Earnings Call Transcript - ASTS Q2 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the AST SpaceMobile Second 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.

Scott Wisniewski, Chief Strategy Officer

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, 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 3. For those of you who may be new to our company and 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 everyday smartphones based on our extensive IP and patent portfolio. Our engineers and space scientists are on a mission to eliminate the connectivity gap faced by today's 5 billion mobile subscribers and finally bring broadband to the billions who remain unconnected. The markets we are pursuing are massive, and we have a significant first mover advantage. It has been an extremely active and productive few months since the last quarterly update call. As our Chairman and CEO, Abel Avellan, will discuss, we have continued to make significant progress on technology, manufacturing, commercial and regulatory fronts and, very importantly, with regards to funding our growth strategy. It is my pleasure to now pass the presentation over to Abel.

Abel Avellan, Chairman and CEO

Thank you, Scott. I welcome everyone to our Q2 2023 earnings call. We had a busy quarter, and I want to update you on our progress. In June, our BlueWalker 3 program achieved a milestone with the first-ever space-based cellular broadband 4G LTE connection to everyday smartphones, delivering speeds over 10 megabits per second. This was accomplished in partnership with AT&T, Vodafone, and Nokia, following our historic voice call from space announcement in April. We also advanced our commercial initiatives, now holding over 40 MOUs and agreements with mobile network operators globally, totaling around 2.4 billion subscribers. On the manufacturing side, we're working on building and launching our first five commercial BlueBird satellites and ramping up production in our Midland, Texas facility. This satellite program is fully funded and is scheduled for launch in Q1 2024. On the financing front, I’m pleased to share that we have secured two interim nondilutive debt financing deals while also seeking capital from participants in the wireless ecosystem. Additionally, we have received several indications of interest for strategic investments, including both equity-linked and nondilutive commercial payments. The proceeds from this capital raise are aimed at funding our operations leading up to the launch of our initial Block 2 satellite planned for 2024 and 2025. Moving to our 4G capabilities, we have again made history and continue to shape the direct-to-device industry. We are the only company that has demonstrated the capability for scalable space-based cellular broadband. Our strong portfolio of intellectual property, boasting over 2,600 patents and pending claims, combined with the size of our satellites and our integrated manufacturing strategy, supports our growth. I appreciate the public endorsements from our partners, who are among the largest and most innovative in telecommunications, celebrating these achievements with us. Our collaboration with AT&T, Vodafone, and Nokia for our 4G testing this quarter has been invaluable. We see a massive opportunity, given that over 5 billion phones are currently in circulation. Our testing has shown the ability to connect with every phone from major brands, maximizing our market access. Turning to our commercial and regulatory progress, we have established over 40 agreements with mobile network operators globally that have around 2.4 billion subscribers. Our MNO partners are actively working with us towards our shared success. The telecom companies we collaborate with are leaders in the industry, and we are honored to partner with them. We are also progressing with our regulatory efforts, updating our SEC application to reflect the spectrum lease with AT&T. Our discussions with the FCC have been constructive and align with our plans. In manufacturing, we are ramping up the production of our first five Block 1 satellites at our Texas facilities. We have completed our 185,000 square feet manufacturing facility, which includes one of the largest commercial clean rooms in the country. We recently completed a full manufacturing readiness review, which is highlighted in a video we shared earlier this month that can be found on our website or YouTube channel. To summarize our progress, nearly all equipment for our state-of-the-art clean room in Midland is delivered and installed. Our manufacturing process for Block 1 is fully implemented, with opportunities for further automation moving into Block 2. We've established new production lines for solar panels, power systems, mechanical structures, and antennas, reinforcing our vertically integrated manufacturing strategy. We also added more test equipment at our Texas facility, enhancing our timeline from assembly to launch compared to BlueWalker 3. Lastly, we have developed a traceability system for quality control, allowing us to tag and track every part in the production process. We are also excited to announce the opening of a new space technology and R&D center at our hub facility in Hyderabad, India. This center will help us tap into one of the largest wireless markets and access an incredible engineering talent pool, including 1.5 million engineering graduates each year in India. With that, I'll pass it on to Sean.

Sean Wallace, COO

Thanks, Abel, and good afternoon, everyone. Since our last call, AST has continued to make significant progress and continues to define the satellite-to-device industry as one that will offer broadband cellular service using existing MNO spectrum and working on widely available smartphones and devices. Integrating the ubiquitous coverage of a satellite constellation into the terrestrial wireless infrastructure will be one of the most exciting innovations in communications in the last 25 years. We could not be able to define this new industry without our hard-working team of engineers, technicians and suppliers and without the support and confirmation by our partners who are some of the most sophisticated wireless companies in the world, including AT&T, Vodafone and Nokia. Beyond defining this new segment in the wireless industry, we also continue to drive our plan of execution in the second quarter. Specifically, as Abel outlined, we made progress around our commercial, regulatory and manufacturing milestones and we remain on target for the launch of 5 BlueBird commercial satellites in the first quarter of next year and the initiation of commercial service in 2024. Let's spend some time discussing a couple of our key operating metrics for the second quarter that are displayed on Slide 8. Looking at the first chart, we see for the second quarter of 2023, we had non-GAAP adjusted cash operating expenses of $38.4 million versus $40.3 million in the first quarter. Non-GAAP adjusted operating expenses exclude certain noncash operating costs, including depreciation and amortization and stock-based compensation, which totaled $4.2 million and $19.6 million for the first and second quarters, respectively. Most of the increase in our noncash operating expenses reflect the initiation of noncash amortization of our BlueWalker 3 satellite, which we disclosed in the last quarter. Our second quarter non-GAAP adjusted operating expenses decreased by $1.9 million versus the first quarter. Our research and development expenses fell this quarter as a result of the timing of certain milestones, which reduced the level of payments. Our R&D expenses consist principally of nonrecurring development activities for which we typically engage third-party vendors and payments are based on the completion of milestones. Conversely, our engineering services and general administration expenses rose modestly in the second quarter. We currently expect that the level of non-GAAP adjusted operating expenses will remain in the mid- to high 30s for at least two more quarters as we continue to pursue important R&D projects for our BlueBird satellites and execute the construction and planned launch of our first 5 BlueBird commercial satellites in the first quarter of 2024. Turning towards the second chart. Our capital expenditures for the second quarter were $12.1 million versus $14.4 million for the first quarter. These capital expenditures were directly related to the completion of many of the expenditures we have made around our Site 2 manufacturing facility. We expect that our levels of capital expenditures, which include direct material expenditures and launch costs for satellites as well as capital improvements for our manufacturing facilities and ground infrastructure, will increase in the third and fourth quarter. We expect that our capital expenditures, which have been averaging around $10 million to $15 million per quarter, will begin to increase to nearly $15 million to $20 million in the last two quarters of the year in order to fund the manufacturing and assembly of our first 5 BlueBird commercial satellites. In addition to these figures, we also expect to pay $45 million to $50 million for launch services and related equipment and services, all in the third quarter. Once these payments are completed, we will have made well over 90% of the projected expenditures for our first 5 commercial BlueBird satellites. And on the final chart on the slide, we ended the second quarter just shy of $192 million in cash on hand. As we stated in our 10-Q, we believe this cash as well as our ability to raise capital to our existing facilities is sufficient to support our expenditures for at least the next 12 months. As we have also discussed in our 10-Q, our cost positions and capital plans are quite modular. And this characteristic provides us the flexibility to increase or decrease our rate of expenditures depending upon changes in our build-out plans and the availability of capital. This flexibility provides us comfort that we can manage our liquidity profile dynamically depending on our rate of raising capital. Let's turn to the next page outlining our capital raising efforts. As I've mentioned in our last earnings call, we continue to explore a variety of ways to fund our business plan. I am pleased to report that during the second quarter through today, we have completed a comprehensive financing plan, which will provide us $179 million of gross cash and liquidity. These activities include $64 million in equity proceeds, including our common stock offering in late June. We also closed 2 debt facilities. These facilities include a $15 million equipment loan facility and a $48.5 million draw on a $100 million senior secured credit facility. The equipment facility arranged by Lone Star Bank in Midland, Texas will enable us to leverage the portfolio of equipment and the building at our Site 2 manufacturing facility. The senior credit facility is structured such that we have drawn close to $50 million at close and have an additional ability to draw up to another $50 million over the next 12 months, subject to certain conditions, should we desire. These new facilities represent our growing ability to access a diverse set of capital sources, including debt providers. I also wanted to comment on Abel's discussion on our efforts around raising strategic capital from key players in the wireless ecosystem on the bottom half of this page. After hiring financial advisers, we approached a number of large, sophisticated players with the explicit desire to develop financial and strategic ties that will help fund our business plan and support the development of our commercial efforts in markets around the world. We are making progress. We have received multiple indications of interest from several parties that we believe represent the right strategic partners for us as we move towards commercial service. We also believe that the structure of these transactions will enable us to fund the business with a combination of debt and equity securities, thereby reducing our reliance on selling equity. We are negotiating the terms of these nonbinding indications of interest, and the counterparties are performing due diligence. The size, complexity and commercial and strategic nature of these negotiations require significant time to complete and may require certain regulatory approvals in order to close. As of this time, we cannot guarantee that any agreement will be reached, nor can we disclose the names of the parties and the type of their potential commitment. As these discussions evolve, we will provide more detailed information. And with that, this completes the presentation component of our earnings call, and I pass it back to Scott.

Scott Wisniewski, Chief Strategy Officer

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

Operator, Operator

Tim from California asked, "What is the overall test plan? Where are you at in accomplishing that plan? What are the key successes and challenges?"

Abel Avellan, Chairman and CEO

Thank you, Tim, for the question. And first of all, I want to emphasize that now we are turning our attention to the build of our next 5 operational satellites. BlueWalker 3 has delivered all the knowledge we needed to refine our design, learn how to fly the largest commercial communication array that has ever been deployed into orbit, how to implement and use our patented Doppler and delay compensation, and how to integrate with network operators like AT&T and Vodafone to serve their future customers in 2G, 4G, and 5G. And these have been essential. It has been a long process to incorporate all this knowledge into our company. And this positions us very well to move to the next phase, which is basically the launch of the next 5 satellites to start commercial services. Now that all these lessons are being incorporated in our IP, that will translate to a faster rollout of these first 5 satellites. And we are very happy with everything that we have accomplished with BlueWalker 3. We have made the first-ever phone call directly from space to a standard cellphone device, we have made the first-ever broadband (LTE) connection ever done from space directly to a device, and we have also demonstrated that we can scale and that we can access the vast majority of the 5 billion phones that are in circulation, which is also regardless of the manufacturer, and the type of phone that is in the market. So we're very happy with the results, and the significant amount of learnings that have been incorporated into our IP and our design. But with BlueWalker 3, we were able to look at our design and basically move to manufacturing, which is what we're doing now.

Operator, Operator

Dennis from Chile asked, "Considering that BlueWalker 3 took months for opening, positioning and testing the satellite before operation, when will the first BlueBird satellite become fully operational?"

Abel Avellan, Chairman and CEO

Thank you, Dennis, for the question. We are still on track to launch our first 5 Block 1 satellites, our first 5 commercial satellites in Q1 2024, and they are in the process of being manufactured and tested in Midland. We have several upcoming milestones with SpaceX, which will narrow the launch window and provide more clarity to the exact timing of the launch. With that said, once we launch, we will expect to spend around 3 months to test and calibrate these satellites in orbit, which will be significantly faster than what we did for BlueWalker 3, as well as BlueWalker 2 and the first satellite. As I said earlier, there were a lot of lessons learned on how to do it, how to fly, how to calibrate it, and how to connect directly to the phones. All those lessons are already part of what we know and how to do it. So we estimate approximately 3 months; it may take longer, but that's what we're estimating. With that in-orbit testing, we are preparing to start being ready for commercial service with these 5 satellites. The commercial services that we're anticipating for these satellites are not only broadband but also other governmental and different types of applications that we anticipate to be using with the first 5 operational satellites.

Operator, Operator

Leedin from New Zealand asked if the FCC has been supportive during the meetings between ASTS and the FCC.

Scott Wisniewski, Chief Strategy Officer

I'll take that one. Thank you, Leedin. Absolutely, we have continued to have very encouraging meetings with the FCC over the last quarter, and you'll see multiple new filings in support of our planned service. We believe that enabling technology like ours, which the FCC calls supplemental coverage from space, is a priority for them. This is informed by the fact that they've created a new space division focused entirely on satellite communications, the initiative of a new rule-making process with tight public comment periods, and also their responsiveness with us. So going forward, we look forward to further engagement with the FCC alongside AT&T in the U.S. And while we cannot comment on near-term timing, of course, we're confident we'll be able to begin commercial service in the U.S. once the space-based network is ready.

Operator, Operator

Eduardo from London asked if there are any updates regarding a senior DoD Officer's comments about testing integrated commercial services with military applications next year.

Abel Avellan, Chairman and CEO

Thank you, Eduardo, for the question. We continue to believe that there are very strong governmental applications for our space array technology. This is basically thanks to our intellectual property, but particularly because of the size and power capabilities of our satellite in low Earth orbit. We're evaluating various opportunities on the government side, while we continue to make progress and maintain our focus on several broadband applications. We're planning to begin commercialization by using our first five operational satellites, which we expect to launch in the first quarter for applications of interest to the U.S. government.

Scott Wisniewski, Chief Strategy Officer

And 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

And the first question comes from Griffin Boss at B. Riley Securities.

Griffin Boss, Analyst

So I just want to start off, Samsung just, I think it was yesterday, talked about how its Galaxy S24 could feature an emergency SOS feature via satellite similar to what Apple and Globalstar are doing. And that's also expected to launch in the first quarter of '24. I'm just curious if you are looking at that as an opportunity for your early services?

Abel Avellan, Chairman and CEO

Listen, thank you for the question. We are really focusing on broadband. I mean we believe that with this announcement that we did this quarter, where we announced speeds of 10 megabits, if you can do 10 megabits, you can do SOS, you can do voice, you can do basically every application that you have in your phone when you are in a connected area through terrestrial normal means. So our focus is being completely agnostic to the manufacturer. A few phone calls were done on Samsung, but we have also tested every major device. That's the way that we position ourselves. That's the way that the technology is designed to support broadband and all the other applications that you are capable of doing when you are in terrestrial means.

Griffin Boss, Analyst

Okay. Got it. And then just one for Sean on the credit facility. Is that interest payable in kind or in cash?

Sean Wallace, COO

A portion of it, it's almost like a synthetic 0 portion of it was set aside. So it will be set in escrow and, fortunately, will be funded with cash on hand.

Operator, Operator

The next question comes from Chris Quilty with Quilty Analytics.

Chris Quilty, Analyst

Just wanted to ask a question about where you are in terms of potential customer decisions on that first batch of satellites.

Scott Wisniewski, Chief Strategy Officer

Thanks, Chris, Scott here. So we've, as you know, continued to grow the list of logos. We're now over 40 MNOs globally that we have MOUs and agreements with and over 2.4 billion subscribers among them. So we have had a great list of potential sources. I think as we think about where to launch service first, it's obviously driven by several considerations: one is who are our close partners; and two, which markets are most interesting to us. So I think, as we look at that list, the U.S. is a pretty obvious choice as an attractive first market, but there are several others around the world, and you can look to our partners for candidates. But at this stage, I think we're focused on the technology roadmap and believe all commercial, regulatory and other major milestones fit within that. So I think as you think about timing, it will be within that time frame. But we're pretty happy with the partners that we have at the table with us now.

Chris Quilty, Analyst

Got you. And then a question on the manufacturing basis. It sounds like you've gotten most of your production equipment in place and ready to roll. Assuming that all that is applicable to a larger build, what are you looking at in terms of time to ramp up the production capability for building at a high rate, the next batch of satellites?

Abel Avellan, Chairman and CEO

Yes, Chris. I mean the way that we have set up ourselves, given enough number of parts and components, the facility that we have, 185,000 square feet of facility, can support up to 6 satellites per month. We're obviously not there yet. And that ramp-up is planned to take the next 6 to 12 months. But that's what we're aiming for: having the manufacturing capability in Midland to produce 6 satellites per month.

Chris Quilty, Analyst

Got you. And I guess just in the last year, we've had Rivada come online with 600 satellites; last Friday, Telesat, 300 satellites. When you look at your supply chain, are there any particular areas where you have concern about the supply base or the fact that you brought so much vertically in-house that you're in good shape?

Abel Avellan, Chairman and CEO

Right, Chris. First of all, unlike any other constellations, we need about 90 satellites to provide global broadband connectivity. We're not talking about thousands or even tens of satellites; it's around 90 satellites to achieve global broadband capability. Additionally, we are very substantially vertically integrated. We begin with aluminum and composite materials, and we manufacture most of our parts. This means we handle all our antennas, structures, batteries, solar panels, and every major component of our satellites ourselves, which allows us to manage and control the costs of these parts and the supply chain effectively.

Chris Quilty, Analyst

Got you. And final question, just I know it's a long road on the FCC waiver, but at a high level, what are the sorts of next steps we should expect coming out of the FCC for approval?

Abel Avellan, Chairman and CEO

We are very optimistic about the new processes established by the FCC and our position within the current regulatory process. We do not anticipate any delays from the FCC regarding our initial commercial services set to launch next year. We are confident, although we rely on the FCC to ensure everything stays on schedule to support our services in 2024. The immediate action we took was leasing spectrum with AT&T. We will continue with the experimental satellite licenses we have active for BlueWalker 3 and the additional satellites we are launching.

Scott Wisniewski, Chief Strategy Officer

Yes. I would add, Chris, the key differentiator is that we have a satellite on orbit, right, to show data and to provide information to the FCC for both paths. Remember, we have two parallel paths to a commercial license in the U.S. One is the rule-making process, which the FCC has been a leader on and has been very fast. The public notice period for comments was only 30 days, which is pretty short for a big rule-making like this. So they clearly are interested in speed on the rule-making. And then on the other process, where we filed the lease with AT&T for substantially all of their licenses over 1,000 individual licenses, that's another process that, like I said earlier, we have the data and the information to back it up. So we don't view this as a limiting factor on our overall timeline.

Operator, Operator

And the next question comes from the line of Benjamin Soff with Deutsche Bank.

Benjamin Soff, Analyst

I've got a couple here. So obviously, today versus the initial business plan, a lot has changed in terms of the timing and some of the costs. But I'm wondering, if you sort of go back to the beginning, if you think the commercial assumptions as far as the revenue per satellite and the timing to ramp from when you launch, if those inputs still hold and still make sense? Or if you think maybe some of those factors may have changed as well?

Abel Avellan, Chairman and CEO

Thank you for the question. Listen, the completion of BlueWalker 3 testing, the lean budget confirmations, and the number of types of devices that we're able to interoperate with our technology all confirm basically all the fundamentals of our business plan.

Benjamin Soff, Analyst

Okay. And would you anticipate that the Block 1 commercial satellites would be sufficient to generate free cash flow on their own, if you weren't going to make the additional investments in other satellite launches? Would those alone be able to fund the business?

Scott Wisniewski, Chief Strategy Officer

Yes. I think part of the reason for the announcement we had today with the comprehensive interim financing package and the status update on the strategic capital raise, we've kind of reached a point with technology, manufacturing, commercial and regulatory maturity. We've reached a point where we see visibility to revenue on those first 5 commercial satellites. We don't think that that's not the business we're looking to build. As Abel said very clearly, we're looking to build cellular broadband. And to do that, you need more than 5 satellites. But based on market feedback and things you can clearly read in the press as well, we think that even those first 5 satellites will present interesting opportunities in terms of revenue. So we don't predict it will be cash flow positive, but we do believe there will be revenue opportunities on those first 5 satellites, whether you look at government applications or other services that can take advantage of non-continuous service like IoT or monitoring. So we think there are interesting opportunities there, not cash flow positive, but definitely interesting opportunities and ones that we plan to commercialize fully.

Benjamin Soff, Analyst

Okay, and then the last question for me is about the U.S. being one of the early markets. You mentioned that there may be others. I'm curious if you could discuss the factors you consider when deciding whether to enter a particular market.

Abel Avellan, Chairman and CEO

Well, we obviously had a loan lease on that 40 operators that we had announced where we have MOUs or agreements. There is obviously interest in having the markets first. I mean we will prioritize them according to size of the market, but also to their participation and how closely they are working with us, supporting us technically, financially or otherwise. So it is multi-factorial; we have a lot of interest to start using our services, and we will prioritize according to the support that we get from the MNOs.

Operator, Operator

At this time, I'm showing no further questions. And now I'd like to turn the call back over to management for their 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 their questions, and I hope everybody has a great week. Thank you.

Operator, Operator

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.