BigBear.ai, Inc.

Thank you for joining the Big Bear AI second quarter 2022 conference call. This call is being recorded. And at this time, all participants are in a listen-only mode, and a question and answer session will follow the formal 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 Josh Henley of Big Bear AI. Please go ahead, Mr. Henley.

Good afternoon, everyone, and welcome to Big Bear AI's 2022 Second Quarter Earnings Conference Call. I'm Josh Kinley, the former CFO and now Chief Corporate Development Officer of Big Bear AI. I'm here with Dr. Reggie Brothers, CEO, and Julie Pepper, our new CFO who joined the company in June. 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 Big Bear 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 in our FCC filings. We will also discuss the 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 Reggie.

Thank you, Josh, and thank you all for joining the call. Big Bear AI is in the early stages of a transformation. We're evolving our successful services-led business into a high growth, high margin, technology-led company that empowers customers to make the right decisions at the right time using AI-powered analytics. This is a multi-year process that requires aggressive investments in people, products, and infrastructure to achieve scalable growth. It also requires maturation, operate as a public company effectively and efficiently. Despite some challenging circumstances affecting our second quarter results and outlook for the rest of the year, we continue to have a strong foundational business with significant backlog, and we remain confident in our ability to transform and deliver on our vision. As you likely have seen in the earnings announcement issued today, our second quarter performance did not propel us forward at the pace we had anticipated. Externally, the war in Ukraine and the slowing U.S. economy created delays in revenue we were expecting in the quarter. Internally, we increased spend in Q2 to support our growth, as well as governance requirements of the public company, both of which reduced our operating margins and cash reserves. Based on these circumstances and their expected impact on our 2022 financial model, we are taking a more conservative approach to our revenue forecasts in operating expenses for the remainder of the year and recalibrating our guidance accordingly. Julie will provide more details on these changes later in the call. First, I'd like to provide more color on our customer engagement and how we are responding to market dynamics, starting with our government contracts. The flow of funds from the appropriations bill signed in March continues to work its way through individual agencies and projects but we have also experienced delays in the contracting process through the focus on the war in Ukraine. Unfortunately, this has delayed the timing on some anticipated contract awards in our near-term pipeline. To be clear, we continue to see strong demand for our products and services with our federal customers, but the timing associated with some of this revenue has become increasingly difficult to predict given the current geopolitical and economic climate Importantly, while the uncertain timing of contract awards is frustrating, the government's fundamental need for our solutions and the value of the relationships they enable us to build are enduring. Further, we have historically supported and included in our forecast and backlog certain lower margin procurement activities on behalf of our customers to foster long-term relationships. However, the regularity of this revenue introduces lumpiness in our projections and margin pressure. Therefore, we're no longer including certain anticipated awards of this type in our 2022 forecast, which is reflected in our revised guidance, as Julie will describe. Similarly, Julie will explain the more conservative approach we are taking to calculate our backlog in Q2 and going forward. With some government funding being diverted to Ukraine, We believe it is prudent to reduce our estimates within certain categories of our backlog. Despite the lower numbers reflected in our earnings under the new calculations, our firm backlog has increased by approximately 70% over the last 18 months. And we believe it reflects continued strong demand for our products, services, and solutions. We further believe as a result of these changes, our projections will be more predictable and will better reflect our strategic engagements and focus on building a higher margin business over the long term. While the current geopolitical environment is delaying the timing of new deals, it also highlights the need for advanced AI and cyber solutions that provide enhanced intelligence and threat detection, areas where we have an outstanding track record of success in highly complex environments. We continue to perform well on prototype projects in these areas. In fact, our team was awarded first place at the US Cyber Command Prototyping Event held in June, highlighting Big Bear AI as a leader in AIML full spectrum cyber technology. This is just one of several new prototypes we developed and demonstrated in the second quarter that resulted in accelerated production phases for large contracts, invitations to participate in new military exercises, and expanded business development relationships introducing us to new customers. Although prototype work frequently occurs significant upfront investments with very low or even negative margins, they have the potential to lead to significant multi-year contracts with much better margins. We expect to see new awards associated with our latest prototypes beginning this month. and continuing through 2023. We also expect the increase in funds earmarked for AI adoption in the defense budget to generate more opportunities for us with current and new government customers well into the future. With a growing pipeline for both our cyber engineering business, as well as our analytics business, we continue to be well positioned to drive growth and capture larger technology-led projects with government customers. Now I'd like to address our progress with Pro Model. During the Q1 earnings call, I mentioned that mergers and acquisitions would be a key part of our growth strategy this year, allowing us to accelerate our product roadmap and entry into rapidly growing markets. The Pro Model acquisition that occurred in Q2 is a great example of this strategy at work. This accretive acquisition has enriched our portfolio with advanced modeling and simulation products and has given us a foothold in the high-growth manufacturing and healthcare markets. For example, our FutureFlow RX product for the healthcare sector provides a simulation platform for patient flow and hospital capacity, helping hospitals to predict patient loads, optimize patient care, and improve financial performance. In the second quarter, we signed a new deal with one of the largest healthcare systems in the eastern United States, And we're seeing rapid growth in our pipeline as hospitals and healthcare centers continue to feel the effects of COVID and a shortage of healthcare workers. We are seeing similar demand in shipyard operations, domestically and abroad, as shipbuilding and repair facilities struggle with intense challenges in capacity planning and resource utilization. Our ability to integrate AI-powered analytics with additional twin of production processes dramatically improves forecasting accuracy, yard optimization, and operational efficiency for our customers. These benefits are applicable across a wide range of industrial and discrete manufacturing processes. And we are working to extend our shipyard AI product to address more segments of the global supply chain. These examples demonstrate just a fraction of the opportunities gained from the acquisition of ProModel, the integration from both a business and technical perspective, is on track. And we are building relationships with our expanded customer base and partner network, which we will leverage to expand into new markets and geographies in 2023 and beyond. Although our commercial sales cycles are moving more slowly due to economic uncertainty, we are pleased with our bookings to date. We expect to see a positive impact on revenue in the back half of this year, with significantly more impact next year, as is common with subscription-based offerings. Before turning the call over to Julie, I'd like to briefly address our operating expenses. As I mentioned earlier, we lean forward in our investment strategy during the second quarter to support our requirements as a public company and to fuel future growth. Many of these investments, such as the acquisition of ProModel and our growing commercial go-to-market organization, will help us transition our business to steadier, more predictable, and higher margin SaaS business contracts in the future. However, in light of the unexpected delays in revenue and longer sales cycles we are seeing as a result of the slowed economy, we are taking a more stringent approach to reducing operating expenses and conserving cash for the remainder of this year. Increasing operational efficiency is a core component of our transformation and maturation process. It is also one of many strengths that make Julie Pfeffer, our new CFO, a great addition to our executive team. Julie brings 20 years of experience building and running mature, efficient finance departments and other G&A functions for global public companies like AWS, FlowServe, Raytheon, and many others. She's well-versed in government contracting processes, healthcare, and manufacturing industries, and SaaS subscription business models. She'll be instrumental in helping Big Bear AI improve our operating efficiency, forecasting fidelity, and governance capabilities as we plan and execute our aggressive growth and transformation strategy. With that, I'm pleased to turn the call over to Julie to provide more details on our Q2 earnings and recalibrated guidance for the remainder of the year. Julie?