BigBear.ai Holdings, Inc. Q1 FY2022 Earnings Call

Thank you for joining the BigBear.ai First Quarter 2022 Conference Call. This call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. I will now like to turn the call over to Josh Kinley of BigBear.ai. Please go ahead, Mr. Kinley.

Good afternoon, everyone, and welcome to BigBear.ai's 2022 first quarter earnings conference call. I’m Josh Kinley, Chief Financial Officer, and I'm here with our CEO, Dr. Reggie Brothers, and other members of the BigBear.ai leadership team who will participate in the Q&A session afterward. During the call today, we may make certain forward-looking statements. Listeners are cautioned not to put undue reliance on the forward-looking statements, and BigBear.ai specifically disclaims any obligation to update the forward-looking statements that may be discussed during the call. Many factors could cause actual events to differ materially from the forward-looking statements made on the call. These statements are based on current expectations and assumptions and as a result, are subject to risks and uncertainties. For more information about these risks and uncertainties, please refer to the forward-looking statements section of the earnings press release issued today and our SEC filings. We will also discuss some non-GAAP financial measures during the call today. These non-GAAP measures should not be considered a replacement for GAAP measures and should be read together with the GAAP results. You can find the GAAP to non-GAAP reconciliations within our earnings release. With that said, I will turn the call over to Dr. Reggie Brothers.

Thank you, Josh, and thank you all for joining our first quarter 2022 earnings call. As I described in our last call, our mission at BigBear.ai is to guide our customers to realize their best possible future by delivering transformative technologies and expert actionable advice. Our AI-powered analytics software and cyber engineering solutions are cornerstones within the defense intelligence agencies of our federal government. We are now bringing these advanced capabilities to the commercial market. For the first quarter of 2022, BigBear.ai took several important steps in our journey from a steady and profitable services-first company to a high-growth, high-margin technology-first company. We made good progress in our land and expand strategy in the federal market while establishing a strong foothold in the commercial side of our business through a strategic and accretive acquisition. We also continued to position the company for rapid scale by acquiring outstanding talent and implementing operational efficiencies through automation and reorganization. These developments are on track to achieve expected revenue for 2022 in the range of $175 million to $205 million and end the year with positive adjusted EBITDA, as stated during our last call. I'd now like to share some details on our progress. On the federal side, we're pleased to see the appropriations bill signed into law on March 15. For those of you unfamiliar with the federal contracting process, it takes some time for budget authority to flow down to individual agencies and then to distinct projects. So this event happened too late in the quarter to positively affect Q1 revenue. However, we anticipate the new bill, coupled with the conclusion of the continuing resolution, will generate momentum for BigBear.ai throughout the rest of the year and into 2023. We added 11 new contracts in the quarter and have added several significant new opportunities to the pipeline. Increased focus on artificial intelligence and machine learning at the federal level is already underway. The current geopolitical situation has heightened the need to enhance intelligence and cyber capabilities through advanced AI tools. Notably, the 2022 defense budget includes $200 million specifically earmarked for the adoption of AI, and the 2023 budget is projected to be considerably higher. The March 2022 GO report on AI in the DoD noted that the department has made organizational changes and is investing billions of dollars in corporate AI technology into its operations. For example, the Joint Artificial Intelligence Center (JAIC), which was established in 2018 to accelerate the department's adoption of AI, saw its budget increase from $89 million in fiscal year 2019 to $278.2 million for fiscal year 2021. The DoD requested $14.7 billion for science and technology programs in fiscal year 2022, including $874 million for the development of AI, compared with $841 million for fiscal year 2021. This reflects the rapidly growing importance of AI in the DoD's operations. The report also noted that fiscal years 2021 and 2022 requests do not reflect the total of DoD's AI investments. The appointment of the Pentagon's new Chief Digital and Artificial Intelligence Officer further underscores the government's focus on ramping up their AI and machine learning capabilities. For about 20 years, we have been a trusted adviser to the government, and they will need an experienced partner like BigBear.ai to help them deploy these capabilities as quickly as possible. With strong relationships and an outstanding track record of success, we are in the right place, at the right time, with the right solutions to meet this need. Now, I'd like to turn to our commercial business. We recall the market penetration strategy we discussed last quarter included both organic and inorganic growth. In early 2022, we made progress on both fronts. First, our commercial revenue for the first quarter exceeded our commercial revenue for all of 2021. Second, we established a solid market presence across several key industries. The acquisition of ProModel Corporation, which we closed on April 7, significantly expands our customer base, adding hundreds of commercial customers in more than 30 countries worldwide, and providing a solid foundation to accelerate commercial market penetration. We know from our history of ProModel Government Solutions that our products are complementary. The synergies between our technology, expertise, and market focus enhance each company's ability to deliver scalable decision support solutions to our customers. For example, ProModel customers in the shipbuilding industry, such as Ingalls Shipbuilding and Newport News, use a shipyard AI tool to streamline production scheduling and capacity planning. The ProModel processes that took weeks can now happen in days, and tasks that took days have been reduced to hours. We can further increase our value with these customers by adding the data curation and AI-powered analytics capabilities that BigBear.ai has developed for the maritime industry. Using our rich data sources and pre-built analytics modules, our customers will be able to see and mitigate the impact of global supply chain factors, such as the pricing and availability of iron and steel, allowing them to decrease production risk and achieve better business outcomes. In the healthcare field, ProModel serves dozens of hospitals across the country, including children's hospitals. ProModel’s FutureFlow Rz product provides the simulation platform for patient flow and hospital capacity, including scenario analysis for staffing, bed counts, arrival and discharge patterns, and case mix. The hospital reported significant ROI from their deployment, which allowed them to optimize staffing levels and operations over the past two years during COVID-19. The BigBear.ai and Children's Hospital Colorado can benefit from augmented data, including national and regional COVID infection rates, and real-time emergency calls and ambulance traffic. Medical professionals are excited about working with us to incorporate external data and predictive insights to optimize their specific needs, emphasizing that children only have a chance if they are at one of the Children's Specialty Hospitals. These are just a few of the many ways in which BigBear.ai's data enrichment and AI capabilities have enhanced ProModel solutions to help our customers reach new levels of predictability, efficiency, and profitability. As I mentioned in our last earnings call, channel partnerships will be important to our growth strategy. In addition, ProModel brings very strong co-marketing and distribution partnerships with industry leaders like Autodesk and Datech Solutions, which is the global reseller of Autodesk products. ProModel's AutoCAD addition works seamlessly with the Autodesk product design and manufacturing collection, which includes AutoCAD, Inventor, and Factory Design Utilities. According to analysts from HG Insights, AutoCAD alone is used by more than 500,000 companies worldwide. So our ability to leverage these strategic channels will accelerate the adoption of ProModel and BigBear.ai solutions on a global scale. To support our federal and commercial growth, we continue to bolster the BigBear.ai leadership team with top talent. Recently, we announced the appointment of Carolyn Blankenship as our General Counsel. Carolyn brings deep experience with artificial intelligence and data ethics throughout her 25-year legal career and was most recently General Counsel for the innovation and product group at Thomson Reuters. Her unique expertise in artificial intelligence, intellectual property, and business strategy will be critically important as we expand our portfolio and global reach. Key hires were also made in product, marketing, sales, and sales operations, providing us the commercial experience we need to rapidly bring new products to market, fill the sales pipeline, and convert opportunities into success. On the federal side of our business, we appointed Tony Barrett as our new President of Cyber & Engineering. Tony will lead our Integrated Defense solutions, security efforts, and the creation of strategies that allow us to evolve our services to a software company. We continue to invest in research and development to drive innovation and new products for federal and commercial customers. With an eye toward more strategic acquisitions, our product team has been reorganized to ensure rapid integration and enhancement of acquired technology while concurrently packaging our unique AI capabilities for the commercial SaaS market. We anticipate increasing our product, sales, and marketing investments in future periods to help us achieve our commercial goals and drive sustainable growth. In summary, we made great progress in the first quarter of 2022 on our growth strategy despite the ongoing impact of government contracting delays. With the continuing resolution lifted and the new appropriations bill signed, we are in an excellent position, building a robust backbone of federal business while expanding into the commercial market. The addition of ProModel Corporation provides us with a solid customer base and strong channel partnerships from which we will accelerate our commercial market penetration.

Now, I will turn it over to Josh, who will give Q1 financials in detail. Thanks, Reggie. In the first quarter, we continued to execute our growth strategy and are in a strong financial position to capture opportunities that will ramp up throughout the year. Revenue for the quarter was $36.4 million, compared to $35.6 million in the first quarter of 2021. This revenue was in line with our projections due to the federal government operating under a continuing resolution for almost the entire quarter and does not change our year-end projections. About $19.1 million of revenue was from our analytics segment, compared to $17 million in the prior year period. The $2.1 million increase is largely attributable to our growing commercial analytics business, as Reggie mentioned, which saw more revenue in Q1 of 2022 than the entirety of 2021. Approximately $17.3 million of our revenue came from our Cyber & Engineering or C&E business, compared to $18.6 million in the prior year period. The minor drop in revenue reflects the impact of the continuing resolution on certain programs that we were unable to execute funding for while the government was operating under a temporary budget. We still expect all of the projected revenue to come in during 2022, and it does not change our year-end projections. Overall, we were pleased with the quarterly revenue, given we were operating under the continuing resolution. This is actually a direct benefit of our large contracted backlog that allowed us to continue delivering our products and services while the government finalized the 2022 budget. Now that the appropriations bill has been signed into law, we expect contracting activity to pick up at the end of the second quarter as funds flow down to individual government agencies, thus allowing them to award new contracts and allocate spending to individual programs and projects. As Reggie mentioned previously, the government has specifically earmarked spending for AI and ML research and thought leadership, and we expect to benefit from the increased focus on the areas that represent BigBear.ai’s core competencies. On the topic of backlog, we ended the quarter at $459 million, a small or roughly 1% decrease from the end of 2021. Given the federal government's inability to award new contracts during the period, we were very happy to report strong revenue for the quarter without seeing a meaningful change to overall backlog. A considerable portion of this can be attributed to new commercial analytics orders booked in the period. We expect to see backlog continue to grow in future periods with federal contract awards on the horizon. For the first quarter, our gross margin was 27% on a GAAP basis. Our segment adjusted gross margin in analytics was 47%, a full two percentage points above where we ended in 2021, reflecting the impact of increased sales to commercial customers in the quarter. Our segment adjusted gross margin in cyber and engineering was 22% for the quarter, roughly in line with prior periods. On a consolidated basis, the company's total adjusted gross margin was 35%, which is once again an improvement on where we ended the prior fiscal year. As we continue to see growth in our analytics business, especially with commercial customers, we'll see continued expansion of the margins, which is consistent with the strategy we've communicated in the past. While we're discussing revenue and gross margin, Reggie talked about how we closed the acquisition of ProModel Corporation early in the second quarter. We'll start to see this revenue in our Q2 report, and this will also contribute to our gross margin expansion. Operating expenses were $26.2 million in the first quarter, including interest expense of about $3.6 million, and SG&A expenses of approximately $22 million. The growth over the prior year period is primarily driven by equity-based compensation costs, as well as increased payroll, IT, recruiting expenses, and public company requirements. We're closely monitoring operating expenses and are confident we can continue investing in our long-term growth while remaining positive on an adjusted EBITDA basis. For the first quarter, we had a net loss of $18.8 million, primarily driven by non-cash equity-based compensation, in addition to non-recurring integration costs and investments in our commercial software products. Adjusted EBITDA was negative $2.9 million for the first quarter. This was in line with our expectations for Q1, as a considerable amount of our revenue growth was pending contract awards and the passage of the federal budget. Turning now to our balance sheet, we had cash and cash equivalents of approximately $60 million at the end of the quarter, $9 million less than our position at year-end. We expect cash usage to peak in Q2 and then improve afterward. We maintain a strong cash position and have an additional $50 million available through our credit facility. Also in the balance sheet, we had roughly $101 million of restricted cash at year-end that was used in Q1 to repurchase shares held under forward share purchase agreements with certain investors. I can confirm all these agreements were wrapped up in Q1 through share repurchases and this restricted cash is no longer on our balance sheet. Now turning to outlook, we expect to see increased government activity in the coming quarters as the spending appropriations make their way down to various agencies and projects, allowing them to fund existing programs and award new contracts. We've already seen progress on several programs and expect this to continue through Q2 and Q3. As Reggie mentioned, the current geopolitical environment is driving a renewed focus on AI and ML tools and capabilities within the government, generating relevant new opportunities for the company. In light of these factors, we expect budget requests to be even higher in 2023 and expect to continue to build our growth pipeline in new and existing government customers. We remain on track to reach our previously announced revenue range between $175 million and $205 million for the full year 2022,and are confident we'll see the gross margin expansion from increased sales of our analytics products and solutions. We also expect the company to be EBITDA positive on an adjusted basis for the year. Additionally, we expect our commercial sales to approach 10% of our total revenue for the year, a tremendous jump from the prior year when it was just 1% of total revenues. In summary, BigBear is executing on all aspects of our 2022 growth strategy. The recent passage of the 2022 Federal Budget helps derisk our full-year revenue and gives us confidence in prior projections. We are on schedule for revenue growth of nearly 30% for the year. We have already seen the gross margin expansion we projected as a direct result of increased analytics sales. We expect to be EBITDA positive for the year, and our pipeline of new opportunities continues to grow in both the federal and commercial markets, further cementing our long-term growth strategy. Now I'll turn it over to the operator for our Q&A, where Reggie and I will be joined by Brian Frutchey, Chief Technology Officer, Sam Gordy, Chief Operating Officer and President of Federal, and Jeff Dyer, President of Commercial.

Hi, thank you. This is Param Singh on Ittai Kidron. So just a few questions here. Firstly, you talked about 11 contract wins on the federal side. Can you help me reconcile that with the backlog decline you've been seeing? Why would that happen, if you got some wins? Why is it not recognized?

Thank you for the question. The 11 contract wins were initial funding that came through for some new projects in the quarter. So on a net-net basis, it did add some initial funding. However, given that those government customers were still operating under a continuing resolution, those 11 contracts did not include any large awards. Those are essentially pending awards for Q2 and Q3, in all likelihood.

Thank you. And then, on the commercial side, you mentioned your revenue in the quarter was higher than the entire past year. So is it in the 1 million to 2 million range? Is it above 2 million? Any clarity there would be really helpful.

I think the best way to think about that is, you can see our year-end projections. We're projecting 10% of the revenue coming from commercial sources. We're not at this time reporting specifically on commercial revenues for the quarter. But you can think of it as we build up to that mark, which year-end projections of, let's say, roughly $200 million leaves you with $20 million of projected revenue. We're going to see that ramping up throughout the year. So I think it's fair to say that somewhere in the range of 15% to 20% might have been achieved in Q1, and that will ramp up throughout the year to that overall 10% of our projected commercial revenue. Hopefully that helps.

Yes, definitely. Thank you very much for that. Maybe talking about ProModel then, how much of commercial revenue does ProModel add, what are the margins like? And do you expect to keep ProModel as a separate product or integrate it into your three observe, orient, dominate products?

So, I will discuss the revenue very quickly, and then I'll ask Brian to weigh in on the technical integration. We are not disclosing their revenue to date, but we expect to be able to capitalize considerably on the opportunities they have and the existing customer sets. At this point, it is not a substantial add to our projected commercial revenue. The most important thing is the pipeline opportunities for us moving forward on the technical integration side.

This is Brian Frutchey, the CTO. I appreciate the question. On the technical integration side, the discrete event simulation capabilities that ProModel offers will continue to exist as standalone tools and capabilities, but we are going to repackage that capability with our Orient and Dominate product. So that integration will be happening and likely won't be completed until the first part of 2023, but that integration is planned.

Thank you. And then maybe one last one. How many commercial sales additions are you getting from this acquisition? And do you expect to add more commercial salespeople throughout the year? What number can we expect given your trajectory in commercial?

Sure. Thanks for the question. This is Jeff Dyer. We inherited six sellers, both direct and indirect, from ProModel, and we do expect that we will add on a ramp basis throughout the year as we continue to grow that pipeline, and further to Brian's point, integrate our product offerings to leverage the best of both companies' technologies together.

Thanks. Yes. Congratulations on the results here. In terms of just following up on the last question, if you'd include the six adds here, as well as the organic adds planned, how many new salespeople or how fast will you grow the sales and marketing group this year relative to 2021 in total for commercial?

Hey, Mike. This is Jeff. Thanks for the question. We anticipated this in our guidance for the year. While it wasn't done, we knew that we would be hopefully executing this acquisition, so it was contemplated in our original plan. A lot of focus right now on accelerating the demand plan, as I've planned to add sales headcount in each quarter as we ramp up through the year and into 2023. I need to test that over the next quarter with obviously the demand cycle and lead generation, as it relates to the conversion ratios that we see now and what we anticipate we can do moving forward. But it certainly strengthens the ability for me to fund the sales offers the right way. However, we need to still ingest and learn a few things as we get closer to our new friends and family members that we inherited with the ProModel acquisition.

Yes. Okay, great. And then just thinking about the revenue flow throughout the year, obviously, the third quarter is the fiscal year-end for the Fed. Should we think about the third quarter being the peak revenue quarter for the year, or is the growth or do you just have a little sequential growth each quarter to hit your numbers?

Yes. Thanks for the question, Mike. And good to hear from you. This is Josh. That's a good way to think about it. We actually expect things to continue ramping up even through Q4. We do have some insight into some later calendar year awards that are going to be released. So I wouldn't necessarily think of Q3 as the peak; I think it will continue to climb even through Q4. Part of that is because some of the government or federal awards that we expect in Q4, but also between the ramp-up of the commercial revenue, which isn't necessarily bound by the government budgeting and contracting cycle. So I think it will be a steady ramp, as we see the commercial revenue making up a bigger and bigger portion of our overall revenue. I think that is something we will continue to see in future years as well.

Can you share insights about the main customers contributing to this $20 million and the use cases that are driving it this year? Additionally, do you have a win rate statistic indicating how often you are successful in closing these deals?

Sure, thanks for the question. Again, this is Jeff Dyer. On the last part of your question, with respect to win rate, I need to learn more on that, not just to best understand the win rate against the legacy pattern that we inherited with the acquisition, but to really understand that with the sales offensive we will put in place moving forward. However, Reggie gave an example of a success in healthcare, whereby the Children's Hospital Colorado, which is one of many children's hospitals that use ProModel today for optimizing hospital efficiency, made direct requests to incorporate AI and ML models to best understand how to care for the children that can only be impacted at a children's hospital different than at other medical facilities. We think that there's huge opportunity; these are seven- and eight-figure annualized ROI types of impact studies through the hospitals that we've been able to talk to and learn from. These are large six-figure sales. Anytime you sell to a hospital, as an example, a six-figure type of offering, even though there is tremendous value, there's a cycle that takes time. We need to best understand how we can leverage partners to accelerate certain buy cycles, but also get our own motions in place to accelerate what we think is a really exciting growth opportunity for us in the back half of the year certainly. In the next year, there is an incumbent pipeline around manufacturers, shipbuilders, and hospitals. We're excited to help execute at a higher rate of conversion in the second half of the year, but we certainly need to test some of our theories and establish those patterns for ourselves as we head into 2023.

Yes, absolutely. This is Sam Gordy on the federal side. The contracts you're talking about are OTAs, right, other transactional authority contracts within the U.S. government, which require that they invest on a prototype side of the house. But the advantage is, it allows the government to very quickly move from prototype to production without having to go through a further round of competition. It's a great vehicle for the government and a great vehicle for us. We have two major efforts underway today. One is the ATEC modernization management system, and the other is the G10 MOE with the Army G-3 and PEO. Both of those are in the prototyping stage right now. From our perspective, we're extremely happy with the progress we are making through phase one and in both cases, moving into phase two. You're probably aware we've talked about on the G10 MOE side that we're now teaming with Palantir in putting together a joint project, and that's receiving a lot of attention. We are certainly looking forward to the progress and are encouraged by what we're doing there.

Okay. Thanks. Good luck.

Thank you for joining us on this first quarter 2022 earnings call. We look forward to talking with you the next time we report on our progress. Thank you very much.

This concludes today's conference. Thank you very much for your participation. You may now disconnect.