BigBear.ai Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 6 speakers on the call.

Operator

You for joining the Big Bear dotai Second Quarter Conference Call. This call is being recorded. At this time, all participants are in a listen only mode and a question and answer session will follow the presentation. I will now turn the call over to Norm Loudermooch, Chief Operating Officer. Please go ahead, Mr.

Operator

Loudermooch.

Speaker 1

Good afternoon, everyone, and welcome to Big Bear AI's 2023 Second Quarter Conference Call. I'm joined by Mandy Long, our CEO 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 Big Bear AI specifically disclaims any obligation 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.

Speaker 1

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.

Speaker 2

Thank you, Norm, and thank you all for joining today's call. I'm excited to spend time with you today as the momentum at Big Bear I continue. We have driven change across our company and are increasingly poised to capture growth opportunities across the markets we service. We're delivering on our stated goals in this foundational year, improving operational rigor and building momentum in key sectors, And our culture of execution at Big Bear AI is unlocking significant opportunities and wins. We've also refreshed our branding, Supporting our reintroduction to the market and more closely aligning with the end markets we serve and the solutions we provide.

Speaker 2

A key win for us this quarter was being selected as the sole provider by the U. S. Army to implement Phase 2 of the Army Big Bear AI will provide a modern no code, low code solution designed to replace ATEC's legacy system with a cloud based API centric platform combining project and portfolio management, enterprise content management, workflow management, Application Integration and Business Intelligence Data Analytics Capabilities. The solution offers the U. S.

Speaker 2

Army unique and democratized access The data, collaboration tools and advanced analytics. What's important to recognize in this extension Moving from Phase 1 to Phase 2, the Army selected us as the sole provider after previously sharing this contract. This positions Big Bear AI well as future work is awarded. As we continue to execute, we will see more of these types of contract progressions. This award builds upon Big Bear AI's portfolio of work supporting U.

Speaker 2

S. Army readiness, including its continued delivery of the Global Force Information In addition to AIM, we received a 6 month extension from the U. S. Army as the prime contractor The extension builds on Big Bear AI's previous work in Phase 1 and Phase 2 and continues to show the strength of our relationship with the U. S.

Speaker 2

Army. This is another example of how we are well positioned to win future work. Under the terms of the single source contracts, State Fair AI will serve as a prime contractor to build an enterprise wide intelligent automation platform, providing the U. S. Army with a holistic view of its global force structure.

Speaker 2

During the extension, the Big Bear AI team will be charged with migrating the prototype into U. S. Army With one of the largest shipbuilders in the world, where we are currently supporting U. S.-based naval operations, displaying the global opportunity We are winning and beating competitors both large and small as the world unlocks the power of discrete event simulation and digital twins. Now I'm going to switch gears and talk about responsible and ethical AI.

Speaker 2

Earlier this year, we submitted comments to the National Telecommunications and Information Administration and Department of Commerce concerning accountability measures and policies for artificial intelligence systems. Specifically, we sought to provide a perspective on industry experiences related to And recommendations based on that experience in response to the Biden administration's concerns around accountability measures And policies for artificial intelligence systems. The rapid acceleration of AI innovation and integration into everyday civil society Underscores the importance of ongoing federal efforts to advance trustworthy AI applications, research U. S. Leadership in emerging AI systems and applications supports a national security strategy that defends core democratic values and protects Civil Liberties and Human Rights.

Speaker 2

NTIA's focus on developing sound AI assurance and accountability frameworks and standards It's a critical component for realizing the benefits of AI and mitigating risk, while incentivizing organizations to invest in AI system governance and We focus our thoughts on the scope of AI accountability mechanisms that It should involve collaboration between governments, regulatory bodies, industry stakeholders, academia And civil society to develop comprehensive frameworks that address the challenges and risks associated with AI design, development and deployment. Additionally, mechanisms should consider international cooperation and harmonization to facilitate consistent standards and practices across borders, While accommodating cultural, legal and societal differences, AI accountability measures should cover a range of As NTIA continues its work On drafting and issuing a report on AI accountability policy development, Big Bear AI strongly encourages the development of policies and regulations that support and encourage Responsible Innovation. Put it simply, we believe in the power that responsible technology can play in regulating technology and believe that today more than ever it is not only possible but necessary for AI accountability to be successful. Lastly, I want to share our excitement on the announcement of our new Chief Technology and Strategy Officer, Ted Tanner. Mr.

Speaker 2

Tanner has more than 30 years of Most recently serving as CTO and Chief Architect at IBM Watson Health, now Meredith. Ted also has held architect positions at both Apple and Microsoft and has co founded several acquired startups, including most recently PocketDoc acquired by Change Health. He also created one of the first machine learning and natural language as a service company is on Amazon AWS called belief networks. His extensive experience will be instrumental in delivering technology led solutions was already in place at Big Bear AI and we've added top talent from outside of the company. We are never done evolving, But I feel great about how we're positioned to lead in the AI industry with this team.

Speaker 2

With that, I will turn the call to Julie for a detailed review of our

Speaker 3

Thank you, Mandy. This past quarter, we executed well in the Additionally, as we make progress on our transformation to a higher margin Technology Led Solutions business, we are seeing our contract mix begin to shift and move away from programs like ePass. EPass represents a legacy program where we operated as a subcontractor, focused on resource staffing for the U. S. Air Force.

Speaker 3

Despite these headwinds, we delivered on what we set out to achieve. This is a testament to the team we are building and the Quality of our solutions and our ability to execute and grow within our markets. If anything, the current geopolitical climate has and our capabilities as a result. Now let's turn to quarter results. Revenue for the quarter With $38,500,000 up 2% year over year compared to $37,600,000 in the Q2 of 'twenty two and up 9% year to date.

Speaker 3

As always, I want to emphasize that our revenue can be lumpy and can fluctuate meaningfully GPM contract, partially offset by the termination of the Virgin Orbit contract and the completion of one phase of our ePass contract. Total gross margin was 23% in the quarter, a 2 20 basis point decrease from 25% in Q2 2022, driven primarily by the loss in revenue and gross margin from Virgin Orbit after their declared bankruptcy in April. In terms of this contract, Which is up 5% or approximately $9,000,000 compared to the Q1 of 2023. This increase Is largely driven by awards for the GFIM Extension, AIMS Contract and G3 Analytics. Now turning to expenses.

Speaker 3

For Q2, operating expenses were approximately $19,200,000 which included R and D expenses of $2,200,000 and SG and A expenses Of $16,900,000 We want to highlight that SG and A is down $10,000,000 or 37% versus last year When Q2 SG and A was $27,000,000 This significant reduction in SG and A was due to the effects of headcount reduction actions taken in Q3 of On a year over year basis, total operating expenses were lower by 70% this year in Q2 or 35%, excluding the goodwill impairment expenses in Q2 2022. Our net loss was $16,900,000 in the quarter versus $56,800,000 in Q2 2022. The current quarter includes a $3,100,000 Non cash charge related to the fair value adjustments on warrants that were issued in 2023. Additionally, the company booked a bad debt reserve of $675,000 this quarter related to the unpaid receivables from Virgin Orbit. Excluding the Q2 2022 non cash goodwill impairment charge of $35,300,000 operating expenses Have decreased approximately $10,500,000 in Q2 of 2023 versus the comparable period.

Speaker 3

Similarly, Our overall operating loss has improved by approximately 50% and $10,000,000 even after While we are pleased to report this level of improvement, we remain committed to driving improved operating efficiency in the second half of twenty twenty three and beyond, with a focus on gross margin improvement and continued rigor on operating expenses. Q2 adjusted EBITDA was impacted by the additional bad debt reserve and gross margin loss from Virgin Orbit, partially offset by improved performance on our GFIM contract compared to last quarter. In review of the balance sheet, at the end of the second quarter, we had cash and cash equivalents Of approximately $29,900,000 The increase was due to a $22,800,000 of net proceeds from the registered direct offering we completed in June. We are also expecting an additional $11,000,000 of government receivables in the quarter That will not come in, in Q3 due to the timing of payments. Most of these have already been received.

Speaker 3

As we stated last quarter, we continue to focus on lowering our cash burn in the second half of twenty twenty three to get to positive operational cash flow, which excludes non recurring and non operational items such as interest payments, legal and transaction fees and tax payments for stock vesting. Now turning to our financial outlook. Today, we are reaffirming our guidance of expected 2023 revenue in the range of $155,000,000 to $170,000,000 We continue to expect adjusted EBITDA to be single digit negative adjusted EBITDA in 1,000,000 for 2023. As Mandy previously stated, we are doing what we set out to accomplish in 2023 and our momentum continues to build. The anticipated GFIM extension, AIM's award and continued partnership and expansion with L3Harris gives us increased confidence in our leadership position within AI.

Speaker 3

With a stronger balance sheet, better operational execution, the right partners and a talented team in place, We continue to build and we are looking forward to growth to come. And now I turn to Mandy for final remarks before we turn to Q and A.

Speaker 2

Thank you, Julie. We have already made a great deal of progress and I am extremely excited about what we're building And the path ahead. Operator, we are ready for questions. Thank you.

Operator

Thank Your first question comes from Vivek Palani of Northland Capital. Your line is open.

Speaker 4

Hi. I'm Vivek on for Mike Latimore of Northland Capital. I have a couple of questions with me. The first one is, What is your headcount and are you planning on adding more by the year end?

Speaker 3

Hi there. Sorry, I missed your name. I missed the name. Sorry about that.

Speaker 4

Yes. I'm Vivek on for Mike Latimore.

Speaker 3

Vivek, I'm sorry. I missed the name. Sorry, sure. Great. Thanks for the question.

Speaker 3

On our headcount, we don't actually release our headcount numbers. But I will say, and I mentioned on the call on my scripted remarks that we are ramping down On from a specific contract and ramping up on others, that is showing that our headcount is actually coming down right now because of some of those contracts that are heavily weighted toward labor. But that is not a number that we specifically release. We will be growing headcount specifically in some areas based on key investments that we're making, But we're not releasing the specific headcount numbers at this time. Okay.

Speaker 3

My next question is, Are you

Speaker 4

expecting the large face of GFIM deal to get awarded in Q4 of this year?

Speaker 2

Hi, Vivek. This is Mandy. It's nice to talk with you again. And to build on Julie's Previous comments in regards to headcount. We have quite a few open positions right now that we're hiring for, specifically related to the contracts that we're executing On and those that are anticipated, to transition to GFIM, we From an expectation standpoint, right, as we look at the extension, that is certainly our hope.

Speaker 2

I would say, As we continue to work with the customer and reflect on timing, if there are any updates, right, I think we Certainly share those, but as of right now, yes, that is our current expectation.

Speaker 3

Okay. Thanks. And the last question is,

Speaker 4

so Where might the gross margins trend in second half of the year?

Speaker 3

Yes, great question. Yes, we saw some headwinds in the Half of the year, I think I talked a little bit about these, but specifically between Some contracts that were ramping down and as you recall, we talked about Virgin Orbit coming off our books and that obviously is creating Some headwinds for us in Q2 specifically, but we actually see that we have some contracts that are ramping down that are lower margin and other That we already are anticipating that are ramping up that are going to give us that better margin in the second half of the year. We're very confident that it's going to improve in the second half of the year. So I can provide a little bit more detail maybe offline, but happy to give you a little bit more of that when we connect later.

Speaker 2

Sure. Thanks a lot. And Vivek, one kind of comment that I'll make, we talked about it a little bit in our opening remarks Regarding this particular quarter, but I think it's worth reinforcing that right now we are in the midst of Very deliberately looking for places where we can shift away from businesses that are a part of our large portfolio that have margin ceilings towards Those with a larger opportunity for margin expansion and that's a lot of what I think Julie was really getting at as we look at sort of how we Think about how our backlog is changing, how we think about how our mix, right, from a contract basis is changing. We are seeing Great indicators, right, in terms of how we look at our mix of our fixed price mix going up, Right, quarter over quarter. And I think that those are indications when we look in the second half of the year that I think make us feel good.

Operator

Your next question comes from Louie Gopona with William Blair. Your line is open.

Speaker 5

Julie, are you able to quantify the impact of the portion of the EPAS subcontract ending? And Are you able to estimate what is the underlying growth of the business excluding this, EPAC headwind?

Speaker 3

Yes. I mean, it's fair to say that. So let me give you a little bit of insight specifically on ePass. So again, ePass is a legacy program. We were It really is a 2 phase of ramp down.

Speaker 3

So in the quarter specifically, we were notified last quarter that They transitioned ePass into a new prime and that prime was going with who we used to subcontract through. So That is shifting, but it's really in 2 parts. Part of it was completing at the end of Q1, part of it is completing within Q3. So it is going to gradually ramp down But we're not only looking at specific information about exactly that impact, but this is why I talk about the fact that Quarters can be lumpy depending on when contracts are ramping down and when they're ramping back up. And so you can see that reflected in our results as well as Always something that we consider as part of the business.

Speaker 5

Great. Thanks, Julie. And Mandy, Angelie, congrats on the GFIM 6 month extension. Is Big Bear expected to be awarded The production GFIM contract at the end of this year and with the current annual run rate Roughly $17,000,000 should the production cut Run rate roughly double that amount?

Speaker 2

So I'll take the first part of that. So From a production award standpoint,

Speaker 3

as we shared as a part of the

Speaker 2

extension, right, where the sole prime vendor Included in that, I think it puts us in a great position, right, when we think about what we're doing to deliver value, right, for the customer And so our chances as we look into the production award, but ultimately, obviously, as you know, Louise, the decision lies with the customer, but we will do our best, right to continue to deliver and I think that's why we earned the Phase 2 extension.

Speaker 5

Great. And Mandy, you also mentioned how you received the sole source AIMS OTA and that involved like no code, Low Code Solutions. Is there the potential that like AIMS can be in the same total contract value Size as GFIM or how would you estimate the size for investors on the call?

Speaker 2

So I think, so first, one thing worth noting about what you said is there is definitely a, I would note a So as we think about the work that we've done with GFAM and continue to do the work that we're doing in AIM, the thing that I would kind of reinforce to this thread along those is that We absolutely have a very strong partnership and pattern of success associated with being able to do transformation work associated with core business systems And in an intelligent automation platform form factor. From a size standpoint, we I think We expect as most of these happen, right, as you shift from Phase 1 to Phase 2 and then into production, the size of the contract It goes up significantly. I don't we don't have an indication of that total value at this point, but I think safe to assume a similar pattern. Great.

Speaker 5

And another question. With The equity offering, what is the new diluted share count that we should be using?

Speaker 3

Let me give you that. I've got that handy. Hold on just one second. Share For the end of the quarter or for the average for the quarter? I can give you both.

Speaker 3

The ending share count is 150

Speaker 5

Great. And one final one. With SG and A continuing to be Optimize, is there potential for further cuts into the second half of the year? Or are we currently at the optimal level?

Speaker 2

Yes, I mean That's your question and

Speaker 3

So I Go ahead. Sorry, Mandy, go ahead.

Speaker 2

No problem, Julie. So what I would say is that We are in a very good position right now and I think we have a lot to be proud of in terms of progress over the last I've been in the role for about 9 months. The kinds of improvements that we're seeing year over year are significant and the thing that I'm most proud of in that is that While we've really gotten our operating expenses to a good level, we are Right. And I think that it's a testament to the exceptional team that we have and the amount of rigor that we're putting in place associated with how we go after and grow opportunities. Now from a kind of how we look at the rest of this year, I do think that we're in a pretty balanced position right now.

Speaker 2

But we're always going to look for opportunities for further automation, right, and further optimization. And I would say, I always reserve the right To get better.

Speaker 3

Yes. Yes. Let me add that a little bit too. Just as a reminder, I mean, we We committed to deliver $20,000,000 in annualized savings last year after the Q2. We did our reductions and I can't give you the numbers right this would be Over $30,000,000 in annualized savings comparison to that Q2 baseline that we established.

Speaker 3

So as we talked about, we're very proud of So the work we've done to get our cost structure back in line to where we are, I would say, even with this improvement, we're committed to continuing to drive improved operating efficiency. And that's going to come over time, and we're going to continue to have rigor within our operating expenses. I would not anticipate Okay. Huge shift, but as Mandy talked about, this is something we're always going to be focused on and we'll continue to see that in the numbers.

Speaker 5

Great. And one final one. There's obviously a lot of excitement associated with generative AI In the market, for both federal defense customers and commercial customers, can you describe how this It's impacting your pipeline of award opportunities as you have your own Intellectual property here, and how is that translating? Thanks.

Speaker 2

Yes, absolutely. I can speak And what I would say is that, I think generative AI being one bucket, right, of opportunities that where we see Interest in our skill set being able to apply, but I would say, Louis, as we look at pipeline and how we're diversifying, Certainly not limited to that, right? The way that I and I think we as a business think about using advanced technologies like this Is that there are a variety of different tools in the tool belt, but at the end of the day, our job and how we approach engagements with customers Is that we want to understand what problems they're trying to solve, what challenges they're facing, and then we will bring the technology to bear, right, that is Crossing that possible and practical line, I think what's spectacular about where we are right now, right, as a society is that so many of these That previously lived in the lab have now crossed both, right, the possible and practical thresholds. And so we are seeing more and more opportunities To bring those into the solutions that we're delivering to our customers.

Speaker 5

Great. Yes. I was thinking along the lines of how last quarter You discussed the expansion of your partnership with LRS for their unmanned service That's why you're integrating your software into their platform and how there's probably other opportunities for similar Partnerships, there's a lot of excitement in the market. Thanks.

Speaker 2

Yes. I think that's well said and I think you're right. I think there's this interesting intersection that we're seeing emerge between those who are building and have Expertise right in building and delivering these physical platforms and organizations like Big Bear AI where our superpower lies Software, right, and underlying technology that when put together, right, is absolutely a differentiator. And so Some of the things I see as we look forward, I think we're going to have more opportunities for partnerships where 2 organizations can come together and say We've got some really complementary stuff and let's combine it and take that to market because it will ultimately benefit the customer.

Operator

At this time, there are no further questions. I'd like to turn the call back to management for any closing remarks.

Speaker 2

A huge thank you to everyone for joining and for the wonderful and thoughtful questions. As I shared earlier, I think We have in the 9 months that I've been in this role, really focused on being clear, right, The broad market around what it is that we're focused on, who we are and what we're setting out to do. I think this quarter is another great example Of what you can rely on from Big Bear AI and this leadership team associated with doing what we said. And as we look into the second half of this year, We continue to be excited. 2023 has been from the beginning, right, since I stepped into the role, a foundational year for this organization.

Speaker 2

The world is changing around us every day as we go through the 4th Industrial Revolution and Big Bear AI has All of the parts to play a very significant role in moving that ball forward. We look forward to reconnecting with everyone next quarter. Thank you so much.

Operator

Thank you everyone for attending today's conference call.

Powered by Quartr
Earnings Conference Call
BigBear.ai Q2 2023
00:00 / 00:00