Earnings Call: Q2 2021

Aug 16, 2021

Hello, and welcome to the AST's PACE Mobile Business Update for the Q2 of 2021. As a reminder, this conference is being recorded. It is my pleasure now to introduce the company's Executive Vice President and Chief Strategy Officer, Scott Wisniewski. Thank you. Scott, you may begin. Thank you, and good morning, everyone. Let me refer you to Slide 2 of the presentation, which contains our Safe Harbor disclaimer. During today's call, we may make certain forward looking statements. These statements are based on current expectations and assumptions and as a result are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward looking statements made on this call. For more information about these risks and uncertainties, please refer to the Risk Factors section of AFT SpaceMobile's Form S-1 filed in June with the Securities and Exchange Commission as well as Form 10Q for the Q2 of 2021 and other documents filed by AFP SpaceMobile with the SEC from time to time. Readers are cautioned not to put undue reliance on forward looking statements And the company specifically disclaims any obligation to update the forward looking statements that may be discussed during this call. With that, I'd like to introduce Chairman and CEO, Abel Arian and Chief Financial Officer, Tom Servison to the call. Abel, over to you. Thank you, Scott. I'm really excited to be here, provide you, our shareholders and a broader community an update on our progress. This is our first quarterly update and a really special milestone for us as a public company. As many of you know, ASUS Pay mobile is my life And our team could now be more fully committed to our mission. And we work day and night to deliver on it. Space based solutions are increasingly becoming more important and part of everyday life. But it is our belief that the best and most relevant solution for the long term will be the one using the phone That you already have in your pocket. As usual, we will not incur on an additional cost for specialized phone Or satellite equipment. There are already more than 5,000,000,000 mobile phones. Over 600,000,000 people Are without any cellular coverage and approximately half of the world population it is without cellular broadband. As we talk today, we will try to remind you of some of the highlights of our company plan and strategy. And we also plan to talk about our 2nd quarter financials. But I thought I will start First, with an update on our business execution, which I focus every day. Starting on Page 4, Our strategy breaks down into 3 parts: industrialization, commercial And organizational. Industrialization, we divide into BlueWalker 3 efforts, which will mark the conclusion of our development phase. And then Blue Bear 1. Commercial, we split into 2 parts, getting market access in countries where we want To operate and sign in agreements and MOU with mobile network operators for access to their subscribers. And organizational for us It's about getting the right people in place for execution. Starting with BlueWalker 3, we expect to launch in March 2022 From Cape Canaveral. BlueWalker 3 is our next prototype spacecraft with 693 Square Foot Phase array. Chain loan service provider to SpaceX in order to increase certainty of launch timing and simplicity delivery of transportation to our launch site. The successful launch in TESO BlueWalker 3 will mark the conclusion of our first development phase and the commencement of our production phase. Now into Bluebird 1. Bluebird 1 is our production spacecraft, which we expect to be the largest communication phase array Ever deployed into space. Over the Q2, we continue to make progress in finalizing the design of Blue Bear 1 As well as making investment in our Midland Texas facilities and global supplier development. Once at full rate, when anticipated our Midland facilities will be able to produce up to 6 spacecraft per month. On commercial, we continue to have a broad based discussion with mobile network operators And regulators globally, both directly and through our partners. We recently signed new MOU with the smart communications, Aficell, Mooney, UT Mobile, LeapTelco and others. As a result, We had increased the subscriber count with mobile network operations under MOU from 1,500,000,000 up to up to from 1,300,000,000 At the end of the Q1. And while it's still early, we have regulatory approval granted in 6 countries To the date, with total population of over 360,000,000. And in terms of organizational progress, our hiring plan continue in order to support a scale spacecraft production. In the Q2 alone, we grew by 62 employees across all our offices, significantly enhancing our in house engineering, manufacturing, Procurement and Corporate Activities. This bring our team to 452, Including 261 full time employees, 49 full time contractors And 144 working at 3rd party engineering services dedicated to AST Space Mower. We also opened our office in the UK. We had employees there for some time, but we felt now was a good time to open an office and that would support our business development, Engineering and Regulatory Functions. Thank you. With that, back to you, Scott. Great. Thank you, Yvel. Over the next couple of minutes, I wanted to briefly frame the opportunity and solution that ASC SpaceMobile is working towards And link that to what we are working on now to the launch of BlueWalker 3. Some of this may be a little repetitive, but as our audience continues to grow, we want to ground our 1st quarterly update Turning to Slide 6. I'll start with our market opportunity and what we're playing for. The wireless services market has over 1,000,000,000,000 in annual revenue that comprises all of our monthly service payments to the phone in our pocket. This is a market that is evolving dynamically that experiences the same strong demand drivers that you see across telecom and this is an industry that wrestles with issues around coverage reach And rural connectivity. Some of the numbers we think that are relevant to understanding where a service like ours would fit, our first 5,200,000,000 unique cellular subscribers. These are people with mobile devices who are paying mobile network operators And move in and out of coverage as they live, work and travel. So this is a big number. And keep in mind that 1,200,000,000 of these subscribers are not even using broadband Another key number is the 3,800,000,000 people who do not have cellular broadband service, half of the world's population. As you unpack this number, there are a lot of reasons for what's called the usage gap across age, gender or income. But notably, it includes over 600,000,000 people We fall into what's called coverage gap. They simply are not in range of cellular broadband. Intuitively, we know that the earth is big and coverage gets increasingly harder with Tougher unit economics for terrestrial networks as you go to lower and lower population densities. That is one of the reasons you are seeing governments pressing policies with Universal coverage requirements and often attaching subsidy programs as well. So we look at the state of play in cellular broadband and we see a Huge installed base of users and unmet needs. Flipping to Slide 7, it's with this context that we are so excited about SpaceMobile. Simply put, we are building the 1st and only space based cellular broadband network. This means that there is no terminal or satellite dish to buy, No modifications to the phone in your pocket. You will be able to just connect directly to our network. For those less familiar with solving global telecom network pinch points, bypassing this need for an expensive extra device is very special Because it changes the unit economics when a user considers adopting the new service. And once you have put aside a several $100 purchase requirement for the user or subsidy by the network provider. You can start thinking more about offering service at lower price points and expanding the potential user base. So we think SpaceMobile is very compelling solution for this evolving and perfect networks that we just talked through. And this need Sits against the user base that is hungry for coverage and bandwidth and now pays for connectivity prioritized above most other household needs. Looking to the topic of competition, we believe the nature of SpaceMobile service is differentiated relative to any other existing or planned service offering. And this differentiation is backed by over 1200 patent and patent pending claims, as well as our first mover advantage. As the telecom ecosystem continues to evolve, macro cell towers, small cell towers, fixed wireless, Wi Fi hotspots, fiber to the home, Satellite fixed broadband, satellite backhaul, these are all great solutions for users as well and will help fill a tremendous market But they will not be able to match the type of service we believe we can offer. Another element of the competitive mode here is that building a global business is hard, Which is why we are not doing it alone, but we want to have really incredible partners. Partners that have made investments and contributed important development and commercial relationships. Partners who are leaders in the industry and significant innovators. These are Vodafone, Rakuten and American Tower to name a few. Shifting to the commercial side of the business, our go to market strategy is pretty simple. We plan to build and organize our network and service offering so that it looks and feels like a cellular service. And we partner with mobile network operators to deliver that service to their existing subscribers. In terms of user experience, We believe in reducing friction to the absolute minimum, which should also serve speed adoption. Cellular networks today have the Capability to program text messages that will offer SpaceMobile service that can be turned on with a simple yes text message response offered at precisely the time when our service is needed. So our mobile network operator relationships are very important. They are at the core of our technology solution and the scalability of our business. They offer a built in subscriber customer base ready to be turned on. As we sign more agreements and collaborations, we will provide updates. But to date, we have MOUs with Almost 20 different MNOs who cumulatively have 1,500,000,000 subscribers. Overall, We believe we have a revolutionary technology matched with an elegant commercial approach. Moving to Slide 8, so what's next? Couple of weeks ago, we announced our expected March launch for BlueWalker 3 with SpaceX out of Cape Canaveral, and we are thrilled to be launching from our own backyard. As a refresher, our test satellite BlueWalker 1 launched in 2019 was used to validate our network and was capable of managing the effects of Doppler and communication delays from low earth orbit using 4 gs LTE protocol. Building on this, now BlueWalker 3 is planned to demonstrate the space mobile end to end system design, communicating directly with cell phones via 3 gsPP Standard frequencies. This spacecraft is notable as it features 1 of the largest phased arrays ever deployed in space, Measuring 693 Square Feet or about the size of a studio apartment. The size here is a Key attributes in order to generate the power and signal strength required to communicate with a relatively small and low powered mobile phone 100 of miles away. Overall, manufacturing assembly and testing continue to progress and we believe we're on target from that March timeframe. With over 75% of planned project CapEx incurred to date, including non recurring engineering expense. We will provide more details as we get closer to launch date. But to give you a sense of what happens after launch, there are a couple elements of the spacecraft test plan. Immediately following launch, we will be doing some health and wellness checks, including orbital placement, deployment and basic connectivity. In the months following launch, we will be doing full system testing in Texas, Hawaii and other locations globally. Ultimately, the goal of BlueWalker 3 is to configure ground equipment to ensure SpaceMobile's production spacecraft will be able to interconnect with mobile network operators for backhaul and with unmodified 4 gs and 5 gs mobile phones. Moving to Slide 9, And before I hand it off to Tom, I want to leave you with a few key points of differentiation for ASP SpaceMobile and put it into a broader context. With lots of investments flowing into SpaceTech, we think that shows the importance of space based solutions for telecom networks and ASC SpaceMobile is the only pure play for public investors in LEO Broadband. We are also playing in a very large market with a solution that is applicable to 5,000,000,000 mobile phones and a related $1,000,000,000,000 TAM and we are jointly going to market with industry giants and we are not competing with them. We have a revenue share business model designed to allow users to sign up with a simple text message and we have approximately $400,000,000 cash to Now with that, it is my pleasure to hand off to Tom. Thank you, Scott. First, I too would like to welcome everyone to our Q2 business update, which is our first conference call as a public company. On April 6, we closed our business combination with New Providence Acquisition Corp and started trading on NASDAQ under the ticker ASTS. The transaction provided $416,900,000 in net proceeds, which will be used to fund the operations of the business And to construct our 1st phase production satellites. As of June 30, 2021, we ended the quarter with $402,600,000 of cash on hand And the Company is currently debt free. The proceeds from the transactions were derived from cash in the new Providence Trust account And also through the sale of a $230,000,000 pipe financing. In addition to new investors, the pipe financing was supported by our pre transaction investors, including Rakuten, Vodafone, American Tower and Cisneros. This transaction was extremely important to the company As it eliminated the funding risk associated with the delivery and proof of our space based cellular technology and also provided capital for the first phase of our production satellites. Now, with the public currency, we are well positioned to raise the additional capital required to complete the space mobile constellation of 168 satellites. I'd now like to turn over to financial highlights for the Q2 and give Color on our ongoing operational initiatives and trends we expect to see as we look forward into the second half of twenty twenty one and into 2022. Cash operating expenses including engineering services, R and D and G and A increased from $11,500,000 for the Q1 of 2021 to $24,500,000 for the Q2 of 2021, a sequential quarterly increase of 13,000,000 This increase was primarily due to R and D expenses, which were $9,100,000 for the Q2 of 'twenty one compared to $300,000 for the Q1 of 2021. During the Q2, we aggressively engaged with our 3rd party technology partners and ramped up our efforts relating to long lead time engineering work items in order to meet our constellation timing goals. I would expect 3rd party R and D expenses to continue through the remainder of 2021 2022 as we seek to complete and optimize the electronic Design of our production satellites. In addition, Q2 G and A increased to $9,200,000 from 5,500,000 In the prior quarter, as we incurred expenses relating to becoming a public company, including D and O insurance, legal, corporate staff and other related expenses. Engineering services increased to $6,300,000 for the Q2 of 2021 compared to $5,700,000 for the Q1 of 2021. We expect engineering related expenses to continue to grow as we add additional engineering staff and also ramp up our team responsible for satellite assembly, Integration and testing, which we refer to as AIT at our facility in Midland, Texas. We are currently in the process of industrializing our process in order to meet our full scale production requirements. In terms of our engineering and AIT employees and full time consultants, Total headcount grew from 156 at the end of Q1 to 193 at the end of Q2. We expect this to grow approximately to 300 by the end of the 2022 as we ramp our AIT capabilities. In terms of our CapEx, To date, we have invested $51,700,000 in the construction of the BW3 satellite and we expect to incur an additional $14,000,000 to 16,000,000 to bring the project to completion. A significant portion of the total project cost of BW3 is non recurring development and also includes Satellite componentry and launch costs. Total investments in our property, plant and equipment were $15,700,000 through the end of the second quarter, And we're happy to report that Phase 1 of our AAIT facility in Midland, Texas is substantially complete, and we are currently in the process of We are now ready to launch in March of next year. As we prepare to move into full scale production, We will continue to expand our AIT capabilities in a matter that will support our production and launch timing goals. Finally, as it relates to our CapEx spending, we are engaged in the procurement process for our 1st phase production satellites, and we expect these investments begin to ramp up as we close 2021 through 2022 and through the first half of twenty twenty three. We still reaffirm our cost estimates to build and launch first 20 satellites with each satellite in the $13,000,000 to $15,000,000 range. And for the constellation of 168 satellites, Our average cost per satellite is currently expected to be in the $10,000,000 to $11,500,000 range. As we move further Into the procurement process and close our production satellite design, we remain confident with respect to the execution of our plan, the cost of our plan and our ability to deliver our technology. And with that operator, let's open the call for questions. For our first question, we have Chris Quilty from Quilty Analytics. Chris, your line is open. Thanks. First question for Tom. Since I didn't hear you make any changes in the CapEx profile, I'm assuming there was no cost increase from switching over from soyuz to CapEx or to base execution? That's right, Chris. Nothing material. We obviously had to do some engineering changes, which we did. And so, in terms of the total cost For BlueWalker 3, you see we have 12 to 14 to go, and we're 75% complete. Great. And just around that Are you still planning on doing a rideshare launch? And if you can remind us, is that going to be an equatorial launch If it's a ride share for both of those types of orbit insertions. Hey, Chris, I'll start. We are not the primary payload, but we feel comfortable with the window that we've been provided and the number of launches that SpaceX plans to do that were pretty protected and that was one of the motivating factors for going with them is increased timing certainty. We feel good about that even though we're not the primary payload. And in terms of the orbit, I don't know if Bill, do you mind jumping? Yes, it's a 400 kilometer orbit And it's an inclined orbit that is well representative of what we want to take who we walk at 3. And the 400 kilometer orbit, which is lower than the planned operational altitude, Presumably that calculation was made from smaller antenna size to simulate what it would be with a larger antenna from a higher Yes. Well, basically, the difference between 400,700 doesn't change the capability to connect directly to the handset. Basically, what it changed is the time that you had available for testing. Both are like BlueWalker 3 and Bluebird 1 being designed to connect directly to the handset broadband speeds. And that's we can achieve that. The 400 in a range of 400 to 700 kilometers of altitude. Great. And Abel, while I have you, I guess, congrats on the recent MOUs and regulatory approvals. I guess, The elephant in the room is the FCC. Can you just kind of give us an update of where you stand in the process of your regulatory waiver And expectations on when we might see some progress milestones? Yes. Well, just as a reminder, the we get to service in the U. S. Later after the Equatorial countries. The FCC actually approved our application and is Subject to comments around November. And so we're expecting To hear from them about the next step after the commentary period in November. But our application is actually in process with the FCC. And the I know there were some issues around your intended altitude and the NASA A Train. Can you give us an update on that situation? Well, the actually NASA officially communicated to the SEC that they will not Oppose our application. We have built a working relationship with them. We had agreed to share The position of our satellites with them and we anticipate a long term Relationship with NASA with regards of the operation of our satellites. So but that issue was completely resolved many, many months ago. Great. And global chip shortage, clearly, you're not in production mode now. But as you look at your Supply chain and suppliers, do you anticipate any issues, critical parts or components or chips that you're currently looking to source? Yes. For BlueWalker 3, we don't. We have all parts on hand. We're actually in the final stage For integration and testing of BlueWalker 3, all the electronic parts actually we purchased Approximately a year ago. For Bluebird 1 and for the Constellation, we had a plan where we're developing our own ASICs. We also are procuring in advance long lead items in preparation to the production of the bluebird ones, the production satellites. It's an issue that we are monitoring very closely. At this moment, we feel that We can manage it by basically procuring loan lead items in advance. Great. And I guess a final question. The projected cost now on BlueWalker III substantially more than what you expect the production units to be and understandably a Significant portion of that is probably NRE that I assume is applicable to the Bluebirds also. But beyond that, I mean, when you look at the projected cost of BlueWalker 3 and compare it to production satellites, Is the cost reduction driven primarily around volume or are there other elements that get you to your targeted price? Yes. BlueWalker 3 is heavily, heavily loaded in NRE, basically some pre metal satellite where We went through a development phase to get to the design that we have now. We well know the cost Of BlueWalker 3. And we had a very, very close estimation for BlueBird 1 simply because of the construction of BlueWalker 3. There are some advantages for some part, in some cases significant that has to do with volume. The transition from FPGAs to ASICs is one of them. Also, the solar panels that we're using for the production satellites are much more cost effective than the 1 that we're using for BlueWalker 3. And as I said at the beginning of this conference, I mean, we're focusing very hard in industrializing the process To target the cost of the worker tree at the prices that we have. We had a lot of confidence On the bill of material, on the design, basically, we are in the last stage With BlueWalker 3. And one thing that I always want to remind people when they think about our satellites, Our satellites are modular. They are built with identical parts that use as much as possible Equipment or technology that is also used on the ground in order to lever consumer electronic pricing for components. We are a fully vertically integrated design, where we pretty much manufacture the design Or by in volume all the components and the electronics of our system. So we have our own electronic system. We have our own Solar Vinyl System, we had our own reaction wheels to be produced in mass In order to make the costs that were anticipated for Blue Ribbon. Actually, that brings up a separate question. I think in the script, you mentioned a targeted production capacity of 6 Satellites per month. And I guess the question given the size of the global constellation, Is that production rate intended through sort of the first phase of equatorial and you would ramp production from there? Or do you consider that the full rate production That you'll target for the full time? Yes. That is our production capacity till 2023. We will continue to increase it. Before we run, we need to walk. So we had an 85,000 square feet facility in Midland. We will be Expanding that to support the 6 satellites per month, that roughly would allow us Provided that availability of launches is available, allowed us to launch 50 to 18 satellites a quarter With the production capacity that we're designing. In order to achieve that, we're working in a fully modular system For the satellites, all satellites are pretty much identical. We follow manufacturing process closer to automotive rather than space In order to be able to produce these number of satellites in the timeframe that we're setting ourselves to do, Which is roughly allowing us to launch between 50 18 satellites every quarter. For our next question, we have Brian Kraft from Deutsche Bank. Brian, your line is open. Thanks. Good afternoon. Abel, as you know, there is some skepticism out there among some in the satellite regarding the viability of your satellite design, namely around the size of the array. Can you just help us understand why those skeptics And the confidence you have at this point in the efficacy of the design and the engineering, including an assessment, if you don't mind, of where maybe you're still Kind of figuring it out versus what you think you already have figured out at this point. Thank you. Yes. I mean, the sala industry in general I've been a very conservative industry, pretty much doing the same for over decades. Yes, recently, a company like ourselves, SpaceX and others are just starting to change the mold on how to Build hardware for space. I would say our design is completely different than any All the previous design of spacecrafts before, that's the reason why we have around 1200 patents and patent Claims in order to support our design. So thermally, mechanically, is In terms of weight, the ability to produce enough power and gain to connect directly to handsets, It is a new design compared to what the industry has been doing. What we can say, we have tested The viability to connect directly to a handset with our first test satellites, that was the whole purpose of that. That satellite is something that we have reviewed extensively with our wireless partners, Vodafone, Rakuten, American Tower. Then BlueWalker 3 will be roughly 683 Square Feet Face array, that is part of what it makes it tricks to connect directly to a handset. It's already one of the largest it will be one of the largest phase upgrades to be deployed. We have spent Over a year and a half testing that deployment on the ground to get it confident that it will deploy And the support of that technology. So at this point, we were very confident in the viability and the feasibility of the technology. And that is basically a novel approach to build satellites module really In order to be able to produce enough power and gain to connect on a broadband speed directly to handsets. And The reason why nobody has done that before, somebody needed to break the code. We did it. We are Basically, closing the development phase with the launch of BlueWalker 3 and moving Starting to move into the phase of industrialization, which is basically being able to produce these satellites. Even though they are multi toned, they are large. We produce then fast and at the rate of 6 per month. Thanks, Bill. And if I could ask one follow-up. Will there be any test launches Of Bluebird 1 to just sort of test the whole design in a space environment to see that it Unfolds correctly and you can deploy it into orbit without any issues before you launch Many satellites at once in case there are any modifications that need to be made after the first one? Or will you be starting Or you'll be going right into commercial launch where you're launching multiple commercial deployments in one launch. I hope that came across okay. But I'm just trying to understand how much risk you're kind of putting on the first tranche. So, no, that's a great question. So, Our plan is, well, obviously launch BlueWalker 3 in March. Then there is a way for us To launch up to 18 satellites in a single launcher or 4 in a smaller launcher With the same vehicle, we will not be doing that. So, we will launch BlueWalker 3. By the end of 2022, our plan is to launch a handful of bluebird ones for which we are Purchasing all the lonely items and parts that we would require to do that. And then Pending launch availability and other things that we need to line up Will be to launch 15 to 18 in Q1, Q2 2023. So, we will now go With the whole with the capability that we're anticipating for launches to take on our satellite, which is up to 18, I'll be first launched. So BlueWalker 3, 1 satellite, then few in 2022. And then at that point, we hope to be able to launch between 50 18 per launch. Thank you very much. We don't have any further questions at this time. And that concludes today's conference call. Thank you all for participating. You may now disconnect.