BlackSky Technology Inc. (NYSE:BKSY) Q1 2024 Earnings Call Transcript May 8, 2024
BlackSky Technology Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen, and welcome to BlackSky Technology’s First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this conference call is being recorded. I would now like to turn the call over to Aly Bonilla, BlackSky’s Vice President of Investor Relations. Please go ahead.
Aly Bonilla: Good morning, and thank you for joining us. Today I’m joined by our Chief Executive Officer, Brian O’Toole; and our Chief Financial Officer, Henry Dubois. On today’s call, Brian will provide some highlights on the quarter and give a strategic update on the business. Henry will then review the company’s first quarter financial results and outlook for 2024. Following our prepared remarks, we will open the line for your questions. A replay of this conference call will be available from approximately 12:30 p.m. Eastern Time today through May 22nd. Information to access the replay can be found in today’s press release. Additionally, a webcast of this earnings call will be available in the Investor Relations section of our website at www.blacksky.com.
In conjunction with today’s call, we have posted a quarterly earnings presentation on the Investor Relations website that you may use to follow along with our prepared remarks. Before we begin, let me remind you that certain statements made during today’s conference call regarding our future plans, objectives, and expected performance, including our financial guidance for 2024 are forward-looking statements. Actual results may differ materially as these statements are based on our current expectations as of today and are subject to risks and uncertainties, including those stated in our Form 10-K. We encourage you to review our press release, Form 10-K and other recent SEC filings for a full discussion of the risks and uncertainties that pertain to these statements and that may affect future results or the market price of our stock.
BlackSky assumes no obligation to update forward-looking statements, except as may be required by applicable law. In addition, during today’s call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, adjusted imagery and software analytical services cost of sales and cash operating expenses. The reconciliation of these non-GAAP financial measures to their most comparable GAAP measures are included in today’s accompanying presentation, which can be viewed and downloaded from our Investor Relations website. At this point, I’ll turn the call over to Brian O’Toole. Brian?
Brian O’Toole: Thanks, Aly, and good morning, everyone. Thank you for joining us on today’s call. Let’s begin with Slide 3. I’m happy to report that Q1 was another strong quarter as we continue to make great progress across all aspects of our business. Demand for our space-based intelligence remains strong as we continue to secure more new customers and expand the services we are delivering to existing customers. We also continue to demonstrate strong operating leverage in our business as revenue growth from our high-margin Imagery and Analytic services delivers improving operating margins. Combined with our disciplined cost management and streamlined operating efficiencies, we continue on our path of delivering positive adjusted EBITDA results.
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Q&A Session
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Let me share some of the quarter’s key highlights. First, we delivered strong year-over-year revenue growth of 32%. Our Imagery and Analytics revenue continued to grow with many of our existing customers placing incremental orders for our high-frequency imaging services. Second, we were awarded $30 million in new contracts and renewal agreements in the quarter, supporting U.S. and international government agencies. These contracts demonstrate the growing demand from customers looking to obtain BlackSky’s unique Space-Based Intelligence Solutions. Third, we delivered another quarter of positive adjusted EBITDA, driven by our strong revenue growth and operating leverage inherent in our business model. As our business continues to scale, we look forward to delivering improved EBITDA performance over time.
Fourth, we continue to make significant progress on the production of our Gen-3 satellites. Our constellation remains on track with Gen-3 satellites planned to start launching this year. And finally, we secured a $20 million commercial bank line in April, which strengthens our liquidity position and provide us with additional financial flexibility. Henry will go into more details on this transaction later. These highlights, along with the growing market demand for our Imagery and Analytic services and Space-Based Intelligence Solution reinforces our confidence that we are well positioned to capitalize on new sales opportunities and are progressing towards sustainable, long-term profitable growth. I would now like to share some operational highlights from the quarter.
Turning to Slide 4. During the quarter, we continued to invest in advanced AI capabilities, which are resulting in the capture of new customers and contracts. One of our recent awards was with the Air Force Research Laboratory or AFRL. Through this IDIQ contract, which is valued up to $24 million, we will develop and deliver advanced moving target engagement services in support of emerging surveillance, reconnaissance, and tracking or tactical SRT missions, which is one of the key commercial investment areas identified in the U.S. Space Force’s recently released commercial space strategy, which I will talk about more in a few minutes. The program will leverage our advanced AI capabilities to feature highly scalable and high-speed machine learning technology that can process data from our proprietary satellites and from other data sources to provide a deeper understanding of pattern of life changes.
These data sources can include government intelligence, surveillance, and reconnaissance or ISR, as well as data from other commercial providers. Combining multiple data sources through machine learning techniques increases our capability to detect, track, and identify moving targets more accurately and at a much greater scale. Turning to Slide 5. We continue to see government agencies at home and abroad, increasing their investments in space-based capabilities to meet their country-specific intelligence, surveillance, and economic development needs. This trend is driving strong demand for BlackSky’s products and services worldwide, resulting in new customer wins and the expansion of services to existing customers. One example is a multimillion-dollar contract we won during the first quarter with an existing defense and intelligence customer.
We’re happy to provide this customer with advanced space-based intelligence capabilities that are essential to their day-to-day operations. In addition, we successfully closed over 10 6-figure contracts and renewal agreements in the quarter. Many of these contract wins are multi-year awards, demonstrating the customer’s commitment to adopt long contract periods in order to secure access to our capacity. These multi-year contracts help to further strengthen our base of long-term customers and provides BlackSky with good revenue visibility. We’re happy that our land and expand strategy continues to gain traction as these new and expanded contracts help to further build the foundation for recurring subscription Imagery and Analytics revenue. Moving on to Slide 6.
I would like to provide an update on the contract supporting the government of Indonesia that we announced last quarter. Within 30 days after contract award, we sent a BlackSky team to Indonesia to provide training to government end users on how to task our Gen-2 satellite constellation and receive AI-driven analytics through our Spectra AI software platform. We’re pleased to report the training program was a success and that the Indonesian government now has direct access to our Spectra AI platform to receive high revisit satellite imagery and analytics. With BlackSky’s software-first AI approach, end users through our Spectra AI platform can receive real-time space-based intelligence, giving them a strategic first-to-act advantage on mission-critical objectives.
We continue to see strong interest in this new adoption and acquisition model from governments around the world. This new model enables customers to immediately take advantage of BlackSky’s real-time Imagery and Analytic Solutions, while also enabling them to develop and accelerate their sovereign-based space capabilities over time, leveraging rapidly advancing commercial space and AI technologies. Turning to Slide 7. Last month, the U.S. Space Force announced their new commercial space strategy. The strategy outlines a framework and a commitment for integrating commercial space solutions to deliver technological innovations that supplement government-owned and operated capabilities. The strategy aims to leverage commercial space solutions, combined with organic and allied capabilities into a hybrid architecture to enhance national security and other military requirements.
A key part of the strategy will be to strengthen partnerships with commercial space companies in order to develop more resilient space architectures and expand the number of solutions that can be addressed by the commercial industry. This is very encouraging for BlackSky as we have anticipated this market opportunity and have spent the last several years building an architecture capable of supporting these objectives. We have already won a number of multimillion dollar R&D programs with organizations such as the Defense Innovation Unit and AFRL, for capabilities such as moving target engagement and advanced tactical ISR capabilities from space. These program wins align with several of mission areas outlined in the Space Force’s commercial strategy.
We believe this has us well positioned as the Space Force moves forward with this plan over the next several years. Moving to Slide 8. We continue to make significant progress on our Gen-3 satellite program and remain on track to begin launching this year. Our Gen-3 satellites are in production and are currently in the integration phase. As a reminder, these satellites will deliver very high resolution 35-centimeter imaging, along with other advanced capabilities, such as short-wave IR and high-speed communications to further improve the timeliness and the delivery of actionable intelligence. Keep in mind, we already have contracts in hand for Gen-3 capacity and are excited to bring these new capabilities to market to unlock these revenue growth opportunities.
As these satellites begin to come online, we anticipate this new capacity and enhanced capabilities will meet the strong demand we’re seeing for space-based intelligence and drive even more opportunities over time. In summary, we’re pleased with the progress we made in the first quarter and the strong execution in our business. I’ll now turn it over to Henry to go through the quarterly financial results. Henry?
Henry Dubois: Thank you, Brian, and good morning, everyone. We’re pleased to have delivered another quarter of strong revenue growth and positive adjusted EBITDA. Now I’ll walk you through the details. Beginning with Slide 10. Total revenue for the first quarter of 2024 was $24.2 million, an increase of $5.8 million or 32% over the prior year quarter. Imagery and Analytics revenue grew to about $17.8 million, an increase of $2.1 million or 13% over the prior year period. The year-over-year increase was primarily driven by incremental customer orders for BlackSky’s imagery services. Professional and Engineering services revenue grew to $6.4 million in the first quarter of 2024 compared to $2.6 million in the prior year quarter.
The significant year-over-year increase was primarily driven by new customer wins and the step-up in the execution of multiple major international contracts we won last year. Keep in mind, revenues recognized from these types of contracts, which are largely milestone-based, may have quarter-over-quarter revenue variability. As a reminder, these strategic contracts deepen our relationship with these customers and are oftentimes precursors to securing long-term subscription contracts for Imagery and Analytic services. Moving on to Slide 11. Our Imagery and Analytics business continues to demonstrate strong operating leverage. Imagery and Analytics cost of sales, excluding stock-based compensation, depreciation, and amortization expenses was $3.4 million in the first quarter of 2024 compared to $3.6 million in the prior year quarter.
The $200,000 year-over-year decrease was primarily driven by cost savings in our satellite and software operations. Put another way, our first quarter 2024 Imagery and Analytics revenue increased 13% year-over-year, while our cost of sales decreased 6%, resulting in another quarter where our incremental high-margin revenues flow directly to the bottom line. This consistently strong performance further demonstrates the operating leverage in our business and is a fundamental driver to our long-term profitable growth. Let’s move to Slide 12 and talk about cash operating expenses, which excludes stock-based compensation and depreciation and the amortization expenses. For the first quarter of 2024, cash operating expenses were $16.1 million, an improvement of $300,000 compared to the prior year quarter.
This 2% reduction in our expenses demonstrates our lean business model and ability to effectively manage costs while continuing to substantially grow our top line, especially when compared with the revenue growth of 32% over the same period. This year-over-year improvement was primarily driven by reductions in general corporate costs, such as insurance, rent, and various professional fees. These cost savings more than offset investments we’ve made in our go-to-market initiatives, which include expanding our sales team to capitalize on new opportunities and investing in our AI capabilities and R&D efforts. Turning to Slide 13. Our adjusted EBITDA for the first quarter of 2024 was $1.4 million, an increase of $5.5 million compared to the prior year period.
The year-over-year improvement was primarily driven by greater volumes of our high-margin Imagery and Analytics revenue, coupled with cost savings and cash from operating expenses, as I just mentioned. Moving on to our balance sheet. We ended the first quarter of 2024 with $35.8 million of cash, restricted cash, and short-term investments. As you may have seen in April, we entered into a $20 million commercial bank line, which together with our ending cash position in Q1, brings our total liquidity to $55.8 million on a pro forma basis. In addition, we expect to further enhance our liquidity from the receipt of approximately $24 million from a few major customer contracts that include interim milestones for which revenue and costs have already been recognized, but have not yet been billed.
These activities, combined with the vendor financing in place for upcoming launches and anticipated continuing adjusted EBITDA improvements, reinforce our position that we have sufficient cash for the foreseeable future to execute on our business plan. Lastly, our capital expenditures in the first quarter of 2024 were $14.6 million, in line with our expectations and primarily due to milestone payments for our Gen-3 satellite production and software development spend to enhance our Spectra AI platform. Now let’s move on to our 2024 outlook, as shown on Slide 14. As mentioned earlier, we are continuing to win new contracts and expand existing agreements with U.S. and international government customers as demand for our Space-Based Intelligence Solutions remain strong.
With continued revenue growth and ongoing disciplined cost management, we expect to carry on the strong operating leverage our business has consistently delivered. Therefore, we are maintaining our full year 2024 guidance with revenues between $102 million to $118 million, adjusted EBITDA between $8 million to $16 million, and capital expenditures between $55 million and $65 million. In summary, we’re pleased with our financial performance in the first quarter and the continued momentum we’re seeing across our business. We look forward to continued progress throughout the year. With that, I’ll now turn it back over to Brian for some closing remarks. Brian?
Brian O’Toole: Thank you, Henry. In closing, we’re off to a strong start in 2024 as we continue to deliver critical intelligence that our customers rely on every day in support of their national security needs. We’re pleased with our first quarter results and the strong execution across all aspects of our business. We’re continuing to deliver revenue growth while demonstrating strong operating leverage in our business. We’re advancing our leadership position in AI as we continue to win more contracts driven by our advanced AI technology. We’re capitalizing on a growing U.S. and international market for BlackSky’s space-based intelligence and we’re advancing our leadership in space, and we’re ready to unlock our next phase of growth with the launch of our Gen-3 constellation.
We built a strong foundation, are executing well on our plan, and are on track to deliver sustainable, long-term profitable growth. This concludes our remarks for the call, and we’ll now take your questions.
Operator: [Operator Instructions] We’ll go first to Greg Burns with Sidoti & Company.
Gregory Burns: The first 2-year period of the EOCL contract is coming up, I think, this month. What’s your outlook for that? Do you expect the government to increase funding there or maintaining it at the same level? Any color you can give on that would be helpful.
