AST SpaceMobile, Inc. Q2 FY2022 Earnings Call

Thank you and good afternoon, everyone. Let me refer you to slide 2 of the presentation, which contains our Safe Harbor disclaimer. During today’s call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements on this call. For more information about these risks and uncertainties, please refer to the Risk Factors section of AST SpaceMobile’s Annual Report on Form 10-K for the year that ended December 31, 2021 with the Securities and Exchange Commission and other documents filed by AST SpaceMobile with the SEC from time to time. Readers are cautioned not to put undue reliance on forward-looking statements and the Company specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call. Also, after our initial remarks, we will be starting our Q&A section with questions submitted in advance by our shareholders. Now, referring to slide 3, for those of you who may be new to our Company and our mission, there are over 5 billion mobile phones in use today around the world. But many of us still experience gaps in coverage as we live, work and travel. In this backdrop, AST SpaceMobile is building the first and only global cellular broadband network in space to operate directly with standard unmodified mobile devices based on our extensive IP and patent portfolio. Our engineers and space scientists are on a mission to eliminate the connectivity gaps faced by today’s 5 billion mobile subscribers and finally bring broadband to the billions who remain unconnected. Since our last quarterly business update, we have made strong progress and it is my pleasure to now pass it over to our Chairman and CEO, Abel Avellan, who will take you through right now.

Thank you, Scott. I would like to do a quick technology and industrialization update. Let me start with BlueWalker 3. BlueWalker 3 has been delivered to Cape Canaveral. It is planned to be launched during the early to mid-September window. In parallel to the construction of BlueWalker 3, we are building the next five satellites that are in the initial construction phase. Using designs and parts similar to those in BlueWalker 3, including the FPGA, reaction wheels, and antennas, they are planned to be launched in late 2023. In parallel to that, we also have substantially complete commercial agreements with partners and vendors in order to get access to the components that we will need for the next five Block 1 satellites and the next generation satellites. Also, we’re on target with our extension facility, Site 2, to support our scheduled plan of launches. A little more detail on what happens when we launch BlueWalker 3: two months after the launch, we will have BlueWalker 3 placed into its orbit. We will initiate the initial in-orbit testing. We will unfold the array and deploy the QV antenna to initiate communication. From the launch, over six months, we will start a campaign to test our broadband direct-to-cell phone systems in cooperation with participating MNOs on six continents. We will also be testing the BlueWalker 3 satellite using Nokia and Rakuten infrastructure to interconnect with local operators. As for business momentum, it continues to be strong. We have added three new operators, including a memorandum of understanding with Smartfren Telecom in Indonesia, reaching more than 1.8 billion subscribers that we can access through our global agreements with operators. We have increased our patent portfolio to over 2,400 patent and patent-pending claims to support our expanding competitive advantage. We also achieved an agreement to sell a majority ownership in NanoAvionika for an enterprise value of €65 million. The Company is expected to receive approximately $27 million in net proceeds at closing. Recently, we completed an agreement with Nokia for their 4G and 5G technologies to be integrated into our space network, using the AirScale System, which will serve as interconnection infrastructure between our satellite infrastructure and the MNO infrastructure. With that, I would like to hand it over to Sean, our Chief Financial Officer.

Thanks, Abel. Good afternoon, everyone. These are exciting times for AST, and I want to thank the entire AST team for their efforts in getting the BlueWalker 3 test satellite to Cape Canaveral. There has been an incredible amount of hard work and dedication for this to happen, and it’s truly been a team effort. As I reflect on my first three months at AST, I continue to be impressed by the significant progress our company has made over the past few years. This progress has been recognized through the interest from large important third parties, including MNOs with whom we have agreements representing over 1.8 billion subscribers, and through our recent announcement with Nokia, where one of the leading mobile equipment providers has recognized the potential of our system and is willing to invest significant time and resources to support our efforts. Let me move on to a discussion about some of our key operating metrics. Looking at the first chart, we see that for the second quarter of 2022, we had non-GAAP adjusted operating expenses of $31.8 million versus $29.4 million in the first quarter. Non-GAAP adjusted operating expenses exclude non-cash operating costs including depreciation and amortization and stock-based compensation totaling $3.6 million and $3.4 million in the second and first quarter, respectively. We expect to continue to expand that level of operating expenses for the next two quarters. The $2.4 million increase in adjusted operating expenses compared to the first quarter was related to increased employee costs and other research and development expenses as we ramp up the development and infrastructure investments to support the BlueBird program. Our total property, plant, and equipment increased by $9.4 million in the second quarter, which compares to an increase of $19 million in the first quarter. The $9.4 million and $19 million represent our capital expenditures for those periods. A payment to our launch provider in the first quarter was a reason for the larger capital expenditures in the first quarter. We ended the second quarter with $202.4 million in cash. We believe this cash is sufficient to support our cash expenditures for more than the next 12 months. In addition to this cash on hand, we have been working hard to develop other sources of cash and liquidity to supplement our activities. As our BlueWalker 3 satellite now resides in Cape Canaveral, we are now focusing our investments towards the production of our BlueBird satellites. We believe the key advantage of the SpaceMobile system is its ability to be deployed in a phased manner, targeting a modest number of satellites to provide limited coverage to specific countries. We currently estimate the capital expenditures required for the design, assembly, and launch of our first 20 commercial satellites to be approximately $300 million to $340 million. This is an increase from a midpoint of $14 million per satellite to $16 million per satellite, due to several factors. The initial five satellites, which we expect to launch in late 2023, will utilize components from our BlueWalker 3 test satellite design. While this will enable us to construct and launch these satellites sooner, it also results in an increase in cost per satellite due to the current higher costs of these first-generation components. Preliminary cost trends are based on certain assumptions and information currently available to us and are subject to change based on several factors described earlier. I am encouraged by the progress that the team has made and I’m excited about the Company’s future as we transition from the development phase to commercial satellite production. Thank you for your continued support of the SpaceMobile mission. With that, I’ll turn it back to Scott.

Thanks, Sean. Before we go to the queue of analyst questions, I would like to address a few of the questions submitted ahead of the call by our investors. Operator, could you please start us off with the first question?

Terry from Georgia asked, what is the ramp-up plan for BlueBird launches and deployments post-production?

Thank you, Terry, for the question. Our plan is to use our two production facilities in Midland, Texas. One, which is the production facility that we used to build BlueWalker 3, and Site 2, combined with Site 1, will allow us to scale up to six satellites per month in production. We’re taking a phased approach. We are first building our next block of satellites using similar technologies, and a combination of our current facility and Site 2, to support the launches we have next year and then to follow-up and extend our site to support the six satellites per month production capabilities.

Steve from Arizona asked, will the proceeds from the sale of AST’s stake in Nano and equity sold under the B. Reilly facility generate enough proceeds to complete phase 1 of the SpaceMobile constellation, or will other actions such as tapping into the mixed shelf offering be needed?

Steve, thanks for that. As we disclosed in our filings, we look to manage our business with liquidity for at least the next 12 months. And as I stated earlier, we believe we have enough cash and resources to fund our activities for the next 12 months. Having said that, we will need to raise additional capital before entering into Phase 1 commercial service with 20 satellites. As part of this capital raising effort, we have been working on a number of fronts, including the filing of a $500 million shelf for debt, equity, and preferred. We sold Nano, which will provide us with $28 million in gross proceeds. And we are in advanced stages of securing an equipment facility that will help us purchase equipment for our manufacturing facility. We will be opportunistic in raising this capital and strategic, and continue to raise capital from a variety of sources to fund out our plan.

Rick from the Netherlands asked, can you please explain the expected average cost of the BlueBird satellites compared to the cost of BlueWalker 3?

Yes. Rick, the BlueWalker 3 costs are the result of one-time research and development, building out supplier relationships, and seeing what works and what doesn’t. A lot of those expenditures will be done once but not again. Our Block 1 BlueBirds will benefit from these learnings in design and manufacturing, material selection, as well as scale economics from prior upfront investment. The increase in our capital cost estimates for the first 20 satellites was due to higher costs from using older generation BlueWalker 3 parts and general inflation and supply chain issues. This has increased our estimated per satellite costs by about 14%.

Ashwin from Toronto asked, can you stress test BlueWalker 3 in Ukraine? Starlink is already in heavy use there, and SpaceMobile would definitely add value by connecting emergency services in the eastern southern parts of the country to broadband internet?

Our technology architecture, which does not require a user terminal and is designed to connect directly with unmodified handsets, is ideal when terrestrial networks are unavailable. We would love for our solution to someday support humanitarian missions and save lives, which applies to natural disasters, outages, or other emergencies. However, we do not currently plan to test BlueWalker in Ukraine.

Andrew from Pennsylvania asked, what do you anticipate being the biggest challenge for the launch and deployment of BlueWalker 3?

Thank you, Andrew. We’ll be continuously testing BlueWalker 3 all the way until we encapsulate it into the launch vehicle. That is planned for a launch scheduled for early to mid-September. Between now and then, we’ll continue a significant amount of testing and also continue our preparations to be ready to launch by that date. All of that is being performed at the Cape and in Midland, where this satellite will be launched. Once launched, we will conduct in-orbit tests to ensure everything continues to work as planned and that we achieve our orbit, followed by deployment and continuing test campaigns with our network partners worldwide. We have test plans lined up across all continents where there are populations, with many testing facilities and locations already arranged.

And with that, I’d like to thank our shareholders for submitting these questions. Operator, let’s open the call to analyst questions now.

Our first question is from Griffin Boss with B. Riley.

So, first off, we’ve obviously seen some strength in the stock recently. I’m not going to speculate on the exact drivers there. But it seems like the significant rally on the 11th came on the heels of the SEC announcement that SpaceX wouldn’t be awarded the $900 million from the RDOF fund. Whether or not that contributed to the rally is anyone’s guess. At the end of the day, you’re not competing directly against Starlink, and the RDOF’s unrelated to ASTS, given that it’s focused on fixed broadband. But I did want to come back to that topic of government funding in general. We know you’re vying for a piece of the 5G fund in the U.S. I’m curious if you could provide any other insight into whether there are other government programs already out there internationally that you’re looking to participate in, or if you expect to see many of those opportunities like that outside the U.S. in the future?

Hi, Griffin. It’s Scott here. First off, we continue to believe that we qualify under a prospective fund for 5G in the U.S. Details have not been released as it’s still in process. But we believe we qualify based on prior rulemaking. This creates an opportunity for us. Globally, there are similar types of funding available. We haven’t discussed those specifically, but our message has been well received. Apart from grants, there’s also government-supported debt available. Our story continues to resonate well with governments and regulators. As we get closer to launch, and we have delivered a satellite to Cape Canaveral, that tangible milestone has been powerful with various audiences. We believe we qualify for the prospective FCC fund, but we are currently in a wait-and-see mode.

Next is related to the upcoming BlueWalker 3 launch and subsequent testing. If everything goes according to plan without issues, your ability to sign deals becomes much simpler. I know you mentioned a few more deals in the quarter, that was good to see. The BlueWalker 1 launch in 2019 was the basis for investment from Vodafone, Rakuten, and A&T. Have you been in talks with additional MNOs that may have indicated a willingness to sign MOUs if the BlueWalker 3 testing is successful?

At this point, we’ve signed agreements with a considerable number of global MNOs, approaching 2 billion subscribers under some form of agreement or understanding. The message has continued to resonate well. Those tangible milestones, such as the delivery of the satellite, are significant for our customers and regulators. There are a few large MNOs, with over 100 million subscribers, that we have not signed yet. Generally speaking, we’ve made substantial progress with the top MNOs that are not in conflict with Vodafone or based in China. We’re happy with the progress we have made at this stage.

I know you mentioned the Nokia deal, and I was hoping you could elaborate a bit more on that partnership, and the role Nokia is playing in the rollout and commercialization of SpaceMobile. How is this agreement different from other MNO agreements we have seen in the past?

Absolutely. Nokia is among the top three global providers of RAN network hardware and software. They sell to the same customers we are targeting. Their technology supports the wireless companies’ networks and is essential for building out their infrastructure. They, along with Rakuten, one of our top investors, supply equipment that will be part of our MNO network, connecting to our backhaul. Having a leader like Nokia working with us is a powerful indicator, and their off-the-shelf hardware and customized software will be extremely valuable for our MNOs, allowing them to scale quickly.

Our next question is from Bryan Kraft with Deutsche Bank.

Great to see the progress with BlueWalker 3 and the launch coming in September. I wanted to ask about the timing of the five BlueBirds that will launch in late 2023. I believe that represents roughly a two-quarter postponement from your disclosure in May. If that’s right, can you talk about the factors behind the timeline change for the launches? What is your overall timeline for commercializing the BlueBirds and generating revenue from the satellites?

The planning to launch these five satellites on a single Falcon 9 launcher is intended to begin monetizing these initial satellites with a service that is not continuous but allows us to start generating revenue earlier. We are planning the launch for late 2023, and the idea is to reuse elements of the BlueWalker 3 design as we adapt and develop the next generation of satellites. Our plan is to strategically produce components for them, allowing us to monetize sooner rather than waiting for a complete block of satellites.

So, it sounds like you anticipate launching late 2023, early 2024; is that correct?

Yes, that's correct. Very late '23 or early '24.

Okay, great. How confident are you in that timeline for late 2023? You seem to have a lot more pieces in place now.

Yes. Earlier, we announced we have a reservation for that launch. We’re taking advantage of everything we have learned and built for BlueWalker 3. There are many lessons learned applied to our processes. As we repeat the production of satellites, the pace will accelerate, which supports our confidence in this approach.

Our next question is from Caleb Henry with Quilty Analytics.

A few questions for me. Could you share how the first five satellites will differ from the remainder of the Block 1 satellites, the other 15?

Yes. There are two main differences: size and mass, as well as the use of ASICs versus FPGAs. Those are the two distinct differences between the two satellite types.

How much of a size difference are you looking at between the two different designs?

I would say around twice the size difference between one and the other.

The latter ones, those with ASICs, will be the larger spacecraft?

No, they will be the largest ones.

You mentioned that you have testing for satellites in California, while manufacturing is in Texas and the launches are in Florida. Are there plans to consolidate testing to a location closer to manufacturing or launching, or is that not a significant issue with having it in California?

No, that was really a one-time event. For all subsequent satellites, the environmental testing, which is one of many tests, will be performed in-house. We will not need to transport the BlueBird ones outside our facility in Texas.

As for launching the remainder of the Block 1 satellites and going beyond, do you have any timelines planned for announcing additional launch orders, or do you already have launch capacity secured with SpaceX beyond these first five?

Yes, we have a multi-launch agreement with SpaceX and have made prepayments for additional launches. We have contracted many of the component suppliers for the first five satellites, and for the next generation, many components have already been contracted. We aim to be smart about long lead items, especially in light of the supply chain disruptions. While we won't announce when we'll launch the additional satellites, we are focused on increasing our production efficiency.

Our next question is from Landon Park with Morgan Stanley.

Regarding the BlueWalker 3 testing, Abel, can you talk about the main issues you think might arise during testing? What are the biggest hurdles to overcome? What type of disclosure should we expect throughout that six-month testing process?

To answer that, I will need to split it into phases. The first test occurs after we launch and get into orbit. We will perform an in-orbit test to verify that all the components arrive properly in orbit, ensuring all functions work as expected, which we believe will happen in the first two weeks post-launch. Following that, we will deploy the array, and we have multiple planned tests with operators using the satellite technology. The challenge lies in coordinating the logistics of these tests across various testing sites, but we have plans in place.

Which of these do you view as the biggest hurdle to overcome?

It’s difficult to pinpoint a single hurdle. We have dedicated over a year to testing and verifying that all systems will function as planned. As we launch, we are confident everything will operate effectively.

Can you remind me of the expected throughput per device with BlueWalker 3?

We expect 5G and 4G data rates. BlueWalker 3 is a test satellite, and we will fine-tune the network together with the operators. We believe that we will comply with the FCC’s 5G specifications starting with BlueWalker 3. Additional satellites will improve upon this.

I want to clarify. With BlueWalker 3, the service throughput will be more limited because your testing is in such a narrow band, correct?

No, our experimental license allows us to conduct tests within an allocated spectrum. We can expect roughly 1.5 bits per hertz on the uplink and 2 to 3 bits per hertz on the downlink.

Is that 10 megahertz TDD, I guess?

No, FDD 10 megahertz.

So, it sounds like double-digit downlink, is that correct?

Yes.

Have you discussed the type of throughput per satellite expected for BlueWalker 3 and the ratio to the BlueBirds?

The capacity per satellite is around 1.8 million gigabytes per month, which will increase as we launch more satellites. Our production satellites will also enable MIMO functionality.

Could you unpack that throughput in terms of gross and usable throughput?

That is usable throughput into handsets, which is billable.

I’m just curious about the underlying performance of the satellite. What is the throughput in terms of gigabits per second?

The throughput is approximately 9 to 13 gigabits per second, and that applies to the BlueWalker 3.

That’s very helpful. And then, Sean, just one final question from me: have you sized the funding gap you’re expecting?

We don’t disclose that yet. However, we have provided guidance on how we’re funded for the next 12 months, including updates on our 20-satellite configuration.

It sounds like your quarterly burn rate shouldn’t exceed $50 million over the next year on average?

We’re expecting cash operating expenses around $30 million. CapEx will fluctuate but could be in that range.

We have reached the end of the question-and-answer session. I will now turn the call over to Scott Wisniewski for closing remarks.

Thank you, operator. Our company is building a space-based cellular broadband network designed for the phone in your pocket today. We want to thank all of our shareholders for joining the call and their continued strong support of the AST SpaceMobile mission. Thank you.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.