BigBear.ai Holdings, Inc. (NYSE:BBAI) Q4 2022 Earnings Call Transcript

BigBear.ai Holdings, Inc. (NYSE:BBAI) Q4 2022 Earnings Call Transcript March 13, 2023

Operator: Thank you for joining the BigBear.ai Fourth Quarter and Full Year 2022 Conference Call. This call is being recorded. 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’s 2022 Fourth Quarter and Full Year Earnings 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 BigBear.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.

Amanda Long: Thank you, Shane. And thank you all for joining today’s call. In the fourth quarter, we achieved our 2022 financial outlook and took significant steps to bolster our fundamentals and set the stage for long-term growth. As discussed in previous calls, we have continued to take material steps forward in reducing our recurring operating expenses and improving our liquidity position. Less than six months into my role as CEO, we are much healthier. We’ve cleaned up our operating structure fund in the company in a very tough market and completed a comprehensive technology assessment to baseline our portfolio. We now have a clearer understanding of our capabilities, and how they can be applied to the markets that we serve.

I see 2023 as a critical foundational year for us, as we support some of the challenging things that are happening in the world right now. And strive to deliver clarity for the world’s most complex decisions. We were in the midst of an unprecedented wave of excitement around artificial intelligence. Key decision makers and leaders across governments and industry are recognizing the necessity of at scale production great adoption of AI powered decision support. BigBear’s capabilities and decades long heritage in this field gives us a competitive advantage in delivering a higher form, a reliable, scalable decision intelligence solution. We’re seeing an explosion of interest in what we provide. And we are continuing to foster our innovation pipeline to adapt and extend our capabilities to serve our markets.

We will continue to focus on delivering solutions in three core markets; complex global supply chains and logistics, autonomous systems and cyber. We anticipate the government investment in AI solutions will continue to grow. In November 2022, the U.S. Department of Defense released its national defense strategy, which stated that the government would continue to invest in AI and aggressively seek to fill technology gaps in its AI specialization. In December 2022, the U.S. National Defense spending bill was passed allotting over $800 billion in funding to our national security and recommending boosted spending on AI solutions to protect our nation from increasingly sophisticated cyber threats. And just last week, President Biden put forward his 2024 defense budget proposal, which included a record amount of $145 billion for research and development.

At BigBear.ai, we are uniquely positioned and view the unfolding global market dynamics as an opportunity for us to be a catalyst. There will be millions of models that might play a role in the orchestra of how we’ll achieve true augmented decision intelligence in high stakes environments and there will not be a single company that provides all of these models, an organization needs to step up for production grade AI adoption to happen at scale. In other words, this orchestra will need a conductor. That is the role that we will play, we will be the conductor. We have been a trusted partner to critical government agencies for decades. Throughout 2022, we deepen these relationships and see examples of this and selections such as the $900 million 10-year multiple award Air Force IDIQ contract vehicle, where we will have the opportunity to compete for task orders.

With the integration of our legacy companies, we have the capabilities to compete in a more substantial contracting space and have a seat at the table as an established prime contractor for innovative government and defense work. We are showcasing our strengths in complex global supply chains and logistics through our global force Information Management, or GFIM. Phase 2 work, where our solutions are empowering senior leaders and combatant commanders to man equip, train, ready and resource the army more effectively by transitioning 14 legacy system into a single solution to provide real time holistic data for 160,000 users. This phase 2 work is significant in that it builds on our successful fee from prototype efforts during phase 1, and accelerated what was supposed to be a $2 million award for a second prototype into a $14.8 million award to deliver a minimum viable product.

Additionally, the phase 2 award accelerates the program timeline while naming BigBear as the sole prime contractor to deliver this critical capability and puts us in a strong position to receive the phase 3 production award. We are continuing to demonstrate our expertise in autonomous systems through our participation in the digital horizon event series, which supports the Navy’s efforts to integrate AI technologies in unmanned surface vessels. We look forward to showcasing our threat intelligence and situational awareness capabilities at IMX 23, the largest maritime exercise in the Middle East. Our experience and lessons learned through these events sets us up to be a premier partner with the Department of Defense as they tackle their broader Debt 2 strategy, a multibillion dollar effort to use AI, ML and predictive analytics to better sense, make sense and act at the speed of relevance.

We are also providing cyber solutions across sectors. Our spacecraft partnership with Red Wire is delivering a suite of phased cybersecurity solutions to minor effort in the development of an advanced satellite communications program sponsored by DARPA. Our specialized reverse engineering capabilities provide critical insights to our customers as they look to manage the increasingly complex and threat heavy environment of cybersecurity. We are continuing to build our pipeline and the complex manufacturing, shipping and shipbuilding industries. And we are making significant progress. Our process simulation and modeling solutions help companies manage massive and complex physical and information environments, delivering clarity on facility, equipment and personnel systems, forecasting requirements and simulating real world situations.

Another focus area for us in the back half of 2022 was the implementation of the cost savings initiatives we discussed on our last two calls and began implementing in the third quarter. The fourth quarter was our first full quarter to benefit from our restructuring and we are pleased to have delivered on our revenue and adjusted EBITDA target despite a continued challenging macro environment. We continued our cost reduction actions in Q4 and Q1 23 taking additional steps to reduce our overhead spend and improve our financial position. Additionally, in the first quarter of 2023, we closed a private placement for $25 million in a very challenging market, bolstering our balance sheet and providing us with sufficient liquidity to execute on our strategy in 2023.

We are in a solid position and will continue to keep an open eye towards opportunities to grow our portfolio and organically in the coming quarters as well. With that, I will turn the call to Julie for a detailed review of our financials.

Julie Peffer: Thank you Mandy. Now let’s turn to our fourth quarter and full year results. Revenue for the quarter was $40.4 million compared to $33.5 million in fourth quarter of 2021, which was 21% year-over-year growth, primarily driven by our analytics segment at $23.1 million in the quarter, an increase of $6.5 million, or 39%, compared to the same period in 2021. This growth was driven by key program wins in 2022, including the phase 2 award for the global force information management or GPM program with the U.S. Army that Mandy walked through earlier. Revenue in our C&E segment was $17.2 million in the quarter, compared to $16.8 million in Q4 2021. For full year revenue, we achieved our guidance target with revenue of $155 million representing 6% year-over-year growth versus 2021.

The gross margin was 29% in the quarter, an increase from 11% in Q4 2021, driven by the growth in our analytics segment. Turning to segment adjusted gross margins, we are continuing to see growth in our higher margin analytics segment, which includes our commercial business outpace our C&E segments. We anticipate that this trend will contribute to increasing segment adjusted margins going forward. The segment adjusted gross margin was 35% in Q4 2022, compared to 31% in Q4 2021. Segment adjusted gross margin in Analytics was 47% in Q4 2022, compared to 34% for Q4 2021, driven by prior investments that were successful in winning and executing higher margin follow on awards. Segment adjusted margin for C&E was 20% compared to 28% in Q4 2021, primarily driven by a onetime year-to-date fringe rate true up adjustment that was recorded in fourth quarter of 2021, resulting in a higher than typical segment adjusted gross margin in that period.

Now turning to backlog. Backlog was $222 million at year end, which is down 23% or $66 million compared to the third quarter. This was largely driven by contract converting into Q4 revenue of $40 million, as well as a couple of contracts that expired period of performance in the quarter. For those types of material contracts, the customer did not spin to their contractual limits. So our backlog was reduced for any remaining funds when the period of performance was completed. In most cases, we simply roll into the next option year on the contract and we continue to work with these customers to extend these contracts at the end of their option years to recapture these funds. In addition, backlog was impacted by one government contract where we switched to a subcontractor role.

This change in the contract vehicle type does not impact the revenue associated with this work, but impacts when we receive funding from the prime. As a reminder, when comparing our backlog in prior quarters, we made a change in our methodology of measuring backlog to take a more conservative approach that does not include anticipated follow on awards, and also updated estimates as it related to unpriced unexercised backlog. Now turning to expenses, for Q4, operating expenses were $38.2 million, or $19.9 million excluding the non-cash goodwill impairment charge. Q4 operating expenses included R&D expenses of $1.2 million, and SG&A expenses of $15.6 million or $16.8 million in total. This represents a 43% reduction from R&D and SG&A expenses in Q2 of $29.4 million prior to initiating our cost reduction action plan.

Excluding the impact of stock-based compensation and non-recurring integration expenses in both periods, Q4 expense still reflect a 27% decrease in spending compared to Q2, driven by a full quarter benefit of cost savings initiatives we implemented in the back half of the year. While we believe the actions we took in the third and fourth quarters of 2022 and the first quarter of 2023 have positioned us to operate efficiently going forward we will continue to be disciplined in our expense management as we grow and we will be focused on implementing scalable processes, operating rigor and driving overall efficiency across our business. Looking ahead, we are also focused on ways to improve efficiency of contracting processes and timeliness of payments.

Net loss was $29.9 million in the quarter versus $114.8 million in Q4 of last year when we had $60.5 million of stock based compensation expense related to the merger transaction. The net loss in the fourth quarter of 2022 was impacted by a non-cash goodwill impairment charge of $18.3 million in our analytics segment. We reviewed goodwill for impairment in the fourth quarter and while we saw improved financial results in our analytic segment this quarter, relative to fourth quarter of 2021, we concluded that our goodwill was impaired due to several factors, including current macroeconomic headwinds, and previously anticipated growth rate. Adjusted EBITDA was a loss of $2.5 million in Q4 compared to adjusted EBITDA loss of $3.9 million in the third quarter, and $7.7 million in the second quarter.

Our total adjusted EBITDA loss for the second half of 2022 was $6.5 million as we forecasted, compared to the $10.6 million in the first half of 2022. With our cost saving actions in the second half of the year, we now have a foundational baseline for future profitable growth. In review of the balance sheet, at the end of the fourth quarter, we had cash and cash equivalents of approximately $12.6 million. Of the $9 million operational cash usage in Q4, $6 million with our biannual interest payments. The remaining operational cash burn of $3 million was significantly less than previous quarters as a result of the cost initiatives we executed beginning in the third quarter. In January, we took steps to address liquidity with a $25 million private placement which provides us with sufficient liquidity to execute our 2023 strategy.

Following the actions we took to right size, our operational cost structure in the second half of 2022 and early 2023, we expect to continue the trend toward a much lower cash burn in 2023. We are focused on achieving positive operational cash flow in the second half of 2023, which excludes non-recurring and non-operational items, including interest payments, transaction fees, tax payments for stock, vesting and severance costs associated with a reduction in force. And finally, I wanted to provide additional context of the material weakness that we described in our earnings release related to our internal IT control. Following a completed a thorough review of our financial statements, and have not identified any material errors in our financial results or our consolidated financial statements, we have discovered gaps in our internal control processes, and IT related controls that in aggregate resulted in a material weakness in our internal controls.

We are addressing the issues, including enhancing segregation of duties, implementing additional IT, general controls, and increased monitoring and oversight activities. We are implementing a comprehensive remediation plan in coordination with our auditor, and expect the remediation work to be completed this year. Turning to Outlook, we are expecting 2023 revenues to be in the range of $155 million to $170 million. We are projecting single digit negative adjusted EBITDA in millions for 2023. We have several significant expected contract awards in our pipeline, which given their size and timing of award could have a significant impact on our FY 2023 revenue. Additionally, as Mandy said in her opening remarks, it’s clear that the race for AI dominance will continue in 2023.

As we execute our strategy this year, we will undoubtedly have to make certain investments that we believe will be catalysts in accelerating our success as an industry leader in AI. Looking ahead, we remain disciplined on managing cost and focused on areas to drive operational efficiency. Following our cost reduction initiative, we anticipate substantially lower cash burn particularly in the second half of 2023 as we saw in the fourth quarter of 2022. After improving our near term liquidity position, we will make targeted investments to efficiently drive sustainable growth. We are well positioned to deliver increasing gross margins and steady revenue growth driven by increasing demand for offerings in federal markets, and our ramp up in commercial go to market efforts, as well as a continued shift in our business mix in favor of higher margin analytics segment.

I’ll turn it over to Mandy for final remarks before we turn to Q&A.

Amanda Long: Thank you, Julie. I am proud of the BigBear.ai team and the work that we have done to deliver on our commitments and begin to capitalize on the evolving market opportunities we discussed. That is the pattern that you will always see here. We will say what we are going to do, and then we will do it. We know what we are capable of. We aren’t afraid to learn fast and work hard and we see the long game. 2023 will be an important year of growth and stability for BigBear.ai as we deliver clarity for the world’s most complex decisions. We’re very excited about the year ahead. Operator, we’re ready for questions. Thank you.

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Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. And our first question comes from the line of Louie DiPalma with William Blair. Please proceed with your question.

Louie DiPalma: Mandy and Julie. Good evening.

Amanda Long: Hi, Louie.

Louie DiPalma: Hi, hi there. There has been a great deal of investor excitement associated with ChatGPT and its impact on AI innovation. Can you provide a quick overview of how your solutions may differ from ChatGPT and your use of tensor completion as part of your AI solution? And also related to this, will ChatGPT developments translate into contracts for BigBear.ai over the long-term or how should we in general think about the recent excitement for AI solutions? Thanks.

Amanda Long: Thank you, Louie It is an incredibly fair question. And I think, one that many wonder about. So ChatGPT as a whole right is I think there’s been a lot of coverage on is derived off of LMs, right, large language models, which is a capability that’s actually existed for a very, very long time, and has been applied. BigBear uses LMs, a lot of companies do. But I think that this particular instance is the first time we’ve seen a degree of democratization and consumer facing access to the capabilities that exist within training on such a large spectrum of data. Now, in terms of kind of how that pulls forward. For us, I think what’s important to know about BigBear is that we have more than a couple of decades of experience in working in even the early days of machine learning.

And now, as deep learning has progressed, we leverage a wide variety of training tools and methodologies to meet customer needs. And sometimes that, to your point, right, may require different types of artificial intelligence, whether it’s the work that we do in predictive analytics, whether it’s computer vision, or the underlying tools that we use to accomplish those things, we have skill sets that tap into each of them. But what I would note in terms of the you mentioned tensor, right. I think the big thing that I always say about AI in general is that it is a tool, it is a spectacular tool. And it can be applied in a way that, even five years ago, we really couldn’t tap into because of the limitations around compute. But at the end of the day, as a technology provider, and as a solution provider, our job is to use the right tools to solve the customer problem.

And we’re going to lean into things like tensor, right as a as an example. It does a pretty spectacular job. And we’ve been working in that for quite a while around weak link correlation. So dirty datasets. And we do use that and some of our solutions that are deployed with the federal government as we look forward into 2023, as well as beyond unquestionably we are seeing an unbelievable amount of interest in the application of artificial intelligence in both the federal sector as well as the commercial sector. What’s putting us apart in those conversations, and what gets us excited about the future is that we’re not new to the table. We’ve been doing this for a very long time. And we have a lot of production examples of the types of tools that I just talked about.

And so I would expect, and when we look at our pipeline, right, I see a lot of promise, right, associated with where we’re headed. And it’s really on us to do what we did, right, go execute, and then keep sharing it as we go. Does that answer your question, Louie?

Louie DiPalma: Yes, definitely. Thanks, Mandy. And you were you were just talking about production examples. And last quarter, you discussed how your Med model and future flow RX platforms have been gaining some traction with hospital customers. And I’m wondering how has that platform progressed since last quarter in terms of customer adoption? And what is the pipeline look like?

Amanda Long: So it’s a great question. And I do want to note, right, the commercial side of our business, which does include the future Clorox solution, we don’t break out separately in terms of recording, but the pediatric care crisis continues. Right, there is a unbelievable challenge happening in the world that I spent many years in across hospitals and health systems associated with staffing shortages associated with incredible optics, in particular types of illnesses that we just haven’t seen, right in this kind of volume for a very long time. And our tools are incredibly well situated to be able to help with how to design, right patient flow solutions and optimization solutions for how to get patients to the right place at the right time and do prioritization. We are continuing to see interest in that and our pipeline is reflective. Does that answer your question?