Surf Air Mobility Q2 2024 Earnings Call Transcript

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August 14, 2024

There are 5 speakers on the call.

Operator

you for standing by. At this time, I would like to welcome everyone to today's Surf Air Mobility Second Quarter 20 24 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you.

Operator

I would now like to turn the call over to Sam Levinson. Sam, please go ahead.

Speaker 1

Thank you, operator. Welcome to Surfer Mobility's Q2 2024 Earnings Call. I'm joined today by Deanna White, Chief Operating Officer and Interim Chief Executive Officer and Oliver Reeves, Chief Financial Officer. Our earnings results can be found on the SEC EDGAR website and on our SURF Air Mobility Investor Relations page at investors. Surfair.com.

Speaker 1

During this call, we will discuss our outlook and expectations for future performance. These forward looking statements may be preceded by words such as we expect, we believe, we anticipate or other similar statements. These statements are subject to risks and uncertainties and our actual results could differ materially from those views expressed today. Some of these risks have been set forth in our earnings release and in our periodic reports filed with the SEC. During today's call, we will present both GAAP and non GAAP measures.

Speaker 1

Additional disclosures regarding non GAAP measures, including a reconciliation of GAAP to non GAAP measures are included in the earnings release we issued earlier today, posted on the Surfer Mobility Investor Relations website and in our filings with the SEC. I'll now turn the call over to Surfer Mobility's Interim CEO, Deanna White. Deanna?

Speaker 2

Thank you, Sam. I would like to welcome everyone who has joined our call this evening. As many of you know, I have been with Surfer Mobility since 2021 and previously served as the Chief Financial Officer. Approximately 90 days ago, I became the Chief Operating Officer and Interim Chief Executive Officer. I know the organization well and understand our opportunities to lead innovation in our industry.

Speaker 2

I am excited to be here to execute our strategy. Let me start by noting how pleased we are with the financial results of the Q2. Revenue for the quarter exceeded our expectations and rose over 13% year over year on a pro form a basis. Adjusted EBITDA results were materially better than our expectations, with an adjusted EBITDA loss of $11,800,000 as compared with our expectations of a loss of $16,000,000 to $18,000,000 Let me take a moment to address the important we made yesterday related to our new venture with Palantir Technologies. We have been working with Palantir since 2021 to develop and deploy software and analytical tools across all three of our air travel brands.

Speaker 2

Going forward, we will form a new venture with Palantir, Surfair Technologies LLC to further develop market and sell a software platform solution for the advanced air mobility industry. At the center of this solution sits SURF OS, a category defining operating system and an all in one holistic suite of software tools to enable operators to more efficiently run their businesses. Components will include flight distribution, airline and charter operations, revenue and demand management, business intelligence, financial reporting and customer service. Surfer Mobility will become the 1st customer of Surfer Technologies and will thereafter leverage Palantir's sales force to offer SURF OS to Part 135 operators, existing aircraft manufacturers and manufacturers of clean sheet design electric aircraft. Surfair Technologies has unique relationship with Palantir, designed to penetrate the Part 135 market and harness the growth of the emerging regional air mobility segment of the aviation industry, which McKinsey estimate at between $75,000,000,000 $115,000,000,000 by 2,035.

Speaker 2

Using Palantir tools and processes, we will advance our efficiency, innovation and leadership position. An important reason for the formation of CertFair Technologies is to sub capitalize or refinance our software platform and reduce the capital burden on Surf Air Mobility. During the Q2, we made significant strides in the development of our software, adding exciting new features to our platform. First, we layered a Palantir powered solution into our new pilot check-in mobile app, which validates the pilot's eligibility before he or she takes a flight. 2nd, we started training a large language model, ASAM, on operational documentation such as aircraft manuals and operating specs, pilot training manuals and flight logs to serve our future AI needs.

Speaker 2

3rd, we worked on digitizing flight log records. Today, one of our pilots can take a picture of a handwritten flight log, which our mobile app, which will automatically digitize it, store it and allow someone to make prompts against the data using OpenAI's engine via Palantir. These features are just a small example of how software solutions and AI applications can meet the needs of our industry, which will only become more complex as the industry matures and expands. Turning to our electrification initiatives, our aircraft electrification program remains on track to complete the conceptual design phase by the end of the Q4 of 2024. At that stage, we will have selected the key supplier for the electric EP1 variant and will have concluded commercial agreements with our core supplier group.

Speaker 2

Regarding the hybrid EP1 variant, we have made significant progress on the preliminary design, having completed a series of trade studies. We are now confident in the system's performance and viability and the capacity of the supply chain to support its commercialization. With regard to our STC, we remain on track to meet our 2027 deadline. We intend to take a similar approach with our electrification initiatives as we have with our software and technology initiatives. Partnering with leading electrification supply chain partners to create a venture focused on building electrified powertrains for the Cessna Caravan and thereafter other turbo aircraft.

Speaker 2

As with our software platform initiatives, we intend to pursue the subcapitalization of our electrification initiatives. Now turning to our mobility initiative. In the last 3 months, we have moved rapidly to effect change and reposition our regional airline operations for success. First, we have augmented our leadership team. In June, we named Jim Sullivan President of Air Mobility.

Speaker 2

Jim is an airline industry veteran with experience as CEO and COO of a Canadian airline and previous experience as a commercial pilot and VP of Flight Operations at both JetBlue and Frontier. Jim is overseeing our regional airline operations and commercial strategy across all three of our travel brands. In July, we named Louie Sanciere, President of our Hawaiian operations reporting to JEM. Louie previously served in operations and guest experience roles at Hawaiian Airlines, Air Canada and WestJet. Jim and Louie have joined me to bring new focus and rigor to our regional airline operations.

Speaker 2

And as the Q2 results show, we are notching many early wins. Our regional airline operations, previously known as Southern Airways produced positive adjusted EBITDA for the Q2, which reversed a long standing trend. An early focus of the new team was to examine the profitability of each of our scheduled routes. This analysis identified unprofitable routes we have begun to discontinue. As mentioned last quarter, we added 2 new routes between Purdue University and O'Hare and between Williamsport, Pennsylvania and Dallas.

Speaker 2

Next, we are focused on our essential air service routes, which currently serve 20 markets and the anticipated positive impact from the passage of the FAA Reauthorization Act, which raises the cap on subsidies. The rate cap will potentially make existing routes more profitable when they are rebids and open new markets that would be attractive for us to bid on. 3rd, we are implementing new systems, processes and workflows, coupled with real time operational and financial KPIs to accurately measure performance against aviation standards. We are developing a best in class operations center, network of maintenance facilities and stations to more effectively support our geographic footprint. 4th, we are applying rigor to identify new growth markets for scheduled services and mapping out the timing of our needed equipment.

Speaker 2

We will be taking delivery of 8 new Caravan aircraft in the 3rd 4th quarters of this year. These initial deliveries will replace aging equipment and will have an immediate positive impact on fleet availability and completion rates, which in turn will drive increased revenue and maintenance cost reductions. Going forward, we are optimizing the quantity and timing of new aircraft deliveries to most effectively deploy new aircraft to growth markets, further expanding our leadership position as the largest commuter airline in the U. S. By departures.

Speaker 2

To put it simply, our first priority is improving our existing operations and our second priority is ensuring that we enter new markets profitably. Last, it is important to understand that we work today with over 15% of the Part 135 operators in North America booking charter flights. These operators are vendors to us today and will be our customers tomorrow for our SURF OS software platform and our electrification products. As evidenced by the revenue growth we have achieved in on demand services, our distribution platform continues to expand, further enhancing the network effect in our business model. To govern the transformation of Surf Air Mobility, I have implemented a strategic process across people, process and technology, which is serving as our roadmap for change.

Speaker 2

I look forward to discussing these pillars with you in more detail when we host our Investor Day in a few months. At that time, we will also discuss the early signs of progress from the work we have done as well as our revised go forward strategy. Now, let me take a moment to summarize what I have shared with you. We are moving fast. We are repositioning our strategy to drive profitability, reduce our capital needs and expand our industry leadership.

Speaker 2

We are partnering with exceptional companies such as Palantir and Textron to leverage our joint capabilities and further distance ourselves from the competition. We have new leadership, new systems, processes and workflows and a new strategic roadmap that we are executing against. We are notching early wins. We have a commitment to success and we look forward to keeping you informed of our progress over the coming quarters. With that, I will now turn the call over to Oliver to discuss our Q2 results and our outlook for the Q3.

Speaker 2

Oliver?

Speaker 3

Thank you, Diana. Revenue in the Q2 of 2024 rose 13.2% over the prior year period on a pro form a basis to €32,400,000 exceeding our expectations of €28,000,000 to €31,000,000 This double digit revenue growth was driven by 13.8% growth in scheduled service revenue and 11.7% growth in on demand service revenue. The increase in scheduled service revenue was primarily driven by the launch of subsidized flight operations on the Lanai route in Hawaii and the Purdue and Williamsport routes. The increase in on demand service revenue was driven by a 13.1% increase in departures over the comparable period. As Yana mentioned in her comments and as we discussed on our call last quarter, we undertook an analysis of all of our scheduled routes and have taken steps to either discontinue or improve the profitability of underperforming routes.

Speaker 3

Overall, increased subsidies and necessary cost cuts contributed to our improved profitability. As a result, our regional airline operations produced positive adjusted EBITDA for the 2nd quarter. Importantly, did not come at the expense of revenue growth and as expected does not yet reflect any positive impact from the FAA Reauthorization Act. On a pro form a basis, adjusted EBITDA loss increased modestly year over year to $11,800,000 from 11,100,000 dollars We are very pleased with this outcome as it is materially better than our expectations and with adjusted EBITDA loss of between $16,000,000 $18,000,000 for the quarter. Renewed rigor on cost control implemented by the new management team is already beginning to show results, and we are now targeting positive adjusted EBITDA at our regional airline operations for the full fiscal year.

Speaker 3

Turning to liquidity, as of June 30, 2024, ZFN Mobility had $1,500,000 of cash on hand, with the ability to draw $90,000,000 in committed draws and up to $296,000,000 in follow on draws, subject to the terms of the GEM share subscription facility. As a reminder, we continue to purposefully manage our cash balance to minimize the utilization of the GEM facility. Recently, we closed on our previously announced $35,200,000 convertible security with GEM Global High Yield. The new security cancels a significant portion of GEM's currently issued and freely tradable shares in the company. It imposes a volume restriction on daily trading and gives us the flexibility to redeem all or part of the security in cash at 115% of the then outstanding car amount.

Speaker 3

Importantly, as Jana mentioned, we have agreed to form Cerf Air Technologies, a venture with Palantir, and we will be working together with them to bring an outside investment to subcapitalize and fund our SURF OS software initiatives and thereby reduce the spend from SURF Air Mobility. Now turning to our guidance for the Q3, we expect 3rd quarter 2024 revenue in the range of CAD25 1,000,000 to CAD28 1,000,000 pro form a adjusted EBITDA loss in the range of CAD10 1,000,000 to CAD13 1,000,000 which excludes the expected impact of stock based compensation, changes in fair value of financial instruments and other nonrecurring items. The company's expectations for the Q3 reflect the impact of unplanned maintenance of aircraft over the last 2 months, resulting in lower completion factors. Due to these factors, the company currently expects that its regional airline operations will be marginally unprofitable on an adjusted EBITDA basis in the Q3. Importantly, the company continues to execute a series of actions to improve profitability and is targeting profitable regional airline operations for the full year.

Speaker 3

With that, let me turn the call back over to Diana for some closing thoughts.

Speaker 2

Thank you, Oliver. In my new capacity as Chief Operating Officer and Interim CEO, I would like to take a moment to share with you why I'm so excited about the opportunities ahead for this company. We are the largest commuter airline operator in the U. S. And we are advancing the very notion of air mobility.

Speaker 2

We operate in a vast marketplace, ripe for disruption. By partnering with Palantir, Textron and other leading organizations, we are bringing new innovations to the market. We are pioneering the path into fertile territory, empowering our operations to capture market growth, drive efficiencies and profitability and expand our offering across air mobility networks worldwide. We are still in very early innings, but we cannot be more excited about what lies ahead and we look forward to keeping you apprised of our progress. I would like to thank everyone who has been with us on this call today.

Speaker 2

I will now turn the call over to our operator so that we may take some of your questions.

Operator

Thanks, to compile the Q and A roster. And while we're waiting, just want to remind you again, joining us today to answer your questions are Deanna White, Chief Operating Officer and Interim CEO Oliver Reed, Chief Financial Officer Sudhind Shahani, Co Founder of Surf Air Mobility and Ito Gruberger, Chief Strategy Officer. And it looks like our first question today comes from the line of Austin Mueller with Canaccord Genuity. Austin, please go ahead.

Speaker 4

Hi, good afternoon. Just my first question here, what was the passenger load factor on the Purdue and Williams port routes currently? And how many flights do you schedule per week?

Speaker 2

This is Deanna. Thank you for your question. You broke up a little bit. It was hard to hear second part of it. But you were talking about the load factors on our newly launched, Purdue and Williamsport routes.

Speaker 2

The load factors are in the 50% approximately and improving. And both of those routes are, have shown us to be profitable for the time we've operated them right out of the gate with the private subsidies we have with those 2 partnerships.

Operator

Awesome. We're having a hard time hearing you.

Speaker 4

Can you go

Speaker 1

A little better. Go ahead.

Speaker 4

Sure. Just ask how many flights you have scheduled on those routes per week?

Speaker 2

Austin, this is Deanna. I think you said, how many flights do we have scheduled on each one of those routes per week? I don't have those exact numbers with me, but I can get back with you, and circle back with an answer after the call.

Speaker 4

Okay. Great. Thanks for the details. All

Operator

right. Thank you, Austin. And ladies and gentlemen, that does conclude our prepared remarks today. Thank you so much for joining and you may now disconnect. Have a good day everyone.

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Surf Air Mobility Q2 2024
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