Q3 2022 Maxar Technologies Inc Earnings Call
Satellites, we operate when.
And we delivered to the U S government, our allies and commercial customers for the past two decades. This one is Buckingham palace during the recent Queens memorial as seen from space.
On slide eight.
<unk> other key differentiator is our 125, plus petabyte archive of high resolution satellite imagery that we have added two for everyday for decades.
This one is Beijing airport seen on a rare smog free day.
This archive is our one of a kind digital time machine of the world. We have at store then accident accessible in the cloud and.
And we use it to create unique products for our customers.
On slide nine I'll talk about one of these unique products Max.
<unk> visited base map. These are inventory mosaics of the entire Earth first created in 2015 to support our enterprise customers mapping initiatives.
Visit based maps on a single cloud with color corrected skin of the Earth stitched together for more than 440000 satellite images into what has become really the default base map for consumer mapping.
Billions of people around the world have been using Max our <unk> imagery regularly in their cars and their mobile mapping apps for years, often without knowing about it.
Turn to slide 10.
Now with <unk> acquisition of <unk> in 2020, we've again leveraged our imagery archive to create a sustainable competitive advantage. This time, it's in <unk> <unk>.
<unk> runs AI and ml algorithms on our entire archive to create a three D globe a true digital twin of the Earth at an accuracy and resolution specification that would take years of imagery collections to match the.
The resulting product seen on slide 11 is <unk> precision <unk>.
This is of Yosemite National Park in California, One of my favorite places, where every cliff bolder and tree is within just a few feet of reality.
And we're doing this at global scale.
Nothing else can.
Slide 12.
Here's why we believe <unk> is important we see the world shifting from operating in a two D paradigm on flat screen devices like the phones laptops Tvs, we use every day in the two D video chats.
<unk> started since COVID-19.
We see a shift to three D immersive technologies like augmented reality.
Virtual reality, VR and digital twin simulations that mimic the physical world. These are often referred to as the <unk>.
This <unk> <unk> to <unk> transition had signals already VR gaming is already a multibillion dollar industry transporting customers around the world via virtual tourism and VR games and.
Our glasses are imminent and will provide our virtual heads up display of relevant information as you go about your day.
Our contact lenses that technology is in active development right now.
And with modern GPU powered by near Infinite compute on the cloud.
Reducing true to life three D graphics in near real time, we're on the cusp of another major technology shifts.
On Slide 13, this is where we fit in we see an opportunity for our <unk> digital twin of the Earth to be the reference globe for this shift in technology from to date <unk> immersive three D applications need an accurate version of the world to use as the base map just as the two deep mapping applications do today.
With our base map.
Slide 14.
We took a big step forward in our <unk> strategy two weeks ago at the Unreal first conference hosted by Epic games in New Orleans for.
For background epic games. They are the makers of the Unreal game engine, which powers thousands of games worldwide, including Epic's own global hit game Fortnite. If you haven't heard of Fortnite and you are on this call.
Ask your kids afterwards.
Unreal first we presented our capability to thousands of developers and released the demo of a photo real digital twin of New Orleans, where the conference is being held and.
And we built it with our partner Black Shark Dot AI a company, we made a strategic investment in earlier this year and mentioned on our Q1 earnings call.
This demo shows all of New Orleans from Bourbon Street to the Superdome running in the Unreal game engine built only from satellite imagery and AI model, if you'd like to see the demo video you can scan the QR code or click the link on slide 15.
A demo was downloaded by more than 120 companies in industries, ranging from automotive and drone delivery and climate protection all the way to video games and Hollywood film and television production.
Can turn to slide 15.
Hollywood is using game engines too.
This is the picture of the manned delorean on Disney plus but also the matrix awakens and others have gone public about how they use game engines.
To make their content.
So instead of flying a cast and crew to film on location or using green screen that are replaced later with background graphics like you see here. They now surround actors with a 360 degree screen <unk>.
During game engine produced scenery, so with <unk> globe in the game engine next year film producers could theoretically film anywhere.
Slide 16, a little more on our black shark Dot AI partnership we met black shark when they used our data on the Microsoft Flight simulator game pictured here. This is a digital London with digital plans and it looks great.
On slide 17 talk a little bit more about black shark and our own precision <unk>.
As mentioned on the Q1 earnings call, we joined Microsoft as an investor in Black shirt, using our imagery as a form of currency and exchange for equity in the company and a meaningful royalty on products using our data.
We said electric would help us enter the gaming market and now it has black.
Black shark can create a light weight three D version of the world that prioritizes rich graphics over high accuracy and fast Max our zone precision <unk> processes, our entire archive and prioritizes accuracy over visual appeal precision <unk> is also already in the market today and in use cases that require high accuracy.
Like the U S. Army's Oneworld terrain program, which uses <unk> <unk> globe to train our troops and through the life environment.
Slide 18.
<unk> demand is also accelerating the enterprise market precision <unk> is used by current customers and autonomous navigation drone delivery and telecommunications were also seeing interest from companies in risk management climate protection and as mentioned before media production.
Also our largest <unk> deals also now include royalties, so that Max or participate in the upside of successful products that use our data something we haven't always had in <unk>.
Slide 19, the last slide we believe that the largest long term growth driver for the three D. Globe is large scale simulation that can improve decision, making across governance or enterprises. A few examples if you take the Queen's Memorial from the first slide and accurate city scale simulation of lunch.
Populated by millions of AI bots to represent people. This would help authorities optimize the experience and advance our lease placement signage walking routes.
<unk> put in certain situations that weather or a car accident to aid in contingency planning in advance and a commercial example of product scale globally.
Global scale soon could help a new product launch by modestly inventory distribution globally.
Global supply chain throughput and even Billboard placements to optimize customer contact this kind of capability.
Rapidly testing decisions scenarios and scaled simulation with both real and staged input that.
That could be a key differentiator for anything.
And that's where we're headed.
So to wrap up <unk> has an established high margin enterprise business with proven capabilities in high profile customers and as we add any worldview Legion capacity, our strategic investments in <unk> that we mentioned.
And our transition towards a more scalable data as a service model.
We see upside in our enterprise business going forward now.
Now I'll hand, it over to Biggs Porter.
Thanks, Dan.
Please turn to slide 28, where we present year over year comparisons for the third quarter net.
Net loss for Q3 was $4 million inclusive of a $12 million expense recorded related to the satisfaction on offset obligations.
Net loss per share was <unk>.
Revenue was flat year over year for the quarter on a consolidated basis.
Adjusted EBITDA margins for the quarter are down roughly 70 basis points inclusive of $5 million in unfavorable foreign exchange charges and increased investments, we're making this year to drive future growth.
Excluding foreign exchange losses of 5 million tons of the strong dollar our adjusted EBITDA was $115 million.
On a year to date basis total company revenues decreased 2% and adjusted EBITDA margins expanded 50 basis points, including $7 million of foreign exchange charges.
Please turn to slide 21.
<unk> intelligence revenue increased 1% year earlier in the quarter driven by a $15 million increase in U S government revenue, including $11 million in crisis support services.
And the $3 million increase in revenues from international Defense and intelligence customers.
These increases were partially offset.
By a $14 million decrease in revenues.
Enterprise programs due primarily to the significant enterprise contract in the third quarter of last year.
We expect enterprise growth in the fourth quarter.
Adjusted EBITDA margin decreased 400 basis points, driven by increased spend particularly on product development efforts.
Our year to date basis, we continue to experience increases in product revenues from U S. Government programs. However, this underlying growth continues to be masked by headwinds we're facing in our services business driven by contract award delays in prior quarters as slow ramp up of order work do cleared workforce challenges.
To date basis, our services business is down roughly $30 million.
However, our backlog continues to grow and we expect our services business to recover as we catch up on staffing challenges, including some benefit from western wear.
Yes.
I should note that we had one large precision <unk> transaction that we expected in the third quarter that has slipped into the fourth quarter I will discuss that more in a moment.
Please turn to slide 22.
Space infrastructure revenue increased 3% year over year on the third quarter due to increases in U S government and commercial programs.
Adjusted EBITDA margins expanded to 990 basis points driven by reduced risks on certain programs nearing completion.
On a year to date basis revenues have increased 1% and adjusted our margins have expanded 750 basis points.
Normalizing for one significant charge in 2021, adjusted EBITDA margins have expanded 290 basis points.
Please turn to slide 23.
The company generated $124 million in operating cash flow from continuing operations in the third quarter and invested $75 million in capex.
Please turn to slide 24.
We have roughly $379 million liquidity into the quarter net.
Net debt decreased $44 million this quarter, driven by free cash flow generation.
We are well within our covenant ratios and continue to look forward to free cash flow generation continuing in the fourth quarter and strengthening next year.
As Dan mentioned in October S&P upgraded our credit ratings to a b plus from a b rating on improved credit metrics supported by our recent contract awards.
We expect improved credit ratings will help drive further drive better pricing and future refinancing transactions.
Particularly launch Worldview Legion launches are underway combined with free cash flow generation and debt reduction.
As we highlighted last quarter, our credit agreement allows us to reprice, our term loan b loan.
I'm Robbie.
Our premium.
Early as December 'twenty, two depending on market conditions alone valuations and our bonds become callable beginning in June 2024.
Now please turn to slide 25 for an update on our 'twenty two guidance.
And also intelligence, we lowered our total revenue guidance range by $50 million driven by a combination of factors.
As I spoke to earlier, our service business was down roughly $30 million year to date and.
We do not think we're going to be able to recover this year.
To a lesser extent, we have seen some imagery transaction slide right and this is hindered our ability to hit the top end of our previous range.
When we ultimately adopt depends in large part on two large high margin multiyear arrangements. So we expect to contribute significantly in the fourth quarter, one in public and one in enterprise.
Notably on the larger of the two.
Well, along and all of the customer approvals.
Most of these are large multiyear deals with a significant portion expected to be livable out of inventory here yet.
Yeah.
This is subject to file a decentralization of the contract and the customer's July desired delivery schedule.
The second deal is with a large commercial customer looking to expand their relationship with us including access to our <unk> product.
At the midpoint is still represents 5% growth in revenue and Earth intelligence from last year.
By capacity constraints, and a $30 million of top line headwinds, we're seeing in our services business.
We continue to see a strong pipeline Earth intelligence and expect to continue to grow from this space.
Revenue guidance for space infrastructure, and intersegment eliminations have both increased $5 million on the Worldview Legion program, but this has no impact to consolidated results.
Turning now to adjusted EBITDA guidance.
We are reducing our consolidated adjusted adjusted EBITDA guidance by roughly $10 million, reflecting the effect of the Forex charges, we've experienced year to date.
And Earth intelligence are updated expected range for adjusted EBITDA is $500 million to $530 million, which in the middle of the range reflects a 45% adjusted EBITDA margin.
Guidance for space infrastructure, adjusted EBITDA is now at $80 million to $95 million.
This is driven primarily on the over performance in the third quarter.
In terms of trends, we expect our R&D expenditures for the year to be more heavily weighted towards the fourth quarter.
Our expectations for corporate and other expenses increased $10 million to $95 million for the year.
This increase was driven by the $7 million of year to date foreign exchange losses on a strengthening dollar.
All in our adjusted EBITDA for the company in the middle of the range reflects 11% year over year growth.
We've tightened the range of our expectations for operating cash flow of around the same midpoint of $340 million.
I said last quarter, the capital expenditures were tracking towards the top end of our guidance range and we've increased slightly to $330 million for the year based primarily on the timing of Worldview Legion expenditures.
Please turn to slide 26.
We don't confirm long range guidance each quarter and we're currently in our planning cycle, but even though we are still in process on next year's plan and laying out specific buildup to our targets were.
We're far enough along to confirm that we are holding the targets that we've guided to for next year.
To avoid any confusion those targets are for $570 million of adjusted EBITDA and $290 million of free cash flow.
Although we will not lay out all the line items comparing next year to this year at this point the drivers of year over year improvement remained leisure related revenue growth increased imagery product revenues growth in space infrastructure third party revenues, replacing Legion intercompany revenues and.
And lower Capex.
I should note that Capex on laser is currently shifted into 2023.
We anticipate being able to offset this through adjusting the timing of other expenditures and by improving operating cash flow.
Dan talked earlier about Legion precision three D and the diversification of our space infrastructure business.
And we have for some time talked about our ability to drive free cash flow significantly higher in 2023 and each year after that in sequence.
I want to lay out what all that means and a few closing thoughts.
<unk> at the front end of high margin high growth with significantly increasing free cash flow.
This is driven by one increased capacity and revisit frequency from Legion.
To accuracy of imagery and products, including proprietary precision reading capability.
Three long term customer relationships and contracts.
Five years firm on LCL, having never lost a DAP customer and solid relationships with large tech players.
Four with precision <unk> the development of the <unk> globe the ability to capture on a broad scale new use cases, such as simulation training planning targeting GPS denied navigation met averse gaming and autonomous vehicles.
Five capturing increased customer base and smoother revenue growth through our investments and platform capabilities and customer access through a data as a service model.
Six are lower cost more capital efficient cost base with low variable cost to support revenue and margin growth.
Seven a proven low cost manufacturing capability that is now penetrated civil defense and Intel business with a diverse product offering.
We expect to hold an investor day following the release of our fourth quarter earnings, where we will drill and policies in the meantime, we'll be doing some video presentations by our leadership, we will put on our website to help us everyone's understanding of these drivers.
With that I'd like to hand, the call back over to the operator to begin Q&A.
Thank you if you would like to ask a question on the phone lines. Today. Please press star one on your telephone keypad. If you would like to remove yourself from the queue. You can press star one again as a reminder, please limit yourself to one question and one follow up and if you have additional questions you may return to the queue.
We'll take our first question is from Matt Akers with Wells Fargo.
Hi, Yes. Good afternoon, everybody. Thanks for the question I was wondering if you could go into a little bit more detail on the software delays on Legion.
Are you seeing there that led to the delay.
Thanks, Matt So what we talked about.
<unk> talked about this back in September , but we were seeing some software delays.
On the verification and validation portions of it.
And that's before we do all the hardware software interface work.
We've now completed essentially most of that work.
The ground teams, the AI and <unk> teams and the others.
The program have gotten the software drops so we are progressing now through the other phases of our testing.
<unk> two <unk>.
Shipping satellites in December for launches in January .
So I mean, the essential nature of the burn down per wasn't as fast as we thought it was going to be.
But we made our way through that that part of the program.
Okay, great. Thanks, and then I guess.
Thanks for the presentation on the <unk>.
Virtual.
It's pretty pretty interesting I guess can you talk a little bit about.
I think you've mentioned a lot of different potential customers, there sort of a <unk>.
<unk> of when that ramps up what does that look like in terms of like size and profitability in just sort of how you can sort of model that.
Coming out from our perspective.
Yes, why don't I kind of take that and then I'll turn it over to Dan for some of his perspective as well.
<unk>.
One of the things I had.
Stressed right off the bat is.
The growth you have seen in the company even as we have been capacity constraint has been driven by our products and in particular, our <unk> capabilities. So the army <unk> program is one area, where we are functioning very well at this point and that's on the order of about $50 million year program at this point for building simulation and virtual training.
Environments for the U S Army while.
While we're seeing strong uptake with our international defense and intelligence customers as well.
Particularly.
As as more functionality as we build out more of the globe first I guess and then second as more functionality is being realized from that particularly with some of the hotspots going on in the world right now.
We're also seeing great traction with <unk>.
<unk> planning and navigation planning for for example drone companies.
Autonomy navigation and any other thing by which you might want to use a digital twin or a three D reference point for the planet. So I think.
We've got good business, we're growing the business strongly we've seen good adoption and the margins are.
Very much aligned with what we're doing in the rest of the Earth intelligence business. At this point I think Dan you want to add some perspective on how you're seeing that in the enterprise.
And I think a key point is that this <unk> globe works for our government and allies as wells that works for enterprises, and it's going to be $1 <unk> globe as reference.
I think the bigger change when we work on these <unk> deals.
How we.
The structure of the deals and how we deliver the content the <unk> deals are going to be better.
We're going to take this.
Impressive one of a kind asset and we're going to make sure that we participate in the upset.
Through royalties like you see with our flagship deal as well as equity.
And we're also delivering more of the data as a service model that's continuous deliberate delivery instead of a big lump.
A quarter or once a year I think those are the two larger differences for us.
Yes.
Okay. That's great. Thank you.
We'll take our question from Colin Canfield with Barclays.
Hey, good afternoon guys.
Can we just focus first on the adjusted EBITDA Bridge from 2019 guidance on 2003.
Obviously, youre not going to get into the segment details the biggie.
Just kind of August through the high level of operating earnings interest expense will be.
The region Capex and then also the world where acquisition of I think the.
The employee head count suggests something like $25 to $50 billion of adjusted EBITDA.
And that is crazy.
Yes.
Okay.
On the.
On the final point I think you are high in terms of the.
Thanks.
<unk> acquisition in Monaco, despite them out separately.
Don't take that there are other value where we.
Back to discretely change our guidance for 2003.
Associated with that.
It is an important.
E <unk> acquisition, but part of that is just in ensuring that we havent worked for us to continue the efforts that we're already engaged in.
As well as.
The.
Accelerating the services business from <unk>.
Present.
Pass.
But.
The total value I would say is lower than your number, but we're not going to discretely communicated.
In terms of the bridge otherwise to 'twenty three.
I guess I'll hit a high cash first because I think it's all I've got a couple of moving parts to really point out.
Our Allegiant Capex is growing so capex will be higher than the $146 million that we previously guided to 23, but.
But we're offsetting that through other reductions.
And Capex overall, probably about $30 million increase in Capex the big.
The big payments.
With respect to next year on Legion are really driven by insurance of launch.
So far away are so far along otherwise.
With respect to the program.
On EBITDA.
Kind of starting out with Legion.
We've always said that the first full year of Legion AE.
<unk> million dollars roughly that's a first full year of operation of all six satellites once our all in service.
In February when we gave the guidance for 2003.
We didn't expect that full $80 million in 'twenty, three because we were launching.
Late into the year in terms of the last launch was at that point in time. So we've earned a 90 to start with.
But what we're now expecting is full operability would be in the July August kind of time period based upon.
The guidance with respect to launches that we've given.
Yeah.
So that sort of gives you an idea of what we might expect with respect to.
The Legion contribution in 'twenty, three without putting a fine point number on it.
Having said that.
We always had some contingency in our plan going back to February for 2023, and we're getting lift from Ukraine knock on effects and increased demand and also what we see as the opportunities on three D.
Including some of the Big multiyear awards I've already spoken to.
Got it and then.
With respect to it sounds like the technological or the kind of the update that you guys made the software allowing U.
To X.
And the year of your legacy assets.
Is there an incremental profit to consider from that or is that more just kind of like downside protection in case of Legion delays.
So just to kind of clarify there we.
We do we do in engineering assessment once a year.
In the third quarter to determine.
For accounting purposes.
Of the satellites our internal models.
I'll show them significantly longer than that.
But we extended them based on that modeling this year.
Those assets will continue we believe to produce revenue as long as they continue to be in space, even as we bring the Legion capacity online.
So the Legion capacity, especially while those assets are operating will be.
The high incremental capacity at relatively high margins.
Yes.
Okay got it I appreciate that clarification. Thanks for the question.
Thanks, Paul.
We will take our next question from Peter Arment with Baird.
Hey, good afternoon, Dan Biggs and.
Hey, Thanks for all the detailed and I appreciate that Dan's contribution there that was real.
Really interesting on the <unk>.
Dan could you update it sounded like kind of expectations now with the cadence of the other launches now that you've kind of you've got the official date now kind of moving to January how we expect the others to be launched.
Yes, we still expect that.
After the first launch we're about two months.
For the second launch and then just.
Third launch will be in due course, we will see how the first to go but it's probably that two to three months after that depending on how the teams are and how the commissioning process goes.
So we would expect a significant amount of.
Of revenue and EBITDA from the assets in 2023.
And we're looking forward to getting them downrange in getting them up in space.
Yes for sure.
I just would note.
Because we're always cautious in how we do the language and this is a space program and so we.
We will continue to rigorously test all aspects of each of the satellites right up until the point when we're in final launch phase.
<unk>.
We're known for our quality one of the reasons, we're known for that is the extensive testing we do.
All the way throughout and right up until the end of the programs.
I appreciate that you had previously said that kind of a 60 day checkout once in orbit is that still accurate.
Yeah, we're right around right around that within a few days either way.
I appreciate it I'll leave it there thanks guys.
Okay. Thanks Peter.
We'll take our next question from Chris Quilty with Quilty analytics LLC.
Hi, Thanks, I wanted to follow up on one other guidance items.
I heard you say, 45% EBITDA margins for the AI business for the year, which if I heard that correctly would imply like close to 50% in Q4 is that correct am I doing my math correct.
Yes, yes.
Yes, 45% for the year.
Fourth quarter, but.
50.
Keep in mind that that.
The step up in revenue and margin in the fourth quarter driven by.
Product revenues not service revenues in the product revenues are a higher margin.
And that 50%.
And in fact.
We're delivering out of inventory at the timely delivery of the margin is closer to 100.
Gotcha, and so that's just mix related and how should we think about the margins for the.
Space infrastructure business. It sounds like you took out some of the management reserves in the third quarter.
Real Big margin I mean should we be aiming more for that low double digits on a go forward for the next couple of quarters.
Well the implied.
Implied in the middle of our range.
The full year margin per space infrastructure would be around just under 12%.
The fourth quarter I think it would be around <unk>.
Nine nine ish.
We will continue to see quarter to quarter variations trade.
<unk> two EAC accounting.
The variability that that creates.
Going forward we.
We continue to target the 10% kind of range.
<unk> to be better than that but we will see variability period to period.
I think.
On that point, Chris we are seeing better performance out of the space segment.
At this point in the journey some of Thats due to program mix some of Thats due to.
Just better performance in the programs and in some of its due to the roll off of some of the larger programs that had been impacting us on the downside.
We move into <unk>.
Programs over.
More appropriately bid managed through the future here, but I think we're really excited about the mix of programs had got there will be some that are cost plus we've got the accounting systems in place to do that there will be some that are firm fixed price and we will expect higher margins on those types of programs, where we're taking a little more risk on them as well.
Got you one other accounting related question can you give us either the orders or the general book to bills for both of the segments.
Sure.
You want it for the quarter or year to date and trailing 12.
Okay.
Trailing 12, because we think we like looking over the longer period I've given.
I've already given some I think on year to date.
On a trailing 12.
Two five book to Bill space infrastructure Trail.
Trailing 12.6.
But I will emphasize that.
The quarter was high at one five we expect to be over one times for the year.
Consolidated basis, we're at 1.5.
So.
All of these things I think are trending in the right direction.
We look for sizable orders here in the fourth quarter on space infrastructure in particular.
Got you and.
Presumably the guidance include any contribution from the acquisition, which is probably not hugely material.
Yes, I said it is not expected to move the needle against the guidance we've already given themselves.
Yeah.
Not changing it for that.
Got you and final question just on the Earth intelligence commercial side of the business. It looks like Theres been some international weakness recently again is that attributed to the same delayed order issues. We've been talking about previously is there something else going on there.
I wouldn't say we've got any.
Weakness on the international side, I think we've seen strong growth throughout the year.
We see some fairly large deals to close out the year as Vic mentioned in Q4 here.
But.
Just.
Seeing very strong, particularly with the situation and use cases that are being shown in some of the crisis in conflict areas around the world.
We're seeing pretty good adoption of the product sets, we have been limited by satellite capacity with those traditional international customers and as we bring Legion online expect to see a lot of tail tailwind coming from that.
Alright, good can't wait till January .
Thanks, Chris Yeah, and I think I was just wanted to add in on on the logo or acquisition when I say it it doesn't move the needle in terms of the <unk>.
Bottom line expectation for next year, and then we're not adjusting our guidance for it is thats in part because we're going to use those resources to fuel our long term growth.
Using them to further our development of the <unk> product and yes level, we expect to get some support to other areas as well like services.
But it's really about.
Being a very efficient resource that we can add to over time that will drive the business forward and enable that long term growth.
Very good thank you.
Okay.
We will take our next question from Robert Spingarn with Melius research.
Hey, good afternoon.
Dan I think that Matt just asked you about W. VL software and Peter talked about the launch schedule.
Im not sure we talked about hardware status for W. L. Three through six.
Can you update on that.
Yeah, sure and just kind of go back to the one slide we referenced in the deck, but the first two are essentially a hardware ready ready to ship down range waiting for their final software packages for the.
Launch and commissioning phase of the program.
We want to make sure we validate that software all the way through the hardware interface and the <unk> sections and with the ground teams but.
<unk> got the software will continue to do.
Any any patches to along the way here as we get ready for launch.
And so that's looking good on the.
On the next two satellites.
<unk>.
Going into AI, and so they're going into the environmental testing that we do up in Palo Alto.
I think you've seen some of those facilities, but the thermal vac chambers tables, all that kind of stuff. There. They are in that process right now.
And we're running will be ranked closed loop software all the way through those testing phases, and then five and six our hardware is done and at that point.
Yes, they are as they come out of it they're essentially hardware ready to go down range too.
We will continue to do performance reference testing all the way until we.
Send them down to the base, but.
They are in very good shape.
The last two satellites, we've got the the.
Instrument four five we're still waiting for the instrument four six from Raytheon.
But when we bring that one and then one or two other minor hardware components will be hardware already on those as well. So at this point those are further out that's not unexpected to have them at that phase but.
With the exception of that last instrument for the six satellite.
We're tracking right along to where we want to be with the three coordinated launches.
Okay, and then just a high level question Yep Biggs offered up a really nice list of the numerous growth drivers earlier.
And if I heard correctly, all but one are in and the AI business.
<unk> got a ton of momentum we've talked about it throughout the call. The other Dan had a really nice description of the innovation you have got in that business.
So it's a little bit of a loaded question and we have some history with this but does XI fit in the long term as you move past WEL.
With all the strength you have NII.
And just given how the market is changing on the hardware side with all of the competition and so forth.
We're very pleased with the performance of the space infrastructure side of the business I think they're doing a great job, we're really like the.
The way in which.
The Legion program will support both sides of the business as well as I think as we've moved our way of startup move our way into.
Defense and Intel there is a lot of.
Customer coordination and overlap, which is particularly nice for example, the national Reconnaissance office Space Force things the Air Force does as well so we'll continue to.
Sure.
Push that business forward, Chris and team are doing a great job.
<unk>.
Like what we see there.
Okay. Thanks very much.
You bet.
As a reminder that is star one to ask a question. Our next question comes from Tim James with TD Securities.
Thank you. Thanks, Thanks for your time.
My first question housekeeping actually just wanted to go back.
And Adam upfront about the change in depreciation.
The lives through July one will be one and two I'm sorry, when did the lives for accounting purposes get extended two on each of those satellites.
We do that.
Third quarter I'm, sorry in the fourth quarter, we did that in the fourth quarter review. So it's an October work stream for us and we do a rigorous engineering assessment simulation.
We do that for accounting purposes, because we have to every year.
We've got internal models that generally have those running longer than the accounting stimulations.
<unk>.
Long range planning and forecasting.
And I think the takeaway there is just like we have in many years in the past we've extended those three satellites by year end.
So.
The key point is that we renewed insurance on the entire constellation or the next year as we normally do at the same rates that we'd previously been procuring.
Mercury insurance.
Okay. So it was essentially one year that you've extended the lives from on those is that right and I believe they were all due to the lives, we're finishing up in either Q3 or Q4 and they've each been extended by one year.
Each by one year second half of 'twenty four for all of them.
And I think okay.
Hopefully you get it but.
On the insurance is not just a matter of us.
Increasing the.
Yes.
<unk> the coverage by one year.
The insurers taking all the data on the performance of the satellites and assessing that theyre comfortable with renewing the assurance for another year as well so.
There's a lot of analysis that goes into this not just for depreciation purposes, but also given to the insurers which supports arm based decision making.
Okay.
My next question.
The services business.
Thanks.
Kind of a shortfall or how service business has been lagging I guess your expectations can you just walk through again the reasons for that and quantify that I think you mentioned $30 million I. Just wanted to understand is that a kind of difference on a year over year basis or is that relative to your expectations, maybe just some additional color there.
It would be helpful.
It's really both.
And in term in terms of being against our expectations and also against last year.
For some some quarters.
Or is this a very high level of proposals that are outstanding with the customers.
Just being freed up.
For us to execute against.
That has.
Corrected itself.
Such that the.
The book to Bill actually at a year to date for services, although it's not in what I gave earlier is one four.
Time so.
Backlog is growing and we're catching up on those awards, but.
But we do still have challenges associated with getting.
Cleared personnel available.
To work on some of these programs and that is if you're a little tempering.
The growth.
We've hoped for and that we expect to get going forward.
<unk> will be one of the ways in which we.
We would expect we're going to be able to support growth in the services business as well as what we talked about in terms of driving our product development or otherwise.
Is it primarily services work for U S government entities.
Absolutely yes.
Yes.
The very substantial bulk of all of the services work as well.
Defense and intelligence customers throughout the government.
And where the delays are over.
The difference is there obviously, okay and then just my last question, if I could and again, maybe it's going back to the presentation that was.
Very informative.
Big is it possible to give us a sense for how and I realize this is more about an opportunity for the future, but we look at the business today.
How much.
Revenue of approximately.
How much comes from.
Customers that are using data or services, three D or otherwise for entertainment purposes, whether it's gaming or it is a slide on Hollywood uses in there is it possible to kind of.
There's a bit of it.
Haven't significant it is today.
I'm going to turn it over to Dan Northern second we haven't broken it out by industry other than to say inside of the enterprise.
Business, we've got gaming.
Gaming Entertainment of course, the traditional large tech companies that we work with.
Mapping applications geolocation services risk management vehicle navigation.
Those sorts of things.
We've seen good growth on the on the public sector side, we see an opportunity for really substantial growth on the enterprise side as well.
Any thoughts on that.
Yes. Some of this is new technology entering Hollywood until actually the Unreal first.
Recitation, we gave a few weeks ago that was when some of these customers just learned about it. So we're right on the front end.
The growth with the black shark Dot AI product.
But there is plenty of other applications to use.
Our <unk> data.
So.
I think.
Its opportunity and upside on the gaming and entertainment side, and it's clear opportunity and mapping.
Drone delivery and some of the more expected areas for <unk> globe.
Okay. Thank you very much that's all the questions.
Thanks, Tim.
We will take our next question from Michael <unk> with <unk> Securities.
Hey, guys. Good evening, Thanks for taking my question.
Maybe.
Dan I guess, if you could speak a little bit.
I'm thinking about the overall pipeline and the competitive environment and I guess, if we were to go back 12 months to 15 months ago. There was.
Certainly a lot more buzz about all these upstart satellite competitors, but what are you seeing out there now I mean, certainly you've done a lot here on the <unk> side and scaling that up but can you maybe just characterize what.
As it relates to the pipeline of opportunities in the competition, what youre seeing out there.
I think we're seeing continued very very strong adoption and growth of our product sets.
Particularly on the Earth intelligence side.
I think that as things work through what what our expectations are for the 2023 numbers that have been out there for quite some period of time.
Some of the price of spots in the World. If you will that sort of an insatiable demand for the types of satellite data.
And derivative products like the <unk> products that Max or provides especially as we.
Show, a more global scale accurate applications for those those things like three point clouds and precision <unk> apt.
<unk>.
<unk>.
So I think.
We're doing really well there the broad area components, plus the hyper sort of accuracy at 30 centimeter quality is really what's driving the engines for the AI and machine learning applications that we're seeing.
And that's where we're seeing the growth of the top to the future and Legion will do nothing but.
Contribute pretty dramatically to the amount of capacity that we have especially in the areas of the world, where we have the highest.
Product sets for that.
Yes.
Kind of not to comment too much on what we're seeing in the marketplace with everybody else but.
Even as others have come in and are doing some of this it it hasnt really impacted too much or if at all the trend lines, we have been on it that we've been expecting.
On the space side of the business. We've been we've been doing really good diversification work, we continue to love and serve the customers and the Geo communications market.
But being able to diversify products and customers and we've got a lot more products in that part of the business now.
It's allowing us to penetrate and drive real cash flow neural profits in the business. There also and we're excited about those trends.
Got it got it and then just one more on update on the Worldview Legion do you still just have one contract from one customer or what are the expectations there.
No. We've got we've got much more than that we've got two DAP customers that have signed up for the additional capacity all the way through we've upgraded gosh at seven seven out.
Our ground stations and that's in anticipation of that picking up allegiant.
Capacity as well.
There is some built in.
Growth with.
Government U S government customers.
Yes.
With that additional capacity also it meets all the specifications for the commercial customers. The enterprise customers that we've got and we've got strong backlog for them as well, there's some contracts, where we have not been able to deliver.
Close to the requirements for a 100% of the contract and so as we start delivering more with the Legion constellation.
We'll snap right into some revenue growth there as well.
Got it alright.
Alright, great. Thanks, guys.
Thank you.
We will take our next question from Austin Moeller with Canaccord Genuity.
Hi, Dan good afternoon.
Hey, Austin.
All right.
Just my main question is on space infrastructure, you've had the win with all three tariffs to build 2014.
<unk> buses for the tracking where.
What kind of production quantities you sort of have in your vision for the next few years.
For <unk> do you think we could get like 50 to 100 satellites a year that would enable you to be highly competitive with the parent orbitals market labs with the world.
Yes, we're shortly we're certainly building that type of capability.
We haven't just been winning awards, but we've been reengineering, our manufacturing footprint, our design and our our.
Space architecture.
Engineering architecture groups out there as well.
And so we will be set up.
Again, the first 14 satellites are really a prototype phase.
If that program gets legs and grow significantly or there are other programs in the defense and intelligence side.
<unk> are certainly bidding on and their programs on the commercial side that were required numbers in the.
Dozens to hundreds as youre talking about there will be in a position to scale up to capture that market opportunity. So we're yes, we're bullish on it and we're.
We're getting lots of good market signals.
Because.
The one kind of a calling card the Max or has is the quality. So as we ramp up those types of production levels. We will expect to keep the same quality of our customers are used to in a very efficient.
Delivery points.
Good signals for us right there.
Yeah.
Excellent thanks for giving me some insights there on that.
Thanks Austin.
Okay.
We'll take our next question from Stephen Mikkelsen with BMO capital markets.
Hey, guys just a couple quick questions on via working where acquisition so its sales like that.
EBITDA is already baked into the guidance, where it is going to be neutral is that a fair way of looking at it.
At this point as I said, it's not something we're going to revise the guidance for this point in time and don't expect to do that that future.
From the standpoint of.
Discrete third party revenues.
It's not something to move it and otherwise we're going to take those resources and use them to drive our business forward. So you need to think of it that way.
Okay and.
Just on the third party.
Is that a business that youre going to continue to carry on once the acquisition closes or what was just the <unk>.
Internal part of <unk>.
We're planning to.
Certainly carry on with some of the customers. This is a great company and they built a really successful long term business.
<unk>.
Krishna Carlos through their founders.
It's a great young team of software engineers and developers many of them from <unk> University in Puerto Rico and <unk>.
<unk> certainly done a lot of business with us in the past that they have developed some great third party work as well.
Whether that's accretive to the model and our business and where those are good customers to keep going forward.
Totally expect we'll be able to do it the nice thing is as we grow that business and we expect to grow it significantly down there.
We will be able to moderate between how much we do for outside third parties and how much we did from Baxter <unk> our internal development.
And it will give us some flexibility on both fronts.
Okay. Good to hear and final quick question is the acquisition will be funded out of cash on hand, or will you have to draw down on your credit facility.
Well, we're we're presently drawn on the credit facility so effectively.
It really doesn't matter, what you think of it as cash on hand, or he has a credit facility because we.
We'd like to take any excess cash we pay down the credit facility.
As it's available having said that.
It's not a big cash upfront outlay is over five years.
So there actually is.
The entire outlay is pretty pro rata over the entire five years. So it's not a big cash use upfront.
Alright, great. Thanks for clarifying those points of service Center.
No I think that was it.
We do expect it to be immediately accretive.
2023.
Great. Thanks.
That does conclude the question and answer session I would like to turn the call back over to Dan Jablonsky for any closing remarks.
I'd just like to say thanks to the entire Max our team for Great work this quarter and the work we're doing to finish out the year very much looking forward as I know our investors are too.
Getting allegiance downrange in launched in successfully operating in space.
Primary focus for us.
Look forward to seeing many of you at the launch site. Thank you.
And that does conclude todays presentation. Thank you for your participation and you may now disconnect.
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Okay.
Yes.
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