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spk00: Thank you for standing by. This is the conference operator. Welcome to the Flight Aerospace Solutions third quarter 2022 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then zero. To the volume of questions expected on today's call, we ask that you limit your questions to three to allow time for others to queue. If there are any outstanding questions at the end of the call, the company will be happy to take them by email to investors at flight.com. I would now like to turn the conference over to Bill Tempany, Chief Executive Officer for Flight. Please go ahead, Mr. Tempany.
spk02: Thank you very much and welcome everybody to our Q3 conference call. We're very excited about the results in this quarter and the future of the company looks very rosy. We've been working very hard with the staff and our customers and our prospects to make sure that the products we're building, the services that we're putting together, meet the needs of the industry as they recover from the COVID pandemic. We've invested over the last two or three years in new hardware, additional software, and taken advantage of all of the learnings and software that we've built over the last 20 years. I was talking to an investor the other day and Said that flights a 20 year old company that spent 17 years learning what the industry didn't want to do Building tools that did things the entrance industry wasn't interested in and the last three years taking those tools and those learnings and creating solutions that the industry needs and wants and appreciates we rolled out a lot of those over the last six or eight months we've attended 16 shows in 22. We've got about 19 industry type shows that were booked for in 23. And we now have a sales force of 13 people around the globe to go out and sell these products with relationships with the customers all over the globe. Our recent addition in Europe of the cross consents team has opened doors and companies and opportunities over there that were never open to us before because we were a North American company and focused on smaller aircraft. The Cross Consents team is focused on larger aircraft, larger customers, larger airlines, and have experience and expertise in dealing with those companies. We've since beefed up our European sales force with the addition of Murray Skelton in Scotland. We have a part-time person in England that's helping Jacob talk to customers in the Middle East, Africa, and Europe, and we're very excited about the way the pipeline is growing. We're currently sitting at about $26 million in backlog, customers with signed contracts waiting for us to deliver product, and we've got a sales pipeline near-term sales opportunities that's in excess of $75 million. So we're looking at $100 million of near-term sales opportunities and backlog that we believe are going to very easily fill the opportunity we had this year in our licensing revenues with new hardware and new services revenues. We've got a full suite of products functional and working. We've done trials with several customers. We're in the process of signing contracts with those customers on our actionable intelligence tools. The databases, the Amazon Web Services opportunities are there, and we're continuing to develop those solutions with new customers and old customers. And I think you'll see a significant ramp in SAS revenues over the next 12 to 24 months as the industry recovers, our customers get back to flying, and our new products get rolled out across the industry. So we're very pleased with the results. We think we can sustain that level of opportunity going forward. And it's certainly our intention to have the company continue on the growth path. 100% growth year over year. is significant and the largest revenue quarter in our history. There was one quarter with higher EBITDA, but it was supported by one-time payments on a purchase that reduced the cost to a point where that became a very profitable quarter. I think that everybody in the industry is seeing what we're doing. When we talk to companies at the shows, they look at the products, they look at the legacy of the company, the fact that we've been around for nearly 25 years and continue to develop and build. The staff is really excited to be part of it. We made it through COVID with very few changes to the staff. In fact, we added staff in several areas. And I think we're tools for success for the future. We have a strong sales team. We have a very experienced and knowledgeable development and certification team. Our administrative and customer support teams have been solid throughout the pandemic and 10, 15 years of experience each that is really serving well for our customers. So I'm very excited about what we're doing and where we're going. And I'd like to turn it over to Alana to make comments on the financial results.
spk01: Thanks, Bill. Happy to. So I'll just have a look at the balance sheet first, then we'll turn to the income statement. The first thing you'll notice on the balance sheet is a reduction in cash from year end, and then right after, an increase in receivables. They're almost exactly offset as a major portion of the cash decrease is reflected in our AR balance at quarter end. Some increases in the AR and AP balances relate to the addition of cross-consents as of the end of Q1, which carries forward through Q2 and Q3 as they're fully consolidated into our results. Our intangible balance, you'll see a large increase over last year. That again is cross-consents. Work on the allocation of the purchase price continues. It's a highly technical equation, and we'll have that solidified by year end. Basically, we're working on an allocation of the overall goodwill amount into allocating it to various intangibles, the brand, customer contracts, and so on. Something new in our balance sheet as compared to last year is the contract liabilities category, and that's the balance of customer amounts that have been billed and haven't been yet delivered, as some of the cross-consents customers are billed annually for recurring monthly services. And now turning to the income statement, we're really pleased with our revenue increase compared to Q3 21. We showed increases in all categories except for hardware, which has historically been lumpy. And then we showed increases in all categories year to date. This quarter included a large licensing portion, and licensing is our highest margin revenue line as we continue to deliver on that large PO we announced that we received in Q2. On the G&A side, we also see increases due to increased scale of our business in adding cross-consents in Europe. to our consolidated results and also increases in distribution and R&D expense as we focus the organization on the completion and the sale of our edge product. We're really happy to show a return to profitability, both in EBITDA and net income. It was the result of a lot of hard work by the team and some pandemic recovery that have both gone into producing these kinds of results. And so, Gaylene, with that, we'll go to questions from the group.
spk02: Just one thing I'd like to add on that. That's okay. One thing I'd like to add on the increased G&A expenses is everybody knows we're having an inflation event and we've gone and given the staff inflation increases to make sure that they continue to be happy and can survive as our economies evolve to come out of COVID. And I think you'll see increases there we've also changed our customer contracts to include a cpi rider so that we're not locked into long-term contracts while the global economy goes through the the bumps and turns it's going to go through to recover from the investments in in covet over the last three years from government so there will be increases to cover the the cost of living for our staff and It's global. It's not something that's regional. Every jurisdiction we do work in is going through it. So something to keep an eye on and something that we're monitoring and making sure we stay ahead of both from a customer point of view and an employee point of view. So then we'll take some questions.
spk00: Thank you. We'll now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. And to withdraw your question, please press star, then two. Our first question is from Dick Ryan from Oak Ridge Financial. Please go ahead.
spk03: Great. Thanks for taking my questions today, Bill and Alana. Congratulations on a strong quarter. I guess my first First couple of questions really probably on the segments. You highlighted licensing being strong, driving the gross margin. Can you remind us how much is left on that large order, and will that be delivered by the end of this year, or will some of that push into next year?
spk02: We actually have a bell in our office to celebrate significant events. And during our board meeting yesterday when we were approving The financial statements, the bell rang, and the final part of that order has been shipped. So when we announced it, we said that all deliveries would be done in this fiscal year, and mission accomplished. It's done.
spk03: You know, I think the anticipation was there might be a pause in licensing, at least through the first half of next year or whatever. What's the outlook for follow-on orders and licensing? Has that outlook changed at all?
spk02: I think if you look at the global distribution of aircraft deliveries and how Airbus is becoming so dominant in those deliveries, that is going to pick up the deliveries and licensing. L3 obviously was doing a a buy to cover supply chain issues with the large order that was placed. But I think that they'll consume that much quicker than before just because of the percentage of deliveries being done by Airbus versus others. We have an agreement with COMAC to factory install our SATCOM on the C919. I saw recent articles, I think yesterday, that they have something like 600 aircraft on order. We believe we'll be installed on the majority of those aircraft, which it won't be booked in license revenue. It'll be booked in hardware, but it's an OEM sale. Excuse me. We're working with a couple of other manufacturers, smaller manufacturers that are installing our system for safety services as well that will show up in hardware revenue rather than license revenue. But that's all part of that sales pipeline that I was talking about.
spk03: Okay. And maybe looking at hardware, hardware is kind of backed off sequentially in each of the last two quarters, but it sounds like there's backlog there. What's the gating factor? You know, is it supply chain not getting components or materials? You know, even though I haven't seen your inventory bulge. So I'm not sure if it's that or is it more on the government certification side?
spk02: We're having a real problem with certification with both the FAA and Transport Canada. Our STC packages and approval packages are not being processed in a timely fashion. And it's not just us. It's everybody in the industry has got a backlog there. So we've got orders on the dock for a lot of kits for this quarter. and probably half of them are waiting for a rubber stamp from either Transport Canada or the FAA so we can ship. Our team is working hard. We have great relationships with those entities, but they're working from home and not doing a lot of work at it, and we've got to get that fixed. The world has got to get back to normal. We've got to get people back in the office, back doing their jobs and being accountable because the only way the economy is going to recover is if everybody is doing their job.
spk03: Just to clarify, I mean, you do have certifications on the 320s and the 737s, but not the NEOs and the MAX. That's what you're waiting on. So, I mean, it's not like you have to reinvent the wheel, right?
spk02: No, it's not. These are, these are, additions to existing packages that need the approvals. They're not new STCs. They're enhancements.
spk03: Okay, great. That's it for me. Thanks, Bill. Thanks, Nick.
spk00: The next question is from Bruce Krugel, a private investor. Please go ahead.
spk04: Hi there. Great set of results. I just wanted to clarify, Reuters reported on that COMAC front that the number of orders received at the recent Chinese air show was 330 aircraft. So that was 300 C919s and 30 ARJ21s. What is the driver bill to be installed on those aircraft? Do they need to be, do they have international requirements or is it purely internal Chinese SATCOM requirements?
spk02: If they're delivered in China, the internal SATCOM requirements are what's driving the installation. But I haven't seen announcement of international or outside of China carriers buying those aircraft yet. But I know they're working hard in Africa and Southeast Asia. So in Africa, if they're flying over land, they may not put SATCOM on. In Southeast Asia, if they're flying over water, they're going to need SATCOM. But I haven't seen a list of non-Chinese airlines that are buying or intend to buy. So it's really hard for me to say what percentage will end up with SATCOM on them.
spk04: Okay. All right. Moving on to AirAsia. So AirAsia is to report its Q3 later this month. And revenues are forecast to increase almost 100% sequentially this So that suggests that AirAsia is starting to see or should be starting to see a recovery. Are you seeing any recovery in AirAsia at this point?
spk02: We are seeing some recovery. AirAsia is a very complex company because they have partnerships in 10 different countries. So Vietnam, I think there's three of their subsidiaries that are back flying and they Malaysia itself still has border restrictions on international flights. So it's kind of a mixed bag and we're working with them almost on a daily basis to make sure that we have the right product on the plane as they come back.
spk04: Okay. Any update on that UK Met Office contract?
spk02: Actually, Kent's going on Sunday to London and has meetings with them on Tuesday. We were going to be doing the installation with Loganair, and then Loganair got put up for sale and stopped all those programs. So we're going to meet with UKMET and figure out a way forward. So stand by on that one. It's a work in progress.
spk04: Okay. And then just my final question. You said you've met with a number of clients that are looking at the edge device, perhaps even starting testing on the edge device. Is there a particular service that is resonating with clients?
spk02: Well, they're definitely interested in the 5G wireless QAR as the 3G, 4G networks get shut down. The product has other features. There's an aircraft interface device that runs third-party software in there. You saw in March we announced a marketing arrangement with MBS out of Great Britain for an avionics data loader. That is of interest to the airlines because I was talking to a director of one of the European airlines on the weekend last weekend, and he said, We've gone from the frying pan to the fire in running this business. We went through three years of COVID and not having passengers and trying to keep the company stitched together. And then the restrictions get lifted and we have no trained staff. The fuel prices are going through the roof and a war in Ukraine. And a lot of the things that we've been working on building that we're rolling out today, Dave Kuntz, On our to help them reduce the number of people they have to retrain to get back into business so things like our clear port product helps them utilize resources on the ground for turns better than they could if they were doing it the way they used to do it. Dave Kuntz, we've got a bunch of things with the edge that. download the data and get information to the people that need it so they don't have to run out to the aircraft to either pick up data or tell somebody we're ready to load customers. So the things that we put together were specifically designed to help reduce the bottleneck as the recovery got underway, and we're seeing great interest in those tools.
spk04: Great. Thanks, Bill. Thanks, Elena.
spk00: The next question is from Mark Berger with MKB Associates. Please go ahead.
spk05: Congratulations, Bill, and a great quarter. Thanks, Mark. Okay. With regard to the Chinese orders, what do you expect that you might start making deliveries on them, and what kind of revenues do you expect to receive off the orders?
spk02: We've already started delivery. We've delivered, I think, five ARJ kits. We've got three C919 kits in China. I think one installed. It's really hard to predict. You know the C919 got certified in China, but not for international sales yet. The ARJ is basically being used by the Chinese airlines, and I think we'll probably be on all of them as they roll out, but they have, believe it or not, supply chain issues in China, and their production is not ramped up to the point that they'd hoped it would be. I think the last thing I saw is they'll deliver between three and five C919s in 23 when the original plan had been to do 50. So they're having teething pains like everybody else and supply chain issues like everybody else. I have no doubt it's a kind of a Chinese Communist Party goal that they will be self-sufficient in aviation by the end of the millennial. They're working towards it and they will achieve it. It just takes more time than even they thought.
spk05: On the edge, when do you expect you'll start delivering on some of that product. We're looking at early 2023, mid-2023?
spk02: First quarter 23, we will be installing it, products on aircraft.
spk05: Okay. And on those seven huge orders or potentials that you have out there, do you have any idea as to when you might close some of those in terms of timing or
spk02: Mark, you've been involved in this story for a long, long, long time. Yes, I know. When I expect and when they actually put pen to paper are very divergent numbers most times. I think with the sales force we've got and the need to do something before the 3G networks go dark, we should see a lot of activity in the next 12 to 18 months on all of those opportunities. Tell me what's going to hit aviation next.
spk05: Okay. And Europe, can you give us an update on what's going on in the European market in terms of potential waters?
spk02: We're looking really good on a two or three opportunity. And that pipeline is growing as we integrate Cross Consents and their customers with our tools and products and people.
spk05: Okay. Sounds good. Great. That's all for me. Thank you. Thanks, Mark.
spk00: Once again, if you have a question, please press star then one. Our next question is from Dick Ryan with Oak Ridge Financial. Please go ahead.
spk03: Thank you. Say, Bill, a follow-up on Edge. Probably more from a competitive landscape. You know, you got pretty good boots on the ground with the teledyne hires that you made during the summer is there anything going on on the competitive side or can you give us a sense what some of the airlines are doing are you know are they waiting for edge or are they kind of going with maybe the quick fix sort of solutions that a teledyne may offer just kind of give us the lay of the land there if you would um
spk02: I don't really have an answer on that. The guys started 12 weeks ago and they've been reaching out to people they know in the industry and attending shows and getting a great deal of interest to move to our platform because of other things we're doing and functions they want. I have no doubt there's a percentage that are going to take the the short-term fix that Teledyne's offering. It's not a 5G solution, but it gets them to LTE for the next two or three years. There's 15,000 aircraft out there, and if five of them decide to stay and 10,000 decide to come with us, I'll be happy. We'll get the other 5,000 three years from now when LTE goes dark.
spk03: Okay. And just one last one on the SAS side. You talked about SAS being a driver. Going forward, you know, outside of cross consensus contribution to SAS, what have you seen, you know, over the last couple of quarters, just on your kind of legacy SAS business?
spk02: It's wavered up and down as, as, uh, uh, the restrictions came off a lot of our SAS businesses in Southeast Asia. Um, and the COVID situation there is totally different than Europe or North America. So, you know, we've had some gains, we've had some losses. The beauty of the cross-consensus business is it's very regular. It's a, you know, they've signed long-term contracts with known values and it's a nice steady business. It's something you can count on. And our traditional business is tied to if they're flying their aircraft or not. And there's so much of that outside of their control and our control that we get the waves in it. Um, the new products, a lot of the things we're putting out there are per month charge as opposed to a per flight or per flight hour charge. So we're trying to level that out. So it's more predictable and manageable, but, um, you know, that's not something that, uh, uh, is going to show for the first couple of quarters next year, but then it should start showing big time. Okay. Okay. That's it. Thanks Bill. No problem.
spk00: We have a follow-up from Mark Berger with MKB Associates. Please go ahead.
spk05: Okay, Bill, could you give us an update on potential research coverage? I know you're spending a lot of time doing more conferences and everything. Any other research firms on the street becoming interested because of the edge and everything else that's going on? Is that bring some more attention to you? And what can we expect going forward?
spk02: Well, we have Lake Street and Oak Street covering us right now. Bruce Krugel has a private report out on us. I'm talking to two investment banks next week that have an analyst talking to us. It's one of those things that I think As we build up the business and show the continued improvement in our results and our penetration in the market, there will be people interested and get involved in it. It's kind of a chicken and egg thing where we got to deliver to get the analysts involved, and the analysts get involved, and it drives us to deliver better. So we continue to work it on a nonstop outside of our control.
spk05: Our last question with regard to earnings, uh, we're now positive. Do you anticipate we stay positive or will it be an up and down affair based on, uh, you know, certain orders coming in or is there a more, you know, forward looking reasonable expectation that we should be looking for?
spk02: Our, our, We did a longer-term planning cycle this year than we normally do, and the plans that we have in place and put a lot of thought into it from both a sales and a product point of view, we believe that we will be even a positive and cash flow positive going forward.
spk05: Okay, great. Thank you. That's it for me, Mark.
spk00: This concludes the question and answer session. I'd like to turn the conference back over to Mr. Bill Tempany for closing remarks.
spk02: Okay, well thanks everybody for taking the time to listen. As I said to start, I think that we've put together a team of people with a suite of products in a customer base that requires what we're doing, and I'm very excited about what the next quarters and years are going to bring. the long-term planning I just talked to Mark about shows that the market penetration that we've got, the tools that we've got should generate very positive returns for our investors. So I want to thank all of the patient investors that have been around as long as me, which seems like forever some days, but it's a bright and sunny day here in Calgary and I feel very excited about what we're doing and where we're going. So thanks for your time and We'll talk to you next quarter.
spk00: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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