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 Third Quarter 2018 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Tom Schmutz, Chief Executive Officer for FLYHT. Please go ahead, Mr. Schmutz.

[Thomas R. Schmutz, Chief Executive Officer]

Thanks, Steve. I'd like to start by thanking our shareholders and those who have dialed in or accessed the online recording of this call. To learn more about FLYHT at flyht.com under Investor Relations and Presentations and Webcast. Financially, FLYHT's third quarter showed organic growth in the Software as a Service and strong hardware revenues. Total revenue was $3.1 million, equivalent to the second quarter of 2018, and down relative to the third quarter of 2017, by 4%. Licensing revenue for the quarter was only $265k but was welcomed as none was forecasted. The licensing revenue will continue to be lumpy according to the orders received from our partners as I have discussed in the past few quarters. Software as a Service showed growth at little more than $1.1 million, growth that was consistent with the guidance that I reported last quarter. Software as a Service revenues in the third quarter were positive relative to the third quarter by 15% and better than last quarter by 2%. AFIRS Hardware for the revenue for this past quarter was strong at $1.7 million, which was up 93% over the second quarter of this year and within 2% of Q3 of last year, which was also a strong AFIRS Hardware revenue quarter. Revenue from AFIRS shipments this past quarter was the third largest since my arrival at FLYHT. Overall, expenses in the quarter were up 11% relative to the third quarter in 2017, primarily due to legal expenses associated with the acquisition of Panasonic Weather Solutions in early October of 2018. Year-to-date, overall results are down 7% relative to this time last year. AFIRS Hardware revenue is up 16%. Software as a Service is essentially flat and Licensing revenue is down 39% relative to this time last year. Our total expenses are up 2% relative to the same period in 2017. Through September, we have shipped 81 kits this year, from inception through September of this year, FLYHT has shipped 2,200 AFIRS units, including 1,500 AFIRS units through our OEM partner on the A320, A330 production line and 700 units directly to customers and airframers. FLYHT also announced USD 5.1 million in new sales in contracts and purchase orders during the third quarter of 2018. FLYHT gained 3 new customers in the third quarter, including an original equipment manufacturer, who purchased AFIRS 228S units with our TSO-C159b for certification on an Antonov aircraft, an African airline with purchased UpTime services for CRJ aircraft that they had acquired with AFIRS units installed. And a second aircraft -- African operator, who purchased AFIRS and FLYHT ASD for their operations. FLYHT also renewed UpTime Software as a Service products for Australasian operator in the Middle East and a Middle Eastern airline. Finally, FLYHT sold AFIRS hardware kits, technical services or data services for a Canadian and United States lessor, an existing Canadian airline and a Chinese cargo airline. During the third quarter FLYHT received an FAA STC for AFIRS 228 system on an Airbus A319, A320, A321 family of aircraft, which was necessary to cover the New Engine Option, or NEO, version of the aircraft. FLYHT also closed the convertible debt financing of $2 million in the third quarter, and finished the quarter with a backlog of AFIRS unit and UpTime services of approximately $25 million. Now I'd like to turn the call over to Alana, who will provide details on the quarter's financial results. Alana?

[Alana Forbes, Chief Financial Officer]

Good morning, shareholders, and thank you for joining us on this call. Before we discuss the detailed financial results, I just wanted to mention again, you will notice a difference in our comparative 2017 revenue and cost of sales. If you are comparing this report to our Q3 2017 report, you'll notice that 2017 numbers have been restated, resulting from our January 1, 2018, adoption of IFRS 15. So having said that, our second quarter results of -- our third quarter results -- revenues of $3.1 million were in line with revenues for each of the past several quarters, and were lower than Q3 2017 by $129,000. SaaS revenues have been increasing over the past 5 quarters as we've been converting contracted backlog into SaaS revenues, while recovering from last year's Q2 expiration of one of our larger contracts. A portion of that recovery was due to the re-signing of a portion of that contract. Licensing revenues decreased from Q3 2017 as fewer modems with related licensing fees were ordered and shipped this past quarter. We hadn't expected any modem shipments in Q3. So the small revenue in this category was a welcome surprise. Hardware revenues made up for the decrease we saw in licensing revenues to leave us with an average quarter top line. Year-to-date, this hardware category remains a strong and consistent source of revenue for us. Gross margin came in at 57% compared to Q2 -- Q3 2017's 53%, but down from Q2 2018, which was 66%, which is due really to the relative proportion of hardware sales versus licensing revenues in each of those quarters. The quarter's G&A expenses showed an overall increase in the distribution and admin categories with a decrease in R&D expenses. Looking at all three categories together, overall, we saw an increase in salaries that was more than offset by a larger decrease in contract labor. We saw share-based compensation that was higher in the quarter while remaining lower year-to-date and this results from changes in our stock option plan that expenses the options over a longer vesting period. And finally, legal fees were higher than in past quarters due to the requirements of the PWS acquisition. Our Q3 net loss of $953,000 was $200,000 more than in Q2 2017. EBITDA of negative $793,000 followed a similar pattern, coming in at $217,000 lower than Q2 last year. And now turning to the balance sheet. Cash is holding steady with that a year-to-date increase of $68,000, resulting mainly from receipts of both our debenture issue in July and the quarterly funding we continue to receive through the WINN program. We increased our cash balances following quarter end with the receipt of 1/3 of the $3.3 million subsidy from Panasonic Avionics Solutions. While decreasing from year end, our customer deposits have remained fairly steady since the end of Q1. The larger than normal balance we carried through year-end in this category was largely recognized in Q1, which for Q2 and Q3 means we held steady at a similar level of new customer deposits were received as were applied to shipments in those quarters. 2017's ending balance of warrants moved into contributed surplus when they expired in May while the value of the warrants issued with the July debenture are all that remains in that section of the balance sheet. And the largest change in our balance sheet since year-end is the debenture addition to our noncurrent loans and borrowings, leaving that category comprised of loans from our 2 government programs, SADI and WINN, and this latest debenture. I will now pass the mic back to Tom for a review of current activities at FLYHT. Tom?

[Thomas R. Schmutz, Chief Executive Officer]

Thanks, Alana. The nonfinancial highlight of the past quarter was Boeing, Embraer and FLYHT's joint release of a whitepaper and the corresponding presentation, describing the results of the Autonomous Distress Tracking and timely recovery of flight data -- flight recorder data trial. The findings delivered at the Airlines Electronic Engineering Committee, or the AEEC, meeting in Kelowna, Canada in August reported on test performed during the Boeing ecoDemonstrator Program. Using FLYHT's AFIRS solutions and the company's UpTime SaaS product, the joint paper concluded that existing commercially available equipment and network services, which specifically were FLYHT's AFIRS and Inmarsat's SwiftBroadband solutions are suitable for providing distressed flight data, streaming capabilities that support the International Civil Aviation Organization, or ICAO, objectives. The whitepaper and the presentation are published on the FLYHT website. We think this result is very positive for FLYHT's future revenues. When we combine this verified, commercially deployed technology with our FLYHTStream patent, which has been issued in China, United States and Canada, and is pending elsewhere, to our unmatched library of supplemental type certificates, which allow FLYHT to install on 95% of the commercial air transport aircraft and add in FLYHT's selection as Inmarsat's inaugural aviation Certified Application Provider, or CAP, for Inmarsat's new Swiftbroadband safety services and FLYHT appears extremely well positioned to satisfy the upcoming January 2021 ICAO regulations regarding the Operation of Aircraft in Autonomous Distress Tracking and timely recovery of flight recorder data, which are modifications to Annex 6, Operation of an Aircraft, Amendment 40. As we look forward to the fourth quarter financial performance, our financial results will begin to look different from the past 6 quarters, which have been similar on the top line at slightly more than $3 million with the constituent revenue components varying according to our order book. FLYHT's next quarter will include the financial impact of having received the 1/3 of the USD 3.3 million Panasonic subsidy at acquisition close. Additionally, there will be an immediate and significant increase in Software as a Service revenues from the 10 PWS airline service contracts with 200 aircraft in service, along with monthly SaaS revenue from a USD 2 million per year contract from the weather data from the National Oceanic and Atmospheric Administration via Synoptic Data PBC. The result will also include the total assets and associated expenses from the acquisition. FLYHT is currently very focused on achieving parts manufacturing authorization, or PMA, from the US FAA as soon as possible to begin shipping FLYHTLink and TAMDAR backlog from the Littleton facility. This is necessary since the ownership moves the assets from PAC to FLYHT. When accomplished, these shipments were recorded in the hardware revenue category, which we currently refer to as the AFIRS Hardware revenue. So we'll make that a more generic category of revenue. This will add further to our revenue growth in 2019, as we were able to ship hardware and place additional aircraft into service from the $20 million backlog that FLYHT acquired as part of the PWS transaction. Adding together the acquired backlog that I just mentioned, and that which FLYHT had prior to the acquisition, FLYHT currently has a $44 million backlog in undelivered hardware and SaaS services to help drive our future revenues. So that finishes our update on Q3. I did receive some questions in e-mail. I'll answer those, and then we'll go to the phone lines to see if there's any questions.

[Thomas R. Schmutz, Chief Executive Officer]

The first question is, "How will full integration of the PWS assets change FLYHT's competitive standing in the aviation marketplace?"First and foremost, we eliminated a competitor with this acquisition. So we have seen PWS in the past and competed with them for accounts like AirAsia, those accounts now have transferred over to us. So it's important that we enhanced our standing by eliminating a competitor. We also gained that large operator. So the ongoing development that is ongoing with AirAsia will be very applicable to other operators in the marketplace in improving our offering. We've also gained a great deal of notice from others in the industry and further secured FLYHT as a strong supplier for real-time health monitoring and real-time aircraft data. And finally, I would say that this acquisition definitely improves our scale and allows us with economies of scale to better serve the market.The second question says, "Since this is the last quarter for separately reporting on AFIRS, it would be nice to know what FLYHT's profit or loss would have been without the expenses related to the acquisition. What would FLYHT have reported on Q3 from the AFIRS business alone?"So we closed on the PWS acquisition after Q3 closed. So the revenues and the reporting is generally what it would've been without PWS acquisition. The only effect is the legal, labor and travel, which was associated with this acquisition, which I don't think that I can report on because we actually are still incurring some of those cost, but it was on the order of a couple of hundred thousand dollars.The next question says, "To achieve being in the black at the end of the acquisition period, what do you see as a trajectory for profit and loss in the next 6 quarters?"And I don't believe that I can provide this information. We have indicated that we would be profitable by the end of the transition period, which is the first quarter of 2020. So what I would expect that we will see is that we will see consistent improvement in our financial reporting and our bottom line, along with the normal bumpy turbulence that is difficult for a small company like ours to avoid during that 6-quarter period.The next question says, "FLYHT reports monthly on flights and flight hours using a graphic at the bottom of FLYHT's site web pages. Will there be similar monthly reporting on TAMDAR vertical profiles, which I think the indication there is on soundings."And so we may provide some type of sounding reporting. We're really in the middle of evaluating the appropriate KPIs to provide insight into this portion of the business. I think that this is a nice suggestion, and we'll certainly look into what we can do to make this visible to our shareholders.The last question is, "Are there indications of the licensing revenue in Q4?"The only indication that we received was the forecast at the beginning of the year. According to that forecast at the beginning of the year, the licensing revenue in Q4, we would expect to be modest. But again, we don't have perfect information in there. And as you saw in this last quarter, we expected nothing and we got a modest amount. So a lot of that depends upon a dynamic order book from our operators. It looks like we got a couple recently, shortly here. This is, "How much you think that PWS will increase AFIRS' sales?"So the -- this is an interesting question. This, I think, goes to, will we be able to achieve cross-selling across the 2 different customer bases? And that answer, I believe, is yes. We're very involved right now between the employees of both locations and building the budget for next year. Part of that budget is developing engineering programs that allow us to offer TAMDAR-like capabilities through AFIRS and then similarly, we're looking at whether or not it make sense and can we offer some additional real-time data capability through the FLYHTLink product, which is deployed at a couple of large operators. Basically, our number of operators have increased again by -- from 70 to about 80 operators. Some of the operators that Panasonic was pursuing, FLYHT was also pursuing, and I expect that we will be able to close on one or more of those operators with some hybrid sales. So I believe my short answer on this one is yes."Are there any updates on Chinese regulations?", is the next question.The Chinese regulations right now, have formalized in this CCAR 121 rev 5, which requires the Chinese operators to conform to this 4-minute requirement to answer calls to their AOC, which right now can only be accomplished through SATCOM, by the end of 2019. So we see indications that, that is taking effect within the industry in terms of the -- our communications with the operators that are still -- need to be in compliance. There also appears to be some movements. There's been a bit of a -- within China, a licensing requirement for Iridium and other satellite communications, which was a little bit of unclarity to the operators on the numbers of licenses that were available and there appears to be improvements in that from the Chinese government. So both of those are very positive. We expect, and we have seen, a great deal of increased sales opportunities in China. Things have slowed down over the last year, but we think with these couple of changes that have occurred in China, we expect to see, and are seeing, a very active sales funnel in China.The third question, it says, "Are major Chinese airlines near making investment decisions to meet Chinese regulations?"We are in discussions with major Chinese airlines. We've won 23 of the 57 operators there, I would characterize the airlines that we have won thus far to be the smaller to midsized airlines. We've been working on the midsized to larger airlines. Those, like in any business, take a little bit longer to close. We have seen movement in our dealings with those based on the factors that I've talked about earlier. And we also are in trial discussions in China. So I think all of those bode well for our 2019. We expect 2019 to be much stronger in terms of our Chinese performance than 2018. So that's my best answer for that.So those are the questions that were e-mailed in. So Steve, if we could open the phones for any questions from -- that are called in?

[Operator]

[Operator Instructions] The first question is from Bruce Krugel, a private investor.

[Bruce Krugel]

Just three questions. So the first is, we're seeing decent year-over-year revenue growth starting on the SaaS front. This is a function, I'm assuming, of your increased deployment of AFIRS. The question is, can we expect to continue to see healthy year-over-year growth in your SaaS revs as these boxes are turned on?

[Thomas R. Schmutz, Chief Executive Officer]

I think the answer is two parts. The first part is, organically, yes. We're going to continue to see growth that has been consistent with the past several quarters, which has been steady since the -- really since we lost a contract in the second quarter of last year. We've done a good job in building it back up. It's never as fast as we want, but the shipment of the hardware gives us the opportunity to upsell. And I think that you're seeing in recent press releases that we've made -- that we're seeing some success there. Secondly, as I mentioned during the scripted portion of the conference call, we're going to see a significant bump in Software as a Service revenues, both from the service contracts with the new operators that we're bringing in, which are substantial, and with the weather portion, which is going to be recorded in SaaS. So that's a $2 million -- that starts out as a $2 million per year contract, and as we are successful in adding additional TAMDAR sensors, we expect to grow that component to significantly help our Software as a Service growth. So I think you'll see significant increase in the fourth quarter and it will continue forward from there.

[Bruce Krugel]

Okay. And that actually then leads in to my second question. So I was just doing back of envelope calculations, and just to get a feel for what PWS might contribute in Q4 and I'm sort of coming up with about USD 1 million, USD 1.2 million. Is that in the ballpark for revs for Q4?

[Thomas R. Schmutz, Chief Executive Officer]

I'd say that's in the ballpark.

[Bruce Krugel]

Okay. And then my final question. This $3.3 million Panasonic payment, as you mentioned you've already received 1/3 of it. How is it being accounted for? Is it being accounted for as revenue to offset costs?

[Thomas R. Schmutz, Chief Executive Officer]

I'll let Alana address this question.

[Alana Forbes, Chief Financial Officer]

Yes. So we're -- we are working through the exact treatments with KPMG and our advisers. The -- as we move over time, it will be used to offset costs.

[Bruce Krugel]

I guess where I'm coming from is, you know that you're going to receive at least $3.3 million and accrual accounting, if you account for all of it, you should end up with the $3.3 million credit going somewhere, and I -- what I'm trying to find out is, does it end up on the income statement, does it end up on the balance sheet? Point being is how does this impact your level of profitability for Q4?

[Alana Forbes, Chief Financial Officer]

Right. So over time, it will absolutely end up all on the income statement as a recovery to expenses. As we receive the deposits, we expect a portion, at least, to be on the balance sheet.

[Thomas R. Schmutz, Chief Executive Officer]

Yes. Bottom line is because the auditors and FLYHT have not come to mutual agreement on how it'll be treated, we're not supposed to talk about treatment until there's a clear guidance on how we'll treat it.

[Operator]

[Operator Instructions] This concludes the question-and-answer session. I would like to join the conference back over to Tom Schmutz for closing remarks.

[Thomas R. Schmutz, Chief Executive Officer]

Thanks, Steve. It is an exciting time at FLYHT with our One FLYHT integration program, which is the integration of the operations in Calgary and Denver, and the many programs and trials that we have underway. As I stated last time, we're looking forward to this final quarter of the year with a great deal of enthusiasm. There is -- several of the exciting items that we anticipated have happened and we think that more of the programs that we have been working on will mature. I remain very excited for the items in the pipeline, and I believe that as the performance details of this recent acquisition are demonstrated in our results, there will be significantly more positive market response to the acquisition we have completed than we've seen thus far. Thank you very much for your support, and have a great day.

[Operator]

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