BigBear.ai - Q2 2023

Transcript

Operator (participant)

Thank you for joining the BigBear.ai 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I will now turn the call over to Norm Laudermilch, Chief Operating Officer. Please go ahead, Mr. Laudermilch.

Norm Laudermilch (COO)

Good afternoon, everyone, and welcome to BigBear.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 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 statement 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.

Mandy Long (CEO)

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 BigBear.ai continues. We've 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 BigBear.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. 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 Test and Evaluation Command Integrated Mission Management System in a single award contract worth over $7.7 million over seven months.

BigBear.ai will provide a modern, no-code, low-code solution designed to replace ATEC legacy systems 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. Army unique and democratized access to data, collaboration tools, and advanced analytics. What's important to recognize in this extension is that in moving from Phase 1 to Phase 2, the Army selected us as the sole provider after previously sharing this contract. This positions BigBear.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 BigBear.ai's portfolio of work supporting U.S. Army readiness, including its continued delivery of the Global Force Information Management Objective Environment Intelligent Automation platform.

In addition to AIMMS, we received a six-month extension from the U.S. Army as a prime contractor for continuing work on the Global Force Information Management System in a six-month contract valued at just over $8.5 million. The extension builds on BigBear.ai's previous work in Phase 1 and Phase 2 and continues to show the strength of our relationship with the U.S. Army. This is another example of how we are well positioned to win future work. Under the terms of the single-source contract, BigBear.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. During the extension, the BigBear.ai team will be charged with migrating the prototype into U.S Army's cARMY cloud, aligned with the U.S. Army's Cloud Plan 2022.

Our ProModel Solution continues to enhance our clients' operational efficiency in a variety of use cases. Most recently, we won and expanded work with one of the largest shipbuilders in the world, where we are currently supporting U.S.-based naval operations, displaying the global opportunity for leveraging our capabilities in complex manufacturing environments. We also won a contract with a large industrial automation company, where we are assisting in their existing flat product fabrication process to identify constraints and understand the best opportunities for eliminating or reducing them. In doing so, our models will allow key stakeholders to quantify the expected improvements and cost benefits of any considered process changes in advance of implementing those changes. 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. 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 complex technology regulation 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, and U.S. leadership in the development and use of trustworthy AI in the public and private sectors. Furthermore, 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.

NTIA's focus on developing sound AI assurance and accountability frameworks and standards is a critical component for realizing the benefits of AI and mitigating risk, while incentivizing organizations to invest in AI system governance and responsible AI products. We focused our thoughts on the scope of AI accountability mechanisms that should be broad enough to encompass certifications, audits, and assessments, but also adaptable to evolving technologies and practices. 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 topics to ensure responsible and ethical AI practices.

As NTIA continues its work on drafting and issuing a report on AI accountability policy development, BigBear.ai strongly encourages the development of policies and regulations that support and encourage responsible innovation. To 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. Tanner has more than 30 years of experience, most recently serving as CTO and Chief Architect at IBM Watson Health, now Merative. Ted also has held architect positions at both Apple and Microsoft and has co-founded several acquired startups, including most recently, PokitDok, acquired by Change Health.

He also created one of the first machine learning and natural language processing as a service companies on Amazon AWS called BeliefNetworks. His extensive experience will be instrumental in delivering technology-led solutions for leaders in government and defense, manufacturing and warehouse operations, and healthcare and life sciences. As I think about the team that we've assembled over the last year, we've truly experienced the best of both worlds. We've elevated top talent that was already in place at BigBear.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. With that, I will turn the call to Julie for a detailed review of our financials.

Julie Peffer (CFO)

Thank you, Mandy. This past quarter, we executed well in the face of market challenges, including headwinds from the bankruptcy of Virgin Orbit. 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. 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 highlighted the need for advanced technologies like artificial intelligence in our national security efforts, and we are seeing increased interest in our capabilities as a result.

Let's turn to quarter results. Revenue for the quarter was $38.5 million, up 2% year-over-year compared to $37.6 million in the second quarter of 2022, up 9% year to date. As always, I want to emphasize that our revenue can be lumpy and can fluctuate meaningfully, depending on the quarter in which contracts are awarded, milestones achieved, or contracts complete. For Q2, year-over-year growth was driven by our U.S. Army GFIM 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 220 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, we initially anticipated that the company would be sold quickly, but this has not materialized, so we are taking further action to write off most of what is remaining from the Q1 invoice this quarter, which is reflected in our SG&A expenses. Backlog was $206 million at the end of the second quarter, which is up 5% or approximately $9 million compared to the first quarter of 2023. This increase is largely driven by awards for the GFIM extension, AIMMS contract, and G3 Analytics. Turning to expenses. For Q2, operating expenses were approximately $19.2 million, which included R&D expenses of $2.2 million and SG&A expenses of $16.9 million. We want to highlight that SG&A is down $10 million, or 37%, versus last year, when Q2 SG&A was $27 million.

This significant reduction in SG&A was due to the effects of headcount reduction actions taken in third quarter of 2022 and first quarter of 2023 to realign our operating structure, in addition to rationalization of our third-party vendor expenses. 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 $16.9 million in the quarter versus $56.8 million in Q2, 2022. The current quarter includes a $3.1 million 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 second quarter, 2022 non-cash goodwill impairment charge of $35.3 million, operating expenses have decreased approximately $10.5 million in Q2 of 2023 versus the comparable period. Similarly, our overall operating loss has improved by approximately 50% and $10 million even after the Q2, 2022 goodwill impairment charge is excluded. Adjusted EBITDA was a loss of $3.2 million in Q2, 2023, compared to the adjusted EBITDA loss of $7.7 million in the same period a year ago, or 58% year-over-year improvement. While we are pleased to report this level of improvement, we remain committed to driving improved operating efficiency in the second half of 2023 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 $29.9 million. The increase was due to a $22.8 million of net proceeds from the registered direct offering we completed in June. We were also expecting an additional $11 million of government receivables in the quarter that will now come in in Q3 due to the timing of payments. Most of these have already been received.

As we stated last quarter, we continue to focus on lowering our cash burn in the second half of 2023 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 million-$170 million. We continue to expect adjusted EBITDA to be single-digit negative adjusted EBITDA in millions 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, AIMMS award, and continued partnership and expansion with L3Harris gives us increased confidence in our leadership position within AI.

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. Now I turn to Mandy for final remarks before we turn to Q&A.

Mandy Long (CEO)

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 (participant)

Thank you. If you would like to ask a question at this time, please press star, then the number one on your telephone keypad. You will then be placed in the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star, then the number one on your telephone keypad. One moment while we compile the Q&A roster. Your first question comes from Vivek Palani of Northland Capital. Your line is open.

Vivek Palani (Equity Research Analyst)

Hi, I'm Vivek on from Mike Latimore of Northland Capital Markets. 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?

Julie Peffer (CFO)

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

Vivek Palani (Equity Research Analyst)

Yeah. Yeah, I, I'm Vivek, on for Mike Latimore.

Julie Peffer (CFO)

Oh, Vivek. Oh, Vivek, I'm sorry.

Vivek Palani (Equity Research Analyst)

Yeah.

Julie Peffer (CFO)

I missed the, I missed the, the name. Sorry. Sure. great.

Vivek Palani (Equity Research Analyst)

No problem.

Julie Peffer (CFO)

Thanks for the question. On our headcount, we don't actually release our headcount numbers. I will say, and I mentioned on the call, on my, my scripted remarks, that, you know, we are ramping down 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. I'm 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, but we're not releasing the specific headcount numbers at this time.

Vivek Palani (Equity Research Analyst)

Okay. my next question is, are you expecting the large pace of GFIM deal to get awarded in fourth quarter of this year?

Mandy Long (CEO)

Hi, Vivek. This is Mandy. It's nice to talk with you again. To build on Julie's previous comment in regards to headcount, we have quite a few open positions right now that we're hiring for, specifically related to, you know, the contracts that we're executing on and, you know, those that are anticipated to transition to GFIM. We, from an expectation standpoint, right, as we look at the extension, that is certainly, you know, our hope. I would say, you know, as, as we continue to, you know, work with the customer and, you know, reflect on timing, if there are any updates, right, I think we would certainly share those. As of right now, yes, that is our current expectation.

Vivek Palani (Equity Research Analyst)

Okay, thanks. The last question is: where might the gross margins trend in second half of the year?

Julie Peffer (CFO)

Yeah, great question. Yeah, we saw some headwinds in the first half of the year. I think I talked a little bit about these, but, you know, specifically, you know, between some contracts that we're 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. We actually see that, you know, we have some contracts that are ramping down that are lower margin, and other contracts 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.

I, I, you know, I can provide a little bit more detail, maybe offline, but, happy to give you a little bit more on that, when we connect later.

Vivek Palani (Equity Research Analyst)

Sure. Thanks a lot.

Mandy Long (CEO)

Vivek, one kind of comment that I'll make, we, we talked about it a little bit in our opening remarks regarding this particular quarter, but I think it's, it's worth reinforcing that right now we are in the midst of, you know, 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. That's a lot of what I think, you know, Julie was really getting at. As we look at, you know, sort of how we think about how our backlog is changing, how we think about, you know, how our mix, right, from a contract basis is changing.

We are seeing, you know, great indicators, right, in terms of, you know, how we look at our mix, of our fixed price mix going up, right, quarter-over-quarter. I think that those are, you know, those are indications when we look in the second half of the year that I think, you know, make us feel good.

Operator (participant)

Once again, to ask a question at this time, please press star one on your telephone keypad. We do ask that you limit your questions to two, one question and then a follow-up. If you have further questions from there, please press star one to enter the queue again. Your next question comes from Louie DiPalma with William Blair. Your line is open.

Julie Peffer (CFO)

Hi, Louie.

Louie DiPalma (Research Analyst of Industrials)

Hi, Mandy and Julie. Good afternoon.

Julie Peffer (CFO)

Hi, Louie.

Louie DiPalma (Research Analyst of Industrials)

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

Julie Peffer (CFO)

Yeah, I mean, it's fair to say that. Let me give you a little bit of insight specifically on EPASS. You know, again, EPASS is a legacy program. We were a subcontractor. It really is a two-phase ramp down. 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. That is shifting, but it's really in two parts. Part of it was completing at the end of Q1, part of it is completing within Q3. It is been a gradual ramp down over time, but we're not going to specific information about exactly that, its impact.

This is why I talked about the fact that, you know, fifth quarters can be lumpy, depending on when contracts are ramping down and when they're ramping back up. You can see that reflected in our results as well as, you know, always something that we consider as part of the business.

Louie DiPalma (Research Analyst of Industrials)

Great. Thanks, Julie. Mandy and Julie, congrats on the GFIM six-month extension. Is BigBear.ai expected to be awarded the production GFIM contract at the end of this year? With the current annual run rate, roughly $17 million, should the production contract run rate roughly double that amount?

Mandy Long (CEO)

I can take the- I'll take the first part of that. From a, from a production award standpoint, as we shared as a part of the extension, right, we're the sole prime vendor included in that. I think it, you know, it puts us in a great position, right, when we think about what we're doing to deliver value, right, for the customer and, and, you know, so our chances as we look into the production award. But ultimately, you know, obviously, as you know, Louie, it's- the decision lies with the customer, but we will do our best, right, to continue to deliver, and I think that's why we, why we earned the phase two extension.

Louie DiPalma (Research Analyst of Industrials)

Great. Mandy, you also mentioned how you received the sole source AIMMS OTA, and that involved our, like, no-code/low-code solution. Is there the potential that, like, AIMMS can be in the same total contract value size as, as GFIM? Or how would you, like, e-estimate the size for investors on the call?

Mandy Long (CEO)

I think, first, you know, one thing worth noting about what you said is there is definitely a pattern here, right? As we think about the work that we've done with GFIM and continue to do the work that we're doing in AIMMS, you know, the thing that I would kind of reinforce as a thread along those is that we absolutely have a very strong, you know, partnership and pattern of success associated with being able to do, you know, transformation work associated with core business systems, and in a intelligent automation platform form factor.

From a size standpoint, you know, we, I, I think, we expect as most of these happen, right, as you shift from phase one to phase three- two, and then into production, you know, the size of the contract, you know, goes up significantly. I don't, you know, we don't have an indication of that total value at this point, but I think, you know, safe to assume a similar pattern.

Louie DiPalma (Research Analyst of Industrials)

Great. Another question: with the equity offering, what is the new diluted share count that we should be using?

Julie Peffer (CFO)

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

Louie DiPalma (Research Analyst of Industrials)

Um, the-

Julie Peffer (CFO)

The, the ending share count is 155.453, and the average for the quarter is 145.469.

Louie DiPalma (Research Analyst of Industrials)

Great. One final one. With SG&A continuing to be optimized, is there potential for further cuts into the second half of the year, or are we currently at the optimal level?

Julie Peffer (CFO)

Yeah, I mean-

Mandy Long (CEO)

Great question.

Julie Peffer (CFO)

Oh, go ahead. Sorry, Mandy, go ahead.

Mandy Long (CEO)

No, no problem, Julie. What I would say is that we are, 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. You know, I've been in the role for about nine months. You know, 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, you know, really gotten our operating expenses to, you know, a good level, we are still growing, right? I think that it, it's a testament to the, 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, you know, kind of how we look at the rest of this year, I do think that we're at a pretty balanced position right now. We're always going to look for opportunities for further automation, right, and further optimization. You know, I, I would say I, I always reserve the right to, to get better.

Louie DiPalma (Research Analyst of Industrials)

Yeah.

Julie Peffer (CFO)

Yeah. Let me, let me add to that a little bit.

Louie DiPalma (Research Analyst of Industrials)

Yeah.

Julie Peffer (CFO)

Just, just as a reminder, I mean, we, we committed to deliver $20 billion of annualized savings last year after the Q2 to get our reductions. I think if you look at the numbers, right, this would be over $30 million in annualized savings in comparison to that Q2 baseline that we established. You know, as, as we talked about, we're very proud of the, the work we've done to get our cost structure back in line to where we are. I would say, you know, even with this improvement, we're committed to continuing to drive improved operating efficiency, and, and that's going to come over time. We're going to continue to have rigor within our operating expenses.

I would not anticipate, you know, huge shifts, 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.

Louie DiPalma (Research Analyst of Industrials)

Great. 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 is impacting your pipeline of award opportunities as you have your own intellectual property here and how is that translating? Thanks.

Mandy Long (CEO)

Yeah, absolutely. I can, I can speak to that. What I would say is that, you know, I, I think generative AI being, you know, one bucket, right, of opportunities so where we see, you know, interest in our skill set being able to apply. I would say, you know, Louie, as we look at pipeline and how we're diversifying, it's certainly not limited to that, right? I, 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.

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, then we will bring the technology to bear, right, that is sort of, you know, 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 capabilities that previously lived in the lab have now crossed the possible and practical thresholds. We are seeing more and more opportunities to bring those into the solutions that we're delivering to our customers.

Louie DiPalma (Research Analyst of Industrials)

Great. Yeah, I was thinking along the lines of how last quarter, you discussed the expansion of your partnership with Elaris for their unmanned surface vessel. You're integrating your software into their platform, and how there's probably other opportunities for similar partnerships, as there's a lot of excitement in the market. Thanks.

Mandy Long (CEO)

Yeah, I think that's well said, and I, I, and I think you're right. I think there's this interesting intersection that we're seeing emerge between, you know, those who are building and have expertise, right, in building and delivering, these, you know, physical platforms. Organizations like BigBear.ai, where, you know, our superpower lies in, you know, software, right, and underlying technology that when put together, right, is, you know, is absolutely a, a differentiator. Some of the things I, I see as we look forward are I think we're gonna, you know, we're gonna have more opportunities for partnerships where, you know, two organizations can come together and say, "We've got, 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 (participant)

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

Mandy Long (CEO)

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

The world is changing around us every day, as we go through the Fourth Industrial Revolution, BigBear.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 (participant)

Thank you everyone for attending today's conference call. This does conclude today's call. You may disconnect. Have a wonderful rest of your day.