AST SpaceMobile, Inc. Q1 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the AST SpaceMobile First Quarter 2023 Business Update Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Scott Wisniewski, Chief Strategy Officer of AST SpaceMobile. Please go ahead.

Thank you, and good afternoon, everyone. Let me refer you to slide two 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 31st, 2022, 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 three. For those of you who may be new to our company and our mission at AST SpaceMobile, there are over five billion mobile phones in use today around the world, but yet many of us still experience gaps in coverage as we live, work and travel. On top of this, there are billions of people without cellular broadband who remain unconnected to the global economy. The market opportunity for us is large and the problem we are solving is important and touches nearly all of us. In this backdrop, AST SpaceMobile is building the first and only global cellular broadband network in space to operate directly with everyday unmodified mobile devices. And this is supported by our extensive IP and patent portfolio. Over the last few weeks, we have made significant steps to confirm our technology, opening new business opportunities. It is now my pleasure to introduce Chairman and CEO, Abel Avellan, who will summarize what we've been up to since our last public update six weeks ago. He'll be providing important context for what these activities mean to our company, our partners and our shareholders. Abel?

Welcome to our Q1 2023 key highlights. We had a significant quarter to report. To start, we want to highlight a few key messages from our update today. First, we made history by successfully completing the first direct voice connection from our BlueWalker 3 test satellite to everyday smartphones, establishing our leadership in the market we pioneered. This achievement not only reduces business risks but also opens up new crucial opportunities for us. The success of this initial call validates our technology and confirms our potential to access over 5 billion mobile devices in circulation. Additionally, this first call broadens our opportunities to secure funding for our business, including new options that we are consistently exploring. Since our last update, we achieved a historic milestone by completing the first direct voice call from our BlueWalker 3 test satellite to regular smartphones, utilizing AT&T spectrum and a Samsung Galaxy S22, among other devices. This was a remarkable technical accomplishment resulting from years of research and development, hundreds of millions in investments, and an extensive patent portfolio covering over 2600 patents and pending claims. We are pleased to collaborate with AT&T, one of our close network partners. As shown in our graphic on page five, AT&T has placed our achievement in significant historical context, comparing it to the first phone call, the first television transmission, and the first satellite content transmission, among others. This is truly astonishing. We continue to build strong momentum within the wireless industry. This milestone has enabled us to maintain strong momentum with major players in the wireless ecosystem. Margherita, CEO of Vodafone, placed our accomplishment in significant historical context alongside the first text message sent by Vodafone 30 years ago, and Chris from AT&T Network echoed similar historical remarks. Currently, we have approximately 40 mobile network operators around the world under preliminary agreements, representing key industry leaders. Some of these partnerships are substantial, with robust executive backing. They are actively involved in helping to bring this technology to fruition. This recent technical milestone will further accelerate our relationships. So, what does this technical achievement mean? It confirms our system architecture, indicating that we do not need to alter our approach or redesign our satellites. Specifically, it confirms that no significant modifications are required for our Block 1 BlueBird or our technology roadmap. As a result, we are ramping up manufacturing and material sourcing at our Midland facilities. The successful first call also confirmed our technology’s compatibility with everyday smartphones. We are equipped to integrate with the existing wireless ecosystem, including spectrum. The pressing question for BlueWalker 3 is what comes next, specifically the demonstration of 4G and 5G capabilities for download speeds, which we are progressing towards while confirming we can support signal strength consistent with those speeds. Our testing has verified our ability to work with everyday smartphones and devices, whereas older architectures may only support SOS or text features or require extra hardware. We are developing the first and only system to use low-Earth orbit satellites to connect to the cell phones you currently use at broadband speeds. Our technology is designed to work with over 5 billion phones in circulation on carrier spectrum, without requiring modification, special frequencies, apps, or chipsets. Our goal is for users to be able to make calls simply by downloading or dialing, without any intermediary steps. This positions us access to the $1.1 trillion wireless industry and represents a significant advantage in a market where we believe we are the first movers. Moving on to our update regarding the industrialization of our patented technology, I am pleased to report that we are on track for the production of our next five Block 1 satellites, slated for a Q1 2024 launch. Manufacturing is already underway at our facilities in Midland, Texas, with the images on this page showcasing our second production site and initial manufacturing efforts for Block 1. We remain on schedule to launch the five Block 1 satellites in Q1 2024. Now, let's discuss our technology roadmap, which is designed to evolve as we build and develop new advanced satellite architecture. We are continuously working to improve both our unit costs and the capacity we can deliver to users. With BlueWalker 3, we have shown the ability to connect directly to handsets, and we expect a tenfold capacity improvement with Block 1 and another tenfold increase with Block 2. Thus, we are not only reducing our unit costs but also enhancing our technology and increasing our network capacity as we add more satellites. This is possible due to our patented technology, our integrated approach to building and designing satellites, and our ownership of our software, firmware, and custom ASICs. Now, I'll hand it over to Sean for the financial overview.

Thanks, Abel. Good afternoon, everyone. Since our last earnings call, AST has achieved a historic milestone by making the first voice calls connecting smartphones to our BlueWalker 3 satellite. I want to commend our team for this significant accomplishment, which has been recognized and validated by some of the leading wireless companies worldwide, including AT&T and Vodafone. In addition to this breakthrough, we are actively executing our strategic plan. We have made notable progress on our manufacturing goals and are looking forward to the next 12 months, during which we expect to launch five Block 1 satellites and move towards commercial service initiation. Now, let's discuss some key operating metrics for the first quarter displayed on slide 11. According to the first chart, our non-GAAP adjusted operating expenses for the first quarter of 2023 were $40.3 million compared to $39.1 million in the fourth quarter of 2022. These expenses exclude non-cash operating costs, such as depreciation and stock-based compensation, which were $3.5 million and $4.3 million for the fourth and first quarters, respectively. The increase in adjusted operating expenses by $1.2 million from the previous quarter was largely due to a $1.7 million rise in research and development expenses, mainly from our collaboration with Nokia on developing our gateway infrastructure. Our engineering services expenses increased by $0.6 million while our general and administrative expenses decreased by $1.1 million, thanks to effective cost controls. We anticipate maintaining non-GAAP adjusted operating expenses in the high 30s for at least two more quarters as we advance crucial R&D for our BlueBird satellites and the planned launch of five Block 1 BlueBird satellites in early 2024. Turning to the second chart, our capital expenditures in the first quarter reached $13 million compared to $10.4 million in the previous quarter. This increase reflects our commitment to building the five Block 1 satellites and includes capitalized materials and ongoing investment in our assembly process. As we move forward, our capital expenditures, which have averaged between $10 million and $13 million per quarter, will rise to support the development of our Block 1 satellites, with anticipated launches in the first quarter of 2024. We expect total capital expenses for the five Block 1 satellites to be between $100 million and $110 million, of which $40 million has already been recognized as of the end of the first quarter. In past quarters, we provided estimates for capital costs of our Block 2 satellites, which include materials and launch expenses. Last quarter, we estimated costs between $16 million and $18 million. Moving forward, we plan to offer these estimates annually unless significant changes occur, believing that annual reviews will yield a better understanding of the trends associated with these long-lived assets. By the end of the first quarter, we had capitalized costs of $92.5 million for BlueWalker 3. Following successful testing, including voice calls, we have confirmed that BlueWalker 3 is now considered operational for accounting purposes, and we will start to depreciate this asset over the next 16 months. This depreciation will lead to increased non-cash depreciation charges exceeding $17 million per quarter until the asset is fully depreciated. On the final chart, we concluded the fourth quarter with approximately $185.7 million in cash on hand. As noted in our 10-Q, we believe this cash, along with our capacity to raise funds through existing facilities, is adequate to support our expenditures for at least the next 12 months. We have received several inquiries regarding our cash maintenance and investment strategy. Our cash investment policy, established last year, prioritizes principle protection, liquidity, and returns. Currently, we invest most of our cash in one of the largest U.S. government money market funds managed by JPMorgan Asset Management. Next, I’d like to summarize our capital raising efforts to date. Since our inception, we have raised over $700 million to fund our development. It's worth highlighting that our Founder and CEO, Abel, invested the initial risk capital in the business and remains the largest shareholder without drawing a salary, aligning his interests with those of our shareholders. Additionally, we have strategic investors who sit on our board and have made two investments in the company. We also made a notable sale of our stake in Nano, realizing a nine times return on our investment when we determined it was no longer aligned with AST's strategy. As we de-risk our business through milestone achievements, we target our fundraising efforts accordingly. Our recent equity raise in the fourth quarter followed the successful launch of BlueWalker 3, highlighting investors' recognition of our milestones as opportune moments for new or increased investments. We are diligently exploring a variety of capital sources to support our operations efficiently. While these efforts are still in the early stages and there's no guarantee of securing favorable terms, we are optimistic about our initial progress. We are looking into raising capital through export-import agencies and possibly accessing the debt markets over time. The modular nature of our business plan could enable us to achieve operating cash flow from a modest part of our planned constellation, allowing access to debt markets to facilitate our development. Furthermore, we are focusing on securing capital within the wireless ecosystem by developing close relationships with key industry players, such as MNOs and space companies. We view this collaboration as essential to commercializing our business and funding our initiatives. With that, I will conclude the presentation portion of our earnings call and turn it over to Scott.

Thank you, Sean. Before we go to the queue of analyst questions, we'd 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?

Josiah from Michigan asked how does AST SpaceMobile plan to maintain their lead in the D2D market?

Thank you, Josiah, for the question. Well, first, we are the first and only space-based cellular broadband system. Second, we invented this new cellular broadband market and hold over 2600 patents and patent pending claims. Third, we are currently operating the largest communication array in low earth orbit for commercial use and have validated our technology in orbit. We're far ahead of any other system with approximately 40 wireless operators around the world on preliminary agreements and agreements of understanding. These relationships continue to accelerate as we continue to meet our technical milestones. Fourth, we have a system that works with the phone in your pocket to support access to over 5 billion phones in circulation today. And fifth, we are deeply invested in vertical integration. We own our own ASIC development software and literally we start with metal and composite and manufacture the majority of our satellite parts. We believe all these points provide us with a strong lead in this market for years to come. Thank you.

Leyden from New Zealand asked what are some upcoming FCC milestones that investors should look out that are relevant to AST?

Thank you. I'll take that one. We have been in front of the FCC for several years now talking about the potential for cellular connectivity from space and also the unique capabilities that our technology is designed to support. More recently, over the last six months, the FCC has taken a handful of steps that we support, including starting a rulemaking process specifically for cellular connectivity from space. And they've also dedicated more resources to reviewing space applications by putting in place a standalone space bureau. And then just last week, we took important steps on two different regulatory processes with the FCC. First, we and AT&T made filings regarding a spectrum lease agreement between us, one that covers the vast majority of AT&T's low band spectrum assets. This filing requested a waiver to lease AT&T spectrum to us for space mobile service. And second, we and AT&T and others also submitted comments for the ongoing rulemaking process for supplemental coverage from space.

Brian from Connecticut asked. There are some concerns about finding confirming launch dates and costs. Can you provide details of the ongoing discussions with launch service providers?

Sean, I'll take this. Thanks, Brian. We signed an agreement in February of this year to launch our Block 1 satellites on a dedicated SpaceX Falcon 9 rocket in the first quarter of 2024. In terms of future launches for Block 2, we are in active discussions with a variety of operators who we feel have enough capacity and manifest openings to support our plans. In order to increase our flexibility, we have also developed a configuration which makes our Block 2 design compatible with multiple launch vehicles. And look, as the launch market evolves, we believe we are a very interesting customer to launch providers who are looking for anchor customers who have the volume and cadence to drive their business.

Leyden from New Zealand asked how many months post-launch are BB1s expected to need before they begin commercial service?

Thank you, Leyden. After all the learnings that we have had with BlueWalker 3, which included the initial deployment, initial flight optimization and then the initial broadcasting of cellular signals, we estimate that it will take three to four months to activate for commercial service, post-launch separation. That includes the in-orbit acceptance test of the spacecraft and the initial fine-tune of the system prior to starting utilizing the service interacting directly with end users.

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

Thank you. Our first question comes from Mike Crawford with B. Riley. Please proceed with your questions.

Thank you. With BlueWalker 3, I know you started the optimization process by turning on kind of one micron of the array at a time. And until doing those first calls, but with a fully integrated array, how would you characterize the capacity that you now expect to achieve with that satellite and what you maybe theoretically thought you would get out of that satellite prior to launch? And then kind of where we are on that process today with that BlueWalker 3 satellite.

Basically separate, deployed, light pointing towards the earth and test our end-to-end Doppler delay compensator. Our patented Doppler delay compensator. Then we start the process turning up the array from two elements to the full type of elements. At this point, we have completed all that process culminated into doing end-to-end connectivity directly to Samsung devices, but others as well. And at this point also we have completed measurements of signal strength at the full array level where we are getting around three bits per hertz, sufficient to support 4G and 5G data rate speeds, which was the intended purpose of BlueWalker 3.

Okay. Thank you, Abel. And just to clarify, the order of magnitude improvement in capacity you expect with the Block 1 BlueBird. Is that per satellite or is that for the Block of five?

No, that is per satellite. I mean, each satellite in Block 1 will have ten times capacity of what we can get with BlueWalker 3. Block 2, we have another ten times, 100 times a capacity improvement compared to BlueWalker 3. This allowed us to really continue adding significant cost reduction per unit cost delivered to the cell phone. And that is thanks to our vertical integration. So we're fully vertically integrated. We own all the software, all the hardware, all the custom ASICs that allow to get to this point. Also that combined with the size of our array that allowed us to basically scale significantly the capacity as we continue to develop our technology from Block 1 to Block 2.

Okay. Thank you. And the last question for me just relates to Beamforming. So you can dynamically point where you want to put the power down to make a connection. And I'm wondering if you could share how accurate you're able to do that versus expectations and then signal strength say in the center of a beam versus on the edge once you're trying to support multiple calls from the same locale.

One of the key features of our technology is the ability to reuse terrestrial spectrum. This means we can direct signals very precisely into specific areas where there are no terrestrial signals, allowing us to use spectrum from global terrestrial operators in regions where their services are not deployed or functioning properly. We have demonstrated this capability with BlueWalker 3. We recently filed an agreement with the FCC regarding our use of spectrum in collaboration with AT&T, which utilizes this feature to accurately direct signals into areas where terrestrial coverage is either absent or inadequate. The precision of this technology ranges from one to two and a half degrees, depending on the size of the array. It is designed to dynamically allocate spectrum as our system is software-defined, allowing us to activate and deactivate capacity as needed by the operator.

Excellent. Thank you very much.

Thank you. Our next question is from the line of Caleb Henry with Quality Space (ph). Please proceed with your questions.

Hey, guys. A few questions from me. I noticed in your 10-Q last quarter and this quarter that the description of the total constellation size is now 95 satellites, not 110. So I was wondering if you could walk us through some of the changes to the architecture that are now based on a slightly smaller constellation.

But we have now confirmation of the signal strength by elevation, and we were reserving some margins on how to do this. Also we feel that with the signal strength by elevation, which basically relates to the number of satellites that you need for continuous service on a global basis. Now we are confirming that we need around 90 satellites for global broadband connectivity directly to handsets on a global basis. Both classes have various requirements on a global basis.

Okay. And can you also share? It looks like there's 25 BlueWalker 3 kind of clones before the transition to the BlueBird. So kind of is there a reason why that transition was made as well?

No, there is five which are in construction that what we call Block 1s. They had a ten times capacity improvement even though that they are the same size as BlueWalker 3. The follow on next batch of satellites 25 Block 2. They are larger than the current BlueWalker 3. The reason for being larger in combination with our custom ASICs is the ability to have another ten times capacity improvement in term of total amount of users, total amount of gigabytes that each of the satellites will support. We continue to add them into the constellation.

Okay. And does that mean between the slightly larger satellites and the better than expected quality of the spectrum usage, does that mean that you're going to get more than 9 to 13 gigabits per satellite? I think that was the previous benchmark.

We're not providing guidance, but to the new capacity, but we are still within the range that we have provided before.

All right. Thank you.

Thank you. At this time, I'm showing no further questions. I'd like to turn the call over back to management for closing remarks.

Thank you, operator. As Abel discussed, this was a historic quarter for us, completing the first ever space-based voice calls using everyday unmodified smartphones. We really appreciate everyone for joining the call and we appreciate your support and questions. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.