Nextnav Inc. Q3 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by. My name is Shubro and I will be your conference operator today. At this time, I would like to welcome everyone to the NextNav Q3 '23 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Erica Bartsch. Please go ahead.

Good afternoon, everyone, and welcome to NextNav's third quarter 2023 earnings conference call. Joining us are Gary Parsons, NextNav's Chairman, Ganesh Pattabiraman, Co-Founder and CEO, and Chris Gates, Chief Financial Officer. Before we start, I want to remind you that during today’s presentation, we might share forward-looking statements in our prepared remarks or during the question-and-answer session. These statements could pertain to our business plans, growth objectives, and intentions for our 3D geolocation services, as well as our next-generation GPS platform and international expansion. They may also cover our partnerships and the anticipated success related to them, along with our future strategies, competitive standing, industry landscape, and other growth opportunities. These forward-looking statements are based on current beliefs and expectations but are subject to various risks, uncertainties, and assumptions that could cause actual results to differ significantly. These may include our financial performance expectations, demand for our services, timing of regulatory approvals, partnership developments, market conditions, our ability to manage resources, and other operational factors. We advise against relying on these statements as reflections of our future outlook, as we have no obligation to update them after the date they are made, except as required by law. After our prepared remarks, we will open the call for questions. A replay of this discussion will be available on our Investor Relations website after the call. Now, I will hand it over to Gary Parsons. Please proceed.

Thanks very much, Erica, and good afternoon, everyone. Welcome to NextNav third quarter call. As Erica mentioned, joining me on today's call is Ganesh Pattabiraman, NextNav's Co-Founder and CEO and Chris Gates, NextNav's Executive Vice President and Chief Financial Officer. This past quarter saw significant progress on a number of our key initiatives, both on the spectrum front and with continued public safety and GPS resiliency efforts. Ganesh will provide more detail on individual contracts and government agency activities, but from an overall strategic perspective, I'm frankly pleased with the ongoing traction of our government and public safety efforts, both on the E911 three-dimensional geolocation front, and with the growing consensus on GPS vulnerabilities and the true need for PNT or GPS resiliency to protect critical infrastructure. NextNav is the acknowledged leader in this area. And we see growing opportunities to expand that leadership position, both here in the United States as well as around the world. A number of these resilient GPS or position navigation and timing PNT initiatives are demonstration programs or initial implementations that are expected to lead to expanded deployment in future phases. Chris will get into that in more detail in his section. Additionally, as we've shared in prior quarters, the specifics of some of these programs, including the contracting agencies, all remain confidential at this stage due to national security issues, but we will try to share as much insight as we can consistent with those non-disclosure responsibilities. As the team will discuss in more detail, several of these opportunities involve partnerships, either with state and federal agencies or leading research universities, responding to RFPs or RFIs in advance of the executive order 13905 finalization. From a purely political standpoint, it probably is worth reiterating the substantial bipartisan support that continues to exist with securing the nation's critical infrastructure and providing a resilient layer to GPS. Regardless of the continuing uncertainty in the federal government's overall budgeting process, there is clear support for current and even growing funding for these initiatives. We expect substantial revenue growth from this sector as we go through 2024. Next, on the spectrum front, on last quarter's call, you remember we announced the granting of an FCC experimental license and disclosed that we would design and deploy a 5G TerraPoiNT network in the Bay Area. We have now, in fact, deployed a network in Palo Alto, California, capable of numerous 5G carrier bandwidth and power levels and have begun a formal testing program. We expect that those testing results will validate our ability to provide highly reliable 3D geolocation and resilient PNT capabilities, using the 5G waveform, while simultaneously using the 5G signal for significant data throughput. We expect that the testing program to be largely complete by the end of this year, following which we would expect to file for appropriate license waivers with the SEC to provide commercial service using these configurations. Overall, a solid quarter of progress towards our key strategic priorities. And with that, let me go ahead and turn it over to Ganesh to go into more depth on the recent contract awards and our operational performance on government and public safety efforts, both with Pinnacle and TerraPoiNT services.

Thanks, Gary, and good afternoon, everyone. It's been another productive quarter, and we're seeing growing momentum out of key partners and federal and state government agencies as the need for solutions tied to PNT resilience grows in importance. Notably, in September, we participated at ION or the Institute of Navigation Conference in Denver where we demonstrated our TerraPoiNT hybrid systems timing and 3D positioning capabilities, leveraging LTE signals from cellular operators. While at the conference, we were able to meet with government officials from the Department of Transportation, Department of Homeland Security and Department of Energy and other partners and held very productive conversations. This reinforced our belief that the government is now actively moving from discussion towards tangible action phase. At this same conference, the Department of Transportation announced its complementary PNT action plan. The plan lays out the key milestones, timelines and establishment of a PNT services clearinghouse or PNT marketplace. As part of this framework, we see DOT issuing RFPs in the coming months that will sponsor several initial implementations of Brazilian PNT systems like TerraPoiNT in critical infrastructure providers' equipment. This is to establish a framework for complementary PNT systems to operate in conjunction with GPS and GNSS systems that may be in operation today. A good example of this is in the telecommunication systems; we could see both GPS and complementary PNT systems-based timing to be integrated as part of the core infrastructure of the operator and to ensure that the two systems can function in a seamless manner. The DOT also plans to establish a clear designated clearinghouse for federal users and critical infrastructure operators. This would be a place to find a list of vetted and qualified complementary PNT providers like NextNav, to help advance their resilient PNT needs and procure services to be in compliance with executive order 13905 beginning in 2025. This is very similar to the federal acquisitions process, where the pre-vetted list of technologies is made available for different federal government agencies to procure against. Here, the intent is broader to not only affect federal government acquisitions, but also critical infrastructure operators and eventually commercial entities, too. In essence, what we see in 2024 and the early part of 2025 are funded initial implementations in various critical infrastructure use cases that will pave the way for wider adoption across the sectors. These timelines and frameworks are captured in our investor deck on slide 5. As we noted last quarter, we're starting to see many state and federal agencies begin to take proactive steps towards building PNT resilience. As part of that strategy, I'm happy to report that we recently signed a contract to support the federal government in their PNT strategy. While we can't speak to the specifics of the contract due to the sensitive nature of our work, we can say that the project will leverage our existing infrastructure to provide persistent PNT characterization initially in select markets around the country. And upon successful completion of this phase, we expect to expand our capabilities nationwide, and this would likely represent our largest contract to date. In addition, many state and federal agencies and critical infrastructure providers are taking steps towards commercial implementation of resilient PNT systems, using federally funded test beds and in some cases, plans around commercial enablement in anticipation of procurement language for executive order 13905. For instance, we have submitted multiple proposals in partnership with state and local agencies as well as research universities in areas as diverse as timing for land mobile radio systems with Texas and automotive use cases with Ohio, as part of smart and cybersecurity grants sponsored by Department of Transportation and Department of Homeland Security, respectively. We expect to be notified of the status of many of these opportunities over the coming months and in the first half of 2024. I must add here that although the process of implementing the complementary PNT strategy is going smoothly within the departments and agencies, we do see a short-term impact from the current stalemate in Congress, including the release of procurement language in support of executive order 13905. We now anticipate this order will be released in Q1 of 2024. However, we currently don't see that impacting either the overall 2025 implementation timeline or the grants to be issued in 2024. Turning now to our Pinnacle technology, we continue to see ongoing progress in the E911 and public safety domain. Notably, we recently announced an agreement with the Iris flip-phone which will be sold on consumer cellular, one of the largest MVNOs or mobile virtual network operators in the country. This is our first device with this carrier. Beyond this agreement, Verizon is continuing to expand its integration of Pinnacle services across devices on their portfolio, and we expect to reach double-digit device models with them in the coming months. With these arrangements, we are now contracted to be on five wireless carriers across the country, including the top four nationwide carriers. As we have shared before, we operate through different business models depending on the specific carrier. In some cases, we have agreements at the carrier level for all devices within their portfolio or we just have a licensing model for each device for the life of that specific device. Either way, these relationships put us in a clear leadership position in E911 and public safety domains. And as we move forward, we look forward to bringing more adoption and integration of our Pinnacle technology to additional devices. On the international front, with the U.S. government moving forward with initial test beds, we expect to see similar actions from foreign governments as well. In Japan, the Japanese Ministry of Information and Communication or Ministry of Internal Affairs and Communication is going through a public comment period on the spectrum, which is likely to be followed by an ICC or Information and Communications Council process. In Europe, the European Commission as part of its recommendation on critical technology areas for EU economic security included PNT as a critical technology. This now leads to a consultation phase with a number of states before moving to the EU legislation phase. And in the U.K., the British government recently released a PNT policy framework and a plan around PNT resilience. In all, we feel very energized by the activities we're seeing across the U.S. government and globally as the importance of PNT resilience gains traction. We believe we have a real opportunity to be a leader in this area, and the growing roster of partnerships and agreements is a testament to this fact. With that, I'll turn over the call to Chris. Chris?

Thanks, Ganesh, and good afternoon, everyone. Thank you for joining us for our third quarter earnings call. As both Gary and Ganesh highlighted, we made important progress in our efforts to expand the utilization of our spectrum licenses in the third quarter and are starting to see tangible results from the PNT resiliency programs underway in the federal government. With respect to our financial results, third quarter revenue increased 104% to $1.0 million compared to $500,000 in the prior year period, primarily due to an increase in recurring revenue from technology and services contracts with commercial customers. Sequentially, revenue was up $200,000. Year-to-date, revenue decreased 15% to $2.7 million versus the prior year period, driven by decreased integration revenue, partially offset by an increase in recurring service revenue from technology and services contracts with commercial customers. Our operating expenses were $15.6 million, down from $18.4 million in the same period last year, with much of the difference due to lower stock-based compensation expense, partially offset by higher depreciation and amortization. Excluding stock-based compensation and depreciation and amortization, operating expenses were $10 million compared to $10.9 million in the prior period and $10.3 million in the second quarter of 2023. Year-to-date, operating expenses were $46.3 million, down from $54.1 million in the prior year, with the reduction driven by the same drivers. Excluding stock-based compensation and depreciation and amortization, year-to-date operating expenses were essentially flat at $30.1 million in the current period and $30.9 million in the prior year. Third quarter net loss was $23.2 million compared to a loss of $18.7 million in the prior year. The primary drivers for the increase were net interest expense of $1.7 million and a change in the fair value of our warrant liability of $6.7 million compared to net interest income of $0.3 million and a change in the fair value of warrant liability of $1 million in the prior year. Year-to-date, net loss was $55.3 million as compared to a loss of $27.6 million in the prior year period. Here, again, the primary drivers were net interest expense of $1.6 million and a loss associated with the change in fair value of our warrant liability of $9.8 million compared to net interest income of $0.4 million and a gain associated with the change in fair value of our warrant liability of $23.2 million in the prior year. Touching on our balance sheet, we previously covered the $20 million of additional senior secured notes, and I note that we finished the quarter with $97.1 million in cash, cash equivalents and short-term investments. Also included in that amount is $882,000 of warrant strike price exercise. As you may recall, the warrants we issued as part of our debt financing are only exercisable for cash and partially callable beginning in 2025. Whether called or exercised otherwise, these warrants may provide a source of additional liquidity as they did in the current quarter. As we've stated in the past, we continue to closely manage and refine our cost base as we build value on our assets and bring new customers into service. And I'd also like to provide some additional insight into the revenue side of the federal and state government activities and process highlighted by Gary and Ganesh. The first contract discussed by Ganesh is in implementation with an initial phase covering a limited number of metropolitan markets with the potential to approach $0.5 million through 2024, starting in the fourth quarter of this year. If the second phase is contracted, it would be expected to encompass a broader geographic area and could be our largest single contract to date, approximately an order of magnitude greater than the initial phase. While complementary PNT remains in the earliest stages of adoption, we are pursuing additional state and federal grant programs for 2024. Under these programs and in partnership with federal or state entities, we will begin implementation of our complementary PNT services in support of different applications and use cases, as Ganesh highlighted previously. We expect per contract for grant values in this phase to range from hundreds of thousands to low millions with durations between one and two years. This will set the foundation for a service provision over longer durations, broader geographic areas and substantially larger grant or contract amounts starting in late 2024 or 2025. Finally, we anticipate incorporation into DOT's complementary PNT clearinghouse, which as Ganesh highlighted, should result in streamlined procurement of our services at the federal level beginning in 2025 and broader-based integration of our resilient PNT capabilities across federal, state and critical infrastructure sectors in 2025 and beyond. Thank you. And with that, I'll hand the call back over to the operator for questions.

Our first question comes from Griffin Boss with B. Riley Securities. Griffin, your line is open.

So just first, can you give a little bit more color on where you're at with regards to the testing and collecting the requisite data for the FCC? I know you said you hope to finish this testing by the end of the year, but I guess, what could happen that would push the testing process into 2024? Or what's your level of confidence that you can gather the appropriate data by then?

Thank you for your question, Griffin. We won't announce the results of the testing prematurely; we'll share them when we include the results in our filings with the FCC. For your planning purposes, that is when we will go public with the information. I am pleased with how quickly we obtained FCC approval for the changes we requested for the experimental license. Our ability to design, procure equipment, and get it set up in the Palo Alto area within a three- to four-month timeframe is something I'm very happy with. The network has been set up, and we are currently in the testing phase. If you’ve seen our experimental license approvals from the FCC, you'll notice that we plan to test various configurations, including eight contiguous channels that could serve as a supplemental downlink configuration, as well as testing different power levels, including our existing approved levels and higher levels that we believe we can operate without causing interference. So, we have a comprehensive testing program. I expect it to be largely complete by the end of the year; that is our goal. However, if the results lead us to adjust power levels or duty cycles, the process may extend slightly beyond that timeline. Testing is progressing well, and we are satisfied with our current status. Again, I won't provide any comments on the testing results until it is complete and we have made the required filings with the FCC.

Sure. That makes sense. Would there be a delay in completing the testing? Do you expect to file with the FCC immediately once testing is done? Are you working on those filings at the same time, or will it take some additional time?

Let's see. As immediately as is possible. Clearly, we are working on those filings already, so we are doing that on a parallel basis is what we would expect to file, but as you can imagine, some of the actual finalization of what we would request and how we would best like it configured is going to depend on the results of the testing. So, we will have to wait to get the final of that into place before we finalize the thing, but candidly, I think it's something that would not take too much longer beyond the completion of testing before we actually put in and also likely to be a licensed waiver. I know some people have talked about doing petitions for rulemaking and going through a notice of proposed rulemaking, that may be required. The FCC may require us to do that, depending upon how extensive the waiver request might be. But we also think it's not a major lift to have some of the changes that we're looking to have, and some of those may well be able to be done at bureau level through a waiver process. So those are not things I can give you a hard and fast and firm answer to right now, but I don't think, for example, multiple months of writing up an FCC request following the testing, I think it would happen pretty quickly after the testing completion.

Got it. Okay. Understood. And then so shifting gears, it's nice to see the DOT's action plan. I guess were there any surprises with that plan that you saw, whether that'd be timing of milestones or just general outline? Was it consistent with what you would have expected?

Ganesh, do you want to take that?

Yes, I can address that. We previously mentioned that once the implementation guidelines are released, they will go through the federal regulatory approval process, which may take 12 to 18 months. This aligns with the 2025 timeframe, so it wasn't a surprise. We're pleased that the DOT is encouraging the industry to adopt resilient PNT solutions and conduct tests in 2024. Once the implementation guidelines are more widely adopted, we will have some baselines to work from. The idea of a clearinghouse is a welcome addition to the process as it facilitates quicker and broader adoption once integrated into that framework. Overall, the timelines were expected, but the additional features introduced in the implementation plan were certainly positive.

Understood. Ganesh, appreciate it. I'll jump back in the queue.

Your final question comes from the line of Timothy Horan with Oppenheim.

It sounds like you're making a lot of progress. Could you just talk about what's the government's ultimate goal here? Are they looking to create like a GPS type system that's free that they fund, that anyone can use? Or is it and would it be nationwide? Or are they just looking for maybe just government users and first responders to use? What do you think they're ultimately looking to do?

I'll let Ganesh explain further as he is closely involved in that part of the business. Overall, I don't believe they plan to create a secondary terrestrial system that they would own and operate; that hasn’t been their approach in the past. Their aim appears to be encouraging the industry to develop these systems, while also enabling government users to be the initial adopters to kick-start the process. Ultimately, they want critical infrastructure to be held accountable for maintaining a resilient system, ensuring that if GPS experiences issues, their infrastructure continues to function effectively. A crucial aspect of this is requiring bidders for government services to demonstrate their ability to implement the necessary technologies. While I can’t rule anything out regarding government contracts, I don’t foresee a scenario where they would contract us to establish a terrestrial PNT system. They seem to acknowledge, as reflected in the DOT testing a few years ago, that various technologies provide different or superior services in different locations. For instance, the old LORAN networks were primarily used by mariners and are ideal for ocean areas where beacons are lacking. Similarly, satellite systems like TELUS are better suited for rural or some suburban regions, but they struggle with penetrating deeper inside buildings. The DOT testing and broader governmental understanding suggest that creating their own complementary PNT capability would involve deploying varied technologies and building out a terrestrial network, which seems unlikely. They may develop certain aspects, and here Ganesh might share insights on some of the initial trials and pilots they are funding.

I don't think the government is inclined to create an additional system to back up GPS, as there isn't a universal solution. GPS has a unique functionality, and we're seeing various applications with distinct needs. eLORAN works well for maritime purposes but isn't compatible with cell phones or urban areas. Additionally, moving from one point of failure to another would be an unwise choice. The government aims to utilize multiple technologies for PNT resilience, as recommended by the Department of Transportation. Their current effort is to be the first customer for resilient PNT systems across the entire federal government, not just in specific sectors. They recognize that they aren't major buyers of these systems, and by adopting them first, they hope to motivate critical infrastructure providers, wireless operators, and suppliers to follow suit. The urgency is evident due to global events like the Ukraine conflict and the situation involving Israel and Hamas, where GPS jamming has become commonplace. Therefore, enhancing industry resilience is essential. Test beds are being established to implement systems in real-world applications, whether in mobile phones, automotive sectors, aviation, or infrastructure systems. The focus for the next 12 to 18 months will be on this implementation. After the adoption of executive order 13905, the goal is to integrate these systems throughout the federal enterprise and into critical infrastructure sectors, leading to broader commercial applications. The government plans to support the funding of these implementations during initial trials and wider adoption phases since they acknowledge that critical infrastructure vendors face challenges in adopting new systems without funding, especially when GPS is free. Grant programs are being utilized to facilitate and accelerate the adoption process.

So let's say, everything goes really, really well, I mean how large of a customer can the government be in four, five years as this is built out? Or how much money could you receive annually from the government, do you think?

It's not entirely clear at this moment, but we can certainly say that the intention is for it to cover the federal enterprise. This includes everything from the FAA procuring systems to health and human services for emergency services, as well as all critical infrastructure providers like telecom operators and those involved with the electrical grid. Any users who require timing, positioning, or navigation will need to ensure resiliency. This could potentially become a significant revenue source for us. We are already witnessing initial signs of this with the government contract we just signed. Currently, the amount is relatively small, but if this initial phase progresses to the next phase, it could become our largest contract within a year, and it could expand further as we approach 2025.

Got it. And sorry, just one last question. Any updated thinking on the best use of the spectrum and technology? Do you think you would build out this network yourself and charge for usage, or would it make more sense to sell it?

I'll take that one. I'm usually hesitant to make broad speculations because the nature of partnerships can vary significantly, leading to different configurations that might appeal to different players. I've mentioned that the supplemental downlink is crucial, but if we can achieve two-way capabilities, it could attract additional partners. My current assumption—though I dislike labeling it as just a guess—is that we wouldn't pursue building it ourselves. It's more plausible that we would lease the spectrum to one of the major carriers for their development. We would still need to ensure we provide full PNT and E911 services, as that's a vital requirement from the government. This makes us believe the government will view our plans positively since we are offering a critical national security service. Thus, the most practical approach would likely involve leasing or possibly negotiating a one-time upfront payment for a multiyear lease. While it's conceivable we could build it out ourselves, I don’t believe we would do so without partnering with a contracted party that has a vested interest in using it. We currently don't see ourselves as looking to establish a nationwide carrier or anything of that sort.

Do you have an idea of how simple it would be for a carrier to integrate this into their current infrastructure? They appear to be increasingly adopting carrier aggregation.

Well, absolutely. And carrier aggregation is absolutely the norm. I mentioned either a supplemental downlink or even a supplemental uplink. The key with other existing spectrum is more of your likely implementation. It is a lot more of that being done today. And what configurations we are able to create and what power levels can be created will have a direct bearing on how easily it can be incorporated into, say an existing carrier's rollout plan. So probably not much more I can say on it at this point in time. Likely when we do make our filings with the FCC, you'll get a far greater granular visibility into what we think we'll be able to pull off. But yes, I mean, we think there's an undeniable spectrum value there if utilized as a 5G data carrier, but exactly what configuration and what other spectrum it might be paired with in a network are things that we probably won't opine on today.

Yes. Got it. That's really, really helpful.

At this time, there are no further questions. I would like to turn the call back over to Gary.

Thank you very much for joining us today. We appreciate everyone who has dialed in. As we usually start these calls, we want to highlight our three strategic priorities: to strengthen our leadership in 3D Geolocation and PNT resiliency, to optimize our spectrum assets for maximum commercial potential, and to broaden our global presence. We believe that today's call will demonstrate the significant progress we've made in all these areas this quarter. Once we finish our testing program and file with the FCC, we expect to showcase even more advancements. We appreciate your participation today and look forward to speaking with you again during our end-of-year call.

Thank you, ladies and gentlemen. That concludes today's conference. You may now disconnect.