is, does Space42 plans to value shareholders by distributing cash dividends going ahead and it will be on a quarterly or yearly basis?

Well, we obviously do value our shareholders. The whole dividend matter is reviewed periodically by our Board. And they take into account not just the performance of the business, but also the capital commitments going forward. And for those of you who attended our Investor Day in November, we presented a commitment to invest in growth projects over the next 5 years of up to $1.7 billion, most notably in the Al Yah 4, 5 program, but also the direct device equities program. And of course, we're in the course now of updating our business plan, and we will present an updated view on that at our next Investor Day. But the point is that there is significant capital that's earmarked for growth initiatives, and in so doing, we anticipate growing the top line and the bottom line and maximizing shareholder returns in that vein as well as, of course, buying back shares, as Karim has already referred to.