Earnings Call Transcript - BKSY Q2 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to BlackSky Technology's Second Quarter 2025 Earnings Conference Call. Please note that this conference call is being recorded. I would now like to turn the call over to Ali Bonilla, BlackSky's Vice President of Investor Relations. Please go ahead, Ali.

Ali Bonilla, VP of Investor Relations

Good morning, and thank you for joining us. Today, I'm joined by our Chief Executive Officer, Brian O'Toole; and our Chief Financial Officer, Henry Dubois. On today's call, Brian will provide some highlights on the quarter and give a strategic update on the business. Henry will then review the company's financial results and outlook for 2025. Following our prepared remarks, we will open the line for your questions. A replay of this conference call will be available from approximately 12:30 p.m. Eastern Time today through August 21st. Information to access the replay can be found in today's press release. Additionally, a webcast of this earnings call will be available in the Investor Relations section of our website. In conjunction with today's call, we have posted a quarterly earnings presentation on the Investor Relations website that you may use to follow along with our prepared remarks. Before we begin, let me remind you that certain statements made during today's conference call regarding our future plans, objectives and expected performance, including our financial guidance for 2025, are forward-looking statements. Actual results may differ materially as these statements are based on our current expectations as of today and are subject to risks and uncertainties, including those stated in our Form 10-K. We encourage you to review our press release, Form 10-K and other recent SEC filings for a full discussion of the risks and uncertainties that pertain to these statements and that may affect future results or the market price of our stock. BlackSky assumes no obligation to update forward-looking statements, except as may be required by applicable law. In addition, during today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA and adjusted imagery and software analytical service cost of sales. A reconciliation of these non-GAAP financial measures to their most comparable GAAP measures are included in today's accompanying presentation. At this point, I'll turn the call over to Brian O'Toole. Brian?

Brian E. O’Toole, CEO

Thank you, everyone, for joining us this morning. I'm pleased to discuss our strong performance during the quarter. We're in a prime position to take advantage of the growing global market for our real-time space-based intelligence solutions. Our new Gen-3 satellites are performing exceptionally, and combined with our Spectra platform and AI capabilities, we're securing new contracts and expanding our customer base. With the successful completion of our debt refinancing, we've boosted our balance sheet and liquidity, positioning us for future growth. We also have over $350 million in funded backlog, primarily from a diverse international customer base for our Gen-3 services. As we continue to roll out our Gen-3 Constellation, we anticipate further growth as we add new and existing customers. We're innovating within a robust portfolio of space technologies, including proprietary AI and advanced satellite design. Recently, we announced the Arrow Constellation, which presents new growth opportunities for us. Now, regarding recent highlights, we've secured a multiyear contract with the National Geospatial Intelligence Agency worth up to $24 million, allowing us to continue meeting their global monitoring needs. We've seen high demand for Gen-3 services, leading to new early access agreements with international defense customers. Our second Gen-3 satellite was launched in June and began delivering high-resolution imagery shortly after launch, setting a new industry standard. We are on track to have six Gen-3 satellites operational by year-end, and our next satellite is undergoing final testing. Additionally, we raised $185 million in a convertible note offering to enhance our liquidity and revenue growth potential. The momentum in our business is clear as our space-based intelligence solutions gain traction globally. Over the last quarter, we've been awarded a multiyear delivery order for operational monitoring under the Luno A program, validating our capabilities in delivering AI-enabled solutions. We're monitoring strategic military and economic facilities worldwide, providing critical insights to our customers. Our services are expanding, and we're seeing increasing international demand for BlackSky offerings. In particular, our recent contract with a major international defense customer combines Gen-3 and Gen-2 imagery with modernization services, showcasing the commitment to our solutions. We've also made progress in Latin America, providing defense agencies with AI-driven insights. Our agreements with allied defense customers ensure they can access Gen-3 imagery for enhanced intelligence operations. As we move forward, it's important to note that around 85% of our backlog comes from international customers for Gen-3 services. Our investments in international expansion are showing positive results, allowing us to manage uncertainties in the U.S. government's budget. We remain confident in the long-term potential with the U.S. government. The demand for real-time intelligence is critical as the pace of global changes increases. We have seen how customers are utilizing our satellite imagery to monitor significant events, providing vital intelligence. After successfully launching our second Gen-3 satellite, which started operational imaging shortly after launch, we anticipate meeting our goal of having six Gen-3 satellites operational by year-end and aiming for eight by early 2026. Existing contracts are designed to scale with our increased satellite capacity over time. We're also investing in the future with the Arrow Constellation, aimed at addressing emerging needs in digital mapping. We're accelerating this initiative in response to the expected gap in market capacity from legacy satellites, with plans to launch Arrow satellites as early as 2027. Combining our monitoring capabilities with the new mapping capabilities will enable us to provide a broader range of scalable intelligence solutions. Now, I'll hand it over to Henry to discuss the financial results.

Henry Edward Dubois, CFO

Thank you, Brian, and good morning, everyone. Starting with Slide 12. Total revenue for the first half of 2025 was $51.7 million, an increase of $2.6 million or 5.2% over the same period in the prior year. As we discussed on our first-quarter earnings call, we had a large contract award in the first quarter that pulled revenue forward from the second quarter. And as such, we feel it is more appropriate to discuss the full first-half performance rather than just the second quarter in many instances. The main driver of the revenue growth was from higher professional and engineering services as timing of these contracts can vary from period to period. Revenues from our high-margin Imagery and Analytics business increased in the second quarter, driven by greater imagery orders and subscription growth for these services. Keep in mind, we are only providing initial Gen-3 imagery at this time to a small number of customers through early access agreements. However, we expect for these advanced services to begin ramping up once we start general availability to all customers in the fourth quarter. Moving to Slide 13. Our adjusted imagery and analytics cost of sales for the first half of 2025 was $7.2 million, up only $400,000 compared to the same period in the prior year. As a reminder, adjusted imagery and analytics cost of sales excludes stock-based compensation, depreciation, and amortization expenses as we believe this measure represents a more accurate picture of our business without having these noncash items obscure the underlying performance. Turning to Slide 14. Our adjusted EBITDA for the first half of 2025 was a loss of $3.4 million compared to an adjusted EBITDA of $3.5 million in the prior year period. The year-over-year decrease was primarily due to higher SG&A expenses from LeoStella, which includes investments in Arrows. Excluding these expenses, we would have reported a positive adjusted EBITDA of approximately $2.2 million for the first half. We will continue to invest in Gen-3 capabilities as planned in order to increase our Gen-3 capacity and unlock revenue growth from existing and new customers. We remain focused on judicious investments and cost management to achieve long-term margin improvement and adjusted EBITDA growth on a path toward free cash flow operations and long-term profitable growth. Turning to Slide 15. As announced in July, we completed a $185 million 8-year convertible note offering. We're happy that interest from investors was exceptionally strong, which led to an oversubscribed book and an increase in the offering size, demonstrating a clear vote of confidence in BlackSky's long-term potential. We used part of the proceeds from the convertible note to repay and terminate BlackSky's secured note of $103.1 million and our commercial bank line of $10.2 million. The remaining net proceeds of approximately $65.9 million are targeted for general corporate purposes and strategic investments. This transaction enabled us to pay off higher interest debt and replace it with a note at an 8.25% interest rate, which is payable to noteholders semiannually in February and August with a maturity on August 1, 2033. With this convertible debt and our path towards free cash flow, our balance sheet and liquidity positions are now much stronger, enabling us to unlock future growth opportunities. Let's move on to our cash and liquidity position, as shown on Slide 16. We ended the second quarter of 2025 with $94.9 million of cash, restricted cash, and short-term investments, which is more than double our cash balance from a year ago. This amount includes $35.8 million in net proceeds from issuing 3.1 million shares of common stock in the quarter under our ATM program. Following the end of the quarter, we successfully completed a $185 million upsized convertible note offering. In addition, in July, we had one warrant holder exercise a portion of their holdings, yielding us $10.8 million of new cash. Our ending cash position, together with the net proceeds from the convertible note and warrants, coupled with our other sources of liquidity, brings our adjusted June 30 liquidity position to nearly $230 million. This is a significant increase of $130 million of liquidity from the second quarter of 2024. Moving to Slide 17. As we previously disclosed in an 8-K filing on July 17, we adjusted our guidance for the full year 2025 to be between $105 million and $130 million in revenue and between breakeven to $10 million in adjusted EBITDA. Given our cost structure and as we grow our revenues in the second half, we anticipate with our operating leverage to get back to positive adjusted EBITDA in the second half of the year, enabling us to achieve this guidance range. Finally, we maintained our full year 2025 guidance for capital expenditures of $60 million to $70 million. The changes made were driven by near-term volatility from the U.S. government budget process and timing related to some international contracts. There is also the likelihood of a U.S. continuing resolution, which historically has slowed the awards of new and expansion government contracts. As a result, those near-term U.S. government reductions have now been factored into our guidance and also reflects the decision we made in Q2 to accelerate our investment in the design of the new Arrow initiative to prepare for the anticipated supply gap coming to the market in a few years. Despite this near-term volatility, we remain confident in our long-term prospects. In summary, we're pleased with the successful convertible note financing, which provides us with additional financial flexibility to continue investing in our business to pursue long-term opportunities. With that, I'll now turn it back over to Brian for some closing remarks. Brian?

Brian E. O’Toole, CEO

Thanks, Henry. In closing, we are pleased with the progress this quarter as we continue to execute across all aspects of our business. Our accomplishments so far this year have us well positioned to capitalize on the growing global market opportunity for our real-time space-based intelligence solutions and have us on a path toward long-term profitable growth. Our new Gen-3 satellites are delivering exceptional performance and when combined with our industry-leading Spectra platform and AI capabilities, we are winning new contracts and expanding our customer base around the world. A strong backlog from these long-term and diverse international customers provides strong out-year revenue visibility and opportunities for expansion as Gen-3 services come online later this year. As we continue to deploy our Gen-3 Constellation over the coming months, we expect to continue this momentum as we add new customers and grow our services with existing customers. With a strong balance sheet and improved liquidity, we are now in a position to unlock even more future growth opportunities. We are continuing our investments and innovation across a strong and vertically integrated portfolio of space technologies, which has us well positioned to capitalize on rapidly emerging market opportunities. And finally, we are accelerating our investments for the future as evidenced by the recent announcement of a new Arrow Constellation, which is a new growth and market expansion opportunity for us. In summary, we are well positioned and have set the stage to meet the rapidly growing global demand for space-based intelligence solutions for years to come. This concludes our remarks for the call, and we'll now take your questions.

Operator, Operator

Our first question comes from Tim Horan with Oppenheim.

Timothy Kelly Horan, Analyst

Can you give us a sense of when you turn on the third-generation satellites for general availability, what that kind of looks like in terms of what's it mean for the revenue trends and volume trends? Like how important is that versus what you're doing right now with limited availability?

Brian E. O’Toole, CEO

Yes, Tim, thanks for the question. As we approach commercial availability in Q4, we will gradually start increasing revenues from both our existing contracts in backlog and new agreements we are signing this summer. You'll begin to notice this incremental revenue over time as we deploy the constellation. It's also important to mention that the contracts we are securing include a mix of Gen-2 and Gen-3 services. The integrated constellation is experiencing strong demand and contributes to the overall revenue growth trend.

Timothy Kelly Horan, Analyst

And just on the U.S. government spending. So, apologize, but get into a little bit more detail on what you're seeing right now? Are you starting to see new orders out of them, new purchase orders? Or what will be the catalyst to kind of cause that to turn back on?

Brian E. O’Toole, CEO

I believe we are experiencing the impact of the current budget process and an expected continuing resolution. We have analyzed several contracts and opportunities, gaining good visibility into them, and considered these scenarios in our guidance.

Timothy Kelly Horan, Analyst

Great. And can you talk about the pipeline for new contracts at a high level? Yes, can you maybe just talk about any new awards or amounts in the quarter if you were to add it all up? I know you kind of gave those details last quarter, would be helpful.

Brian E. O’Toole, CEO

Yes, I can comment on the general trends we're seeing. I think with the success of Gen-3 and the validation of the quality of the imagery and the performance of the satellites, we're now seeing a step-up in interest and demand reflected in some of the early access agreements that we're signing, and we're also seeing a growing pipeline of out-year opportunities coming from that, not only from the imagery and analytics elements of that, but also for satellite solutions similar to programs that we announced previously in places like India and Indonesia.

Timothy Kelly Horan, Analyst

Very helpful. And I guess, lastly, do you have a sense of how your image quality delivery analytics compares to the competition? And I guess, thinking the pricing or other alternatives that your customers have, how much of the competitive advantage is this now?

Brian E. O’Toole, CEO

Yes, I'll say at 35 centimeters, it's comparable to other systems that are about 5x the cost. So when you look at the performance and the economics and then when you combine that with our Spectra and AI capabilities, it's a highly differentiated offering relative to frequency, access to strategic locations in terms of monitoring and then the delivery of actionable intelligence at low latency. So we're highly differentiated not only in the satellites but across our entire platform.

Operator, Operator

Our next question comes from Jaeson Schmidt with Lake Street Capital Markets.

Jaeson Allen Min Schmidt, Analyst

Looking at that backlog number you gave, Brian, not looking for specifics, but at a high level, can you give us a sense of how much of that relates to Gen-3 capacity?

Brian E. O’Toole, CEO

Thank you for the question, Jason. A significant portion of that backlog is tied to Gen-3 imagery and analytics, as well as related satellite solutions and some of the larger contracts we announced previously.

Jaeson Allen Min Schmidt, Analyst

Got you. And then, looking at the outlook or updated outlook for this year, the puts and takes, the high end versus the low end of that outlook, is it really based on a few programs? Or is it sort of just broad-based on thawing in the U.S. government space? How should we think about that?

Brian E. O’Toole, CEO

We are considering both factors. As I mentioned, we have good visibility into several U.S. government scenarios. However, it's important to remember that we usually experience a strong second half of the year. Additionally, the timing of some of these large deals can be challenging to predict accurately. Therefore, we have consistently maintained a wider range as we move into the second half of the year.

Operator, Operator

Our next question comes from Jeffrey Van Rhee with Craig-Hallum Capital Group.

Daniel Hibshman, Analyst

This is Daniel Hibshman on for Jeffrey Van Rhee. Maybe just one opening for Brian. On the early access programs for Gen-3, can you explain to us a little bit better what those look like? We've had multiple of those announced. How does an early access program compare or differ from a full-scale contract? And then is early access essentially just a small operational contract? Or is there a fundamental difference in how the imagery is used in early access? And then what are the steps it takes for an early access program to become a sort of standard operational full-scale contract?

Brian E. O’Toole, CEO

Yes. Thanks, Daniel. The way to think about early access is it's typically a smaller contract to just access the imagery. It does not typically come with a full-service level agreement like we would provide under commercial operations. So, it gives customers early access to assess the imagery and the experience of accessing that imagery through our Spectra platform. Those typically transition into longer multiyear contracts. And also keep in mind, we only have a couple of satellites up right now. And so, as Henry had mentioned, when we get to 4 to 6, that starts to give us meaningful revisiting capacity around a commercial offering. So that ramps up as well.

Daniel Hibshman, Analyst

Okay. That's helpful. I have one more question about Luno. It's exciting to see the significant win you achieved, especially since that facility's task order is much larger than Maxar's, likely making it the biggest task order for either Luno A or B so far. Looking ahead, should we consider the $24.4 million task order as the main award we can expect from Luno over the next four years, or might there be additional Luno A awards as well? Additionally, should we view Luno B as having a similar level of opportunity, or what should our expectations be for B in comparison to A?

Brian E. O’Toole, CEO

Yes, Daniel, you're correct. We believe this is the largest task order awarded under the new Luno contract. What we're observing is a significant variation in the scope of these Luno task orders. We approach them as they come up for bidding in the market. We're particularly excited about this task order because it is a long-term, multiyear commitment that offers greater visibility into recurring revenue from our high-margin imagery and analytics services as options are exercised over the years. We're pleased to have received this award and to see the positive trend emerging from the Luno program.

Operator, Operator

The next question comes from Austin Moeller with Canaccord.

Austin Nathan Moeller, Analyst

Just my first question, do you plan to offer Arrow Imagery in Spectra bundled with Gen-3 imagery? Or would it be a premium add-on to a subscription for a customer?

Brian E. O’Toole, CEO

Thanks, Austin. That's a great question. There is significant demand for wide area mapping services, so we will have offerings related to that. It's also important to note that when Gen-3 operates alongside Arrow capability, it enables broad area monitoring and change capabilities that enhance high-frequency Gen-3 collection. This level of integration by a single company has not been seen in the market before. We view this as an opportunity that customers will leverage, especially as AI is used to analyze broad area changes and is combined with high-frequency change monitoring and more advanced analytics.

Austin Nathan Moeller, Analyst

And what commentary have you heard from the congressional appropriators on the funding for the NRO commercial imagery budget?

Brian E. O’Toole, CEO

Right now, it's in the congressional markup process. So that's very dynamic. Congress is in recess right now. So we'll see how this plays out over the coming months, but it's still very much a dynamic situation.

Operator, Operator

Our next question comes from Greg Burns from Sidoti & Company.

Gregory John Burns, Analyst

In terms of the Arrow Constellation, how many satellites would make up a full constellation? And what is the cost to build and launch one of those satellites?

Brian E. O’Toole, CEO

Yes. When we are closer to deployment, we will provide more details. One thing that's safe to say is that the attractive economics we are seeing with Gen-3 will also apply to the Arrow System. We believe this will offer a very competitive imaging capability at significantly better economics than what is currently available in the market.

Gregory John Burns, Analyst

Okay. Can you provide the breakdown of your full year revenue guidance between imagery and engineering?

Brian E. O’Toole, CEO

About 70-30 meaning analytics sort of.

Gregory John Burns, Analyst

Okay. I wanted to follow up on the U.S. government spending outlook to better understand the situation. Prior to this uncertainty, the expectation was that government spending would increase with Gen-3 coming online, and I assumed they would begin using those services. Does the current outlook and guidance suggest that they will not be utilizing the Gen-3 satellites, indicating a lack of funding for that? Additionally, is there a chance they might reduce their use of Gen-2? I wanted to clarify their consumption outlook based on what you're observing now.

Brian E. O’Toole, CEO

Yes, I would say a couple of things. Obviously, it's dynamic, so it's unclear what's actually going to manifest in the actual budget, but we may not know that until early next year. There is significant demand for Gen-3 capability. So we anticipate the government will want access to Gen-3 as well as Gen-2.

Operator, Operator

Our next question comes from Caleb Henry with Quilty Space.

Caleb Henry, Analyst

I have a couple of questions. First, I see that Arrow is still some time away. Can you provide any insight into the resolution of the satellites, the size of the revisit, and will the satellites generally be the same size? Or are we looking at significantly larger or smaller spacecraft?

Brian E. O’Toole, CEO

As we move forward, this will be a very high-resolution multispectral satellite. We'll determine the size of the constellation based on market demand, targeting a sensible refresh and revisit rate. We anticipated this opportunity and began investing in some of the technologies for the system a couple of years ago, which led to our acquisition of LeoStella. It will certainly feature a different payload, but it will also leverage some new technologies in the bus and other areas we have been developing.

Caleb Henry, Analyst

Okay. And then your presentation this morning references strategic investments as a potential use of proceeds from recent funding raised. Can you talk any about what types of things BlackSky would be interested in as a strategic investment, especially since Arrow is being built internally and you already have LeoStella?

Brian E. O’Toole, CEO

Yes. I'll just talk more broadly. Obviously, we are investing significantly in AI. We are also seeing emerging opportunities for things like Golden Dome that can leverage aspects of our technology stack and space. And as those opportunities become clearer, that may be an impetus to invest more. Arrows is a strategic investment. So, we see that as a new market and growth opportunity out in that 2027 time frame. I still want to emphasize that we remain highly focused on growing our EBITDA margins and getting to free cash flow operations here in the near future. So just because we've secured the cash and liquidity on the balance sheet, it does not mean we're going to be changing significantly our overall operating or investment profile.

Caleb Henry, Analyst

My last question is about the international business. 85% of the backlog is significantly higher than last year's 40%. I know BlackSky has made substantial investments in that area. I'm interested to know if there are other factors contributing to growth in those markets. Additionally, do you expect this level to stabilize, or do you foresee international growth continuing to outpace domestic growth?

Brian E. O’Toole, CEO

We're seeing it growing faster than domestic for sure, absent what happens with some of these larger programs like Golden Dome and some of the Space Force opportunities. But certainly, we see international growing faster and in some cases accelerating. So, that's going to create new opportunities for us in different regions across the world.

Operator, Operator

Our next question comes from Robert Lynch with Stonegate Capital Partners.

Robert Lynch, Analyst

Just wanted to tie back to that 70-30 revenue split you mentioned earlier. P&E revenue was a bit lumpy this quarter. Any sense of if you'll get that pick up in the back half of the year tied to any specific milestones? Or is this a broader shift towards recurring imagery and analytics driving the mix change?

Brian E. O’Toole, CEO

I think for now, you can assume that appropriate ratio of Imagery and analytics to professional engineering services. There's still some lumpiness in those professional engineering contracts as they're all different and have different milestone-based delivery. So, we do anticipate continuing quarter-to-quarter variability related to that revenue line.

Robert Lynch, Analyst

Okay. Great. Just how are you seeing contract terms shift with Gen-3 going up? Is there competition to lock in longer terms? Or what does that landscape look like going forward into the second half here?

Brian E. O’Toole, CEO

Yes, the trend is shifting towards securing longer-term agreements. In the first half, we signed a significant multiyear agreement. The two contracts we announced last quarter were also multiyear agreements. This trend is consistent, and historically, once these types of customers integrate their operations, they prefer to establish long-term recurring revenue contracts to ensure they have the necessary capacity in their regions of interest. We're observing this trend, especially now that Gen-3 is operational.

Operator, Operator

At this time, there are no further questions. This concludes BlackSky's Second Quarter 2025 Earnings Conference Call. Thank you for joining the call today.