Earnings Call Transcript - ASTS Q4 2021

Operator, Operator

Good day, and thank you for standing by. Welcome to the AST SpaceMobile Fourth Quarter 2021 Business Update Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Wisniewski, Chief Strategy Officer of AST SpaceMobile. Please go ahead.

Scott Wisniewski, Chief Strategy Officer

Thank you, and good afternoon, everyone. This is Scott Wisniewski, Chief Strategy Officer of AST SpaceMobile. 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 Form 10-K for the year ended December 31, 2021, 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 session with questions submitted in advance by our shareholders. With that, I would like to introduce Chairman and CEO, Abel Avellan; and Chief Financial Officer, Tom Severson, to the call as well. Abel, over to you.

Abel Avellan, Chairman and CEO

Thanks, Scott. This business update marks our first year as a public company. For those new to AST SpaceMobile, I would like to summarize some key achievements and remind you about some of our fundamentals. We’re pursuing a huge market opportunity to connect people everywhere using our patented space-based cellular broadband technology. There are approximately 5.3 billion mobile phones worldwide, and the wireless service market generates over $1 trillion in annual revenue. According to GCMA, approximately half of the world population do not have cellular broadband. Our partners are industry-leading global companies like Vodafone, American Tower, and Rakuten—indisputable leaders in the industry where we participate. We believe that our service is going to be indispensable, and we think that broadband connectivity is a human right that allows access to knowledge and information on a global scale. By the way of a quick update, we are on schedule for the planned launch of Blue Walker 3 this summer. We now have agreements and MOUs with mobile network operators that represent over 1.8 billion subscribers. We now have over 2,100 patent and patent-pending claims. Over the last few months, we've achieved major milestones in the industrialization of our technology, including the acquisition and development of our 100,000 square-foot second facility in Texas. Together with our current 85,000 square-foot headquarters, this facility increases our overall manufacturing space in Texas to a total of 185,000 square feet. We are now on a mission to industrialize our technology to enable space-based cellular broadband connectivity to be available everywhere. Now, moving on to the Blue Walker 3 update. Let’s start with a little more detail on Blue Walker 3. The satellite is on schedule for our planned summer launch, and all the testing and integration are nearly complete. What is left for us is to store and pack the satellite into its final configuration. After the final RS testing is completed at our Midland facility, what you see in this picture is Blue Walker 3 fly microns preparing to enter the final RS compatibility test. First, is the launch of Blue Walker 3. Turning to Page 5, prior to the final environmental test, we will need to store and pack this spacecraft for the last time. This process involves storing a 693 square-foot phased array into our launch vehicle adapter, which is then mounted into the Falcon 9. The process of storing our satellite is an engineering challenge that has taken the company over two years to solve and test. After the last environmental test is completed, a process that we expect will take approximately four weeks, we plan to perform the final inspection on the spacecraft prior to moving it to Florida for launch. After two years of hard work and over 2,100 patent and patent-pending claims, the company is confident it has created many of the key processes designed to enable our cellular broadband connection from space. Included, but not limited to, the following: the ability to design, build, and produce the items that are the building blocks of our spacecraft; the technology to enable our Phased Array to connect directly from space to regular and modified mobile phones; the ability to control our system that can deploy a satellite with an aperture of 693 square feet into a cubic volume capable of use with multiple launch partners; and last but not least, we have developed the knowledge to vertically integrate the key major components of the build and construction of our spacecraft while continuing to expand our IP portfolio. Now moving on to the industrialization update. In parallel with our technology development efforts, we have also been taking steps toward the industrialization of our technology. Regarding the extension facility update, in December, we purchased a second facility in Texas, a short drive from our current headquarters in Midland. The property offers several buildings with high-quality shells so we can build out our 100,000 square feet of manufacturing space. We have pre-installed high capacity grids and additional land for further build-out if required. This facility will help to grow our potential monthly satellite production from two satellites to six satellites per month or possibly more, and we are also aligning our supply chain to this target. We have earmarked approximately $20 million of additional investment for the extension facility and are making great progress on the renovation. This facility will be highly automated and will focus on micron assembly and related solar panel assembly for our spacecraft. We consider the purchase and planning around the extension facility as a major step for the industrialization of our technology. Now, I will pass it off to Scott to provide an additional business update.

Scott Wisniewski, Chief Strategy Officer

Thank you, Abel. Starting on Page 9, in addition to the great technology and industrialization progress to date, the AST team also continues to advance the ball on the business side. We’re building out the commercial opportunity, enhancing our organization. On the commercial side, we recently announced a new MOU with Orange group, an operator with over 220 million subscribers globally. This MOU will facilitate additional Blue Walker 3 testing in one African country and will also explore opportunities for further collaboration to serve their subscribers. With this signing, there are now 1.8 billion subscribers represented by mobile network operators with whom we have agreements in MOUs. I will talk a little bit more about this opportunity in a moment. We also signed a multi-launch agreement covering Blue Walker 3, the first BlueBird satellite, and a framework for future launches. This is an important milestone that brings increased certainty for our business beyond Blue Walker 3. Lastly, despite it being early days on the regulatory front, we remain active globally, both independently and together with the mobile network operators, targeting approvals for testing and commercial service, supporting our base of initial regulatory approvals for the use of V band and 3GPP frequencies in six countries. On the organizational side, we increased our employee count by 30 during Q4, which brings our full team to 566, comprised of 386 full-time employees and consultants and 180 dedicated third-party engineering staff as of December 31, 2021. As Abel mentioned, we also continue to actively protect our IP and increase our total patent and patent-pending claims to 2,100. This IP portfolio continues to expand and provides us a competitive advantage. Moving to Page 10, given the recent activity here, we wanted to highlight our mobile network operator relationships as they are critical to our business and go-to-market strategy. These agreements and understandings that support the 1.8 billion subscriber number have been put in place starting in 2018 to facilitate the development of our Direct-to-Cell technology and lay out the key commercial elements of our MNO relationships. Many of the key terms of these agreements are intended to mirror agreements with our strategic partner Vodafone, and they leverage the spectrum and technology found in the over 5 billion mobile phones in use today. Ultimately, there are a few factors that we expect will drive success with our commercial relationships. First, MNOs like the solution because it will fix a real network problem amidst insatiable demand. It will improve their service, drive new revenue, and could support churn reduction goals. Users will like the solution because it will fix a real network problem, and it will be easy, with no new hardware or software required. They just need to click yes when they receive a text message offering service. The solution is a good one for AST SpaceMobile because the super wholesale model, where the MNO is our customer, is designed to limit our operating expenses. MNO agreements with revenue share will let us participate in the upside, and the easy signup process allows us to grow subscribers quickly with limited friction costs once our network is operational. Now with that, it is my pleasure to hand it off to Tom for the financial update.

Tom Severson, Chief Financial Officer

Thank you, Scott. Since our last business update, our team has been preparing the BlueWalker 3 test satellite for our summer launch, and we’ve been executing on the setup of the company’s industrial infrastructure to be able to meet our goal of producing six satellites per month during 2023. To this end, we are laser-focused on the build-out and preparation of our facilities at our new Midland AIT facility. We expect to complete the first phase of the clean room build-out during Q2 and are making other investments to construct what will be a state-of-the-art satellite production line with automated machining processes. We are also working on the build-out of our network operation center and satellite operation center, which will be located at our 16,000 square foot engineering office located in Lanham, Maryland. Simultaneously, we are also integrating our ERP and enterprise systems, which will support the industrial manufacturing environment for the production of our BlueBird satellites. Also, in preparation for production, our supply chain team continues to make solid progress with the procurement of long lead-time subsystems and components for our BlueBird satellites. Based on our progress to date, we continue to reaffirm our cost estimates to build and launch the first 20 satellites with an average cost in the $13 million to $15 million range per satellite. For the full constellation, we are still targeting to build and launch 168 satellites for an average cost of approximately $11 million each. Now, to move on to the Q4 financials and current operating expense trends. We ended 2021 with $321.8 million in cash and $5 million in total debt, which was incurred in connection with the Q4 purchase of our new AIT facility in Midland, Texas. During the fourth quarter, our cash operating expenses, including engineering services, R&D, and G&A, increased to $28.5 million, an increase of $7.5 million compared to the prior quarter. This was due to increases across R&D engineering and G&A. These increases resulted from the company’s efforts relating to the completion of the Blue Walker 3 satellite and in preparation for the BlueBird satellite production, investments in our engineering team, expenses related to the setup of our supply chain for our BlueBird satellites, and other improvements to our operating infrastructure. During the fourth quarter, our cash G&A costs were $10.7 million, and we expected our quarterly G&A costs to remain roughly in this range through the end of 2022. During the fourth quarter, our cash engineering costs were $9.9 million, and we expect these costs to continue to ramp during 2022 as our AIT team prepares for the manufacture of our BlueBird satellites. We will also continue to invest in our in-house electronics, design, and development team focused on our BlueBird satellites and ground infrastructure. To give you a sense of scale, our engineering and AIT employees and consultants grew from 241 at the end of Q3 to 287 at the end of Q4. We plan to continue to build this team to approximately 350 by the end of 2022. In terms of our CapEx, to date, we’ve invested approximately $80 million for the build and launch of the Blue Walker 3 satellite, and our capital investments for Blue Walker 3 are substantially complete. Total investments in our property and equipment were $31.9 million through the end of the fourth quarter, which includes the $8 million purchase of our new AIT facility in Midland, Texas. The company now has approximately 185,000 square feet of industrial space in Midland. Once the clean room build-out of the new AIT facilities is complete, we will have approximately 100,000 square feet of ISO 8 clean room manufacturing capacity. We believe these facilities will be sufficient to support our manufacturing target to complete six production satellites per month during 2023. Finally, as we ready Blue Walker 3 for its planned launch this summer and prepare the company for full-scale manufacturing, we are confident in the ability of our amazing team to execute our plans and deliver our game-changing technology. And with that, I’ll turn it back to Scott.

Scott Wisniewski, Chief Strategy Officer

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?

Operator, Operator

We have a question from Steve from Arizona asking whether the dates for both BlueBird 1 and BlueBird 2 were redacted from the launch services agreement. Will you be sharing those dates during the earnings report?

Abel Avellan, Chairman and CEO

Hi, Steve, thank you for your question. Let me start by saying that we plan to stop production of the BlueBird 1 satellite later this year. We seek to ramp up our production capacity during 2023 towards our goal of producing six satellites per month. The multi-launch agreement recently signed was designed to provide us the flexibility as we begin to launch our BlueBird production satellites in 2023.

Operator, Operator

We have a question from Kevin from California asking whether retail investors seem confused about whether or not it’s possible to launch BW3 without FCC approval. Can you clarify whether FCC approval is required for the planned summer launch?

Abel Avellan, Chairman and CEO

Thank you, Kevin, for the question. First of all, we believe the FCC will come through on time for our summer launch. However, if it becomes necessary, we don’t think that it will be, but if it is necessary, we can start testing outside of the United States. We do not think that the FCC is a prerequisite for our summer launch.

Operator, Operator

We have a question from Brian from Toronto asking if you will be competing directly with LEO constellation providers like SpaceX, Starlink, and serving rural underserved markets?

Abel Avellan, Chairman and CEO

Hi, Brian, thank you for the question. No, we don’t see SpaceX or other LEO systems as competition to our system. The way we like to explain it is we view ourselves as a cellular broadband system providing connectivity directly to handsets, whereas we see the other systems as Wi-Fi or broadband connectivity using terminals to connect homes in various locations. Thus, we do not see ourselves in direct competition with the other LEO systems.

Operator, Operator

We have a question from Chan from Nevada asking if you can provide an updated all-in cost for building a single BlueBird?

Tom Severson, Chief Financial Officer

I’ll take that one. This is Tom. Thanks for your question, Chan. We continue to reaffirm our current cost estimate to build and launch the first 20 BlueBirds in the $13 million to $15 million per satellite range. We take materials and componentry costs into consideration during the design process, and our approach is more akin to automotive manufacturing where we benefit from scale production rather than a legacy satellite manufacturing model. Since our last business update, we’ve made solid progress in the supply chain negotiations, and based on our progress to date, we are currently on track to meet our targeted costs. Thank you, Chan.

Operator, Operator

We have a question from Chan from Nevada asking if Phase 1 is fully funded, if yes or no, what are your plans for raising capital beyond calling warrants?

Tom Severson, Chief Financial Officer

I’ll take this one as well. Mr. Chan, thank you again for your question. Our balance sheet has a strong cash position with $322 million at year-end. One of our core corporate finance principles is to always maintain a strong balance sheet with a strong cash position. We estimate the capital asset investments required to manufacture and launch the first 20 BlueBird satellites to be between approximately $260 million and $300 million, which is expected to be incurred during 2022 and 2023. Until we are self-funding through operating cash flow, we will be monitoring market conditions. Our goal is to opportunistically raise additional capital with the most advantageous terms possible, and we will continuously assess various financing options. Our current expectation is that we will seek to raise additional capital before we launch the space mobile service commercially.

Scott Wisniewski, Chief Strategy Officer

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

Operator, Operator

Our first question comes from Bryan Kraft from Deutsche Bank. Your line is now open.

Bryan Kraft, Analyst

Hi, thanks. Good afternoon. Can you talk about how much certainty the SpaceX agreement gives you as it relates to securing launch capacity for the BlueBird satellites in Phase 1? A couple of other questions are related to that: with some of the launch capacity seemingly coming out of the industry due to the war in Ukraine, how can you be so confident in your satellite build and launch costs staying on plan? I think Tom, you reiterated the cost you had previously disclosed. Lastly, will there be any additional payments due this year related to the Blue Walker 3 launch beyond the $23 million that you already paid? Thank you.

Abel Avellan, Chairman and CEO

Hey, Bryan, how are you? Regarding the launch—the multi-launch agreement with SpaceX was designed to secure the initial launches of our BB1 operational production spacecraft. Additionally, it also addressed the Blue Walker 3 launch at the same time. So we had a Blue Walker 3, BB1, and the first multi-launch in this agreement with SpaceX, which is something we tried to secure six months to a year ahead of time.

Bryan Kraft, Analyst

How far—how much of the BlueBird launches are sort of covered in the agreement? When you announced the agreement, it alluded to a framework for future launches, so I was just wondering what kind of certainty or confidence that gives you in the availability of launch capacity. I don’t know if you could say anything there, but I was just curious about that.

Scott Wisniewski, Chief Strategy Officer

Yes. This is Scott here. We can’t say much more than was disclosed, but SpaceX is currently doing more launches than anyone else in the world, right? They offer the most rides to space, and this agreement gives us flexibility around timing and rebooking, as well as making an early payment for the first satellite and then a reservation payment for another launch. So it ultimately provides us with increased flexibility.

Bryan Kraft, Analyst

Okay. Thanks. Can you answer the last part of the question that I had asked about the additional payments on Blue Walker 3? I’m just curious from a cash flow perspective.

Tom Severson, Chief Financial Officer

Yes, sure, Bryan. This is Tom. We’re substantially complete with all the payments for Blue Walker 3. Currently, we have about $80 million invested. There may be a few million more to finish up, but nothing material.

Bryan Kraft, Analyst

Okay. Tom, I know you reiterated the costs on the build and launch costs for your satellites. Do you view there being any more risk to that, given the fallout of some industry capacity because of the Russia-Ukraine war, or do you still have a lot of confidence in that at this point?

Tom Severson, Chief Financial Officer

Well, at the moment, we don’t. That’s why we addressed this agreement in advance. We see a significant amount of launch capacity coming into the market from multiple sources. This agreement acts as a good bridge into that.

Bryan Kraft, Analyst

Great. Okay. Thank you very much.

Operator, Operator

Thank you. Our next question comes from the line of Griffin Boss from B. Riley Securities. Your line is now open.

Griffin Boss, Analyst

Hi. Yes, thanks for taking my questions. First off, given the recent 3GPP release 17 standard, related to that, the focus of 5G supporting non-terrestrial networks, I was hoping you guys could help us understand how, if at all, this affects your technology.

Abel Avellan, Chairman and CEO

All the advances in 3GPP are really supportive of our technology. Ultimately, to have broadband connectivity direct-to-handset, you need a large satellite with all the patents and IP that we own, around 2,100 patents and patent claims. We see it as beneficial for us. It helps us source enov from more vendors, but we think our IP and our unique capability to connect directly to a handset from space is something that is unique for us, and all this proves that our technology is the way to go when you want to connect directly from a handset.

Griffin Boss, Analyst

Got it. Thanks, Abel, appreciate that insight. I was curious, with the rise in LEO satellite deployments, there’s talk and concern in the industry about the implications of orbital debris and Kessler syndrome. I’m wondering if you could help us understand how you are thinking about this and whether or not you anticipate any issues down the line from a regulatory perspective, as it relates to your timeline for deploying the full constellation of approximately 177 satellites?

Abel Avellan, Chairman and CEO

The first thing I will say, different from any other proposed technology, is that we don’t need thousands of satellites. We only need a few hundred. Additionally, a feature of our satellite is that we have a very thin profile in the direction of movement that does not make us significantly more prone to collisions than any other regular LEO satellite. This has been incorporated into the design by reducing the number of required satellites to provide a global broadband service, thus also providing a thinner spacecraft profile to minimize collision risks.

Griffin Boss, Analyst

Got it. Okay, great. Thanks. That’s it for me, guys. Thanks again. Appreciate it.

Operator, Operator

At this time, I’m showing no further questions. I would like to turn the call back over to AST SpaceMobile for closing remarks.

Scott Wisniewski, Chief Strategy Officer

Thank you, Operator. Our company is building a space-based cellular broadband network designed for use with the phone in your pocket today. I want to thank everyone for joining, both the shareholders and the analysts for the questions, and hope everybody has a great rest of the week.

Abel Avellan, Chairman and CEO

Thank you. See you next time.

Tom Severson, Chief Financial Officer

Thank you.

Operator, Operator

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