FLYHT Aerospace Solutions Ltd. (OTCQX:FLYLF) Q3 2022 Earnings Conference Call November 10, 2022 9:30 AM ET
Company Participants
Bill Tempany – Chief Executive Officer
Alana Forbes – Chief Financial Officer
Conference Call Participants
Dick Ryan – Oak Ridge Financial
Bruce Krugel – Private Investor
Marc Berger – MKB Associates
Operator
Thank you for standing by. This is the conference operator. Welcome to the FLYHT Aerospace Solutions Third Quarter 2022 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Bill Tempany, Chief Executive Officer for FLYHT. Please go ahead, Mr. Tempany.
Bill Tempany
Thank you very much and welcome everybody to the Q3 conference call. We are very excited about the results in this quarter and the future of the company looks very rosy. I am — we have been working very hard with the staff and our customers and our prospects to make sure that the products we are building, the services that we are putting together, meet the needs of the industry as they recover from the COVID pandemic.
We have invested over the last two years or three years in new hardware, additional software and taking advantage of all of the learnings and software that we have built over the last 20 years. I was talking to an investor the other day and said that FLYHT’s a 20-year-old company that spent 17 years learning what the industry didn’t want to do, building tools that things the industry wasn’t interested in and the last three years, taking those tools and those learnings and creating solutions that the industry needs and wants and appreciate.
We rolled out a lot of those over the last six months or eight months. We have attended 16 shows in 2022. We have got about 19 industry-type shows that were booked for in 2023 and we now have a sales force of 13 people around the globe to go out and sell these products with relationships with the customers all over the globe.
Our recent addition in Europe of the CrossConsense team has opened doors and companies and opportunities over there that were never open to us before because we were a North American company and focused on smaller aircraft.
The CrossConsense team is focused on larger aircraft, larger customers, larger airlines and have experience and expertise in dealing with those companies. We have since beefed up our European sales force with the addition of Murray Skelton in Scotland. We have a part-time person in England that’s helping, Jacob talk to customers in the Middle East, Africa and Europe, and we are very excited about the way the pipeline is growing.
We are currently sitting at about $26 million in backlog, customers with signed contracts waiting for us to deliver product and we have got a sales pipeline, near-term sales opportunities excess — in excess of $75 million.
So we are looking at $100 million of near-term sales opportunities and backlog that we believe are going to very easily fill the base opportunity we had this year in our licensing revenues with new hardware, new services revenue.
We have got a full suite of products functional and working. We have done trials with several customers. We are in the process of signing contracts with those customers on our actionable intelligence tools, the databases, the Amazon Web Services opportunities are there and we are continuing to develop those solutions with new customers and old customers.
And I think you will see a significant ramp in SaaS revenues over the next 12 months to 24 months as the industry recovers, our customers get back to flying and our new products get rolled out across the industry.
So, we are very pleased with the results. We think we can sustain that level of opportunity going forward and it’s certainly our intention to have the company continue on the growth cut, a 100% growth year-over-year is significant and the largest revenue quarter in our history. There was one quarter with higher EBITDA, but it was supported by one-time payments on a purchase that bumped or reduce the cost to a point where that became a very profitable quarter.
I think that everybody in the industry is seeing what we are doing when we talk to companies at the shows, they look at the products, they look at the legacy of the company, the fact that we have been around for nearly 25 years and continue to develop and build.
The staff is really excited to be part of it. We made it through COVID with very few changes to the staff. In fact, we added staff in several areas, and I think, we are tooled for success for the future. We have a strong sales team. We have a very experienced and knowledgeable development certification team.
Our administrative and customer support teams have been solid throughout the pandemic and 10 years, 15 years of experience each that is really serving well for our customers. So I am very excited about what we are doing and where we are going.
And I’d like to turn it over to Alana to make comments on the financial results.
Alana Forbes
Thanks, Bill. Happy too. So I will just have a look at the balance sheet first, then we will turn to the income statement. The first thing you will notice on the balance sheet is a reduction in cash from year-end and then right after an increase in receivables. They are almost exactly offset as a major portion of the cash decrease is reflected in our AR balance at quarter end. Some increases in the AR and AP balances relate to the addition of CrossConsense as of the end of Q1, which carried forward through Q2 and Q3 as they are fully consolidated into our results.
Our intangible balance, you will see a large increase over last year, that again is CrossConsense. Work on the allocation of the purchase price continues. It’s a highly technical equation and we will have that solidified by year-end. It will — basically we are working on an allocation of the overall goodwill amount into allocating it to various intangibles, the brand, customer contracts and so on.
Something new in our balance sheet as compared to last year is the contract liabilities category, and that’s the balance of customer amounts that have been billed and haven’t been yet delivered as some of the CrossConsense customers are billed annually for recurring monthly services.
And now turning to the income statements, we are really pleased with our revenue increase compared to Q3 2021. We showed increases in all categories, except for hardware, which has historically been lumpy and then we showed increases in all categories year-to-date.
This quarter included a large licensing portion and licensing is our highest margin revenue line as we continue to deliver on that large PO we announced that we received in Q2.
On the G&A side, we also see increases due to increased scale of our business in adding CrossConsense in Europe to our consolidated results and also increases in distribution and R&D expense as we focus the organization on the completion and the sale of our Edge product.
We are really happy to show a return to profitability, both in EBITDA and net income. It was the result of a lot of hard work by the team and some pandemic recovery that have both gone into producing these kinds of results.
And so, again, with that, we will go to questions from the Group.
Bill Tempany
Just one thing I’d like to add on…
Alana Forbes
Oh! Sorry…
Bill Tempany
That’s okay. One thing I’d like to add on the increased G&A expenses. As everybody knows, we are having an inflation event and we have gone and given the staff inflation increases to make sure that they continue to be happy and can survive as our economies evolve to come out of COVID and I think you will see increases there.
We have also changed our customer contracts to include a CPI rider so that we are not locked into long-term contracts, while the global economy goes through the bumps and turns, it’s going to go through to recover from the investments in COVID over the last three years from government.
So, there will be increases to cover the cost of living for our staff and it’s global. It’s not something that’s regional, every jurisdiction we do work in is going through it, so something to keep an eye on and something that we are monitoring and making sure we stay ahead of both from a customer point of view and an employee point of view.
So and we will take some questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question is from Dick Ryan from Oak Ridge Financial. Please go ahead.
Dick Ryan
Great. Thanks for taking my questions today. Bill and Alana, congratulations on a strong quarter. I guess my first couple of questions really probably on the segments. You highlighted licensing being strong, driving the gross margin. Can you remind us how much is left on that large order and will that be delivered by the end of this year or will some of that push into next year?
Bill Tempany
We actually — we have a bell in our office to celebrate significant events and during our Board meeting yesterday when we were approving the financial statements the bell rang and the final part of that order has been shipped. So when we announced it, we said that all deliveries would be done in this fiscal year and mission accomplished, it’s done.
Dick Ryan
I think the anticipation was there might be a pause in licensing at least through the first half of next year or whatever. What’s the outlook for follow-on orders and licensing, has that outlook changed at all?
Bill Tempany
I think if you look at the global distribution of aircraft deliveries and how Airbus is becoming so dominant in those deliveries. That is going to pick up the deliveries in licensing. I felt, obviously, was doing a buy to cover supply chain issues with the large order that was placed. But I think that they will consume that much quicker than before, just because of the percentage of deliveries being done by Airbus versus others.
We have an agreement with COMAC to factory install our SATCOM on the C919. I saw recent articles. I think yesterday that they have something like 600 aircraft on order. We believe we will be installed on the majority of those aircraft, which will be booked in license revenue. It will be booked in hardware, but it’s an OEM sale.
Excuse me, we are working with a couple of other manufacturers, smaller manufacturers that are installing our system for safety services as well that will show up in hardware revenue rather than license revenue, but that’s all part of that sales pipeline that I was talking about.
Dick Ryan
Okay. And maybe looking at hardware, hardware is kind of backed off sequentially in each of the last two quarters, but it sounds like there’s backlog there. What’s the gaining factor, is it supply chain, not getting components or materials, even though I haven’t seen your inventory bulge, so I am not sure if it’s that or is it more on the government certification side?
Bill Tempany
We are having a real problem with certification with both the FDA and Transport Canada. Our STC packages and approval packages are not being processed in a timely fashion, and it’s not just us, it’s everybody in the industry has got a backlog there.
So we have got orders on the dock for a lot of kits for this quarter, and probably, half of them are waiting for our rubber stamp from either Transport Canada or the FDA, so we can ship. Our team is working hard. We have great relationships with those entities, but they are working from home and not doing a lot of work at it and we have got to get that fixed.
The world has got to get back to normal. We have got to get people back in the office, back doing their jobs and being accountable, because the only way the economy is going to recover as if everybody is doing their job.
Dick Ryan
Just to clarify, I mean, you do have certifications on the 320s and the 737s, but not the neos and the MAX. That’s what you are waiting on. So, I mean, it’s not like you have to reinvent the wheel, right?
Bill Tempany
No. It’s not. These are additions to existing packages that meet the approvals. They are not new STCs, they are enhancements.
Dick Ryan
Okay. Great. That’s it for me. Thanks, Bill.
Bill Tempany
Thanks, Dick.
Operator
The next question is from Bruce Krugel, a Private Investor. Please go ahead.
Bruce Krugel
Hi, there. Great set of results. I just wanted to clarify, Reuters reported on that COMAC front that, it good — that the number of orders received at the recent Chinese air show was 330 aircraft. So that was 300 C919s and 30 ARJ21s. What is the driver bill to be installed on those aircraft? Do they need to be — do they have international requirements or is it purely internal Chinese SATCOM requirements?
Bill Tempany
If they are delivered in China, the internal SATCOM requirements are what’s driving the installation. But I haven’t seen announcement of international or outside of China carriers buying those aircraft yet, but I know they are working hard in Africa and Southeast Asia.
So, in Africa, if they are flying over land, they may not put SATCOM on. In Southeast Asia, if they are flying over water, they are going to need SATCOM. But I haven’t seen a list of non-Chinese airlines that are buying or intend to buy. So it’s really hard for me to say what percentage will end up with SATCOM on.
Bruce Krugel
Okay. All right. Moving on to AirAsia. So, AirAsia is to report its Q3 later this month and revenues are forecast to increase almost 100% sequentially. So that suggests that AirAsia is starting to see or should be starting to see a recovery. Are you seeing any recovery in AirAsia at this point?
Bill Tempany
We are seeing some recovery. AirAsia is a very complex company, because they have partnerships in 10 different countries. So, Vietnam, I think, there’s three of their subsidiaries that they are back flying. And Malaysia itself still has border restrictions on their national flights. So it’s kind of a mixed bag and we are working with them almost on a daily basis to make sure that we have the right product and plan as they come back.
Bruce Krugel
Okay. Any update on that U.K. Matt office contract?
Bill Tempany
Actually, Kent’s going on Sunday to London and has meetings with them on Tuesday. We were going to be doing the installation with Loganair and then Loganair got put up for sale and stopped all those programs. So we are going to meet with U.K. Matt and figure out a way forward. So standby on that one, it’s a work in progress.
Bruce Krugel
Okay. And then just my final question, you said you have met with a number of clients that are looking at the Edge device, perhaps, even starting testing on the Edge device. Is there a particular service that is resonating with clients?
Bill Tempany
Well, they are definitely interested in the 5G wireless QAR as the 3G, 4G networks get shutdown. The product has other features. There’s an aircraft interface device that runs third-party software in there.
You saw in March, we announced a marketing arrangement with MBS out of Great Britain for an avionics data loader. That is a big interest to the airlines, because I was talking to a director, one of the European airlines on the weekend last weekend, and he said, we have gone from the frying pan to the fire in running this business.
We went through three years of COVID not having passengers and trying to keep the company stitch together and then the restrictions get lifted and we have no trained staff, the fuel prices are going through the roof and a war in Ukraine. And a lot of the things that we have been working on building that we are rolling out today are to help them reduce the number of people they have to retrain to get back into business.
So, things like our ClearPort product helps them utilize resources on the ground, returns better than they could if they were doing it the way they used to do it. We have got a bunch of things with the Edge that download the data and get the information to the people that need it, so they don’t have to run out to the aircraft to either pick up data or tell somebody we are ready to load customers. So the things that we put together were specifically designed to help reduce the bottleneck as the recovery got underway and we are seeing great interest in those tools.
Bruce Krugel
Right. Thanks, Bill. Thanks, Alana.
Bill Tempany
Thanks.
Operator
The next question is from Marc Berger with MKB Associates. Please go ahead.
Marc Berger
Congratulations, Bill on a great quarter.
Bill Tempany
Hi. Thanks, Marc.
Marc Berger
Okay. With regard to the Chinese orders, when do you expect that you might start making deliveries on them and what kind of revenues do you expect to receive with the orders?
Bill Tempany
We have already started delivering. We have delivered, I think, five ARJ kits. We have got three C919 kits in China. I think one installed and I mean it’s really hard to predict. The C919 got certified in China, but not for international sales yet.
The ARJ is basically being used by the Chinese airlines, and I think, we will probably be on all of them as they roll out, but they have, believe it or not, supply chain issues in China and their production has not ramped up to the point that they had hoped it would be. I think the last thing I saw is they will deliver between three and five C919 in 2023 when the original plan had been to do 50.
So, they are having teething pains like everybody else and supply chain issues like everybody else. I have no doubt it’s a kind of a Chinese party, communist party goal that they will be self-sufficient in aviation by the end of the millennial and they are working towards it and they will achieve it. It just takes an even they thought.
Marc Berger
On the Edge, when do you expect you will start delivering on some of that product, we looked in the early 2023, mid-2023.
Bill Tempany
First quarter 2023, we will be installing it products on aircraft.
Marc Berger
Okay. And are those seven huge orders or potentials that you have out there, do you have any idea as to when you might close some of those in terms of timing?
Bill Tempany
Marc, you have been involved in this story for a long, long, long time.
Marc Berger
Yeah. I know.
Bill Tempany
We expect and when they actually put pen to paper or very divergent numbers most times. I think with the sales force we have got and the need to do something before the 3G networks go dark, we should see a lot of activity in the next 12 months to 18 months on all of those opportunities. Tell me what’s going to hit aviation next?
Marc Berger
Okay. And Europe, could you give us an update on what’s going on in the European market in terms of potential orders?
Bill Tempany
We — We are looking really good on two or three opportunities and that pipeline is growing as we integrate CrossConsense and their customers with our tools and products and people.
Marc Berger
Okay. Sounds good. Great. That’s all for me. Thank you.
Bill Tempany
Thanks, Marc.
Operator
[Operator Instructions] Our next question is from Dick Ryan with Oak Ridge Financial. Please go ahead.
Dick Ryan
Thank you. Hey, Bill, a follow-up on Edge, probably, more from a competitive landscape. You got pretty good boots on the ground with the Teledyne hires that you made during the summer. Is there anything going on in the competitive side or can you give us a sense what some of the airlines are doing, are they waiting for Edge or are they kind of going with maybe the quick fix sort of solutions that Teledyne may offer? Just kind of give us the lay of the land there, if you would.
Bill Tempany
I don’t really have an answer on that. I mean, we have — the guys started 12 weeks ago and they have been reaching out to people they know in the industry and attending shows, and getting a great deal of interest to move to our platform, because of other things we are doing and functions they want.
I have no doubt there’s a percentage that are going to take the short-term fix that Teledyne is offering. It’s not a 5G solution, but it gets them to LTE for the next two years or three years. There are 15,000 aircraft out there and if five of them decide to stay and 10,000 decide to come with us, I will be happy. We will get the other 5,000 three years from now an LTE goes dart.
Dick Ryan
Okay. And just one last one on the SaaS side, you talked about SaaS being a driver going forward. Outside of CrossConsense’s contribution to SaaS, what have you seen over the last couple of quarters just on your kind of legacy SaaS business?
Bill Tempany
It hits waivered up and down as the restrictions came off. A lot of our SaaS business is in Southeast Asia and the COVID situation there is totally different than Europe or North America. So we have had some gains, we have had losses.
The beauty of CrossConsense business is, it’s very regular. It’s — they have signed long-term contracts with known values and it’s a nice steady business. It’s something you can count on. Our traditional business is tied to if they are flying their aircraft or not and there’s so much of that outside of their control and our control that we get the waves in it.
The new products, a lot of the things we are putting out there are per month charge as opposed to a per flight or per flight hour charge. So we are trying to level that out, so it’s more predictable and manageable. But that’s not something that is going to show for the first couple of quarters next year, but then it should start showing big time.
Dick Ryan
Okay. Okay. That’s it. Thanks, Bill.
Bill Tempany
No problem.
Operator
We have a follow-up from Marc Berger with MKB Associates. Please go ahead.
Marc Berger
Okay. Bill, could you give us an update on potential research coverage? I know you are spending a lot of time doing more conferences and everything. Any other research firms on the street becoming interested, because of the Edge and everything else that’s going on? Does that bring some more attention to you and what can we expect going forward?
Bill Tempany
Well, we have Lake Street and Oak Street covering us right now. Bruce Krugel has the private report out on us. I am talking to two investment banks next week that have an analyst talking to us.
It’s one of those things that I think as we build out the business and show the continued improvement in our results and our penetration in the market, there will be people interested and get involved in it.
It’s kind of a chicken and anything, where we got to deliver to get the analysts involved and the analysts get involved in it, they have to drives us to deliver better. So we continue to work it on a non-stop. That’s outside of our role.
Marc Berger
My last question with regard to earnings, we are now positive. Do you anticipate we stay positive or will it be an up and down affair based on certain orders coming in or is there a more forward-looking reasonable expectation that we should be looking for?
Bill Tempany
Our — we did a longer term planning cycle this year than we normally do and the plans that we have in place and that put us and put a lot of thought into it from both the sales and a product point of view. We believe that we will be the positive and cash flow positive moving forward.
Marc Berger
Okay. Great. Thank you. That’s it for me. Thanks.
Operator
This concludes the question-and-answer session. I’d like to turn the conference back over to Mr. Bill Tempany for closing remarks.
Bill Tempany
Okay. Well, thanks everybody for taking the time to listen. I –as I said at start, I think that, we have put together a team of people with a suite of products in a customer base that requires what we are doing and I am very excited about what the next quarters and years are going to bring. The long-term planning, I just talked to Marc about, shows that the market penetration that we have got, the tools that we have got, should generate very positive returns for our investors.
So, I want to thank all of the patient investors that have been around as long as me, which seems like forever some days, but it’s a bright and sunny day here in Calgary and I feel very excited about what we are doing and where we are going.
So thanks for your time and we will talk to you next quarter.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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