BigBear.ai Holdings, Inc. (NYSE:BBAI) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Thank you for joining the BigBear.ai first quarter conference call. This call is being recorded. [Operator Instructions] I will now turn the call over to Shane Karp, Vice President, Marketing and Communications. Please go ahead, Mr. Karp.

Shane Karp: Good afternoon, everyone, and welcome to BigBear.ai 2023 First Quarter Conference Call. I’m joined by Mandy Long, our Chief Executive Officer; and Julie Peffer, our Chief Financial Officer. During the call today, we may make certain forward-looking statements. Listeners are cautioned not to put undue reliance on the forward-looking statements, and BigBarry.ai specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call. Many factors could cause actual events to differ materially from the forward-looking statements made on the call. These statements are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. For more information about these risks and uncertainties, please refer to the forward-looking statements section of the earnings press release issued today and our SEC filings.

We will also discuss some non-GAAP financial measures during the call today. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. You can find the GAAP and non-GAAP reconciliations within our earnings release. Now I’d like to turn the call over to Mandy.

Mandy Long: Thank you, Shane, and thank you all for joining today’s call. The results we posted in Q1 are a testament to our capabilities across autonomous systems, cybersecurity and supply chain and logistics. Our 16% revenue growth year-over-year despite a challenging macroeconomic environment is a remarkable achievement for the entire team and speaks volumes to the value we are bringing to our clients. We’re winning in complex markets, setting us apart in the industries we operate in and positioning us for long-term growth. Our established position and ability to execute are evident in new partnerships, new wins and extensions of our business with existing customers. As you may have seen in our recent press release, we are excited about our new strategic partnership with L3Harris.

BigBear.ai is now their exclusive partner to deliver AI/ML-based forecasting, situational awareness analytics and computer vision capabilities for L3Harris unmanned service vessels. This integrated and collaborative approach brings significant long-term opportunities, and our partnership with L3Harris is another proof point in our continued focus on execution and long-term growth. We are also continuing to bring our autonomous system software capabilities to market, like with the U.S. Navy, where our analytics and computer vision capabilities continue to be assessed and demonstrated in live exercises as shown most recently with Task Force 59 and IMX 2023. We are incredibly excited by the Navy’s April announcement to continue to scale unmanned platforms, integrating unmanned systems into their Fourth Fleet in Central and South America and operationalizing the concept Task Force 59 has worked tirelessly to develop.

In addition, we believe the Navy’s decision to scale unmanned platforms to the Fourth Fleet and their engagement with us through Task Force 59 underscores the importance of autonomous systems in future battlefield. Our advanced AI/ML capabilities enable autonomous systems to operate with unparalleled efficiency and safety, supporting higher-risk missions, expanding operational reach and most importantly, saving lives. As the battle space continues to evolve, autonomous systems will play an increasingly significant role. As a leader in providing AI/ML-based forecasting, situational awareness analytics and computer vision capabilities for these autonomous systems, our opportunities to support this type of work are only just getting started. We’re continuing to see more rapid adoption of AI- and ML-based solutions and technologies throughout the entire Department of Defense.

Innovative approaches to acquiring these AI-focused capabilities such as the Chief Digital and Artificial Intelligence Office’s Tradewind Initiative provide a marketplace for DoD leaders to rapidly source, fund and develop solutions in the AI/ML, digital and data analytics spaces. We are excited to announce the recent addition of 2 of our products to the Tradewind marketplace. Observe is our massive distributed data collection capability focused on capturing publicly available information at scale and has a proven track record of providing actionable decision intelligence for our customers for more than 8 years. Additionally, our AI/ML-based forecasting, situational awareness analytics and computer vision capabilities originally developed for autonomous systems will now be widely available for many other DoD use cases.

We look forward to onboarding other portfolio solutions into the Tradewind marketplace in the coming weeks and months. This is all in the service of supporting the speed, efficacy and accuracy of our customers’ decision-making processes. We continue to operationalize artificial intelligence and machine learning at scale by creating order from complex data, identifying blind spots and building predictive outcomes. And we’re not just winning at the federal level and in defense, the pandemic and subsequent disruption demonstrate that the dramatic impact of uncertainties on supply chain and establish the need for intelligent contingency plans to minimize the impact on operations. AI has the power to revolutionize the way we handle logistics, optimize production processes and improve overall efficiency.

Through decision intelligence algorithms, machine learning and real-time data analytics, we can better forecast demand, minimize inventory costs and ensure on-time delivery of products. AI can play a similarly impactful role in manufacturing, helping to detect quality issues early on, improved product design, automate repetitive path and help free up valuable time and resources for higher-level work. Ultimately, we’re looking to provide a higher form of decision intelligence, empowering businesses to make smarter, data-driven decisions that streamline operations and help drive profitability. We have already been making a lot of progress. We recently extended our relationship with a global Fortune 500 food company that has been using BigBear.ai simulation tools since 2020.

They work with us to extend discrete event simulation modeling to evaluate production of existing lines and also support design, test and evaluation of potentially new production areas. In support of these solutions, we’ve integrated resources directly with the company to perform the project management and data collection responsibilities to ensure successful and on-time delivery of set objectives. The simulation solutions that are being created speak to identify bottlenecks and opportunities for process improvement, while also providing the confidence that any new designer build option is tested thoroughly before any major investments are made. We’re enabling similar decision-making in a large diesel engine manufacturer that’s looking to allocate capital to phase out old designs and drive extensive design work, capital equipment deployment and plant modification.

Given the capital and resource-intensive nature of this endeavor, extensive verification and validation efforts of the proposed changes must be executed. To unleash their success, we’re building a comprehensive discrete event simulation model of their current and future state production systems, enabling scenario analysis and experimentation in a digital twin. As a result, our customer will be able to deploy capital and effect change faster and with greater confidence and success. Our work in health care continues to pay off as we signed a number of new contracts with hospitals, such as the Children’s Hospital Colorado and Thomas Jefferson University Hospitals for FutureFlow Rx and MedModel. For Thomas Jefferson, we designed the department-level simulation to support future state operations for observation, extended recovery patients and to inform long-term staffing needs.

This is incredibly important as the staffing crisis in health care continues and as the pressure on hospitals and health systems increases with the aging population needing more care. While it’s easy to focus on the headline wins, the foundational work we are doing to ensure our long-term success continues to be a part of the team’s focus. During the quarter, we continued our move towards a streamlined approach with a simplified reporting framework and a sustained rigor on cost management. Our work this past quarter focused on improving our operating processes and tightly managing discretionary spending. Cost discipline will remain a priority as it forces rigor and prioritization around decision-making and unlocks growth opportunities by fueling the most impactful areas of our business while also putting us in a much better position to deliver meaningful shareholder returns over time.

With much of our restructuring now behind us, our new operating model is positioned for positive operational cash flows in the back half of 2023. Bigger picture, AI continues to experience an unprecedented wave of excitement as the entire ecosystem of enterprise application looks for new ways to leverage this disruptive technology. Winners and losers will emerge from this period of rapid maturation and those with the ability to grow and execute at scale will be well-positioned to take share across various end markets. The industry has received a lot of attention over the last year. And while the race is only getting going, BigBear.ai has a meaningful head start. It is with this head start that we’ve been able to make strategic hires such as Norm Laudermilch, who will be taking over the role of Chief Operating Officer.

Norm has 30 years of technical and executive level experience and has served in a number of roles, including Chief Operating Officer, Chief Technology Officer and Chief Information Security Officer. He has experience in both startup and Fortune 50 companies across federal and commercial markets. We are also promoting Greg Goldwater to Chief Growth Officer. As Chief Growth Officer, Greg will continue to develop strategies to drive growth across the entire BigBear.ai business and identify new opportunities that align with our capabilities and our core mission to deliver clarity for the world’s most complex decisions. Lastly, many of you have likely heard the recent calls for pausing AI development. My thoughts on this are simple, powerful technology that has the ability to change the world does not come without risk and pausing is the option that our adversaries would love for us to choose.

As an organization who works every day to protect our nation and what it stands for, our role is to leverage these capabilities responsibly and ethically and put them to work where they can make a difference in our national security and in the other environments that we service. That is what we do. And it is why we are the company that our customers call when the hardest problems need to be solved. We have been a leader in providing a higher form of decision intelligence for more than 20 years. We are our customers’ North Star in this AI-driven industrial revolution, and we are doing so with a strong foundation to ensure lasting impact for the company and for our shareholders. We have a leaner, more nimble business today, and we will hire and retain those who are here for the mission and can do things that others cannot.

We are now stronger and more resilient than we were 6 months ago, and we are just getting started. With that, I will turn the call over to Julie for a detailed review of our financials.

Julie Peffer: Thank you, Mandy. Before I dive into the financials, I’d like to address the consolidation of our legacy Cyber & Engineering and Analytics segment into one reportable segment beginning this quarter. As Mandy discussed, we continue to reorganize the business to drive improved operational efficiencies. And as part of the leadership announcements we’ve made today, we’re moving into a more functional structure that will ensure we go to market, develop products and solutions and drive delivery execution as one team. Segment changes were implemented as of Q1 2023 and historical data in the new segment is available as a consolidated view. Now let’s turn to our first quarter results. Revenue for the quarter was $42.2 million, up 16% year-over-year and compared to $36.4 million in the first quarter of 2022.

This is primarily driven by growth with our Army customer through contracts such as Global Force Information Management, or GFIM Phase 2 and other key programs. As we have stated in the past, I do want to reemphasize that our revenue can be lumpy and can fluctuate meaningfully depending on the quarter in which contracts are awarded, milestones achieved or contracts complete. Total gross margin was 24% in the quarter, a 300 basis point decrease from 27% in Q1 2022, driven by additional cost on the GFIM Phase 2 program, which completes in the second quarter of 2023. We’re performing well on this program, but continue to invest in critical capabilities to maintain our strong position as we move towards the production contract. We are in active discussions to continue this important work through GAAP funding until the production contract can be funded with 2024 government fiscal year funding.

Backlog was $197 million at the end of the first quarter, which is down 10% or $22 million compared to fourth quarter of 2022. This was driven by the removal of Virgin Orbit from our backlog due to the uncertainty from their recent bankruptcy announcement. Now turning to expenses. For Q1, operating expenses were $22.2 million, which includes R&D expense of $1.1 million and SG&A expenses of $20.4 million. On a year-over-year basis, total operating expenses were lower by 15% this year in Q1. As a reminder, we began to ramp up indirect hiring in late Q1 last year with hiring hitting a peak in Q2 2022 before declining substantially through the rest of the year. We will continue to be disciplined in our expense management and focus on implementing scalable processes, operating rigor and driving overall efficiency across our business.Net loss was $26.2 million in the quarter versus $18.8 million in Q1 of 2022.

Net loss of $26.2 million for the first quarter of 2023 includes $10.6 million of noncash expense related to the change in fair value of PIPE warrants that were issued in January 2023, $3.8 million of equity-based compensation and $0.8 million related to restructuring charges. Net loss for the quarter of 2022 was $18.8 million. Adjusted EBITDA was a loss of $3.8 million in Q1 2023 compared to adjusted EBITDA loss of $2.5 million in the fourth quarter and $3.9 million in the third quarter of last year.Q1 adjusted EBITDA was impacted by a onetime bad debt reserve booked against receivables owed by Virgin Orbit who announced bankruptcy in April. In addition to the gross margin compression from investments in the quarter on key programs such as GFIM Phase 2.In review of the balance sheet, at the end of the first quarter, we had cash and cash equivalents of approximately $21.8 million.

This increase was due to the PIPE transaction that we completed in January. We continue to focus on lowering our cash burn in second half of 2023 to get to positive operational cash flow, which excludes nonrecurring and nonoperational items such as interest payments, transaction fees and tax payments for stock vesting. In addition to lowering our cash burn, the $500 million shelf registration that we filed in April will allow us to more easily access capital markets moving forward in support of organic and inorganic growth at this pivotal time in the AI industry landscape. Now turning to our financial outlook. Today, we are reaffirming our guidance of expected 2023 revenue in the range of $155 million to $170 million. We continue to expect adjusted EBITDA to be single-digit negative adjusted EBITDA in millions for 2023.

As Mandy previously stated, 2023 continues to be a foundational year for us as we build out our operational rigor and enhance our go-to-market capabilities, but we are thrilled with the progress we’ve seen so far. We’re very excited about our new strategic partnership with L3Harris to deliver AI/ML capabilities to their unmanned surface vessels as well as emerging opportunities as we expanded our core and adjacent markets. We will continue to be disciplined in cost management, and we will make targeted investments to accelerate our position as an industry leader in AI.I will now turn to Mandy for final remarks before we turn to Q&A.

Mandy Long: Thank you, Julie. I’m extremely excited about the pipeline ahead and our ability to deliver as we move forward. Our cost-cutting initiatives have been challenging, but we continue to be proud of the focus and the agility of the BigBerry.ai to collaborate and innovate in changing times. Operator, we are ready for questions. Thank you.

Q&A Session

Operator: [Operator Instructions] And our first question comes from Mike Latimore.

Operator: Our next question comes from Louie Dipalma of William Blair.

Operator: And our next question is from Param Singh of Oppenheimer.

Operator: There are no further questions at this time. This concludes the conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.