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BlackSky Technology Inc. (NYSE:BKSY) is a company that uses its satellite and satellite constellations to provide geospatial intelligence and data analytic products and services to solve problems for its customers.
Operating in a capital-intensive business, concerns over the ability to continue to fund operations for a prolonged period of time have weighed on the minds of some analysts and investors for a while.
As the company gets more wins some of that will be alleviated by improvement in associated costs as it scales the business, while it presumably committed to find ways to remove more expense out of the business.
The company appears to have started to gain traction in diversifying its revenue streams – primarily by governments and internationally. It has started to grab some business from commercial accounts, which I think will be important for it to eventually lead to profitably in the future.
In this article we’ll look at some of its recent numbers in its latest earnings report, and at what it may eventually have to do to raise capital to keep operations going until it turns the corner.
Latest numbers
Revenue in the third quarter was $16.9 million, up $9 million, or 113 percent year-over-year. Imagery and software analytics revenue accounted for $15 million of total revenue, which was up 130 percent over the third quarter of 2021. The bulk of the revenue came from U.S. and government customers in other parts of the world. The remainder of the $1.9 million in revenue generated in the quarter came from engineering and systems integration services.
BKSY showed improvement in cost of sales as a percent of revenue, which was 46 percent in the reporting period compared to 159 percent in the third quarter of 2021. In its imagery and software analytical services business, cost of sales as a percent of revenue was 35 percent in the third quarter, an improvement over the 111 percent last year in the third quarter.
The growth of its high-margin imagery and analytics business is the key to it increasing margin and reducing costs of sales as a percentage of revenue in the quarters ahead.
Not including stock-based compensation, operating expenses in the quarter was $25.6 million in the third quarter, up from the $18.6 million in operating expenses in the third quarter of 2021. The increase was attributed to an increase in operating costs and higher depreciation expense from placing more satellites into orbit in the fourth quarter of 2021.
Operating loss in the quarter dropped to $19.4 billion against the $48.9 million in operating losses year-over-year. The improvement came from lower stock-based compensation and increase in gross profit from its imagery and software analytics services revenue. Most of it was from lower stock-based compensation, is a positive to me, as it suggests to me that management isn’t using the company primarily as a personal piggy bank.
Adjusted EBITDA for the third quarter of 2022 was negative $6.5 million, compared to the adjusted EBITDA loss of $16.3 million in the third quarter of 2021. The improvement was attributed to increasing revenue growth to the point is exceeded incremental costs.
The $9.8 million year-over-year improvement was primarily due to significant operating leverage achieved by increased revenue growth significantly exceeding incremental costs.
At the end of the third quarter the company had cash and cash equivalents of $37.2 million, and including restricted cash, and short-term investments it stood at $90.7 million. That was far below the cash and cash equivalents of $165 million at the end of calendar 2021, which is why concerns over cash burn continue to weigh on the company.
CapEx in the third quarter of 2022 was $8.8 million, while CapEx for the first nine months of 2022 was $34.3 million.
On its earnings call management stated it had filed an S-3 shelf registration with the SEC, which means the company could go to the capital markets as a means of raising capital. I know that diluting shares is usually considered a negative by the majority of investors, but in the case of a company like BKSY which appears to have a legitimate chance of successfully growing its business, over time, to the point of becoming profitable, I don’t consider it a big issue at this point of its growth. If it was just burning cash and just offering hope with no substance to back it, it would be more of a concern for me, but with its growing number of wins, especially in in its high-margin imagery and analytic business, it looks to me that it has a pathway to profitability over time.
With that in mind, if it has to issue more shares in order to obtain the needed capital to implement its strategy, that is worth diluting the stock; after all, it can always reverse that by buying back shares once it has the means to do so.
I don’t think BKSY is going to do this in the near future, as it’ll wait to see if it wins enough high-margin business to slow down cash burn and grow organically. If expenses out run available capital, it’ll be at that time the company would access capital markets for funding.
Differentiation
When queried about how the company differentiates itself in the sector it competes in, management said it’s in its capacity to provide real-time, “actionable intelligence,” citing the EIM contract with NGA as an example. It should be understood here that this was in regard to information and analytics and not imagery. The company believes this was why it was able to win $14 million of the $30 million contract offered to the market over a period of five years.
In other words, the company is saying it’s not providing quality imagery that is setting it apart from its competitors, but the real-time information and analytics that accompany it.
The legitimate question could be asked concerning why the company pointed out that its ability to collect imagery as much as 15 times a day because of its constellation was asserted to be a differentiator which is driving demand for its services. The answer is, it’s the information and analysis extracted from the imagery that’s most valuable for its customers.
Diversification
As for diversification, BKSY has been making progress by winning business, not only in different departments of the U.S. government, but also in other governments outside the U.S. It’s also slowly starting to grow its commercial business as well, which represents a huge opportunity for the company if it is able to start winning significant market share there.
Momentum in international market has been accelerating, based upon demand for “vital geospatial information related to strategic assets and locations within their country’s borders and within their regions of interest.”
The company referenced an example of a renewal of a subscription contract in the third quarter from an International Ministry of Defense customer located in Asia. In that case it received a $10 million contract to provide imagery and analytical services for a period of one year.
Over the last year, the company stated revenues are more than twice what they were from the prior year. That was attributed to increasing demand and the expansion of its international sales team, which is converting that growing demand into expanding contracts.
That of course requires capital, which is why we have to closely watch the financial condition of the company as it moves forward.
In order to further diversify its customer base, the company reportedly has entered in a number of “strategic partnerships.” Management said that as a result of this initiative it is now generating 7-figure revenues from commercial clients.
From management commentary, it appears the new data the company is integrating into its Spectra AI platform is directed toward the needs of commercial enterprises versus the needs of government entities. That would in fact enhance the value of its suite of products, providing growth opportunities in the important commercial side of the business sector.
Conclusion
BKSY competes in an increasingly crowded sector, and asserts the way it is differentiating itself is via real-time information and analytics that separates itself from its competition.
While its primary focus remains on winning the type of government contracts that provide predictable revenue streams, it also realizes it must diversify those contracts across various agencies, as well as other governments. It also is expanding its services to commercial enterprises by adding a lot more data integral to solving their unique problems that are different than the needs and wants of governments.
The big challenge for the company in the quarters ahead will be if it’s able to scale fast enough to offset a lot of its costs in order to limit its need to raise more capital. It’ll of course eventually have to raise more capital, but to reduce the amount it has to raise, whether by increasing debt, which is getting more expensive, or issuing more shares, which dilutes shareholders, it will put the company in the place of being able to generate revenue that is based upon improved gross margin and leading it toward being a profitable company.
In order to do this it must scale, and it must do so in a diversified manner that reduces risk while it increases revenue while lowering costs as a result of it expanding it business.
The thing to watch will be available cash, government contract wins across diverse markets, and how successfully it grows the commercial side of its business.
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