Q2 2022 Maxar Technologies Inc Earnings Call
Addition of hardware and initial performance testing on the third of six <unk> satellites and that space craft will be moving onto environmental testing in the next few weeks.
The fourth satellite is in its final test phase prior to environmental testing.
So we will be hardware ready for the second launch in short order as well.
The fifth and sixth satellites are progressing and logical sequence. So from the hardware side, we're on track.
Moving to software validation.
Our software is code complete and.
Unfortunately, it became apparent in July that we had delays and software validation and testing that could impact overall timelines.
We've made significant progress against these challenges and now estimate a fourth quarter launch window instead of late third quarter.
Once these software validation steps are complete we will begin launch campaign activities, including the shipment of the satellites to the launch facility down at the Kate.
And lastly of course, an orbit testing commissioning and the beginning of revenue generation.
Back on the positive side of the ledger, we have been conducting launch and commissioning rehearsals and teams have been working to reduce the timeframe between launches.
We now believe we can reduce the time period between the first and second launches.
Two months versus the three months, we had previously estimated.
Additionally, we've been working on reducing in orbit commissioning time from our previously disclosed estimate of 60 to 90 days.
These steps should allow us to pull forward revenue generation and recoup some of the schedule impacts.
Additionally, we have increased our insurance coverage for our Worldview Legion satellite launches from $520 million to $620 million with a heavier weighting towards the earlier launches.
These policies cover the launches, including our additional third launch plus the first year in orbit.
Following the first year in orbit, we will seek to obtain in orbit coverage similar to what we currently have on our existing satellites.
So to recap hardware is essentially complete for the first launch we're in a good position for our schedule on the second launch with closer Center lines, we're progressing through software validation and are rehearsing to execute multiple launches in commissioning.
And we bumped up our insurance coverage.
Along the way, we've also been making solid progress with our Legion pre sales and DAP ground systems upgrades and remain confident in the long term success of the program.
Let's now turn to slide five for a quick review of our 2022 priorities.
At the top of the list, our ECL and Legion.
As I just discussed we've accomplished one and are making progress on the other.
As far as investments in products and go to market strategy is a concern. These continue particularly investments focused on our higher margin products, where we see a long runway for growth.
As a reminder, I did a deep dive on our Earth intelligence product business back on the third quarter 2021 earnings call and.
And I would encourage you to revisit the associated slides with that discussion for more details on our focus areas.
As far as other key priorities are concerned the space infrastructure segment executed well this quarter generating solid margin performance and the pipeline remains robust as we focus on capturing awards going forward.
We've been investing in differentiated capabilities like proliferated low earth orbit or Leo satellites and continue to expand our partnerships with large defense companies as we develop efficient commercially oriented solutions for national Defense security and civil missions.
For the SBA tranche, one layer tracking layer L. Three Harris as the Prime and Max are we'll execute a sub contract for the design and production of 14th space craft platforms and associated support for the prototype constellation.
The space Development Agency Commission. This program as part of the missile warning and tracking war fighting capability of the National Defense space architecture. The.
The tranche, one tracking layer will provide limited global indications warnings and tracking of conventional and advanced missile threats, including hypersonic missile systems.
This is a big win and a validation of match ours, expanding national security scope, where we plan to showcase our capabilities more going forward.
These modular satellite platforms illustrate the company's ability to adapt and leverage our deep experience, particularly with proliferating low earth orbit constellation.
Also two weeks ago, Max or was selected by NASA as one of two companies to conduct the geostationary extended observations or Geo XO spacecraft phase <unk> study.
Down to two teams.
Our space team will develop the concept for this next generation of weather monitoring spacecraft.
This continues the legacy of work that started decades ago.
Our space team, both the first and second <unk> satellites in the 19, 7% to 19 nineties, which operated well beyond their expected expected lifetimes.
<unk> is the follow on to the <unk> series.
The phase <unk> phase <unk> work will establish the performance requirements for <unk> XO and helped to fund the spacecraft potential performance and development schedule.
Please turn to slide six.
Couple of other items I'd like to briefly address.
We've discussed in prior earnings calls how our news Bureau program is working with media outlets to increase global transparency and help combat the spread of disinformation it in relation to the war in Ukraine.
This current war more than any other in the past has helped the general public better understand what Max or in the Geospatial community does with satellite imagery and the importance of understanding what is happening where and when.
<unk> has been released in more than just satellite imagery, which is quite impactful itself.
We've been showcasing our precision <unk> capabilities that are particularly powerful and running change detection algorithms.
You can see a demo of that if you click the link on slide seven.
This is a high precision AI enabled environment that allows users to make their way through massive amounts of information at scale.
We've also been using our weather desk solutions to monitored Ukraine's agricultural industry.
As you know the country is one of the world's top grading exporters and supplies. Many parts of the world that are already facing food insecurity.
Whether desk as our on demand product that transforms regularly changing weather data into actionable insights.
The team has been assessing Ukraine's 2022 spring crop.
<unk> planted less acreage this year as indicated in red on the map on slide eight.
And they will likely harvest up to 50% fewer crops. If the conflict continues as it is growing.
The weather in <unk> is also tracking Europe's ongoing extreme heat wave.
For more details on both the assessment and heat impacts Please review slide nine.
We also published a blog post about the planting assessment and harvest prediction, which you can read online.
Max our strengths in global high resolution imagery, multi spectral capabilities for doing things like methane detection analytics expertise and upcoming leaching capacity provide a competitive advantage to be the trusted standard for environmental applications that require geospatial data.
In 2021, our environmental related offerings generated more than $50 million of revenue and we're on track to grow this business by roughly 20% this year.
This is becoming a substantial and leverages a growth vector for us and we aim to be the geospatial industry leader for future public sector and enterprise environment revenue opportunities.
And finally this quarter, we published our first environmental social and governance report and are pleased that our ESG scores from ISS has significantly improved in the last two years.
Importantly provides details on our efforts to build upon good governance practices.
A more diverse workforce invest in the communities, where <unk> and its customers do business create more sustainable practices and leverage our data to help customers and partners make a better world.
That report is also available online.
So to summarize we had a solid quarter, we had good wins with EOC L. T. One tracking our global AG do renewal continued environmental capabilities growth and we got the refinancing work done with <unk>.
Still have work to go on Legion, and we're laser focused on that effort.
And with that I'm going to turn the call over to Biggs for a deeper discussion on our performance.
Sure.
Thanks, Dan Please turn to slide 10, where we present year over year comparisons for the second quarter.
Net loss for Q2 was $30 million inclusive of the $53 million loss on debt extinguishment.
As a result of the refinancing net.
Net loss per share was 41.
Revenue was down 7% year over year for the quarter revenue was flat Earth intelligence and space infrastructure was down 10% for the quarter as commercial and U S government backlog continues to mature.
Adjusted EBITDA margins for the quarter are down roughly 70 basis points.
Driven by tough comps at the segment level from a combination of mix and strong performance in the prior year at space infrastructure.
And the planned increased investments, we're making this year to drive future growth.
Our results for the quarter include increased expense related to our R&D and marketing efforts at space infrastructure.
Our product development strategy to Earth intelligence, and our ERP project, which is an important enhancement of the company's government contract and capability.
These aggregate to over $10 million in the quarter.
On a year to date basis total company revenues decreased 3% and adjusted EBITDA margins expanded 110 basis points.
So setting aside the comparison to a tough comp last year. This was a strong quarter that met our expectations and demonstrated good sequential growth.
Please turn to slide 11.
Earth intelligence revenue was flat year over year in the quarter and adjusted EBITDA margins decreased 90 basis points also on a tough comp from last year.
On a year over year basis, we experienced increases in product revenues from U S government programs.
This underlying growth is matched by headwinds we're facing in our services business year to date.
Does the Pushout of awards include workforce challenges.
The net effect on margins from the favorable mix shift was offset by increased expenses, including those related to our product development efforts.
On a year to date basis Earth intelligence revenues are flat and adjusted EBITDA margins are down 200 basis points as we continue to invest in the build out our product efforts, which includes an uptick in labor related expenses.
Importantly in the current year revenues.
Grew 13% sequentially quarter over quarter.
And margins expanded 600 basis points.
We expect this growth the second half of the year.
Primarily in the fourth quarter.
Please turn to slide 12.
Space infrastructure revenue decreased 10% year over year in the second quarter as commercial and U S programs near completion backlog matures.
Adjusted EBITDA margins contracted 290 basis points due to program mix and strong performance.
Compared to the same period of 2021.
But remained healthy at 10, 2%.
Our year to date basis revenues have increased 1% and adjusted EBITDA margins have expanded 630 basis points.
Recall, the first quarter of 2021 included $28 million negative impact on revenue and adjusted EBITDA from the charge related to Sirius XM seven.
Normalizing for this revenue was down slightly and adjusted EBITDA margins are largely consistent.
As a reminder, the increases seen in R&D, primarily relate to <unk> efforts and were included in guidance for the year.
This spend in our future ERP spend at space infrastructure will continue to create some pressure on margins in this segment over the rest of the year.
But as evidenced by the tier one tracking award these are already paying off.
Please turn to slide 13.
The company generated $19 million in operating cash flow from continuing operations in the second quarter and invested $87 million in Capex.
Cash flows were negatively impacted by $91 million in unfavorable working capital changes driven by timing of receipts and periodic payments.
We expect this to reverse in the second half.
Please turn to slide 14 for a recap of the refinancing activities completed in the second quarter accurately announced the 10 year Eo Seal award in May.
As a reminder, we had bonds maturing in 2023.
We also had a credit facility under which served as a revolver and a term loan that we're approaching our maturities in 2023 and 2024, respectively.
Because of the inner relationships with different obligations and pending maturities the holistic rather than a piecemeal approach was optimal.
Our main priority with this refinancing was to remove all near term maturities.
<unk> ourselves continuing increases in interest rates secured a new credit facility with a stronger more supportive bank group and.
And remove a significant refinancing risk in an increasingly uncertain credit environment.
<unk> contract awards provide a firm foundation for this effort.
Under the new capital structure, our newest maturity is now 2027 versus 2023 in the prior structure and extension of four years.
In addition, we have the ability to reprice our term loan b starting in December 2022.
And we opted for a five year bond with a two year no call period to allow us the flexibility to refinance in June of 2024.
Once worldview Legion launches are underway combined with increased free cash flow generation and debt reduction.
We expect an upgrade or a credit rating will help drive better pricing and future refinancing transaction.
Please turn to slide 15 for a more detailed breakdown of interest changing interest changes, resulting from the refinance.
When we guided for the year, we projected cash interest of $103 million.
This included projected interest rate savings of $10 million from our refinancing.
<unk> absent a refi or expected interest cost was $113 million and a steady market environment without any refinancing.
This $113 million this for interest payments only and excludes any impact of paying a premium to retire between three nodes.
Markets clearly moved away from us during the course of the year.
Increases in base rates upwards of <unk>, 5%.
Spreads and effective yields increased our cash interest cost from what would have been half that what would have happened in a steady rate environment with no refinancing.
We saved interest cost on the refinancing of the bonds with a coupon of seven and three quarters versus nine and three quarters of <unk> bonds with.
The term loans became more expensive by a combination of rising base rates and increasing spreads.
The bottom line is that instead of a decrease in cash interest cost $10 million, we had an increase of $27 million.
Breakdown of the $27 million about 50 million income from rising interest rates on our existing floating rate debt.
From increases in the base rate.
$6 million from the timing of final interest payments on retire debt.
An $11 million is from increased spreads and our term loan b.
This was partially offset by 5 million of savings on the new bonds.
Turning to <unk> 27 increase in cash interest cost as anticipated Tim maintenance savings.
We ended up with a variance of approximately $40 million relative to our guidance expectation.
The comparable variance to our expectations for 2023 has a negative effect of approximately $50 million.
Before any significant mitigation.
In a recovered market and better credit rating there is potential to mitigate the impact down to approximately $35 million with.
With an improved spread and sulfur rates.
I'll say it this way because no or no call period on the $1 5 billion term loan b expires at the end of this year.
So there may be opportunity to bring down.
This down with improved market conditions and improved credit.
Our 'twenty two 'twenty three targets originally contemplated $35 million of interest savings net of minimum those savings have been absorbed by the increase in base rates and spreads.
I would reduce your expectations for 2023 free cash flow by $35 million to $50 million, depending on what you believe about market conditions.
I'll comment more on this in a moment.
As a side note in this refinancing did achieve better pricing on our revolving credit facility. It just doesn't have a significant impact on the calculations I just went through.
Although it's been a tougher interest environment that we would've preferred we did execute and are now in a sound capital structure position with opportunity for further improvement through repricing of the term loan B as early as December of this year and through the call the bonds as early as June 2024.
Please turn to slide 16.
We had roughly 340 million 341 million of liquidity at the end of the quarter.
Net debt increased $203 million this quarter, driven by $90 million of borrowings under revolver to fund the refinancing.
As well as $56 million increase in term loan b associated with the refinancing.
From this point forward, our bank leverage calculation as Glenn look different.
Our adjusted EBITDA is being used as the denominator for our bank leverage calculation.
Has changed as we move from <unk> to GAAP adjustments.
And.
It removes the IRS to GAAP adjustments and reset the covenants to match this as well.
Going forward, we still anticipate the covenant calculation to benefit from additional add back stock based compensation.
The calculation will be closer to what can be derived from our financial statements.
This new calculation is more aligned with how we internally view our leverage as well.
Under this new calculation, our leverage was four seven times levered compared to our covenant of five five times.
Our interest coverage ratio is four one versus the covenant of two five.
Please turn to slide 17.
I want to take couple of minutes to address questions related to our tax asset carried forward that came up during our refinancing activities.
As we move toward the generation taxable income the value of these tax assets is going to be more apparent.
As of December 31 last year, we had federal NOL carryforwards of $523 million.
Interest deduction carryforwards of $141 million, which are in addition to the Nols.
And federal R&D tax credit carryforwards of $84 million.
On a tax effected basis these tax assets add great aggregate to approximately $205 million at todays federal tax rate.
We expect that these tax assets in our tax strategies will shield us from significant cash taxes at least until sometime in 2026.
We also expect to continue generating R&D tax credits increasing annually to around $20 million by 2026.
This should help everyone model future tax benefits and related cash flow.
Now please turn to slide 18 for an update on our 2022 guidance.
Total company revenue and adjusted EBITDA guidance remains unchanged at.
At Earth intelligence to total revenue range consistent with the tightened ranges, we presented in conjunction with the iOS Youll Award announcements.
Top line pressure in our lower margin services business creates some headwind.
We have active prospects in our higher margin imagery business this should partially or fully offset this.
The high end of the range is also still within reach.
As we've been saying much depends on the timing of book ship business.
We continue to expect to see growth at Earth intelligence, primarily in the fourth quarter driven by product growth across our government.
And enterprise businesses.
This will be consistent with the fourth quarter trend in the prior year.
We have a strong pipeline of opportunities and Earth intelligence.
Similar to what we said last quarter. This growth would come from variety of sources, including precision three D increased government revenues, including from Ukraine, and DAP customer upgrades.
We have taken lead Gen revenues out of the guidance for this year.
Guidance for space infrastructure is unchanged and we see less risk there as we continue to execute on the work we have in backlog.
We also see a robust set of opportunities in this segment.
Turning to adjusted EBITDA at Earth intelligence, the softness we're seeing in our services business.
Presents less risk to adjusted EBITDA as this was lower margin work.
The product growth, we were forecasting is higher margin and will help drive adjusted EBITDA growth for the remainder of the year primarily in Q4.
At space infrastructure, we're tracking towards the higher end of our range, but this will not impact consolidated results materially, particularly as the intercompany work related to leads and is eliminated.
Capital expenditures are tracking towards the top end of our guidance range driven by Legion and I've already covered the $40 million change in current year operating cash flow expectations driven by the recent refinance.
Generally we don't update all elements of our long range plans every quarter. So don't quarterly reconfirm every element of longer term guidance.
And we said that.
We assume constant rates when we forecast interest cost on existing debt and therefore implicitly change our line item guidance for cash interest savings in 2023 by.
By $50 million.
This assumes a fairly unchanged credit market, which hopefully is conservative.
I am sure everyone will ask about the effect on 2023 of delay and Legion launches from September through the fourth quarter.
The effect of that delay and whether there are there are offsets to it or other factors to consider it's too early to call.
As a reference point, we have historically said the full year adjusted EBITDA run rate.
For the first year of Legion was $80 million.
But we are tightening our timeline between launches and are focused on commissioning cycle time as a result, there may be no meaningful delay in achieving the full deployment of all six satellites.
To summarize otherwise we executed our refinancing in a tough market, which carries increased cost.
Affecting our near term cash guidance is still de risks and sets us up.
Well for the future we had good sequential growth in the quarter on our operating results, we have strong opportunity sets across both across both of our businesses.
And we are maintaining our outlook for revenue and adjusted EBITDA for the year.
With that I would like to hand, the call back over to the operator to begin the Q&A.
Thank you and as a reminder, that is star one if you would like to ask a question.
Our first question will come from Peter Arment with Baird.
Please go ahead.
Thanks, Good afternoon, Dan Biggs.
Hey, Dan maybe just to focus on leisure I'm kicking a lot of questions on leasing, but maybe just to help level set.
How long is the normal kind of software validation period, and then also if you could just describe how long we should expect on the transportation of the satellites.
Yes, Thanks Peter.
Well, we thought we'd be done with software validation by now and <unk> had some delays that were unexpected and so that's that's causing the shift from from late Q3 into Q4, and we got to get all the way through that software validation testing, but the fact that we're essentially hardware ready is bought down a lot of risk in the program and so.
With a new program like this in the development program, we continue to knock off items on our on our list of deliverables before we take the satellites down to the range.
We're on track to do that but.
More than we wanted to see this this particular cycle.
<unk> <unk>.
Once we once we finished all of that.
Satellites down range in the current schedule, we're planning on ground shipment, we do still have opportunities.
Potentially some allegiance downrange buyer so.
It's anywhere from 10 to 14 days, we go buy ground too.
Same day service with a day turnaround loading and unloading if we do it by air otherwise so got a little bit of slack in the schedule, there, depending on which which route we take.
And then as we are.
As we also mentioned on the call we have been using the time wisely I think while we've had this this unfortunate delay to be able to reduce cycle times focus on that focusing on commission rehearsal activities and also we believe we'll be able to shrink the time towards commissioning of the satellite so limiting the impact of any for.
For investors.
Impact of revenue.
Generation and for our customers the impact of not having the satellites on orbit yet or they are important.
Mission needs.
I appreciate that I'll leave it there thanks.
Peter.
And our next question will come from Colin Canfield with Barclays.
Please go ahead good evening.
Talking a little bit about facing infrastructure can you just discuss so maybe update us on kind of how you view the geostationary market and kind of within that context, if you think about a flat.
Modestly up market, how do you think about the moving pieces between legacy Satcom and kind of incremental new tack demand for big Tech demand.
Yes, thanks, Colin so.
And I'm really pleased that we were able to announce the one down select and also the <unk> Award here.
It's been our announced strategy for quite some time to continue to service a market. We're in which is the Geo comsat market and we continue to expect.
Off a lower base than what they used to be but but but pretty solid numbers of expected awards. There that will continue to maintain our market share and those have been long standing and really important customers for us. So we're excited to see continue serving them and thats a good base in our business, but we did realize that for more resiliency in the business as well as additional growth vectors that we would.
Have to work on diversifying both our product set and our customer sets and so we've been spending as Biggs mentioned.
Good R&D money and capabilities new capabilities technologies like P. Leo.
And we've also been really working our capability.
Efforts for National Defense, and security programs as well as NASA programs, which are huge market opportunities. If you look at the.
The dollars being spent there as well as the strategic importance of space to not just for exploration and science like NASA, but national defense infrastructure and intelligence as well.
<unk> is a perfect example of that.
Being down selected on the <unk> program with NASA for eventual Geo Comsat weather satellites as another element of that and so we're pushing forward on those fronts. We think we're building a much more resilient business, one that has better growth potential and one that will be able to better protect its margins and.
Increasing cash flow going forward.
Got it and just within that construct can you just talk a little bit about what the <unk> deal implies cash and margin trajectory of the business.
I think understanding that kind of going into trumps wanted that it's been a pretty competitive bid environment and obviously you don't want to disclose terms because the competitive but as we think about how that flows through the business is there a good way to frame it.
Yes, I'm glad you said thats, what I didn't have to thanks Scott.
What I'd say is.
One really good thing about this program as we are picking in architectural design that is.
It's not 100% across every different program, we're looking at but a <unk> architecture that is usable not just for national defense missions or Intel missions, but also for commercial missions. So with this award we are buying down a lot of.
Design and engineering and technology work upfront. So even this is this is a little lower margin business to start with as it grows and as it ramps and it just becomes a much larger constellation again 14 satellite infrastructure is sort of.
Prototype constellation. So if that grows we'll have already spent a lot of money on the front end here to build those capabilities and then as we bring this.
This type of capability for other defense and security missions as well as commercial missions, we should expect to see a higher margin rates on the other side of that and as we've said we always wanted to run this business at better than 10% will be a little lumpy here and there depending on awards and investments, we make but we think we're well on our way to do that.
Got it thanks for the color.
You bet.
Our next question will come from Joanna <unk> with BMO capital markets.
Please go ahead good afternoon.
Okay.
Hey, Dan.
Spending on the <unk>.
Circumstance sickness.
Amit.
So I guess to me she is part of the staffing part of that program blades.
At this point I need to develop in terms of when some of those program delays with resolve.
Yes, it's been.
We get more visibility throughout the course of the year and Thats why we are.
Addressed were able to hold our revenue and EBITDA guidance, even if some weakness there.
And also as we backfill some of that with higher margin product business, but they seem to be resolving its just its just taking a little bit longer than we originally thought it would going into it.
To this at the beginning of the year.
We continue to have a very robust we kind of lump. It together is the services business, but there is a lot of classified work and there are a lot of work related to cutting edge technologies like artificial intelligence machine learning.
Space situational awareness and other things that we're doing that matches really well into the rest of our Earth intelligence product business.
And so it's.
Very valuable business for us.
Some of it's just moving a little bit slower than we'd like right now.
I think across the industry. The hiring challenges have been had been pretty well explained by lots of other companies as well.
We continue to pour a lot of effort into that and we think we're turning the corner on it but.
We've just got to we're always hiring on that side of the business, particularly for people with the right tech expertise as well as the right security clearances.
And then just Joe.
International.
Most of the world.
That was down year over year. So that's really just the tough comp.
<unk>.
<unk> seen more.
That program offerings.
We see ongoing growth.
Thank you operator.
Yes.
Yes, I think probably the two things to call out one you mentioned the DAP upgrades. We've got several of those done but we do have continued upgrades to get done throughout the course of the year.
Several under contract now, but continued strong demand for Legion, so with the DAP upgrades and with the Legion capabilities. We've got built in growth just with the existing customer base and then we do have opportunities to add to our debt.
Number and location of customers throughout the world and Thats going to help us more efficiently monetize the overall constellation, but especially in the high demand regions of the world as well as Legion comes online.
The other thing I'd say is we are seeing better product adoption with our international customers as well.
Tough comp, we mentioned last year with some book ship business with a very large international defense customer. So we could see some of that going forward and we're seeing strong adoption of the <unk> technology as well.
So that's exciting for us because the investments we've been making in that and Thats a high margin piece of the business.
Seem to be bearing some fruits with the diversified customer base, particularly the international defense and intelligence customers.
Great.
Thanks Dennis.
Our next question will come from Ken Herbert with RBC capital markets.
Please go ahead.
Hey, good afternoon, Dan and Biggs.
Hey, Ken.
The fiscal 'twenty two guide for Earth intelligence implies a pretty significant ramp in the second half of the year on the top line. It sounds like this is more fourth quarter weighted can you just comment on maybe a little bit more specifics on the cadence you're expecting that business as we go through the fourth quarter I'm, sorry, the third to fourth quarter.
But then also some of the key.
Programs or other items that you have confidence in that will really get to the get up into the guidance range for the segment.
Yes so.
It really is.
If you recall last year, a deal with here before that fourth quarter at good step up and we expect to have that kind of a good step up this year.
The.
Last year, you may recall Lee.
<unk> increased our product revenues in our intelligence by $100 million chance to do that again this year and much of that in front of us.
The DAP upgrades that Dan spoke to.
The adoption of three D.
<unk>.
The general.
Interest that we see out there internationally and domestically.
Some of that driven by world events.
Al.
Positions us well to add.
Good growth through the third and fourth quarter, I would say third quarter flattish.
Flattish to up some and then a sharper increase in the fourth.
Is the pace, we would expect.
Probably just a little bit of an overlay to add on that too Ken is that.
I think we have had the opportunity to move a few of these deals quicker. If we would have wanted to but we're we're really holding pricing on the <unk> product line.
It's a unique capability, it's really valuable and while the deals are taking a little bit longer we do believe they're going to get done and that will build a more solid base for the business on pricing and revenue.
Accretion and bottom line accretion going forward.
Okay.
Very helpful and if I could just pivot over to to the regions.
You called out starting to do some development work on I think satellite 700 to eight maybe some initial work can you just remind us on the schedule for those satellites relative to the first six.
Yes, so just to level set.
<unk>.
We do believe we're getting better at the centre alliance on the current constellation, particularly between the first and the second launch.
And as we have hardware in hand and finished the software program. So.
Fourth quarter launches assumes 60 day Center line on the second launch and then we'll keep working on the third launch there as.
As well.
Seven and eight what we did was we bought long lead time parts.
And started the procurement.
Process for that.
Partially because we see continued demand out there, but even more so to build a little bit of resiliency. Just in case, we had issues with any of the current launches are on over commissioning plants for the Legion constellation. So those are those are at least.
The minimum 24 to 30 months out from today, if we were to start thinking about ramping up an effort to put.
Effort into getting those built in on orbit.
And we'd want to see a strong customer demand for that.
Kind of back on the we mentioned on the call, but its in the Q as well we did enhance our insurance by to also provide some more resiliency into the launch profile here of the constellation. So just we're just kind of building a better.
<unk>.
Set a barrier around the business as we move forward the debt.
Refinancing was part of that and we're just in a much more solid position, where we are today.
With the.
The baseline assumption Ollie's and center data is like really would.
Need to start spending it on a risk on those until the latter part of 'twenty four.
And to go back to an answer I gave to your first question on the ramp up in <unk>.
Long prospect list, which supports our revenue assumptions and EBITDA assumptions for the remainder of the year.
So we feel.
Once again really good about the opportunity set in front of US largely just comes down to that.
Exact timing and particularly as much driven by bulk ship type business.
Great I appreciate all the all the detail. Thank you.
Okay.
And as a reminder, that is star line as you would like to ask a question. Our next question comes from the line of Robert Spingarn with Melius research.
Good afternoon.
Hey, Rob.
Dan could you.
Reviewing where you are on the hardware for <unk> beyond one and two do you did you receive the electro optical instrument from number four and when you said you get the hardware for five and six.
Yeah. Thanks, Rob So we do have all of the instruments for the first four satellites as I said.
Satellite wanted to essentially hardware compete complete doing final closeouts satellites, three and four have the hardware they need now, particularly the instruments.
Is going into environmental test in a couple of weeks.
And then the other will go into environmental reference testing shortly after that so we'll be essentially launch ready from a hardware perspective with four satellites in pretty short order here, we do not have the instruments, yet force six or five and six.
But we've been doing final closeouts on our checklist of items down with Raytheon on those and expect them.
Do order this fall.
To support the launch schedule well within the launch schedule, we've got planned up for five and six right now.
Okay and could you give a little more detail on the software issue you talked about and then on the delay from September to Q4 is that is that a one month delay to October or is it three months to December how should we think about that.
Yes, we're not pinning it down we're just saying Q4. So we went from late Q3 to Q4.
And the software delays, we really were in the software validation.
Validation and verification testing and what happened was we just had a lot more challenges.
Getting through the final validation phase of lots and lots of different tests, we run on the satellites in the software.
To be able to ensure that we'll be able to conduct full mission operations and all of the anomaly events that we might expect during the life of the satellites are fully ticked and tied out and.
It just just kind of hit a roadblock and took a lot longer than we thought we think we're past that now.
Things feel much better in hand, but we've got to kind of complete that validation before we put the software the satellites on orbit.
And just last question on Legion.
Should we still expect five and six to launch 60 to 90 days after three and four.
Yes, yes.
Okay excellent. Thank you.
You bet.
Our next question will come from Austin, Moeller with Canaccord Genuity.
Please go ahead, hi, good afternoon, Dan and Biggs.
Good afternoon.
Alright, So just my first question here.
As you continue to win more work using this 150 kilogram modulate it <unk> like you did with tracking where should we expect less lumpy revenue generation in space infrastructure and should we expect significantly faster Assembly times relative to the Geo comsat or.
NASA programs spacecraft to try and compete with more of these small set manufacturers.
Yes, I think on the I'll take them in reverse order and then Biggs can add color commentary if he'd like.
We will definitely have to go a lot faster per unit satellite so sometimes.
Sometimes the overall courseware program like 14 buses might take similar to what one geo plus might take but we are getting more I.
Don't want to quite call. It Assembly line, yet, but a lot more.
Yeah.
Wrote in how we're doing these programs and how we're going to.
Bumped out satellites and we're building the infrastructure to be able to do these on a very high cadence, particularly as we look at maybe larger expanded scope defense projects like this or else commercial.
Satellite applications as well.
So the investments, we've been making upfront and Briggs brought up a good point, usually you make investments in our business you don't see that pay off as quickly we're really excited to see those investments translating this quickly into wins.
So that's that's good for the business.
The Lumpiness side.
Depending on the size of these awards and if we can layer them in and feather them in.
Hopefully, we don't quite see something like the big slug, you might see with one Geo sat program coming in but it's a little too early to tell on that side of the business for us probably predict that with.
Full certainty at this point.
As we build out a more I think.
Robust and diversified business, we should see.
I want to call it quite smoothness, because it still is a large spacecraft manufacturing endeavor, but a much more predictable.
Sort of quarter to quarter first half second half year to year base of the business. Thanks for your thoughts I would just add that the team is.
Worked very hard to make the business more predictable.
As Dan says, we are expanding the business space.
As a positive.
I would like caution it is still a percent complete accounting and so you're always going to have some degree of variability from quarter to quarter basis. The result of that.
But presumably as the backlog grow the business base Diversifies.
You should see more steadiness quarter quarter on topline basis.
Absent any significant.
Variations from EAC accounting.
Okay. That's helpful and then just a follow up.
Do you anticipate that.
The delays in the software testing and validation on the ground could potentially increase the schedule margin needed for the software or the space craft validation and testing once he gets on orbit.
And that 60 to 90 day midpoint.
No we're not expecting that in fact.
A lot of the work we've been able to do is driving that that number towards the left for commissioning operations. So we're seeing we're seeing good results on the rehearsals that we've been doing there and the additional the ground teams. The commissioning teams have been taking the additional time to.
Get more fluid and efficient on that part of the process. So we're not expecting that the delays and software validation on this end of the launch to impact commissioning in fact, we are trying to drive it the other way.
Okay, great. Thank you for all the details.
You bet. Thanks Austin.
Okay.
Our next question will come from Chris Quilty with analytics.
Please go ahead.
So congrats on the.
Tranche, One award I guess that <unk> two things off your list of P. Leo contract and a defense contract.
But I got three follow ups first one is is this a fixed price contract.
The second part when should we expect revenues on this to hit and given that FDA is due in two year spirals, presumably in the next quarter or two.
And then the third question.
<unk> Zero awards, all the buses for the tracking layer were.
Kilograms or north so can you scale up the Legion bus scale down the <unk> hundred bus or something new.
Let me.
Just to make sure I got all those Chris.
So first off yes, we are under a.
Fixed price model here and we're kind of excited about that we've been used to living in that sort of model. So.
With our commercial heritage and <unk> Harris has been.
A great partner working with us on definitive contracts and getting not just the capture phase, but also we're very excited about being able to work with them and for them on this endeavor.
On the on when revenues hit.
The starting gun has gone off and so where.
We're already working really hard you should start to see revenue ramp, but it will it will start showing up in that.
Third and fourth quarter.
As we as we start the very quick.
Design and build cycle, we've got here.
In terms of.
Sizes of buses and capabilities of buses.
A lot of those investments and where we've seen just a little bit of margin pressure on the space side of the business have been in those technology related investments that allow us to transition between different bus sizes. So.
We've got the traditional 1300, we've spent a lot of money on the the development of the Legion capability, we've been developing other modular capabilities as well and we've been developing.
What I want to call out sort of a workhorse pleo capability along the way here also.
And so depending on when you go through a prototype phase like this what happens on orbit with capabilities look like how you model. It out we will be able to go up or down the stack, we either with FCA space Force.
<unk> other.
Other classified or unclassified programs and commercial programs as well I think pretty.
Pretty a definitely not seamlessly, but I think pretty a definitely with the investments we've been making in the teams and the engineering focus there.
So is that <unk>.
Ability, referring back to the Telesat Lightspeed work you did.
Yes, we did some there, but we've gone a long way past that.
We brought in a lot of great talent.
Our chief engineer down on that side of the business.
Came out of the one web.
For not chief engineer Chief Technology Guy.
Small sat programs came out of one web.
We've been hiring really strong talent across the defense industrial base, including engineering Cape.
Capabilities and we've had some really good existing folks here as well so.
Little little bit tied back to telesat, but not that we.
We've gone way past that I think.
And I guess also we've had other customers paying us for studies.
As well as we continue to work on our technology. So it hasn't been 100% Max are funded we have had customers paying us to develop.
Looking technology there.
Fortunately I don't think Telesat has gone way past it but that's a different issue.
Follow up just on the Earth intelligence, you mentioned that the margins down because of products up when you. When you were saying products were you referring to actual hardware like our GT and DAP or were you.
Element of products like Earth watch and secure watch and whatnot.
Yes, when we refer to products there we're talking more about the.
The products like like secure watch.
Development work going into things like globally GT.
Our <unk> capabilities are.
David base maps as well.
And we've been seeing strong adoption.
And.
You are really customers coming into that and say this is great. Let's now let's take that to the next level and so we've been working on not just those products, but also the environment that we host them that to make it more easily for our customers to consume.
The data and services, we've got there.
Gotcha and speaking of one of those products for icon.
I think it came up short in Q1, it doesn't sound like there was much movement this quarter end.
Q3 sort of flattish so it's got to be a real big Q4 to hit.
Previously you had talked about getting a.
A range of sort of 80 to 110 is that still an achievable goal with they're all big Q4.
Oh, yes, absolutely we're seeing good adoption there I think what you saw maybe a little slower ramp in Q1 was maybe some bleed over from Q4.
Into Q1, but then very strong performance obviously in Q2 now so the adoption rate or the close rates been picking back up.
<unk>.
On the public sector side for the Earth intelligence business, that's dependent on how fast we closeout pro.
Programs and purchases like with the one world terrain program. The Army program is a big source of that on.
On the.
The commercial or enterprise side of our business, we're seeing good adoption rates, there as well and.
A long runway for growth out into the future with enterprise customers as we do I think a lot more diversified.
Enterprise like business with with insurance companies.
Energy companies gaming companies <unk> companies as well the more much more than just our traditional geolocation services business there.
Got you and speaking of insurance have you secured the insurance for the launches because the market has been hardening quite a bit recently.
Now we have secured the insurance and we actually did it at a lower cost.
Then our existing insurance program was up so.
We're very pleased with that outcome.
And I think as.
I think Dan mentioned it.
Not only did we cover the third launch costs, but we increased insurance otherwise.
That increase is weighted towards the first launch.
Which makes sense from the standpoint of where were brisk in insurance should be distributed.
I'm not sure if geico is a good option for that so.
We'll have to see final question <unk>, because I'm lazy can you give us the book to Bill on both segments.
Okay.
It's.
In the.
And the 10-Q, you can get certainly the underlying data.
Just a second here.
I'm being lazy.
[laughter], that's fine, it's very high because of the.
The <unk> award the.
The firm portion of that the one 5 billion.
Flows in.
For the quarter, we'd like to look at this on a trailing 12 month basis in which case.
AI is two three.
<unk>.
Psi is <unk> nine so overall one eight.
If you look at it on quarter only basis, it's a little bit is it's very exaggerated by <unk> five eight for Earth intelligence and <unk> nine for space infrastructure.
For <unk> overall.
Great. Thank you.
Thanks, Chris.
Our next question will come from nowhere.
With Goldman Sachs.
Please go ahead, Laura Hi, everyone.
Dan can you just.
Dan can you just get more specific on what in the Legion software validation process has surprised you.
I know, you've said there've been roadblocks, but.
Can you tell us what the roadblocks are aware in the process. What you have to do to get to the finish line. How close you are it's been pretty pretty vague.
So far relative to something that is.
Pretty important.
Yes.
Hard to bring immense clarity to on earnings call like this I think what I would what.
What I'd say is as we run the software validation both into various environments that we have like our simulators.
The hot environment on the satellite as well as integrating into the hardware environment.
There are certain ways when Youre code complete with the integrated software that you expected to propagate through the system and then not hit.
Trigger or.
Hard stop points and we just hit a lot more of those that precluded us from doing all of the other range of software validation tests that we want to do so there's some there's some.
Basic all encompassing ones upfront that we thought we had wired that we turned out not to have quite as wide as we thought we did and they held up the rest of the validation and testing program.
We believe we are substantially through that phase and so as you look at a burn down curve now.
And I'm sure you've seen us before nowhere.
You expect it to hit at a certain rate you get a certain number of resolutions per day, and youre defect rate, what's going up and starts going down and you've got a good handle on it.
<unk> sort of hit a flatline there even though the teams were working on very hard and we weren't seeing the burn down rate we expected.
We are seeing that now on the path.
That are much more level of higher level of predictability.
It's not without risk as we continue to go through this but.
As we look at it burned down chart like that as we look at full on system validation and then things like our fault detection telemetry triggers and those kind of things.
We will be expecting to see much higher.
Validation rates going through so we're about.
Delayed us yes, so at the latest.
Several weeks in.
<unk>.
Wasn't what we expected, but we learned a lot and we worked our way through it and we're better better understanding of the program at this point programmatic.
Okay. That's helpful. I appreciate that.
Is it possible to make an estimate of.
What percentage out of 100% you are now complete on the total software validation for Legion.
It's.
It's a little hard to describe at exact percentage to it just because some of these are very large all systems ones and then some are like.
Particular.
Check heat light kind of come on are not as.
As we kind of total number so percentages are really hard but.
Sure.
We're past a lot of the big integration once now and are now in the more discreet validation aspects of the program.
Okay.
And then what remains after software validation.
After software validation than its.
Final Closeouts and move into satellites downrange in doing launch based preparations.
Okay. So yes.
As unfortunate as has been what I would say is we did make a lot of progress in last quarter. What we were most focused on was the the hardware testing anomaly issue that we had and we ran that to ground. We got the first satellites through all of their environmental and are in final Closeouts. Since we made a lot of great progress.
This one.
Just kind of slow down the overall aspects of the program, but we've continued to.
<unk> burned down the risk and not knock off our checklist as we go along here.
Okay. Thank you.
Thanks Noah.
Our next question will come from Elizabeth Grenfell with Bank of America.
Please go ahead.
Good evening.
Couple of questions. The first one is Andrew CL contract dependent on lead Gen being operational.
It is not.
Under the ESL contract Legion is backup capacity, if anything were to happen anywhere on orbit assets right now.
For the first several years and then as we ramp out into the full 10 year Award Legion does start picking up additional potential capacity for those movies moving from the step ups from $300 million to $340 million a year.
But.
As we sit right now yes Legion is.
Reserve capacity, which is also great because as Legion comes online, we'll be able to monetize that above and beyond what the current <unk>.
Okay, and then I know you can extend the life of the satellite do you have in orbit.
Many of those are approaching the end of their existing like how much more like and then how much longer can they be extended to compensate for the delays and then.
And that is well within your new timeline, how much contingency is and when you say fourth quarter is that assuming a December launch of that.
Fourth quarter, how should we think about that.
Well.
Im hesitant to say how much exact contingency is there because well.
Just don't know until we're all the way through this.
Our checklist is getting smaller and smaller we're getting much more predictive on on the final on this but we have had several delays in.
Yes.
I can't until we ship these down range.
Won't say the satellites and the environment for them are fully buttoned up.
On the on the question of constellation Health every year, we go through a process. So we have two different things.
Things, we do we run internal simulations and make predictions about.
And how long things last but then we also do an engineering useful life publication that we put in our 10-K and we've extended the life of those based on those engineering.
The simulations that are just used for accounting purposes. Several times now we pushed out one worldview, one and Worldview two sometimes multiple times, we'll be doing that analysis again in October to determine whether we'll be adding to the useful lives on the satellites.
We continually monitor the health of all of our satellites. The current constellation is fully mission capable and as we've said in the past the longer satellites tend to last in space the longer they will tend to last in space and.
We're looking forward to starting that work again in October here.
And then just one more question if I had what is the total cost of lead Gen. One through six now with this additional language and looking at for the total cost.
Yes, so we reported.
Last quarter I think gives over 700 million is still in that.
Territory.
Additional.
Time spent on the factory does a draw us additional cost but.
It's.
It's not changing our guidance for this year.
And.
Well certainly in the fourth quarter and make our plans for next year and update.
If necessary the guidance for next year, but I would not deem this additional delay to be all that significant.
Okay, great. Thank you very much.
Excellent.
And our final question will come from Michael Mueller with truth to Carol.
Please go ahead.
Hey, good evening guys. Thanks for taking the questions.
I guess just on guidance both this year and next year, specifically cash flow I mean, you've got a pretty big second half ramp for cash. This year and then just I mean, how should we think about 'twenty. Three I mean, you just said youll, you'll make those decisions later, you've got that free cash.
Cash flow target out there it sounds like we should handicap that by 35 to 50 million is there going to be any potential change I know you just mentioned the cost of the satellites, but is there any change to Capex next year as things are sliding out.
Should we think about cash maybe I guess, yes.
I wasn't trying to lead you to believe that there's a change coming.
Just that.
We will look at every line item in the guidance.
Later this year when we do our plan and then obviously be more.
Up to date with some lifts each line item in <unk>.
That's not to say anything that will change other than interest right now.
Lead Gen, one direction or another.
Interest yes.
For next year.
Would be $30 million to $50 million.
From the standpoint of your analysis that you would take out of the.
340 that Lee.
Guided too.
I would say if you.
We plan things on a constant market basis.
That would lead to taking up 50, but hopefully we can go and do some mitigation based upon the no call expiring on a term loan b and bring some of that impact back down.
Markets have improved.
Yes.
For this year, yes, the the change to our guidance was $40 million associated.
David with interest.
In terms of the.
Full year cash flow and how you walk forward.
Think of it this way that.
Second half EBIT and.
And cash generation from it.
Before any working capital change will be $277 million.
The interest payments in the second half, which are negative obviously is $79 million.
Based upon the cash interest guidance that we gave and then on working capital.
We would expect to have $76 million of cash from working capital which is.
Roughly a reversal of the negative that we had here in the first half.
Which is the normal trend for us.
The big burn off in the front end and then improvement in the second half, but in this case.
That improvement is.
Exacerbated some by the fact that in.
At the end of the second quarter here, we had a buildup in receivables.
<unk> two domestic.
Domestic and international customers that we know quickly convert to.
Cash to bring that back down.
Perfect Alright, great. Thanks, guys I appreciate it I think just as a general comment too.
We do have many paths to achieving our 2023 targets and.
We're very committed to.
Getting the debt paid down.
Enhancing our credit ratings and to the.
The Capex holiday that you see in those cash flow numbers so intra.
Interest rates moved against us spreads moved against Us, but we've got lots of other levers in the business to keep driving performance that are very very committed to doing that thats healthy company performance there.
Okay.
Yes.
Thanks.
Yes.
And operator I think.
That's it for US we really appreciate it thanks, everybody for joining the call.
And that will conclude today's conference. Thank you for your participation and you may now disconnect.
[music].
Yes.