FLYHT Aerospace Solutions Ltd

XTSX:FLY

Earnings Call Transcript

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the FLYHT Aerospace Solutions Second Quarter 2024 Results Conference Call. As a reminder, all participants are in listen-only mode. The conference is being recorded. [Operator Instructions] Due to the volume of questions expected on today's call, we ask that you please limit yourself to three to allow time for others in the queue. If there are any outstanding questions at the end of the call, the company will be happy to take them by e-mail to [email protected].

I would now like to turn the conference over to Matt Chesler, Investor Relations. Please go ahead, Matt.

[Matt Chesler, executive]

Thank you for joining our second quarter 2024 earnings call. On the call with me this morning are Alana Forbes, FLYHT's Chief Financial Officer; Darrel Deane, FLYHT's Chief Revenue Officer; and Gurjot Bhullar, FLYHT's Chief Operating Officer. Interim CEO, Mary McMillan, intended to be on this call with us but had an urgent personal matter to attend to. She remains available by e-mail.

We posted a press release covering the information we'll review today as well as a webcast of today's conference call on the Investor Relations section of our website, flyht.com. Additionally, an archived version of the call will be posted on the website as soon as it is available from the conference call provider. Before we start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we have included in our Q2 '24 report.

Certain of the statements made today may constitute forward-looking statements, and these statements are the company's present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEDAR filings, including our Annual Report, which is filed on SEDAR. During today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation to the nearest comparable GAAP measures in the second quarter report.

With that, I'd now like to turn the call over to Alana.

[Alana Forbes, executive]

Thank you, Matt. Good morning, everyone, and thank you for joining us on this call. We have reached an exciting and critical juncture in the 25-year history of FLYHT Aerospace Solutions. After years of hard work, the development of the AFIRS Edge+ is functionally complete. This milestone represents a significant achievement for our team and for our company. As we move forward, we must now sharpen our focus, energy and resources around sales of the Edge to new and existing customers and to achieving positive EBITDA on a sustainable basis.

There is both an opportunity and an imperative to retool the organization to focus on delivery of the promised returns to all of our stakeholders while achieving significant cost savings. We are in a position to make this organizational change because we have substantially completed what we set out to do with the Edge, develop an industry-leading 5G compatible Wireless Quick Access Recorder and Aircraft Interface Device. We are now releasing the Edge+, which we believe addresses the present and future requirements of the global airline community.

The Edge+ is a world-class plug-and-play version, which we believe will rapidly penetrate the market. Thus, now is the time to take a pause on incremental development and to allow our sales efforts to catch up with the product and its current capabilities. This R&D pause does not, in any way, impact our array of established businesses, which are successfully supporting over 100 global customers and which are contributing positively to EBITDA. On contrary, our strengthened financial position improves our ability to respond to specific customer requested enhancements of our product.

It also allows us to shift our primary focus to securing additional regulatory approvals. As Gurjot will discuss in greater detail momentarily, we have already completed two supplemental type certificates in Canada and have a clear path to obtaining additional certifications for both the Airbus A320 and Boeing 737 aircraft family, which represents, by far, the most popular aircraft types in key global markets. Unfortunately, [indiscernible] from the restructuring actions involve parting ways with some team members to have critical rules in getting us to where we are today.

Their individual contributions cannot be overstated, and I want to express our sincerest gratitude for their contributions to FLYHT. We have also made a change to the CEO position to ensure FLYHT has the right leader to take the company into the next phase of its growth. Mary McMillan has assumed the role on an interim basis while the Board initiates a search to identify a permanent CEO for the company. We owe our heartfelt gratitude to Kent Jacobs for his service to FLYHT over the past 23 years, and in particular, for leading the company over the past two years as we have completed the development of the AFIRS Edge.

The next leader of FLYHT will share our deep commitment to creating and delivering value to our shareholders by accelerating the commercialization of the AFIRS Edge and bringing us to profitability and positive EBITDA on a sustainable basis. We enter the next chapter of FLYHT on solid footings with a world-class portfolio of products and solutions. And now going forward with this sharpened focus and having implemented organizational changes, I believe we are set up for the financial success we have all been aiming for.

I would now like to introduce our Chief Revenue Officer, Darrel Deane, who will speak more to our commercialization approach. Darryl has been with FLYHT since 2012, and he previously was FLYHT's VP Solutions who's led many of our substantial products, most notably including the recent development of the Edge product line. Darryl?

[Darrel Deane, executive]

Thank you, Alana, and thanks, everyone, for joining the call. I appreciate the opportunity to speak to you. So we have a healthy pipeline of opportunities to support our efforts that Alana discussed. Regionally, we're concentrating on Europe and China. They're the largest markets that need a replacement wireless QAR and AID solutions. And we're also looking to expand our channels to market. We've had great success with our OEM partner for the 228, and we love to replicate that. So we're looking for opportunities to take advantage of that as well.

For my role, specifically, I'll be closely monitoring adjusting our course, utilizing the marketing sales data available to us. A portion of our sales efforts will be focused on the near-term conversion for opportunities [indiscernible] development for some time. I'll also be working with Gurjot who you'll hear from shortly to ensure we deliver on our contracted backlog to achieve the most impact for the company. And we also intend on increasing the volume of our deliveries and diversifying our customer base.

From a marketing perspective, the team over the last couple of years have made great improvements increasing the awareness of our company and our solutions in the marketplace. So we're going to look to hold that ground and also convert that goodwill that we have [indiscernible] to revenue for the coming quarters. We are making significant progress in other divisions as well. Our weather solutions continue to expand and we have received an additional purchase order from NOAA for WVSS-II humidity sensor.

These expanding relationships, both with NOAA and the UK Met validate the growing importance that this data provides to the weather community. It's not just limited to aviation value across various industries as well. Our European division CrossConsense continues to win new MRO business by consistently achieving superior customer satisfaction of this existing base.

We're looking at ways to expand that business, including by providing 24-hour worldwide support. And our sites are squarely driven on revenue growth and realizing positive EBITDA. To do this we're taking a two-pronged approach to cutting costs, as Alana discussed and looking to convert our sizable pipeline to sales.

Let me pass it over to Gurjot here to discuss [indiscernible] certification.

[Gurjot Bhullar, executive]

Thank you, Darrel. Our Supplemental Type Certificate [ or STC ] continues for our new products. I'm pleased to report that we've obtained our second STC for the AFIRS Edge from Transport Canada on the Boeing 737 NG. This, in addition to our A320 STC, which we received earlier this year, covers over 50% of all commercial aircraft. As discussed before, an STC is required to install and use the product in the field.

They also provide credibility for FLYHT showing airlines that these new products provide their intended function as validated by regulators. As development of our plug-and-play variant of the AFIRS Edge+ is functionally complete, the A320 STC work for this product has also commenced. Obtaining this STC will open a substantial market for FLYHT represented by roughly 18% of our pipeline valued at approximately $41 million.

Aside from this Edge+ STC, our team is focused on delivering on our contracted backlog, as Darrel mentioned. Current efforts support driving forward towards our first WVSS-II shipments in Q4 2024. The FLYHT WVSS-II manufacturing line is nearing completion with environmental qualification testing on track to be completed early in Q4. This will allow us to meet our contract commitments to UK Met and NOAA, where each [ ship ] set contains a FLYHT WVSS-II sensor and an AFIRS Edge. We are excited by our progress and look forward to delivering to our valued customers.

I'll now turn the call back to Alana for a review of our financial performance.

[Alana Forbes, executive]

We've often spoken of how FLYHT continues to support customers who use a number of [ pre-hedged] product lines in their operations, including past generations of AFIRS hardware, our existing weather business and CrossConsense, all of which generate healthy margins and have provided substantial internal funds to be invested in our emerging businesses, particularly and most recently AFIRS Edge. The ongoing financial success of these sustaining lines of business has been overshadowed by the R&D spend required to get the Edge to its current market-ready status.

With the development of the Edge now substantially complete, we are pausing future development activities to concentrate on commercialization. To that end, last week, we executed a strategic restructuring of our operations, which has impacted 20% of FLYHT's workforce. These actions are expected to contribute to fixed cost savings of CAD 1.75 million on an annualized run rate basis. We expect to record a onetime expense of approximately $770,000 in Q3 related to the reduction in force, which includes severance payments and benefits to affected employees.

Together with increased revenues driven by the WVSS-II and-Edge product line, going forward, we expect to show a marked improvement in FLYHT's bottom line. This leaner G&A profile will allow us to get EBITDA positive and hit our cash flow goal more quickly, which we will be able to hit when the Edge product line hits its stride and starts producing anticipated revenues. We believe we have enough cash to get us there, given our now smaller ongoing spend and recognize that sustainability is crucial in this market.

Over time, last week's changes to our P&L will also result in a stronger balance sheet, which we've kick started with the $5 million infusion of capital we announced in June. Financially, Q2 revenues increased from Q2 2023 total and slight increases in our high-margin SaaS sources of revenue and solid growth in Technical Services were more than offset by year-over-year declines in hardware and licensing. Both hardware and licensing revenues are lumpy between quarters. As for all of our products, except for the Edge+, the aircraft needs to be out of service to allow for installation.

And so we much wait to ship our contracted backlog to customers until their maintenance schedules allow. Licensing revenues have been even more lumpy between quarters than hardware revenues as we are dependent on sporadic purchase orders issued to us by our OEM partners. You'll remember revenues in 2022 were abnormally high for that program in anticipation of our current redesign effort, which will secure future revenues, and we're estimating those [indiscernible] again starting in 2026 and on out into 2029.

Technical Services continued to increase each quarter as CrossConsense continues to deliver quarter-over-quarter increases in data migration services and as we also see an increase in demand from customers and support for regulatory or supplemental type certification work. Total operating expenses increased from Q2 2023, showing the results of pushing through on the final stages of Edge development and the effort involved in obtaining required regulatory approvals, while not yet being reflective of the savings from last week's restructuring. From a balance sheet perspective, you'll notice an increase in cash resulting from the new financing, which upon receipt was partially used to clear the credit facility balance shown in our Q1 ending balances.

With that, I would like to turn the call back to Akia, and we would be pleased to take questions from callers after which we'll address the questions we received in advance at [email protected]. Akia?

[Operator]

[Operator Instructions] First question comes from Bruce Krugel with KRC Insights.

[Bruce Krugel, analyst]

A couple of questions. First of all, what is the backlog number? And what is the pipeline number, please?

[Alana Forbes, executive]

Backlog at the end of the quarter was CAD 37 million. That's a Canadian figure. And then our pipeline is at $230 million top line in USD with a probable value of $83 million.

[Bruce Krugel, analyst]

Okay. R&D increased quite substantially in the quarter, and I know what I think you're going to say, but I need to ask it anyway. A, what was that about? And why the sudden change in R&D? And B, what can we expect for R&D levels going into Q3?

[Alana Forbes, executive]

So it was almost solely the result of the Edge+. We outsourced some of the hardware development on the Edge+ product line. And so the large increase was reflective of that contract labor. Heading forward, our R&D will be substantially reduced. The workforce reduction that we undertook last week was almost solely dedicated to development resources reduction. And those are almost entirely in the R&D line aside from the onetime restructuring fee that you'll see in Q3 on an ongoing basis, we'll see that $1.75 million reduction annually.

[Bruce Krugel, analyst]

Okay. The restructuring charge of $770,000, how much is that in cash and how much is provisions or ask it another way, what is the cash portion of the $770 million?

[Alana Forbes, executive]

The vast majority, very little will be showing in Q4 and beyond.

[Bruce Krugel, analyst]

Okay. And final question. With regards to the Edge+, are you targeting to get the STCs in Canada or outside of Canada?

[Gurjot Bhullar, executive]

Hey Bruce, this is Gurjot. We're going to be targeting STCs really globally. One of the first big markets we're looking to take advantage of is the European market. So one of the first STCs we'll be looking at for the Edge+ is the EASA STC. And we'll also be looking at obviously the Transport Canada line as well. But really, we're looking to get all of [ the place in ] really quickly with those.

[Operator]

The next question comes from Dick Ryan with Oak Ridge Financial.

[Richard Ryan, analyst]

So Alana, looking at the licensing revenues, I know in past calls, you talked about a refresh of the product working with your OEM partner. Can you kind of update us where that program stands? And maybe give us a little commentary on what you think licensing revenue can do over the next, whatever, 6 to 12 months?

[Alana Forbes, executive]

For sure. I think Gurjot is best placed to talk about the program and then I can talk about revenue.

[Gurjot Bhullar, executive]

Yeah. So far, the programs [ went ] really well. It's basically right on track. And the idea was to be able to complete that development, at least with the end customer by early to mid-next year. And everything that we've done has put that project on track to be able to do that.

[Alana Forbes, executive]

And in terms of revenues, we're not expecting any revenue in -- on the licensing line throughout the remainder of 2024 nor '25, although I would love to be surprised. We are currently projecting '26 through '29 that licensing will return to normalized levels, which in the past, although it's lumpy and it has been lumpy and '22 was certainly an exceptional year. The run rate would average about $4 million a year.

[Richard Ryan, analyst]

Okay. And on the Technical Services, you had a bump due to the data migration work over the last couple of quarters, how sustainable is that? I mean, are you getting some additional customers looking at those capabilities or what's the sustainability of the Technical Service line?

[Alana Forbes, executive]

I think a fair run rate is about the $750,000 mark, which we did see in Q2 of '23. And then we kind of go up from there in quarters. What we've been seeing at CrossConsense are larger contract to provide data migration, which has been great, but it also -- when those drop off, it does have a larger impact. So I think there's a lot of potential there, both in their pipeline and in potential future work. The CrossConsense business is largely tied to the AMOS system, which isn't widely adopted in North America. It's much more popular in Europe. And so I think, particularly in North America, there's more opportunity.

[Gurjot Bhullar, executive]

One other thing on that, too, with the way CrossConsense moves forward, is there expenditures related to some of this work are more elastic, so we can take advantage of these new revenue opportunities with those incurring the sales expenses when things are in the trough.

[Richard Ryan, analyst]

Okay. So Alana, what's the goal for your breakeven target? Once you've got the restructuring in the rearview mirror where can we anticipate breakeven or positive EBITDA?

[Alana Forbes, executive]

Well, with the restructuring and a lower fixed cost base, we can certainly get there more quickly than otherwise anticipated. What we really need to have happen is for our Edge revenues and WVSS revenues to come through in a really meaningful way. We've had early-stage Edge revenue to-date. But until Q4, could even be Q1, we're not going to see that product line really hit its stride. But when it does with this lower fixed cost base, we'll be able to be EBITDA positive a lot earlier.

[Richard Ryan, analyst]

Okay. Maybe one last one for me. Your focus is on Europe and China. Is that with the Edge and/or the Edge+? And you're in process for the Edge+ STC in Canada. When would you see that getting approvals over in Europe and China?

[Gurjot Bhullar, executive]

Yeah, I'll take that. I guess, one thing to clarify, when we say that we have an STC in Canada that we're pursuing Canada, it's as much of a vehicle to get an STC in other jurisdictions and as it is a Canadian STC. We use that as a stepping stone for larger-sized markets. At times, like with the Edge+, it's most efficient for us to do that STC directly in Europe. So we make those decisions based on what's the most efficient way to reach the market. Timelines on the Edge+ in Europe would align to what Alana was saying around Q4, Q1.

The difference between the two product lines, whether it's Edge or Edge+, is it's -- there's multiple factors that could affect which product is the right one for a given customer. Some of it is related to what their current equipage is on their aircraft and so the Edge+ lends itself really well to an aircraft that [indiscernible] with certain provisions. It may be a replacement of an existing solution or may be just taking advantage of some provisions that were already in place on the aircraft. For others, it sometimes makes more sense to go with the planned Edge. So we don't see the two products being in and of themselves regionally focused. We'll tackle those STCs as we see the opportunities come alive.

[Operator]

[Operator Instructions] The next question comes from Kris Tuttle with IPO Candy.

[Kris Tuttle, analyst]

We all want to definitely move on to some better outcomes for the company. And as you know, over the last year or so, I've had a lot of calls and [ whims ] with you as have some other investors. And I'd love to get a little bit more color on what we were missing because I don't think we ever had the impression that there was a market readiness issue. I appreciate you've made management changes and strengthened the balance sheet and restructured the company.

All are good harbingers for better results. But I think it would be very helpful to understand a little bit more about at least what I and some other investors perceive as a gap between our understanding of the company's products and services being ready for the market waiting on some approvals and what seems to be the case now. So a little bit more background there would, I think, would help us get more confidence in what we're going to see next year.

[Gurjot Bhullar, executive]

Sure. It's a challenging question to ask because I'm not always sure what's in your mind as far as what your perception was. But the -- our products and our solutions have multiple aspects to them. They've got a hardware platform to build out. They've got a software platform to build out, and they have an STC pipeline to build out in order to be fully ready for any given market. In parallel to that, we have to see the sales pipeline and engage customers, which have been going on as well as on the marketing side.

So all of these things, of course, come together to be able to bring the product fully to market to a customer that's ready to receive it. So there's lots of moving parts there. The difference between -- with the changes that were made last week is that the fundamental key functions of the products are fully ready. And the sales team is now unblocked to be able to go engage these customers and confidently say when the product would be available for them to use in their region. And so that's the big difference now is that our sales team will be actively engaging those customers doing the roadshows, showing the products to them and in a slightly different way than they could before.

[Kris Tuttle, analyst]

And from what you're saying, is that software that wasn't ready or some integration or components? What was that last piece, I guess, that slid into place where now you can go out and engage your customers?

[Gurjot Bhullar, executive]

Well, it depends on the product line. For the flange mount Edge, the product, I would say, is ready, and there would be some of the STC work to -- with more [ locking ] aspect to it. Of course, we've got on that specific one, when you have to go through that certification test and the certification steps, there can be delays. Some are better in our control than others. For the Edge+, it was more of the hardware side of it and getting through the qualification.

When we build out these hardware platforms we have to go through what's called qualification test of the hardware itself, which involves various things like temperature testing, vibration testing, things that may get so that the product would [ stay put on ] an aircraft. We had some minor delays in that aspect. And then -- and we're in the final stages of the sign-off on that work. So it depends on which specific one and the parallel is all about the software is coming together. So I wouldn't say that the software was the gating aspect to any of those. But yeah, that is I think that kind of is the gist of it anyways.

[Kris Tuttle, analyst]

Okay. I appreciate it. One other question and I'll move on. I send some in via e-mail, so we can process those later. But the -- you talked about Europe and China as being your -- it sounds like your initial priorities. What about the U.S.? Is that -- is there a reason that's going to be later, either due to the STC approvals in the U.S. or was it a Boeing issue? Maybe just understand that part.

[Gurjot Bhullar, executive]

Yeah. It's not so much a Boeing issue or an STC issue. It's the market state. The U.S., when it comes to their cellular -- like refreshing their cellular networks with ahead of the curve compared to other regions. So there are some opportunities that won't open up for a little while. As far as we'll continue to prospect and see what we can get out of that, but it won't be a primary focus. So it's more about the market position and what those customers in that market need. And some of that's driven by the environment that they're operating in, in our case at times the cellular network and where they're at in their technology cycle.

[Kris Tuttle, analyst]

So are you saying the U.S. already phased out the 2G, 3G?

[Gurjot Bhullar, executive]

Correct. Yeah, that's right. That's right.

[Kris Tuttle, analyst]

And what did -- what was the solution in the U.S. apparently?

[Gurjot Bhullar, executive]

Well, this is where we see it being interesting as far as that market is not closed. It's a timing issue. So those customers would have updated to an LTE-based solution or a 4G solution. So the market is not lost. It will open up again, but they have a solution in place that will get them through to that timing or to the time where they would need a 5G solution.

[Kris Tuttle, analyst]

I see. All right. Well, thanks. I'll let others proceed.

[Operator]

That's all the questions we have from the phone lines.

[Alana Forbes, executive]

Okay, great. We did receive some questions in advance. Some of them have been answered as we've been going through, but we could start with how many Edge units have been ordered, delivered, installed or in inventory. Ordered 70, delivered 3, installed 3. And we've got about 30 in inventory. So we're ready to deliver as needed. Has FLYHT received any revenue to-date for an Edge product?

Yes, those three that were delivered and installed were producing revenue. When we're talking about -- earlier when we were talking about revenues for the Edge product line hitting in Q4 and Q1, we're talking about more substantial revenue. These were just one at a time and not substantial in looking at our overall expectations for that product line. Did FLYHT complete delivery of the AFIRS 228 for the WestJet fleet-wide installation?

[Gurjot Bhullar, executive]

Yes, the majority of the fleet has been delivered for the AFIRS 228.

[Alana Forbes, executive]

And a follow-on question, does WestJet have plans to buy the Edge or the Edge+ for its 5G capability? And we have not signed a contract with WestJet for the Edge, but we remain hopeful and they are certainly on our prospect list. What is the latest regarding the partnership with MBS to pair up the Edge with their data loader product? Is this being offered for sales yet?

[Gurjot Bhullar, executive]

Yeah. So we're actively working with MBS to bring the solution to market. We are also engaging customers. So we hope to share more good news about that soon.

[Alana Forbes, executive]

Any news on the COMAC front for both the ARJ and C919?

[Gurjot Bhullar, executive]

Yeah. We continue to take orders for and are delivering AFIRS Edge for the ARJ21 and we have not received any subsequent orders for the C919.

[Alana Forbes, executive]

Okay. Another one for you, Gurjot I think, who will be the holder of the WVSS-II STC for the Loganair Embraer 145 and has a second airline been identified yet for these 17 additional sensor installs required by the [Technical Difficulty]?

[Gurjot Bhullar, executive]

Yeah. So because we're not based out of the UK, we can't [indiscernible] that STC. So it's a great question. STC21 will be the holder of the STC. And FLYHT will be able to use that STC as needed, so no issues there. And we have several prospects for the second airline. So as soon as we can validate the solution on Loganair's initial 13, we'll be ready to strike and sign the second airline for the remaining 17 units.

[Alana Forbes, executive]

What percent of the SaaS revenues are from CrossConsense? It ranges from about 35% to 50% depending, but typically is about 40%. And the final one, which airline will receive the WVSS-II sensors recently ordered by NOAA for the geographical region off the West Coast of the U.S. and extend westward and southward into the central tropical Pacific Ocean? We don't have anything that we can share today, but we're certainly -- we believe we're close. We will let you know as soon as possible.

And that's it for all of the questions that we've received. So looking forward, our sales and marketing team are focused on converting pipeline into backlog. While our operations team is excited to get to the point later this year where we are delivering our contracted obligations for both the Edge and WVSS product lines, converting those new deals plus our current backlog into revenue. Our recent actions through the end of Q2 and into Q3 has set us up well for future success. Thank you all for your interest in FLYHT and for joining us on this call today.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.