AST SpaceMobile - Q3 2023

Transcript

Operator (participant)

Today, and thank you for standing by. Welcome to the AST SpaceMobile Third Quarter 2023 Business Update Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Scott Wisniewski, Chief Strategy Officer of AST SpaceMobile. Please go ahead.

Scott Wisniewski (CSO)

Thank you, and good afternoon, everyone. Let me refer you to page two of the presentation, which contains our safe harbor disclaimer. During today's call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements on this call. For more information about these risks and uncertainties, please refer to the Risk Factors section of AST SpaceMobile's annual report on Form 10-K for the year that ended December 31, 2022, filed with the Securities and Exchange Commission and other documents filed by AST SpaceMobile with the SEC from time to time. Readers are cautioned not to put undue reliance on forward-looking statements, and the company specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call.

Also, after our initial remarks, we will be starting our Q&A section with questions submitted in advance by our shareholders. Now, referring to page three, for those of you who may be new to our company and our mission, there are over 5 billion mobile phones in use today around the world, but many of us still experience gaps in coverage as we live, work, and travel. Additionally, there are billions of people without cellular broadband who remain unconnected to the global economy. The markets we are pursuing are massive, and the problem we are solving is important and touches nearly all of us. In this backdrop, AST SpaceMobile is building the first and only global cellular broadband network in space to operate directly with everyday, unmodified mobile devices and supported by our extensive IP and patent portfolio.

It is now my pleasure to pass it over to Chairman and CEO, Abel Avellan, who will take you through our activities since the last public update.

Abel Avellan (Chairman and CEO)

Thank you, Scott. I would like to welcome everybody to our Q3 2023 Earnings Call. Turning to page four, I would like to start off with our key highlights and updates. We recorded another historic first in the world of connectivity. BlueWalker 3 demonstrated the first and only space-based 5G capabilities and 40 Mbps data rates. This caps a highly successful testing program that includes 2G, 4G, and 5G, with participation from partners Vodafone, AT&T, Rakuten, and Nokia, validating AST SpaceMobile's satellite design, patented technology, and manufacturing strategy. We also are moving full speed ahead with our plans to launch the first five satellites in Q1 2024. Manufacturing is at a full speed and progressing well in Midland. As a measure of progress to date, we have already incurred approximately 85% of the planned capital expenditure for these satellites, including launch costs.

Transition to our cost profile, as we complete certain non-recurring R&D initiatives and the first five commercial satellites, we expect adjusted operating expenses to be between $25 million to $30 million per quarter, beginning from Q1 2024, versus the historical run rate of approximately $37 million to $40 million per quarter. Lastly, fundraising efforts with multiple strategic partners continue to advance and progress, and the timing is in line with what we disclosed to you a few weeks ago in our interim business update press release. Let's turn to page five, so I can provide some additional detail on how this is progressing. We're moving forward on definitive documentation and completion of diligence with multiple strategic partners. The strategic investment process is intended to result in new capital and establish new and incremental financial, commercial, and strategic relationships within the wireless ecosystem.

This new investment is intended to fund the manufacturing, launch, and operation of additional BlueBird satellites beyond our first five commercial satellites. Overall, we're encouraged by where we are in this process and hope to be able to share more at any time during November or December. Transitioning back to our technology on page six. For the third quarter in a row, we have made telecommunications history. In September, we accomplished another unprecedented leap in space-based cellular broadband by successfully making the first-ever 5G connection for voice and data between an everyday, unmodified smartphone and a satellite in space. The 5G call was placed on September eighth from an unmodified Samsung Galaxy S22, located in Hana, Hawaii, in a wireless dead zone. The testing was completed with our partners, Vodafone, AT&T, and Nokia, sharing in our collective success.

In a separate test, we broke previous space-based cellular broadband data sessions record by achieving a download rate of approximately 44 Mbps. I would also encourage you to watch the video of the 5G connection and other testing milestones using BlueWalker 3 on our website. Turning to page 7, our historic achievement of 5G cellular broadband directly from space comes at a time where the United States has placed an emphasis on ensuring 5G broadband connectivity to all Americans. Today, less than half of the geographic United States have 5G coverage, with download speeds greater than 7 Mbps. The SpaceMobile network is the only space-based network designed for cellular broadband, and we will be able to efficiently cover unconnected areas of the country to bring 5G connectivity to everyone. The FCC reopened comments to the 5G fund for Rural America rulemaking process, which we participated in.

We had encouraged the commission to make satellite network eligible for funding through this program, and look forward to monitoring development in the rulemaking process in the near term. This clear need that we are meeting is a key part of how we have been able to develop a strong wireless operators partners over time. On page eight, I want to give you a few examples of how our collaboration has been highlighted by our MNO partners. First, with a quick preview from how Vodafone is thinking about offering our service to seamlessly augment their market-leading terrestrial network. They will use us, the first and only space-based cellular broadband network, to offer voice calls, SMS texts, video calls, internet browsing, email, music streaming, social media, anywhere where the Vodafone subscriber may be located.

With AT&T, for the second quarter in a row, they have highlighted us from front and center as a key milestone in the, in their history and on our earnings call. Here, talking about their support from the world-first direct 5G voice call. The high-profile public support shows the seriousness and the depth of these relationships. Of course, AT&T and Vodafone are key partners for us, but they are not the only ones. Turning to page 89, we're proud to have MOUs and agreement with over 40 of the largest mobile network operators around the world, representing over 2 billion subscribers that will become accessible to us as we deploy our network.

These MNOs include Vodafone, Rakuten, AT&T, Bell Canada, Africell, Etisalat, Globe, Indosat, Liberty Latin America, LTC, Maxis, Millicom, MTN, Muni, Nysat, Optus, Orange, Salam, Safran, Tech, Smart, Smile, Somtel, STC, Telecom Argentina, Telefónica, Telkomsel, Telstra, Uganda Telecom, Jazz, Zain, and others. Before I provide an update on our manufacturing progress, I want to take a minute to highlight the strength of our intellectual property on page 10. Our IP portfolio continues to grow, now amounting to over 3,100 patents and patent pending claims. Over 30 patent families, over 25 US patent applications, and over 10 additional patents around the world. Our strategy since founding has been to patent key aspects of direct-to-device value chain on an end-to-end basis, as well as key aspects of our manufacturing process. Turning to page 11.

We're pleased to report great progress on the manufacturing of our first five commercial satellites at our facilities in Midland, Texas. We're in advanced stages of the production of key subsystems of the satellites and have a high level of vertical integration over the full process. All key components manufacturing have been brought in-house. We're running three shifts at our Midland facilities and have ramped to approximately 160 manufacturing employees, with over 100 of them in the picture above. To date, we have incurred 85% of planned capital expenditure, including launch costs. Transition to page twelve. I wanted to give you an update on manufacturing of our first five commercial satellites, which are, which are in advanced stages in Midland, Texas. It is important to understand the high level of vertical integration in our manufacturing process.

Being vertically integrated is very, is very important for us, as it allow us to maintain the unprecedented cost per unit delivered for our satellites, with the power and capability to deliver broadband directly to everyday smartphones. These capabilities are very unique in the industry and will allow us to run the manufacturing capacity of 6 satellites per month and 72 satellites per year. This page outlines the key subsystems that are part of our, our Microns, which are the building block of our phased array. Our Microns are designed for mass production and are all identical. Our ability to mass produce them is essential to the lowest cost of our satellites. In order to mass produce Microns effectively, we have vertically integrated the systems of the Micron: power system, power storage, electronics, and antennas.

We had a solar panel production in line in Midland and our own CIC lines, cover glass and interconnect cells at a supplier in order to lower our costs, extend life and modify performance of solar panels to survive in space. We also have battery pack production line in Midland, which then we get integrated into the Micron. Both the solar panel and batteries were brought in-house after being externally sourced for BlueWalker 3. Our electronics are designed to last 7-10 years while also maintaining low costs. We produce our electronics for our first five satellites utilizing FPGAs, field-programmable gate arrays, and our own PA LNAs to ensure performance in the harsh environment of space. For Block Two, the FPGA will be upgraded with our own ASICs.

Turning to the next page, our system is composed of a very large phased array, which is built out of the Microns that I explained in the previous page, and a central control and processing unit, which we call our ControlSat, which we will update you on here as well. The ControlSat is also made in-house, including the structure that houses our avionics flight software and central processing beamformer, which is the unit that generate and create the beam that turn into cellular-cell for managing direct connectivity to devices. This is also made in-house. The key component of this have been completed and are being integrated in our Midland, Texas facility.

The flight computer is an essential part of our system and is where we host our attitude control system to manage the position of the spacecraft, and also where we run flight software, which talk to every sensor and actuator on board to control our spacecraft. This is all made in-house, including the wiring harness. The software and control system is architected and designed in our U.S. offices and get integrated and tested in our Midland facilities. In this picture, you see the ControlSat component of the avionics stack, the harness, and all of the ground and flight software, which is required to manage and control the satellites. It is important to remind you that all these subsystems and this level of vertical integration is only possible thanks to the fact that we have BlueWalker 3 operating for over a year successfully.

That has given us all the learnings and all the required heritage in order to be able to integrate effectively and cost-effectively all these parts of our new build of satellites. And with that, I would like to pass over to Sean to provide a financial update.

Sean Wallace (EVP and CFO)

Thanks, Abel, and good afternoon, everyone. It has been a little over a year since BlueWalker 3 was lifted into orbit in the night sky at Cape Canaveral. Since that time, AST has continued to achieve a series of accomplishments and make progress towards the goal of building the AST SpaceMobile constellation. We are now driving and defining the satellite-to-device industry, which is rapidly becoming one of the most exciting innovations in the mobile phone industry in the last 50 years. Since our last earnings call, the AST SpaceMobile team completed more groundbreaking test results utilizing BlueWalker 3, made significant progress towards the expected launch of the five BB-1 satellites, and continued to focus on raising capital to fund the AST SpaceMobile constellation.

An exciting and tangible part of this advancement is watching our assembly, integration, and testing facility in Midland begin its production activity with dozens of technicians and engineers, as well as highly specialized processes, all contributed to the production of five BB-1s for the targeted launch next year. As always, I want to recognize and thank the hardworking team of engineers, technicians, and suppliers, and the support and confirmation by our partners, who are some of the most sophisticated wireless companies in the world, including AT&T, Vodafone, Rakuten, and Nokia. I want to start by reviewing our key operating metrics for the second quarter that are displayed on slide 14. On the first chart, we see, for the third quarter of 2023, we had non-GAAP adjusted cash operating expenses of $37.3 million versus $38.4 million in the second quarter.

Non-GAAP adjusted operating expenses excludes certain non-cash operating costs, including depreciation and amortization and stock-based compensation, compensation, which totaled $21.6 million and $19.6 million for the third and second quarters, respectively. Our third quarter non-GAAP adjusted operating expenses decreased by $1.1 million versus the second quarter. Our research and development expenses fell this quarter as a result of reduced expenditures associated with our ASIC chip design, as we continue to get closer to the completion of that work. Our R&D expenses consist principally of non-recurring development activities, for which we typically engage third-party vendors, and payments are based on the completion of milestones. Our engineering services expenses fell, and our general and administration expenses rose modestly in the third quarter.

Turning towards the second chart, our capital expenditures for the third quarter were $71.7 million versus $26.8 million for the second quarter. As we had indicated on our last call, we had expected our level of capital expenditures to increase substantially as we focused our efforts on procuring parts, materials, and systems for the BB-1 satellites, as well as to make payments to our provider of launch services. As of the end of the third quarter, we have spent over 85% of the expected amounts for these satellites. We are now projecting to spend approximately $115 million for the five BB-1 satellites, up from our last estimate of $110 million.

On a positive note, a good portion of the increase in cost was a result of a potential customer requesting a change in the inclination of the orbit so that our constellation could provide better coverage for their subscriber base. This change to the orbital location required an additional payment to our launch provider. On the final chart on the slide, we ended the third quarter with about $135 million in cash on hand. As we stated in our 10-Q, we believe this cash, as well as our ability to raise capital through our existing facilities, is sufficient to support our expenditures for at least the next 12 months.

As we have also discussed in our 10-Q, our cost positions and capital plans are quite modular, and this characteristic provides us the flexibility to increase or decrease our rate of expenditures, depending upon changes in our build-out plans and availability of capital. This flexibility provides us comfort that we can manage our liquidity profile dynamically, depending on our rate of raising capital. As we head towards the next fiscal year, I wanted to provide guidance on our expected operating expense levels and capital expenditures as we flip towards page 15. We have been supporting the development efforts of our two critical satellite designs, Block One and Block Two, our ASIC chip design, and the construction of five BB1 satellites.

The completion of this BB1 work and a significant portion of the BB2 and ASIC design work is expected to result in a material reduction in our adjusted operating expenses and future capital expenditures. This reduction in cash expenditures will be done without a material reduction in our employee headcount, as most of these reductions are related to the completion of third-party work. Overall, our adjusted operating expenses should decline from a range of $37 million to $40 million per quarter to a range of $25 million to $30 million per quarter, with the full effect starting in the first quarter of 2024. We also plan to reduce our level of capital expenditures as we reach the final investments for BB1 and the material investments for BB2.

Timing of the changes in our adjusted operating expenditures and capital expenditures, as I've just described, could be delayed or may not be realized due to a variety of factors. With that, this completes the presentation component of our earnings call, and I pass it back to Scott.

Scott Wisniewski (CSO)

Thank you, Sean. Before we go to the queue of analyst questions, we'd like to address a few of the questions submitted ahead of the call by our investors. Operator, could you please start us off with the first question?

Operator (participant)

Rolando from Paris asks, "Can the company discuss the competitive landscape for DTD and differentiate the different offerings that are in the works?

Abel Avellan (Chairman and CEO)

Thanks, Rolando. There have been a tremendous excitement about direct-to-device services. Over the past year, we have seen other companies put their hands up on a me-too offering. But clearly, when you get into their details, they are not broadband, scalable, or compatible with today's smartphones. This is a hard problem, which has a lot of different elements for success, and we have been entirely focused on development of this system since the founding of our company in 2017. We have invested over $700 million to date in this effort, resulting in over 3,100 patent and patent-pending claims and our own vertically integrated manufacturing capabilities for our satellites. AST SpaceMobile critical differentiation is that we are the first and only system designed for 5G cellular broadband.

We have shown the ability to achieve 5G data rates, as well 4G and 2G. Other systems today are far away from being able to achieve what we have and are primarily narrowband text and emergency service offering. Our very large phased array antenna, combined with our own ASICs, is unique in this space and is critical for achieving 5G directly to existing everyday smartphones, to scale up to serve the needs of the 5 billion phones in circulation in partnership with the leading and largest MNOs on the planet.

Operator (participant)

Tanner from California asks, "How long from finalizing the ASIC design will you get the chip?

Abel Avellan (Chairman and CEO)

Thanks, Tanner. The development of the ASIC was a 4-year process with a cost in excess of $40 million. That is mostly, at this point, behind us. The design is substantially complete. We expect we will be able to start getting the first units around 3-4 months after the tape out, which is the process where the design gets produced by our foundry partner, TSMC. I just want to remind everyone that the first five commercial satellites will be flying using our current FPGAs, which is essentially the programmable version of the ASIC. The ASIC is expected to give us a 10x improvement in processing bandwidth of 1 GHz-10 GHz of available spectrum per satellite, while reducing the power and consumption and cost of the satellites.

We believe that this is a significant barrier of entry for space-based cellular broadband, along with our large 2,400sq ft phased array.

Operator (participant)

Lydon from New Zealand asks, "How much out of factory testing is AST reliant on? Can everything be tested in-house at this point?

Scott Wisniewski (CSO)

Thank you, Lydon. I'll take this one. You may recall with BlueWalker 3 that we had to move the satellite off-site several times. This included vibration and other testing. Right before we shipped the satellite to Cape Canaveral, we actually had to go back to California for testing, which of course is inefficient and introduced extra time to our schedule. Now, for our first 5 commercial satellites, we will be able to conduct all of our out-of-factory testing in-house at our Site Two facility in Midland, Texas. This testing includes component-level and satellite-level thermal vibration and RF testing. This is another great capability that we've brought in-house alongside the vertical integration that Abel discussed earlier. As a result of this, we expect to significantly shorten our production times and increase our control of our process compared to BlueWalker 3.

Operator (participant)

Lydon from New Zealand asks, "Do you expect to enter into commercial agreements with MNOs prior or post-launch? Has the company decided on which inclinations they intend to initially serve?

Scott Wisniewski (CSO)

As we discussed earlier, we've been continuing to grow the list of MNOs that we have MOUs and agreements with. We're now at over 40 operators globally, who collectively cover over 2 billion subscribers. Our plan is to sign some of these agreements prior to launch, and in fact, we recently changed the inclination for our first 5 satellites based on customer feedback. We're gonna be at a 53-degree inclination, and this orbit allows our satellites to cover anywhere on the globe, up to 59 degrees latitude for both the northern and southern hemispheres. With that, I'd like to thank our shareholders for submitting these questions. Operator, let's open up the call to analyst questions now.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Our first question is from Benjamin Black with Deutsche Bank. Please proceed with your question.

Benjamin Black (Managing Director and Senior Equity Analyst - Technology, Internet, and Media)

Hey, guys. Thanks for taking the question. A couple from me. The first one is: Is there any more color you guys can share on the strategic investment process, what it is you're looking for, and what shape you think those partnerships could take? Thanks.

Scott Wisniewski (CSO)

Hi, Ben. Appreciate the question. I think, you know, we've put most of the latest information in this presentation already. You know, this is an important phase for us because it lays out not just funding, but also the commercial and strategic relationships that will be important for us. So we're very encouraged where we are right now and, you know, we look forward to giving more details during November and December.

Benjamin Black (Managing Director and Senior Equity Analyst - Technology, Internet, and Media)

Got it. And now that you've achieved 5G connectivity, what's the next major testing milestone you guys are looking for, if any?

Abel Avellan (Chairman and CEO)

Hi, Ben, how are you? We're turning our attention now to the build of the next five satellites. We continue testing with BlueWalker 3, but the major milestones required of BlueWalker 3 have been completed.

Benjamin Black (Managing Director and Senior Equity Analyst - Technology, Internet, and Media)

Okay, got it. And then, is there any more color you guys can give on the CapEx trajectory, going forward? I heard the comment that it might decline, but just wondering at what pace and kind of to what magnitude? And that's it for me. Thanks.

Scott Wisniewski (CSO)

Obviously, this last quarter, we've seen a pretty big bump up in our CapEx as a result of some final payments on BB1 and some other BB2 expenditures. We expect the number to come down materially from there. We don't give guidance on that, but it'll be significantly lower than what we've seen in the last two quarters.

Operator (participant)

Thank you. Our next question is from Griffin Boss with B. Riley Securities. Please proceed with your question.

Griffin Boss (Equity Research Analyst)

Hi, thanks for taking my questions. So first for me is, are there any additional insights you can share that you might have learned over the past three months regarding capacity and ability to process multiple calls concurrently within a certain beam or cell?

Abel Avellan (Chairman and CEO)

We have already given preliminary guidance of what is the capacity per satellite is in the, and what is the processing bandwidth that we can support. For Block 1 with the FPGA-based system, is about 1 GHz of processing bandwidth. With the ASIC, that is a tenfold increment to 10 GHz processing bandwidth. And our testing support these assumptions.

Griffin Boss (Equity Research Analyst)

Okay, got it. But just with BlueWalker 3, have you been testing with multiple calls at once? I don't know that I've seen, you know, any test data regarding multiple calls at a single time or multiple video calls? Yeah.

Abel Avellan (Chairman and CEO)

Yeah, we have, we have, done multiple and simultaneous. We also have opened up the pipes to let hundreds, in some instance, thousands of phones latching, connecting to the system. So that also has been verified during the testing.

Griffin Boss (Equity Research Analyst)

Okay, great. All right. Thanks, Abel. I appreciate that. And then, so stepping back, just regarding the U.S. National Spectrum Security that was released yesterday, just curious if there was anything in that that caught your eye as notable as it relates to supplemental coverage in space or, you know, if there's anything in there that suggests to you that the FCC might now move faster on developing such a framework?

Abel Avellan (Chairman and CEO)

Yeah, well, as you know, we invented direct-to-device. We and we are the first one to demonstrate it at a broadband, and we are the only system that support it. We are super encouraged by having a presidential notice where the first item, it is basically a system that replicates what we have invented. So yeah, that caught our eyes. We're very happy. We're very encouraged about that. I think this will facilitate in the future how our services will be regulated, in particular in the United States. United States is also a reference for other countries.

Together with our strategic investors, current strategic investors, we had achieved significant progress around the world in getting this system regulated and to be able to be used, and we solve a big problem. So yeah, we're very proud of being mentioned and be part of presidential strategies for spectrum, which is basically unexpected usage that support a system that we invented and where we are the only one that can provide broadband connectivity directly to regular devices. So we are very happy, very encouraged by that.

Griffin Boss (Equity Research Analyst)

Got it. Great. Thanks for the insights. And then if I could just sneak one more in. There was a question earlier on the competitive landscape. I was wondering if you could share any of your opinions, you know, if you have any, as to why you think Qualcomm walked away from Iridium recently?

Abel Avellan (Chairman and CEO)

Yeah. Listen, I mean, there are 5 billion phones in circulation. When we launched this design of this system, there was a prerequisite that is that you do not need any special chip, any special frequency or any special nothing in your device. Because the moment that you do that, you take that 5 billion phones in circulation to a niche play. And anything that require a change or is an SOS or test, we believe that is limited, and with a limited market opportunity compared with broadband directly to everyday smartphone, with the phone that you have in your pocket.

So we're not surprised by this, and I do believe—we, we do believe that any solution that requires special terminal, as we become a reality, as we start launching our satellites as early as next quarter, next year, all those solutions become less and less relevant. So, so we're not surprised by it. And, and, I think if, if anything, it support our vision that this system needs to support any phone, every phone, everywhere, without requiring any change, any chip, any, any special ASIC on the—any, or any special chipset or, or anything that is proprietary to the phone, in order to make it available for all 5 billion phones in circulation.

Griffin Boss (Equity Research Analyst)

Got it. All right, great. Thanks. Appreciate it, and good luck.

Operator (participant)

At this time, I'm showing no further questions. I would like to turn the call back over to management for closing remarks.

Scott Wisniewski (CSO)

Great. Thank you, operator. Our company is building a space-based cellular broadband network designed for use of the phone in your pocket today. I want to thank everyone for joining, both the shareholders and the research analysts for the questions. Have a great evening.

Operator (participant)

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.