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spk08: Greetings and welcome to the Black Sky Technology Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ali Bonilla, Vice President of Investor Relations. Thank you. You may begin.
spk01: Good morning and thank you for joining us. Today I'm joined by our Chief Executive Officer, Brian O'Toole, and our Chief Financial Officer, Johann Brookhaysen. On today's call, Brian will provide some highlights on the quarter and give a strategic update on the business. Johann will then review the company's first quarter financial results and outlook for 2022. Following our prepared remarks, we will open the line for your questions. A replay of this conference call will be available from approximately 1230 p.m. Eastern Time today through May 25th. Information to access the replay can be found in today's press release. Additionally, a webcast of this earnings call will be available in the investor relations section of our website at www.blacksky.com. Before we begin, let me remind you that today's conference call includes forward-looking statements, including financial performance and guidance for our fiscal year 2022 and that actual results may differ from the expectations reflected in these statements due to factors such as long sales cycles, customer demand, and our ability to estimate expense, operational, and liquidity needs. We encourage you to review our press release and most recent SEC filings for a full discussion of the risks and uncertainties that pertain to these statements and that may affect future results or the market price of our stock. Black Sky assumes no obligation to update forward-looking statements. In addition, during today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is included in today's earnings press release, which can be viewed and downloaded from our investor relations website. At this point, I'll turn the call over to Brian O'Toole. Brian?
spk05: Thanks, Ali, and good morning, everyone. Thank you for joining us on today's call. I'm pleased to report that the first quarter of 2022 was the strongest in the company's history. We delivered strong first quarter financial results and continue to make significant progress across many aspects of our operations as we are now in a phase of rapidly scaling our business. Demand for BlackSky's high-frequency imagery, monitoring, and analytics has accelerated as world events have placed an even greater level of importance and value for just-in-time information and insights. Now more than ever, our world needs real-time geospatial intelligence. From the crisis in Ukraine to the monitoring of critical assets in Eastern Asia to understanding commodity volumes and supply chain logistics in the U.S., there's a growing need for real-time global intelligence and insights that BlackSky provides for critical decision-making. Our strategy has always been to combine a best-in-class software platform with our proprietary high-performance Constellation that, as a single platform, can automatically test the Constellation, integrate other data and sensors, and run sophisticated analytics to deliver information and insights that decision makers rely on as part of their day-to-day operations. This software-first strategy which is of equal importance to the Constellation, is what differentiates us in the market and what is now paying dividends. Today, using our platform, any customer can log in, pass the Constellation, and have imagery and analytics delivered to their inbox in roughly 90 minutes or less, all fully automated. This is a capability that is now fully operational and we believe has uniquely positioned BlackSky capture a significant market opportunity that has been unmet with traditional imagery and geospatial solutions. Our strong Q1 performance was driven by several major factors. First, a growing global demand for our real-time imagery and analytics services across U.S. government, international, and commercial market segments. our ability to capture this growing demand due to the investments we've made in expanding our sales force and global reseller network over the past year. We are now seeing the results from these investments as we are converting this demand into new business. Third, the achievement of a 14 satellite baseline constellation that combined with our Spectre AI software platform can provide on-demand tasking and hourly monitoring of the most important strategic and critical assets and locations in the world. Our integrated space and software platform is delivering a rapid revisit rate of up to 15 times daily, dawn to dust imaging, and information and insights delivered in under 90 minutes. We now have the needed performance and capacity to support the growth of our business over the next couple years. What this means is that we can see and analyze critical and strategic assets, on roughly an hourly basis and provide customers with unprecedented real-time intelligence that they never had before. Fourth, ideal market conditions and timing as our imaging capacity is coming into the market at a time when there is increasing demand for services from trusted suppliers while the capacity from legacy providers is highly constrained and diminishing as satellites from their aging constellations are reaching end of life. Fifth, improving operating efficiencies as we begin to monetize capacity and grow our margins. And finally, improving capital efficiencies as we optimize our CapEx spend to align with market demand, and in parallel, gain benefits from longer than expected mission life of our satellites. Looking beyond these operational achievements, this quarter has demonstrated that what we are doing matters, and is making a difference. Black Sky is relied upon by some of the most important customers and missions in the world. In the past 30 days alone, we delivered over 1,000 images to U.S. and international security agencies, humanitarian organizations, and the media in support of the citizens of Ukraine and our allies in Europe. We are proud that we are having an impact in providing transparency, delivering timely intelligence and providing information to humanitarian organizations who are working to save lives. To quote one senior government official in the U.S., on behalf of the country, our allies, and the people of Ukraine, we want to thank the Black Sky team for your efforts in support of this crisis. What you are doing is important to our nation and the world and is contributing to saving lives. We are grateful for your dedicated efforts to this cause. I would also like to add to that comment in that I'm very proud of our team and want to thank our team for their efforts during this crisis. We are demonstrating to the world that Black Sky has achieved operational capabilities at scale and are changing the way we see and understand important events around the world. providing a cost-effective tool for national security and economic intelligence. This timing aligns well with the secular shift we're seeing within the U.S. international government sector that is looking to leverage commercial satellite operators for more and more national security, defense, and intelligence operations. Although we experienced increased demand from the crisis in Ukraine, the larger contributor to our incremental growth in the quarter came from outside the Eastern European region in areas such as Asia Pacific and the Middle East, signaling a strong global demand for our capabilities. I'm pleased that we successfully carried the momentum we showed in Q4 of last year into Q1 of this year as we started the year on a strong note. Highlights of the first quarter include Record revenues of 13.9 million, up 91 percent over the prior year period. New and expanded contracts with U.S. government customers. New and expanded contracts with international government customers in Europe, Asia Pacific, and the Middle East. Engagement with several new major companies spanning multiple vertical markets. Expansion of our software platform to include new imagery, sensor, and analytic capabilities. The successful launch and commissioning of two additional satellites in April expanding our Constellation's revisit and imaging capacity, and the continued expansion and growth of our Salesforce and global reseller network. We were also proud to announce our new strategic advisory group that included the appointment of three of our country's distinct national security leaders. These include Vice Admiral Joe Kernan, former Undersecretary of Defense for Intelligence, Lieutenant General John Mulholland, Jr., former Associate Director for Military Affairs at the CIA, and Colonel Michael Dickey, former Space Force Chief Architect. We are proud to have them join our team and look forward to their guidance and insights on our national security strategy. I'll now talk in more detail about each of these highlights, beginning with revenues. First quarter revenue grew to $13.9 million. a 91 percent increase over the same period last year, and a new revenue record for the company. Revenue in Q1 also grew sequentially from Q4 of last year, as our efforts in expanding our direct sales team and reseller network continue to gain traction. In fact, for the third consecutive quarter, our imagery, software, and analytics services revenue experienced strong double-digit sequential growth. These are the highest margin of recurring revenue elements of our business. Johan will provide more details on the first quarter financial results later. Now I'd like to provide an update on the progress we made in our government and commercial businesses, starting with the government business. Customer demand continues to be strong for a high revisit imaging and analytic products and services, both in the US and internationally. In the first quarter, we won several new opportunities and experienced significant rise in orders for imagery and analytics from existing customers. In fact, demand for imagery monitoring analytics in March was at an all-time high for the company. In Q1, we saw increased demand and order activity with the National Reconnaissance Office, or NRO, for BlackSky's real-time intelligence on targeted locations around the world. In particular, demand over Ukraine rose throughout the quarter as the crisis escalated in that region. underscoring the vital importance of real-time geospatial intelligence for military, commercial, and humanitarian applications. As a reminder, we expanded our existing contract with the NRO last summer and have continued to see growth over the last several quarters, demonstrating the NRO's confidence in Black Sky's capabilities. We believe this, in turn, positions us well to capture a portion of the upcoming electro-optical commercial layer, or EOCL, contract. As many of you know, the EOCL contract is the largest U.S. government contract for purchasing commercial satellite imagery and will be the vehicle through which the U.S. government acquires these services over the next 10 years. The NRO has recently indicated they are targeting to award the EOCL contract this summer, and we look forward to the award announcement. Another large and longtime government customer we support is the National Geospatial Intelligence Agency. or NGA. In Q1, we received additional task order under the NGA's Economic Indicator Monitoring Program that leverages our high revisit satellite imaging combined with our AI-driven software analytics to provide monitoring services and insights into global activity. Since we were first awarded the five-year $30 million contract in Q3 of last year, BlackSky's services under this program have continued to expand each quarter further integrating us into the agency's day-to-day operations. This award, in the expansion of services we've seen to date, demonstrates the value that NGA has in Black Sky's analytics as a service offering. The combination of high-frequency site monitoring from our constellation and AI-driven analytics that fuse together high-resolution imagery and sensor data from multiple sources, such as synthetic aperture radar, through our unique SAS platform is providing users with access to new types of actionable intelligence. These new and advanced monitoring and analytic services that are powered by our Spectre AI software platform provide us with a competitive advantage as the government is looking to buy more and more commercial analytic services. The US government has recently expressed greater interest in utilizing commercial satellite technology for essential imagery and intelligence capabilities. We started positioning for this market opportunity several years ago with the successful award of the U.S. Army TACGEO program and others, which we believe will lead to significantly more opportunities in the future with the DoD and Space Force customers for tactical ISR. We believe the ISR market is beginning a large-scale shift, where billions of dollars that were once spent on airborne systems are shifting to space and looking to leverage constellations of satellites to support new and emerging missions. An example is the emerging opportunities with the Space Force as the U.S. government expands its agency for tactical reconnaissance and surveillance missions from space. In addition, the government is looking to develop other leading space capabilities for organizations supporting the Army, Air Force, and the Space Development Agency, to name a few. Our longstanding history Working with the NRO, the NGA, and other government and defense agencies puts Black Sky in a great position to benefit from the growing number of programs requiring our capabilities. Moving on to our international business. Customer demand for our products and services increased in Q1, with our international business driving a large part of our growth this quarter as we added customers and expanded contracts in Europe, Asia Pacific, and the Middle East. We are seeing strong demand coming from several international governments around the world as they turn to BlackSky to provide them with mission-critical intelligence and analytics on strategic locations and assets. For example, we were awarded a multimillion-dollar contract from an international government to provide them with on-demand, high-frequency satellite imagery and analytics for monitoring strategic locations in their region. We also signed additional agreements with a number of other international governments as this customer base continues to expand and the use of BlackSky's real-time imagery and analytics in high-demand locations grows. We are now supporting several major international ministries of defense and are continuing to grow our pipeline of opportunities with many more customers around the world. With the world focused on understanding how to navigate various global events We anticipate international demand for BlackSky's products and services will continue to grow in order to meet this rising demand. We will continue to expand our international sales team and partner network to capitalize on this growth and drive incremental sales. Turning now to our commercial business, we're seeing greater interest for BlackSky's disruptive on-demand imagery and analytics delivered through our AI-driven software platform across a number of vertical markets, including financial services, geospatial information systems, commodities, and natural resources. As we continue to drive awareness of our high revisit imagery and Spectre AI's platform capabilities, we are seeing an increase in incoming leads and opportunities across a range of industries. As a result, we are engaged with several new major commercial customers in Q1, and look forward to expanding these opportunities over time through our land and expand strategy. In addition, we expanded our global reseller network by over 25%, further strengthening Black Sky's sales distribution channels and extending our customer reach to multiple regions around the world. We're pleased with the progress we made standing up our commercial business over the last couple quarters and are excited to capitalize on the new sales opportunities that lie ahead as we continue building out the sales team. Moving on to our operational capabilities, which are anchored by our Spectra AI software platform and our proprietary satellite constellation. Let me first start with our software platform, which we believe is one of the biggest competitive advantages that we have. We're seeing increased demand from existing customers who already rely on BlackSky for timely, critical, and accurate analytics and insights, as well as from new customers who are discovering the power and benefits that our platform can deliver. BlackSky software platform provides customers with affordable, on-demand, and autonomous satellite tasking with fully automated analytic intelligence and insights, a real game-changing capability for the industry. Customers can easily log in through a web browser, task our satellites, and receive imagery and custom analytics within 90 minutes. They no longer have to navigate a lengthy, complicated process or wait days to get images and insights, but now can get them from BlackSky on demand. During the quarter, we continue to improve our platform's capabilities with new analytics, sensors, and imagery products. Our Spectra AI software platform integrates information from multiple sources, including synthetic aperture radar, or SAR, enabling all weather and nighttime monitoring. visible infrared imaging, or VIIRS, allowing for wildfire detection and monitoring, the status of refineries and upstream oil and gas operations, and automatic identification systems, or AIS, enabling maritime vessel tracking and monitoring for commodities and supply chain intelligence. In addition, we've enhanced the object detection capability in our platform, enabling us to better identify the various types of aircrafts maritime vessels, and other objects. This capability allows us to keep deeper insights into operational fleet trends, monitor asset traffic to and from sites of interest, and give customers real-time alerts during anomalous events that can impact their operations. Together, these improvements open up a new set of customer use cases and commercial applications, making BlastGuide's platform even more valuable to customers. Let me turn to our satellite constellation. Just last month, we launched two new satellites into orbit, bringing our total constellation to 14 satellites, which provides more than enough capacity and revisit performance to satisfy customer demand for the next couple of years. In response to the crisis in Ukraine and to address demand in the region, we changed the planned orbits for these two satellites 30 days ahead of the launch in order to improve the intraday revisit frequency over Ukraine and the surrounding region. This process can typically take almost a year, but further demonstrates our agility and responsiveness to meet customer demand where and when they need it. We're very proud that these satellites achieved commercial operations within 12 hours of launch and began taking high resolution images, generating revenue and delivering information to customers. thereafter. The additional satellites further expand BlackSky's constellation capacity, increasing the frequency of when images are taken and improving the hourly dawn-to-dusk site monitoring capabilities for customers that need real-time insights. Because of our satellite's high revisit times, customers have the flexibility to shift imaging capacity where and when they require it to best suit their needs. We are also seeing extended performance from our first commercial satellites. providing us some optionality on the timing for when we need to replace these assets. As a result, we are shifting the timing of the launch for our next two satellites to Q4 of this year, which will coincide with the four-year anniversary of our first two commercial satellites. In parallel, we're also focused on building and launching our next Generation 3 satellites. We're excited for the new capabilities our Gen 3 satellites will bring, which include taking our imaging resolution down to 35 to 50 centimeters and adding shortwave IR imaging technology to enable a broad set of imaging conditions such as low light and at night. We anticipate beginning to launch the first of these Gen 3 satellites in 2023. In summary, we had great execution across the business, made overwhelming progress expanding our customer reach, and delivered strong first quarter operating results. I'll now turn it over to Johan to go through the financial results in more detail. Johan?
spk03: Thank you, Brian, and good morning, everyone. I would like to echo Brian's message of how proud we are as a company to be supporting massive humanitarian efforts in Eastern Europe as refugees flee the conflict in Ukraine, along with the critical support that we and others are giving to enable the Ukrainian people to defend their homeland. Black Sky is making a real difference in the world today, and all our employees are very proud to be part of this effort. I am also particularly pleased to report that we started the year on a very strong financial note and have continued to make excellent progress in many aspects of our business. With that said, let's jump right into our first quarter results. Revenues. Increased customer demands for our imagery and analytic solutions drove record first quarter revenues of $13.9 million. This was a 91% increase year over year, our largest growth rate in nine quarters, or $6.6 million in more revenue than Q1 a year ago. Imagery and software analytical services revenue grew to $7.4 million, driven primarily by new and existing government contracts as these important customers look to BlackSky to provide them with real-time intelligence and insights around the globe. The revenue mix for imagery and software analytical services rose to approximately 70% of total revenues, demonstrating the value customers placed in our assured access high-frequency imaging and Spectra AI software platform capabilities. Also contributing to the increase in total revenues was higher engineering and systems integration revenue of $4.1 million, primarily driven by an increase in the percentage completion of certain satellite contracts for customers. Gross margins. Strong demand for imagery and software analytical services, which is our highest margin revenue, drove gross margin, excluding $801,000 of non-cash stock comp in this part of the business, to about 48% in the first quarter, an increase over the approximately 27% in the prior year period. Total non-cash stock-based compensation expense within cost of goods sold constituted about $921,000. However, due to higher engineering and system integration expenses, largely attributable to non-recurring design costs and material procurement costs, total gross margin excluding non-cash comp in Q1 closed at approximately 28% versus prior year same period of approximately 24%. Considering a larger part of our revenues come from imagery and software analytical services, we anticipate gross margin to improve over time as we scale the business off the investments already made in the software stack and the constellation. Operating expenses. Turning to operating expenses, we incurred $30.1 million of operating expenses in the first quarter of 2022. This amount included $9.3 million of non-cash stock-based compensation expense. Excluding the stock-based compensation expense of $9.3 million in Q1 of 22 and half a million in Q1 of 21, operating expenses increased $10 million year-over-year. About half of this increase was due to higher depreciation expense driven by the six additional satellites that we placed into orbit in Q4 of 2021. Investments in building our sales, software, and engineering teams also contributed to the increase in operating expenses as well, of course, as higher public company operating costs to a lesser extent. Adjusted EBITDA. We had an adjusted EBITDA loss of $9.5 million in the first quarter of 2022, compared to a loss of $6.2 million in the prior year period. The loss was driven by investments in sales software and engineering hires across the organization and, of course, public company operating costs. The balance sheet in CapEx. The company ended Q1 2022 with $138.4 million of cash. Capital expenditures in the first quarter were $13.4 million, with about 80% of this spend attributable to building and launching satellites. Going to outlook and guidance. As mentioned earlier, we are seeing strong demand for Black Sky's imagery and analytical insights stemming from both U.S. and international governments, and we are starting to see diversification of revenue streams as foreign customers increasingly are signing up to leverage the services that we are able to provide them. The crisis in Ukraine has clearly put a spotlight on the vital need for Black Sky's real-time geospatial intelligence. and we anticipate interest and demand to continue to grow throughout the year in several areas of strategic interest across the globe. All that being said, we are reiterating our full-year revenue outlook for 2022 of between $58 and $62 million. Taking the middle of the revenue range, this would represent a strong year-over-year growth of 76 percent. We expect capital expenditures for 2022 to be between $52 and $56 million as previously guided. Assuming the middle of the CapEx span range, this would represent a 15% reduction in span from 2021, as we believe we have more than enough capacity from our 14 satellite constellation to support increased customer demand for the next couple of years. With growing revenues and responsible cost management, we believe our business is well positioned to scale and maximize returns. With that, I'll turn it back over to Brian for some closing remarks. Brian?
spk05: Thank you, Johan. In closing, We're very happy we started the year strong and achieved several major milestones in Q1. Revenues and year-over-year growth are at record levels. We continue to win new customers and expand contracts with existing customers. Our operational capabilities in both software and satellite constellation continue to increase and are in place to drive our growth over the coming years. We're capitalizing on numerous efficiencies across the business and scaling our operations. But most importantly, demand for BlackSky's real-time imagery and analytic services has never been higher. With all of these accomplishments and significant opportunities ahead, we are excited to carry this momentum forward throughout the year. This concludes our remarks for the call, and we'll now take your questions.
spk08: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question comes from Scott Ducherelle with Credit Suite. Please proceed with your questions.
spk10: Hey, guys. Good morning. Thanks for taking my questions. Johan, you touched on it somewhat already, but can you maybe just walk us through in a bit more detail the gross margin performance you saw in the quarter and then the drivers of the incrementals you saw in imagery and the decrementals you saw in engineering? Just curious for a little more detail there. Thanks. And I have a few follow-ups.
spk03: Yeah, sure. Thanks for the question. So starting with gross margins, we did see, as we said, an improvement in our gross margins, which frankly is driven primarily by the increase we see in our high-margin revenues, which are monitoring, analytics, and imagery. It's not unexpected, given we've made investments into our software stack and into the satellite constellation, and it is our expectation, obviously, that as we drive those revenues higher, we would expect that the business will scale and margins will improve, which is what you do see. You know, we expect that to continue. Frankly, as long as we're driving those revenues higher, we would expect to see higher gross margins over time, and that's how the business scales. You also asked, I believe, about growth in those areas. I'm actually going to pass that one over to Brian. I think he has a lot of good news in terms of our imagery and monitoring analytics. So, Brian, if you want to talk about that, then we can come back to the other question he had.
spk05: Yeah, Scott, obviously we've been investing over the last eight years in our software and Constellation, and now we're moving into a phase of monetizing that capacity and seeing incremental high-margin business come from the analytics that we also offer with the imagery. So as we're experiencing strong demand with the U.S. government and as we've outlined recently,
spk03: significant demand in the international markets um across multiple regions um you know that's driving that's driving this uh improving uh revenue and margin performance yeah i'll just tag on to that i'll just tag on that we did see some some pretty significant uh improvement in revenues internationally um and frankly as we expected it wasn't all driven in eastern europe we saw um large increases in demand for our services outside of Eastern Europe as well, out in the Asian Pacific region as well as the Middle East. And then you had a third part there that I think was around engineering integration. Is that right?
spk10: Yeah, I was wondering about what drove the decrementals there, and I'm just curious on if that will be a factor to consider for the remainder of the year as well.
spk03: Yes, the engineering integration is essentially where we go out and build out satellite constellations, bid on and build out satellite constellations and satellites for customers, and it's an entry point to provide them the services that come thereafter. Those tend to be large contracts, and because of that, there are step functions up or down. It's the nature of the game, and as I said, we do it for a number of reasons. One, we obviously have the expertise and ability to do that, and secondly, it gives us the opportunity in the opening to follow on with management of Constellation and providing additional imagery and analytical services.
spk10: Okay. Do you feel like it'll create value for the business over time, just given that it is negative gross margin and the margins have gone down as the business has scaled?
spk03: Yeah. I mean, they don't carry the same margins as our imagery and analytical revenue, obviously. So from that perspective, it's diluted to gross margin. But as I said, we believe it drives additional revenue. And ultimately, I think the way one has to look at the business is probably the sum of the parts. And certainly down the road, we'll see, you know, what opportunities present themselves in terms of what we do with that part of the business. But for right now, obviously, it's an important part of our revenue stream, and it brings in cash flow. So, you know, we'll continue to do that.
spk05: Scott, one thing I should add to that is, you know, one, these are highly strategic programs. They align us very deeply with important customers. Two, they offset R&D expenses and are funding advanced technologies that are interesting to those customers. And then three, they are typically bundled with our high-margin services. So over time, they will drive – significant value into the company.
spk10: Okay, that makes sense. And then I guess, Johan, just to clarify, if I were to include or allocate depreciation of your satellites to the COGS of imagery and analytics, would the imagery and analytics business still be generating positive gross margins? Or is a lot of that DNA actually for the engineering business?
spk03: Yes, so the short answer is absolutely. We would be generating positive gross margins on the imagery and the monitoring and analytics. There's no doubt about that. And then how we allocate that is across both those sections of the business, engineering integration as well as our software and imaging. But the reality is that even with DNA, we still have significantly high gross margins.
spk10: Okay, that's helpful. And sorry to take up so much time, but a few more. Johan, just the $10 million in stock comp in the quarter, is that a good run rate that we should expect over the remainder of the year?
spk03: Yes, I think $10 million in comp is probably fairly – well, it's coming down over time. But this year, at the current run rate, as I said, in my comments, it was about $900,000. 921,000 sitting in COGS, right? And then the remainder in SG&A. But, you know, I don't worry too much about, frankly, too much about non-cash comp. I think it's something that over time will come down. And really, it doesn't impact our EBITDA, which is the thing we're most focused on alongside revenue.
spk10: And is most of that comp related to prior equity grants and just the vesting over time, or is it new issuance? I'm just On its face, it would look to be 7% diluted per quarter if it was new issuance. So just trying to think about sketch out dilution over time at the current market. Thanks.
spk03: It's a combination of the two. Frankly, I don't know off the top of my head what that split is as I sit here. But it is both prior equity that was issued to the team prior to going public and then some new equity. But I can tell you that if you go through our public filings, you'll see that the amount of equity that's in the plan that's available to management team is very much in line with public companies.
spk10: Got it. Last question, Brian, just APAC revenues. I think they grew one and a half billion year over year. It was like the business tripled or quadrupled. Just if you could talk a little bit more about kind of the customers, who those customers might be and the kinds of services you guys are providing. I think that'd be a question to close us out on. Thanks.
spk05: Scott, I'll just say generally we are seeing growing interest and demand across a number of regions worldwide, including the Middle East, Northeast Asia, Southeast Asia, obviously in Europe. And it's driven by two major trends that we see. One is there's more and more demand for monitoring strategic assets and critical assets in the world today. And then also, especially around our capability where we can see throughout the day at very high frequencies, we're able to contribute intelligence that a lot of these customers have not had before that go beyond just using imagery for mapping. And there's growing budgets across all of those regions. as I said in my earlier remarks, we're seeing ideal market conditions and timing for bringing our capacity and analytics into the market.
spk10: Okay. Thanks, everyone.
spk08: Thanks, Scott. Thank you. Our next question comes from Colin Canfield with Barclays. Please proceed with your question.
spk06: Hey, good morning, guys. So, DoD commentary is suggesting that pretty constructive environment, and your peers are talking about it being the best they've ever seen. So if you can maybe talk about what your placeholder for EOCL is in the 2022 guide, and then what the aperture for growth looks like beyond that, maybe split between U.S., international, and commercial.
spk05: Sure, and good morning, Colin. Thanks for your question. Yeah, so as you know, EOCL is a very important contract program for us, and we believe we're well-positioned to win a portion of that contract. As I've stated in the past, our contract was expanded last year, and we are now integrated into the day-to-day operations of this contract, and we've been experiencing quarter-over-quarter growth in demand from that customer. And so we feel we're really well-positioned for that contract. Also, as I stated earlier, the government has indicated they're working toward awards this summer. So, we have forecasted an award in our revenue forecast this year. So, we feel we're really well positioned for that. And to your second part of the question, the international demand that we're seeing is growing very rapidly. And we're starting to see a lot of incoming from not only Tier 1 International Ministries of Defense governments, but a lot of Tier 2 and Tier 3 countries that are standing up geospatial intelligence and space-based capabilities for various applications within the government. So we're very excited about what's happening in that sector. In fact, we've been scaling our our sales teams and reseller network, particularly to go capture that growing demand. And so that's where you're seeing we're experiencing and what we've demonstrated is driving a lot of the growth in the quarter and what we see going forward. The other element of that is both in the U.S. and internationally, the shift of using small satellites for tactical ISR applications, which there is a growing number of the growing budgets there for capitalizing and using leveraging the technology that such as what Black Sky has developed for those new applications. So all in all, as I've emphasized, ideal market conditions and timing are what we're seeing in the sector.
spk06: Got it. And then if we think about the cash flow break-even targets contemplated within your SPAC slides, can you just talk about, you know, kind of what the cash levers are to get there and how you think about your buckets of spend in engineering, sales, and then Gen 3 CapEx versus the underlying cash profitability of the business?
spk03: Yeah. So, you know, we pulled those numbers a long time ago. And it's self-evident that you still have copy of them when you look at it. We're obviously not going to get there this year. And as a result, no surprise, you would expect when we expect to get cash flow breakeven no longer matches what's in those data points either. We haven't given any guidance to the street externally as to when we expect to be cash flow breakeven, and we're not going to do that here today either. Was there a second part to the question on engineering integration that I'm not recollecting?
spk06: Yeah, it's around the cash levers and how you think conceptually around the cash levers of the business split between, you know, underlying engineering, sales, and then any CapEx related to Gen 3.
spk03: Yep, sure. So we are obviously investing in particularly in our sales team, but also in the software stack. We do that. We're doing that responsibly. And as we mentioned in the previous earnings call, On the CapEx side, CapEx is significantly lower this year from what it is last year, and most of that is coming from a decline in our satellite investments. We've consistently said that at 14 satellites, we have at least two years' capacity for two years' worth of revenue that we project. We continue to see that. We'll allow the cadence of our satellite deployment and construction to be driven by customer demand. And so, both of those things, expense run rates, but in particular CapEx, are the same at or better than what we've projected in the SPAC numbers. So, we continue to be able to pull both those levers. The company has a history of being able to manage cost aggressively, and we'll continue to do that. But at the same time, obviously, we do have to invest in the organization to ensure we drive revenues as fast as possible. So, we're going to do that prudently. Those are the two main levers we have in terms of preserving cash. As I mentioned, we have $138 million on the balance sheet, which is a sizable amount. But we are in constant dialogue, obviously, with our bankers and others to try and take whatever steps we deem to be necessary to manage the company for the long term in terms of liquidity.
spk08: Thank you. Our next question comes from Josh Sullivan with Benchmark. Please proceed with your question.
spk04: Hey, good morning. Morning. Morning, Josh. Can you just provide some color on the longer life of the satellites you're getting? You know, what were the gating factors or gating life factors that you originally estimated that have now changed? And do you think that's specific to black sky or do you think industry standards or components just improved?
spk05: Well, I think, Josh, when we started building these satellites years ago, we used the best available engineering estimates on the expected life, which we thought would be about three years. So we now have our first two satellites, which will be approaching their four-year anniversary this fall. But also keep in mind, Josh, that we have implemented an agile space strategy approach in our business where we're constantly improving the satellites as we launch more over time within our manufacturing processes. And at the time, we hadn't had a lot of flight heritage, so we used very conservative estimates. So now we have 14 satellites that are operating. We've got over three years of experience And we're starting to see that we're going to be able to squeeze expected longer life out of these than expected. I will say, just industry-wide, you typically will see estimates that are expected mission life that end up being shorter than the actual life, depending on each individual satellite. But we're very pleased with where we are. That's a great, that gives us a lot of optionality in the timing of when we deploy more satellites to replenish those. So we see and expect this trend to continue and is very favorable to our long-term plan.
spk04: And then just on Gen 3 to be launched in 2023, as we think about CapEx longer term, is there a large cost differential with Gen 2? And maybe to frame it, what was the differential between Gen 1 and Gen 2?
spk05: I would say generally we've kept in line the cost of these satellites between Gen 2 and Gen 3. It really demonstrates the opportunity. with small satellite economics so that we're seeing the type of improvements we're making within the same cost basis. So as we move from one meter to 35 to 50 centimeters with an added IR capability and other features on the spacecraft, such as onboard computing and space communication capabilities, really, I think, demonstrates that we're going to be able to continue delivering significant value improvements to our customers over time within the same cost framework.
spk04: Maybe just lastly, a general market question. What does pricing look like, given you've got strong demand here with Ukraine, driving other regions as well, but then you have competitor capacity announcements on the horizon? inflation, how does it all come together in the current pricing environment?
spk05: I think we're seeing a favorable pricing environment. We are, particularly in these market areas that we've outlined internationally, there's increasing demand for services from trusted suppliers while there's flat or diminished capacity in the market from legacy players. It's favorable both in terms of pricing and demand for where we are right now. Thank you for the time. Thanks, Josh.
spk08: Thank you. Our next question is Chris Quilty with Quilty Analytics. Please proceed with your questions.
spk09: Thanks. I want to beat a dead horse on the OpEx question. I just couldn't do the math quick enough with the new numbers you gave it. It looks like year over year, excluding depreciation and stock comp, OpEx is up around 80%. First of all, that order of magnitude, correct? And I guess what I'm driving to is, how should we look at OpEx on a go-forward basis? Do you see the current level you've now reflected New hires, public company costs, should it be fairly stable from this point going forward, or should we expect to see some creep as the year goes forward?
spk03: Yeah, so as I said, OpEx year-over-year in the quarter is up $10 million. Most of that is a combination of investments into our software talent, software hires, software engineers, sales, and of course public company costs. You know, we'll continue to grow that. I think you're looking a little bit at the law of small numbers, right? So there's a small denominator prior to going public, sort of nine months before that September timeframe. So I'm less concerned with the percentage growth. I don't think that's indicative. I think you need to look at a run rate that's more in line with dollars and heads and, of course, then any depreciation on satellites. So I hope that's helpful.
spk09: So maybe can you give a better sense of what the dollar increase might look like? Maybe what's a good run rate for OpEx exiting the year, excluding the depreciation and stock comp?
spk03: Yeah, no, as I said, we've put out revenue guidance. We've put out CapEx guidance. I don't think we're going to get into OpEx and gross margins at all. That will, by default, create an EBITDA guidance, which we're not going to do at this time.
spk09: Okay, fair enough. Question for you. I think with the Gen 3, you mentioned a space communications capability. I'm assuming you're referring to some sort of a relay capability. Can you talk more about that?
spk05: Yeah, Chris, we've made provisions in the satellites to have a lot of flexibility into space-to-space comms that can come from a variety of different networks. So we've made those provisions in the satellite.
spk09: Would that be focused primarily on sort of a TTNC capability or actually a downlink? for imagery? And if so, are you thinking more about RF or optical?
spk05: It's primarily for TT&C because our primary objective is to reduce the timelines for our customers to task and receive imagery. So these are strategies to improve those operating timelines over time, especially for where we see the opportunity market around tactical ISR from space. And as I mentioned, we have an agile platform that allows us to put different types of technologies in there as needed.
spk09: Great. As a follow-up to the satellite life question, how quickly can you turn, or I should say, how quickly can Leo Stella turn a new satellite order around? If you had an on-orbit failure or saw increased demand, how long should we expect from, say, time of order to on-orbit?
spk05: Chris, it depends on really long-lead items such as optics and sensors and other critical components. I think we're seeing, if we start from scratch, it's about a 24-month or less, depending on the supply chain. Now, what we also demonstrated last year is by having a pipeline of satellites, as we have been doing, we can work with launch providers to rapidly deploy capacity to meet replenishment or growing demand, and that's a really powerful aspect of our model. So we intend to keep a pipeline of satellites moving. through Leostella and deploy them as needed to meet market demand or to address any on-orbit issues, which is a significantly de-risked type of constellation to what has been really conditions in the past where a single failure can be catastrophic to the amount of capacity and performance that customers are relying on. So we really just demonstrated that. both in what we did in the fourth quarter by doubling our capacity in about 20 to 30 days, and then also recently as we made a decision to change the orbits of the satellites that we just launched in April to optimize capacity and performance over Eastern Europe to meet customer demand. So it's a different model, Chris, and one that sets us up to really address demand as needed.
spk09: Great. While we're talking about Leo Stella, when we look at the engineering services activities, is it fair to assume that that's a joint activity with Leo Stella? And if so, how do you handle, is there a cost-sharing arrangement around those engineering costs?
spk05: In some cases, we work with Leo Stella. Anything that we do with Leo Stella, even though we own the company, at least half of it, is done at arm's length. contracts, but we do align strategic investments on satellite capability that we can leverage together. So it's an ideal partnership from that perspective and one that we're leveraging very heavily across our business.
spk09: Great. And Paul, sorry.
spk03: Chris, I was just going to say, if you go through the financials, you'll see Leo Stell has accounted for an equity investment basis, and so the revenue you see in our P&L is purely associated with our customer and the cost associated with that.
spk09: Great. A follow-up question on EOCL. Historically, that, well, I guess the enhanced view contract has run through September 30th, and assuming that they do award a contract this summer, Is it fair to assume that the contracts that you've seen are structured so that any new revenues associated with the EOCL would kick in starting on September 1st? Or is there some sort of delay period that we might encounter before actual revenues associated with the program begin?
spk05: Well, one, you know, we're anticipating that the contract would go in force right away. We're already providing services to that customer and have been integrated with that customer. And so I don't think September is a driver. I think it's really just driven by the time of when they make the awards and when they turn on the service. So and we're ready to start. We're ready to start on day one.
spk09: Great. And final question here. When you look at your pipeline, I don't know whether you can quantify it like this, what does your current breakdown look like between government, commercial, and international, and how has that changed in the past year?
spk05: Well, I think the overall pipeline is growing, driven by demand in all of those areas. As we have said, commercial is in its early days. It's more the type of customers and the applications that we're seeing emerge. And then as I've outlined, obviously U.S. government through ELCL, we're seeing demand growing from NGA, as we've outlined through our work. in our analytics as a service to the program we outlined, and then the tactical ISR market we see is early and expanding. But by far, I think we see the biggest growth coming internationally, both for imagery, geospatial analytics, and sovereign ISR capability.
spk03: Yeah, Chris, there's a good desegregation of revenue in the 10Q that you can go and look at and get all the numbers.
spk09: Yeah, and I guess my question was regarding the pipeline, and it sounds like, I mean, you've said this throughout the call, it's international.
spk05: For sure.
spk09: Actually, I do have one follow-up question just regarding in the current quarter, did you see a disproportionate share of, I guess what I'll call one-time rather than contracted opportunity relative to what you've seen in the past and perhaps driven by Ukraine?
spk05: Well, what we've seen, Chris, is we have a very – so, one, we saw a lot of increase in demand over that region, for sure, from both U.S., international, and commercial customers. But, two, we have flexible contracting relationships with these customers so they can decide where they want to prioritize collections. So – We give them that flexibility, and we experience that in the quarter. But as we outlined, the majority of our growth in the quarter came from outside of that European region due to the demand that we're seeing in Asia-Pac and growing demand in the Middle East.
spk09: Great. Thanks for all the detail.
spk05: Thank you, Chris.
spk08: Thank you. Our next question comes from Jason Schmidt with Lake Street. Please proceed with your question.
spk07: Hey, guys, thanks for taking my questions. Just two really quick ones and just following up on your comments on the international market and the momentum you're seeing. I mean, when I look at the international pipeline or when you guys think about it, is it fair to say that the momentum here is outpacing what you guys would have thought kind of 12 to 18 months ago?
spk05: Actually, we saw a lot of opportunity and demand in the international market. We are seeing it accelerate. And I think it's really being driven by world events and the growing interest in the ability to leverage what can be done. And it has been demonstrated in space and analytics by companies like Black Sky. So I think we're seeing all of that coming together at the right time in the market. We're also, as I've outlined, we've been investing heavily in expanding that sales team. And so, you know, now we're, we're getting a lot more insight and understanding how we can begin converting that demand into new business. The other thing I'll point out, Jason, is that, and this has been a key part of our strategy from the very beginning, once you're embedded and trusted in the operations of those customers, these tend to be long-term, recurring, and growing relationships with these customers, and so that's been part of our strategy from day one.
spk07: Okay, that's helpful. And then just as a quick follow-up, obviously government procurement cycles in general are always lengthy, but the length that you're seeing in the international market, is it pretty comparable to what you've seen in the U.S. market?
spk05: I would say they're different, but we understand each of them very well. we have a land and expand strategy. So we are getting into initial piling and initial operating capability with these customers very quickly. We did that in the first quarter. And then once we're in there and operational, those contracts tend to expand over time. So you do have to work with them and plan for out-year budget cycles, which we do. but we understand that very well.
spk07: Okay. Thanks a lot, guys.
spk05: Thanks, Jason.
spk06: Thank you.
spk08: Thank you. Our next question comes from Caleb Henry with Quilty Analytics. Please proceed with your question.
spk02: Hi, guys. Most of my questions have been answered, so just to – for Gen 3 – do you anticipate keeping the same fleet size of around 14 satellites or does that change? And then on the ground network side, I think we talked a lot about the spacecraft and the software, but are you still deploying gateways around the world? And especially with international customers, does that come with a need to deploy gateways in those countries?
spk05: Yeah. So, um, Okay, let's start with the constellation. So where we are today is we've achieved the 14 satellite baseline. That gives us the baseline capacity and performance and revisit we need for the next couple years. We are, our plan has not changed toward an objective of 30 satellites. We're going to begin deploying our Gen 3 capability next year. to replenish the aging of Gen 2 capability and to start expansion, but we'll expand the constellation to align with market demand. So, our long-term plans have not changed in terms of where we want to be in terms of the number of satellites. We're just highly aligned with the growth and capacity we need to do that. So, and then on the ground, As the ground stations or gateways, as you refer, we're adding a couple more to improve timeliness performance. Unlike others, we do not require our customers to buy hardware to do direct downlink or other tasking capabilities within their regions to achieve significant operational performance. Some cases, customers are interested in that and will provide it, but in the most part, our service is primarily through software and integrated that way.
spk02: All right, thank you.
spk08: Thank you. Our next question comes from Scott Duchelle with Credit Suisse. Please proceed with your question.
spk10: Hey, guys, thanks for taking the follow-up. Just real quickly, Johan, how is R&D so low? Are there costs that are getting capitalized? I'm just curious how you manage to keep that expense so low. Thank you.
spk03: Yeah, so we've historically not done a lot of R&D, obviously being cash-constrained prior to going public. Since then, we are pretty targeted and look into specific programs that we believe may have value in the future. That group is still ramping. So, you know, we don't have a lot of R&D expense currently, and it's very targeted and focused.
spk10: Okay. And then the cost to run machine learning training, is that something you guys invest in chips? Is that in the past, or are you going through AWS? Are there not larger costs for that? Historically, I thought that that would be an expensive cost for an AIML company. Thank you.
spk05: It's included in our OPEX. But, yeah, we are investing heavily in software and I've been expanding our data science and machine learning team to enhance, provide that type of training of algorithms, because we are seeing more and more customers want analytics delivered with their data. And then for us, that's also a pretty significant incremental margin off of the data. So we are continuing to invest very heavily in that. Where is the...
spk10: Where's the cost for those employees going then? I mean, R&D is less than a million dollars a year. Where's that cost flowing through the P&L?
spk03: So number one, that team is still ramping up. To the extent they're providing services that are currently in revenue, obviously that goes to COGS. Some of it gets capitalized as they develop those products and capabilities. And what remains goes to OpEx, as Brian indicated. I think a key takeaway to remember here is because we have our own proprietary constellation, our cost to learn, if you will, is significantly lower than many other companies that don't own their own data, right?
spk10: Got it. Thanks, guys. That's it.
spk08: Thank you. There are no further questions at this time. I'd like to turn the floor back over to Ali Bonilla for any closing comments.
spk01: I want to thank everybody for participating on the call, and we look forward to speaking to you again soon. Have a great day, everybody.
spk08: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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