Q2 2023 BigBear.ai Holdings Inc Earnings Call
Thank you for joining the Big Bear got AI second quarter Conference call.
This call is being recorded at this time all participants are in a listen only mode and a question and answer session will follow the presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Now I'll turn the call over to norm Loudermilk, Chief Operating Officer. Please go ahead Mr. <unk>.
Good afternoon, everyone and welcome to Big Bear a is 2023 second quarter conference call I'm joined by Mandy long, our CEO and Julie Pepper, our Chief Financial Officer.
During the call today, we may make certain forward looking statements.
Centers are cautioned not to put undue reliance on the forward looking statements and big Bird <unk>, specifically disclaims any obligation to update the forward looking statements that may be discussed during this call.
Many factors could cause actual events to differ materially from the forward looking statements made on the call. These statements are based on current expectations and assumptions and as a result are subject to risks and uncertainties for more information about these risks and uncertainties. Please refer to the forward looking statements section of the earnings.
Press release issued today and our SEC filings.
Selected as the sole provider by the U S Army to implement phase two of the Army test and evaluation command integrated mission management system, and a single award contract worth over $7 $7 million over seven months.
Hey, Barry I will provide a modern no code low code solution designed to replace a tax legacy system with a cloud based API centric platform, combining project and portfolio management.
Enterprise content management workflow management.
Application integration and business intelligence data analytics capabilities.
Our solution offers the U S Army unique and democratize access to data collaboration tools and advanced analytics.
What's important to recognize in this extension is that in moving from phase one to phase two the army selected us as the sole provider after previously sharing this contract.
Physicians Big Barry I, well as future work is awarded.
As we continue to execute we will see more of these types of contract progressions.
This award builds upon <unk> portfolio of work supporting U S Army readiness.
Including its continued delivery of the global force information management objective environment intelligent automation platform.
In addition to Ames, we received a six month extension from the U S Army as the prime contractor for continuing work on the global Forest information management system and a six month contract valued at just over $8 5 million.
The extension builds on Big Barry is previous work in phase, one and phase two and continues to show the strength of our relationship with the U S Army.
This is another example of how we are well positioned to win future work.
Under the terms of the single source contracts Big Bear AI will serve as the prime contractor to build an enterprise wide intelligent automation platform, providing the U S Army with a holistic view of its global force structure.
During the extension the Big Bear AI team will be charged with migrating the prototype into U S. Army. The army cloud aligned with the U S. Army's cloud plan in 2022.
Our pro model solution continues to enhance our clients' operational efficiency and a variety of use cases.
Most recently, we won and expanded work with one of the largest shipbuilders in the world, where we are currently supporting U S based naval operations displaying the global opportunity for leveraging our capabilities in complex manufacturing environment.
We also won a contract with a large industrial automation company, where we are assisting in their existing flat products fabrication process to identify constraint and understand the best opportunities for eliminating or reducing them.
In doing so our models will allow key stakeholders to quantify the expected improvements and cost benefits of any considered process changes in advance of implementing those changes.
We are winning and beating competitors, both large and small as the world unlocks the power of discrete events stimulation and digital twins.
Now I'm going to switch gears and talk about responsible and ethical AI.
Earlier this year, we submitted comments to the National Telecommunications and information administration and department of Commerce concerning accountability measures and policies for artificial intelligence system.
Specifically, we sought to provide a perspective on industry experience as it related to complex technology regulation and recommendation based on that experience in response to the Biogen administrations concerns around accountability measures and policies for artificial intelligence systems.
The rapid acceleration of AI innovation integration into everyday Civil Society underscores the importance of ongoing federal efforts to advance trustworthy AI application.
Search and U S leadership in the development and use of trustworthy AI in the public and private sectors.
Furthermore.
U S leadership in emerging AI systems and application support our National security strategy that defense core Democratic values, and protect civil liberties and human rights.
NTIA has focused on developing sound AI assurance and accountability frameworks and standard.
As a critical component for realizing the benefits of AI and mitigating risk, while incentivize them organizations to invest in AI system governance and responsible AI products.
We focus our thoughts on the scope of AI accountability mechanisms that should be broad enough to encompass certification audits and assessments.
But also are adaptable to evolving technologies and practices.
It should involve collaboration between government regulatory bodies industry stakeholders, academia and civil society to develop comprehensive framework that address the challenges and risks associated with AI design development and deployment.
Additionally, mechanisms should consider international cooperation and harmonization to facilitate consistent standards and practices across borders while accommodating cultural legal and societal differences.
AI accountability measures should cover a range of topics to ensure responsible and ethical practices.
As NTIA continues its work on drafting and issuing a report on AI Accountability policy development.
Barry I strongly encourages the development of policies and regulations that support and encourage responsible innovation.
To put it simply we.
We believe in the power that responsible technology can play in regulating technology.
I believe that today more than ever it is not only possible, but necessary for AI accountability to be successful.
Lastly, I want to share our excitement on the announcement of our new Chief Technology and strategy Officer.
Tanner.
Mr. Tanner has more than 30 years of experience most.
Most recently, serving as CTO and chief architect at IBM Watson Health now Meredith.
Canada also has held architect positions at both Apple and Microsoft and his co founded several acquired startup, including most recently pocket dock acquired by change health.
He also created one of the first machine learning and natural language processing as a service companies on Amazon AWS called belief that works.
His extensive experience will be instrumental in delivering technology led solutions for leaders in government and defense.
Manufacturing and warehouse operations, and healthcare and life Sciences.
As I think about the team that we've assembled over the last year.
We truly experience the best of both worlds.
With elevated top talent that was already in place the big Bear AI and we've added top talent from outside of the company.
We are never done evolving but.
But I feel great about how we're positioned to lead in the industry with this team.
With that I will turn the call to Julie for a detailed review of our financials.
Thank you Mandy.
This past quarter, we executed well in the face of market challenges, including headwinds from the bankruptcy of Virgin orbit.
Additionally, as we make progress on our transformation to a higher margin technology solutions business. We are seeing our contract mix began to shift and move away from programs like E path.
He passed represent the legacy program, where we operated as a sub contractor focused on resource staffing for the U S Air Force.
These headwinds we delivered on what we set out to achieve.
This is a testament to the team we're building and the quality of our solutions and our ability to execute and grow within our markets.
If anything the current geopolitical climate has highlighted the need for advanced technologies like artificial intelligence and our national security efforts and we are seeing increased interest in our capabilities as a result.
Now, let's turn to quarter results.
Revenue for the quarter with $38 5 million up 2% year over year compared to $37 6 million in the second quarter of 'twenty, two and up 9% year to date.
As always I want to emphasize that our revenue can be lumpy and can fluctuate meaningfully depending on the quarter in which contracts are awarded milestones achieved or contracts to complete.
For Q2 year over year growth was driven by our U S Army G firm contract, partially offset by the termination of the Virgin orbit contract and the completion of <unk>.
One phase of our <unk> contract.
Total gross margin was 23% in the quarter.
220 basis point decrease from 25% in Q2 2022.
<unk>, primarily by the loss in revenue and gross margin from Virgin orbit after their declared bankruptcy in April .
In terms of this contract we initially anticipated that the company would be sold quickly, but this has not materialized. So we are taking further action to right off most of what is remaining from the Q1 invoice this quarter, which is reflected in our SG&A expenses.
Backlog was 206 million at the end of the second quarter, which is up 5% or approximately $9 million compared to the first quarter of 2023 Disney.
This increase is largely driven by awards for the GM extension aimed contract N G three analytics.
Now turning to expenses for Q2 operating expenses were approximately $19 2 million, which included R&D expenses of $2 2 million and SG&A expenses of $16 9 million.
We want to highlight that SG&A is down $10 million or 37% versus last year. When Q2, SG&A was $27 million.
This significant reduction in SG&A was due to the effects of head count reduction actions taken in third quarter of 2022, and first quarter of 2023 to realign our operating structure. In addition to rationalization of our third party vendor expenses.
On a year over year basis total operating expenses were lower by 70% this year in Q2 or 35%, excluding the goodwill impairment expenses in Q2 2022.
Okay.
Our net loss was $16 9 million in the quarter versus $56 8 million in Q2, 2022.
The current quarter includes a $3 $1 million noncash charge related to the fair value adjustment on warrants that were issued in 2023. Additionally.
Additionally, the company booked a bad debt reserve of 675, K this quarter related to the unpaid receivables from Virgin orbit.
Excluding the second quarter 2022, noncash goodwill impairment charge of $35 3 million operating expenses have decreased approximately $10 5 million in Q2 of 2023 versus the comparable period.
Similarly.
Our overall operating loss has improved by approximately 50% and $10 million, even after the Q2 2022 goodwill impairment charge is excluded.
Okay.
Adjusted EBITDA was a loss of $3 2 million in Q2 2023 compared to the adjusted EBITDA loss of $7 7 million in the same period, a year ago or 58% year over year improvement.
While we are pleased to report this level of improvement we remain committed to driving improved operating efficiency in the second half of 2023 and beyond with a focus on margin improvement and continued rigor on operating expenses.
Q2, adjusted EBITDA was impacted by the additional bad debt reserve and gross margin loss from <unk>.
Orben, partially offset by improved performance on our chicken contract compared to last quarter.
In review of the balance sheet at the end of the second quarter, we had cash and cash equivalents of approximately $29 $9 million.
The increase was due to a $22 $8 million of net proceeds from the registered direct offering we completed in June .
We were also expecting an additional $11 million of government receivables in the quarter that will now come in in Q3 due to the timing of payments.
Most of these have already been received.
As we stated last quarter, we continue to focus on lowering our cash burn in the second half of 2023 to get to positive operational cash flow, which excludes nonrecurring and nonoperational items, such as interest payments legal and transaction fees and tax payments for stock vesting.
Now turning to our financial outlook today, we are reaffirming our guidance with unexpected 2023 revenue in the range of $1 $55 million to $170 million.
We continue to expect adjusted EBITDA to be single digit negative adjusted EBITDA in millions for 2023.
<unk> previously stated we are doing what we set out to accomplish in 2023 and our momentum continues to build.
The anticipated GM extension aimed award and continued partnership and expansion with all three Harris gives us increased confidence in our leadership position with NII.
With a stronger balance sheet.
Better operational execution, the right partners and a talented team in place.
We continue to build and we are looking forward to growth to come and now I turn to Mandy for final remarks, before we turn to Q&A.
Thank you Julie we have already made a great deal of progress and I am extremely excited about what we're building and the path ahead.
Operator, we are ready for questions. Thank you.
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One moment, while we compile the Q&A roster.
Your first question comes from the <unk> of Northland Capital. Your line is open.
Hi, where they've gone from Mike Latimore of Northland Capital I have a couple of questions with me. The first one is.
What does your head count and are you planning on adding more by the yearend.
Hi, there I'm, sorry, I missed your name I I missed the name sorry about that.
Yeah, Yeah, I'm vivek on for Mike.
I'm, sorry, I missed the I missed the name sorry sure.
Great. Thanks for the question on all of our head Count, we don't actually released our head count numbers, but.
But I will say and I mentioned on the call are on my my scripted remarks that we are ramping down from a specific contract and ramping up on others that is showing that our head count is actually coming down right now because of some of those contracts that are heavily weighted towards labor.
But that is not a number that we specifically release.
We will be growing head count specifically in some areas based on key investments that we're making but oh, we're not releasing the specific head count number so at this time.
Okay.
My next question is.
Are you expecting the large base of Gee, if I am deal to get awarded in fourth quarter of this year.
Hi, Vivek. This is mandates nice to talk with you again and and to build on Julie's previous comment in regards to head count. We offer we have quite a few open positions right now that were hiring for specifically related to the contracts that we're executing on and those that are anticipated.
To transition to a G SIB.
We are from an expectation standpoint, right as we look at the extension.
That is certainly our hope I would say.
As as we continue to work with the customer and <unk>.
Talked on timing if there are any updates right I think we would certainly share those but as of right now yes that is our current expectation.
Okay. Thanks, and the last question is so Oh, Brad might be gross margins trend in second half of the.
Yeah, Great question, Yeah, we saw some headwinds in the first half of the year I think I talked a little bit about these but yeah specifically.
Between.
Some contracts that were ramping down and as you recall, we talked about Virgin orbit coming off our books and that obviously is creating some headwinds for us in Q2, specifically, but we actually see that Oh, we have some contracts that are ramping down that are lower margin than other contracts that we already are anticipating there ramping up that are going to give us that better.
In the second half of the year, we're very confident that it's going to you're going to improve in the second half of the year. So I'm you know I can provide a little bit more detail, maybe offline, but I'm happy to give you a little bit more of that wouldnt be connect later.
Okay.
Sure.
Thanks, a lot and vivek.
One kind of comment that I'll make we we talked about it a little bit in our opening remarks regarding this particular quarter, but I think it's worth reinforcing that right.
Right now we are in the midst of.
<unk> deliberately looking for places, where we can shift away from businesses that are a part of our large portfolio that have margins dealings towards those with a larger opportunity for margin expansion and that's a lot of what I think.
Julian was really getting out as we look at you know sort of how we think about how our backlog is changing how we think about how our mix right from a contract basis is changing we are seeing great.
Indicators right in terms of how we look at our mix of our fixed price mix going up quarter over quarter and I think that those are those are indications when we look into the second half of the year that I think make us feel good.
Once again to ask a question at this time. Please press star one on your telephone keypad, we do ask that you limit your questions to two one question and then a follow up and if you have further questions from there. Please press star one to enter the queue again.
Your next question comes from Louis <unk> with William Blair. Your line is open.
Hi, Laurie.
Andy Andy and Julie and good afternoon.
Tyler.
No.
Julie are you able to quantify the impact.
The portion of the past sub contract ending and.
Are you able to estimate what is the underlying growth of the business excluding <unk>.
APAC headwind.
Yeah, I mean, it's fair to say that so let me give you a little bit of insight specifically on in the past. So you know again he passes the legacy program. We were sub contractor. It really is a two phase oh ramped down so the core in the quarter, specifically, we were notified last quarter wise.
Transition E path into a new prime in that prime was going with who we used to sub contact them through.
So that is shifting but it's really in two parts part of it was completing at the end of Q1 part of it is completing within Q3. So it has been a gradual ramp down over time, but it will not only be specific information about exactly that impact.
But this is why I talked about the fact that you know the quarters can be lumpy, depending on when contracts are ramping down and when they are ramping back up and so you can see that reflected in our results as well as always something that we consider as part of the business.
Great. Thanks, Julie.
And.
<unk>.
Mandy Angelilli congrats on the <unk> six months extension is maybe they're expected to be awarded the production G firm contract at the end of.
This year and with the current annual run rate.
Roughly $17 million should.
Production.
Run rate roughly double that amount.
So I can take the I'll take the first part of that so from a from a production award for clients as.
As we shared at the front of the extension right. We're the sole prime vendor included in that.
You know it puts us in a great position right. When we think about what we're doing to deliver value for the customer and.
And so our chances as we look into the production award.
But ultimately you know obviously as you know Louise.
Decision lies with the customer, but we will do our best right to continue to deliver and I think that's why we why we earn to the phase two extension.
Great.
And Mandy you also mentioned how you receive the sole source aims.
Ta and net involved are no code low code solution.
Is there the potential that aims can be in the same total contract value sizes chief him or her.
Estimate besides for investors on the call.
So I think so first.
One thing worth noting about what you said is there is definitely a.
I would note a pattern here right. So as we think about the work that we've done with <unk> and continue to do the work that we're doing in Ames and the thing that I would kind of reinforces this bread along those is that we absolutely have a very strong partnership and pattern of success associated with being able to do transformation work associated with core business systems.
And in intelligent automation platform form factor from a size standpoint, we I think.
We expect as most of these happen right as you shift from phase one to phase two and then into production.
The contracts goes up significantly.
We don't have an indication of that total value at this point, but I think safe to assume a similar pattern.
Great.
And.
Other question with me.
The equity offering what is the new diluted share count that we should be using.
Let me, let me give you that I've got that handy hold on just one second.
Okay.
No.
Sure.
For the end of the quarter for the average for the quarter I can give you both.
E D.
The ending share count is 155 or 53.
And the average for the quarter is $1 45 469.
Yes.
Great and.
One final one with SG&A.
Continuing to be.
Optimize is there potential for.
Further cut into the second half of the year or are we currently add number.
The optimal level.
Okay.
Yeah, I mean, our question in.
Oh.
Alright, maybe go ahead.
No no problem.
So what I would say is that we are we are in a very good position right now and I think we have a lot to be proud of in terms of progress over the last I've been enrolled for about nine months.
But the kinds of improvements that we're seeing year over year are significant and the thing that I'm, most proud of and that is that.
While we.
Really gotten our operating expense is too good.
We are still growing and I think that it is a testament to the exceptional team that we have and the amount of rigor that we're putting in place associated with how we go after and grow opportunities now from a.
Kind of how we look at the rest of this year I do think that we're in a pretty balanced position right now.
We're always going to look for opportunities for further automation and further optimization and you know I.
I would say I always reserve the right to [laughter] to get better yeah.
Yeah.
Let me add a little bit too just as a reminder, I mean.
We committed to deliver $20 million of annualized savings.
Okay.
Our reductions and I think if you look at the numbers right it could be.
Yes.
Over $30 million in annualized savings comparison to that Q2 baseline that we establish so as.
As we talked about we're very proud of the work we've done to get our cost structure back in line to where we are I would say you know even with this improvement we are committed to continuing to drive improve operating efficiency and that's going to come over time, and we're going to continue to have rigor within our operating expenses I would not anticipate huge shifts.
We talked about this is something we're always going to be focused on it.
Continue to see that in the numbers.
Okay.
And one final one there's obviously a lot of excitement associated with generator.
In the market for both.
Federal defense customers and commercial customers.
You'd have to how that.
It's impacting your pipeline.
Word opportunities as you have your own intellectual property here.
And how is that translating.
Yeah, absolutely I can I can speak to that and what I would say is that.
I think Jonathan of AI being one pocket right of opportunities there, where we see interest in our skill set being able to apply but I would say Louis as we look at pipeline and how we're diversifying it is certainly not limited to that.
The way that I and I think we as a business think about using advanced technologies. Like this is that there are a variety of different tools in the tool belt, but at the end of the day our job in how we approach engagements with customers is that we want to understand what problems, they're trying to solve what challenges. They are facing and then we will bring the <unk>.
Technology to bear right that is.
Crossing that possible and practical line I think what spectacular about where we are right now or is society is that so many of these capabilities that previously lived in the lab have now across a whole range.
The possible practical thresholds and so we are seeing more and more opportunities.
To bring those solutions that we're delivering to our customers.
Great Yeah, I was thinking along the lines of how last quarter you discussed.
Expansion of your partnership with <unk>.
Or their unmanned surface vessel, you're integrating your software.
Their platform and how there is.
Probably other.
Opportunities for similar partnerships.
Yes.
There's a lot of excitement in the market.
Thanks.
Yes, I think that's all that and I think you're right I think there is this interesting intersection that we're seeing emerge between.
Those who are building and have expertise in building and delivering.
These physical platforms.
And organizations like Big Bear AI, where our superpower lies.
Software right and underlying technology that when you put them together.
Got it.
Absolutely are a differentiator and so some of the things I see as we look forward I think we're going to we're going to have more opportunities for partnerships where.
Two organizations can come together and say we've got we've got some really complementary dolphin, let's combine it and take that to market because it will ultimately benefit the customer.
At this time there are no further questions I'd like to turn the call back to management for any closing remarks.
A huge thank you to everyone for joining in for the wonderful and thoughtful question.
As I shared earlier I think we have in the nine months that I've been in this role really focused on being clear right too.
The broad market around what it is that we're focused on who were who we are and what we're setting out to do I think this quarter is another great example of what you can rely on from being very high in this leadership team associated with doing what we say and as we look into the second half of this year, we continue to be excited.
2023 has been from the beginning rates since I stepped into the role a foundational year for this organization and the world is changing around US every day as we go through the fourth industrial Revolution, and Big Barry I has all of the parts to play a very significant role in moving that ball forward, we look forward to reconnecting with.
Everyone next quarter. Thank you so much.
Thank you everyone for attending today's conference call.
This does conclude today's call you may disconnect have a wonderful rest of your day.
Yeah.