Earnings Call: Q1 2021

May 17, 2021

Good day, and welcome to the August Networks First Quarter 2021 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask Please note today's event is being recorded. I would now like to turn the conference over to Eric Roth, CEO. Please go ahead, sir. Thank you, operator, And good morning, and welcome to our Q1 investor call. This is an exciting day for Andas. In addition to sharing our earnings release, We've also announced the acquisition of American Robotics. This is a deal combining 2 leading mission critical industrial data platforms. Of course, I'm talking about Adas' mission critical Foamax wireless network and American Robotics world class drone This is a home run. It's a great deal for customers, employees and importantly, a huge win for our investors. I'm thrilled to be sharing this news with you and we'll be sure to dedicate enough time on this call to properly introduce American Robotics to the investor community. Of course, we also spent time covering Q1 results and give you an update on where we stand on our critical business development activity. I'm joined today By Stuart Cantor, our President and CFO. In addition, we're joined by American Robotics CEO, Rhys Moser and CTO, Vijay Samadapalli. Reese and Vijay, along with their teams, have built an incredible technology platform, and they are here to share details of their business. Before we get going on the quarter and the outlook, I want to take a few minutes here to share a couple of thoughts on American Robotics. AR is leading the charge in the commercial drone sector. They bring both a 1st in class and a best in class complete Drone in a box platform called the Scout system. Scout is the type of solution that is coveted by our critical infrastructure customers. The platform fits like a glove with our mission critical Foamax wireless platform, both from a customer marketing and distribution standpoint, As well as from a wireless connectivity perspective, the drone needs connectivity. The significant marketing synergies and technical wireless platform integration Even more valuable turnkey data and edge computing solution for our customers. This is a bold move for Andas And that's exactly what Andas and American Robotics need to do to create value in mission critical data markets we are serving. And it's exactly what our customers and shareholders should expect from us. We are leading the charge in defining and delivering these data solutions for the critical industrial, Public Safety and Government Markets we address. Now let's outline the agenda for today. We're going to start first with a financial review from Stuart. I will then give a business outlook focusing on the key areas of business development. Of course, that means I'm going to be highlighting where we are with Siemens, The rails in Aura and then we're going to turn our attention back to providing information regarding American Robotics and the announced acquisition today. And we will leave time for Q and A. Things are clicking for Andas. As Stuart will describe in detail, we generated both record revenue and bookings in the Q1, demonstrating clear progress on our plan. We continue to drive towards platform adoption in our critical rail and drone markets with both the Class 1 rails and Aura and we're broadening our ecosystem, particularly through our Siemens partnership, which is expanding through new product development agreements and we see more of that to come. Stuart, I will now hand the call over to you to provide more details on Q1 and the financial outlook. Great. Thank you, Eric, and welcome, everyone. I want to begin by highlighting that we made excellent progress on all of our key business initiatives in the Q1, including achieving both record revenues and bookings. We booked approximately $2,400,000 in new orders and generated $1,200,000 in revenue with revenue growth of 480% over Q1 2020. Our growth came primarily from joint development programs with Siemens Mobility, our partner in the North American rail market Our financial results have shown substantial improvement year over year and reflect excellent progress toward scaling both the rail and drone communications markets. Our operating expenses were $3,400,000 An increase of approximately $1,100,000 over Q1 2020. The increase in operating expenses was primarily the result of $1,300,000 in non cash stock based compensation. We expect bookings and revenues to continue to grow substantially in the coming quarters, driven primarily by our sales activity from Siemens and Aura. Revenue and profitability will fluctuate quarter to quarter because Our major commercial orders and new system deployments don't happen on a fixed timeline. Because of this, as we've mentioned in previous calls, We don't intend to provide full year financial guidance. For Q2, 2021, we expect revenue between $1,000,000 $1,500,000 and that revenue will come from our backlog as well as new sales orders from Siemens, The Class 1 Railroads and Aura. Eric will tell you more about this in the next section in greater detail. Our cash operating expenses, which exclude non cash expenses such as stock based compensation are expected to be between 2,500,000 3,000,000 In the Q2, we believe we're positioned to see bookings and revenues grow on a quarterly basis throughout the year. We continue to have a strong balance sheet with $24,000,000 in cash at the end of Q1. And relative to the large revenue opportunities in our customer Pipeline, we have a modest cash burn. Given all these factors, we feel we're in a great position moving forward. And now Eric will provide more details on the customer activity and growth outlook for 2021. Eric? Thank you, Stuart. And as you can see, we've made a lot of progress in Q1. Though of course, as I like to remind my team, we have more work to do. While the big news today is, of course, the American Robotics acquisition, Q2 remains busy and milestone heavy as we set up for a strong year. We expect to see significant business development progress throughout this Q2 with the Class 1 rails, Siemens and Ora. Starting with the rails, We continue to highlight that we have multiple networks in our line of sight beyond the 900 megahertz. That includes the 160 megahertz Voice and data network as well as a 4 50 megahertz network where the rails connect on locomotive systems. While the 900 megahertz network is obviously a huge deal And where we will start commercial deployments, I want to make clear that we expect to demonstrate activity on these other systems and outside of North America and rail as we move through 2021. And we will be supported as we do by our ecosystem partners, including Siemens. Let's turn to that all important 900 megahertz network. We continue to drive towards adoption on that large nationwide system where our customer has greenfield spectrum put to work. As we previously shared, we've worked principally with the wireless group under the AAR umbrella to establish full Max as the new 900 megahertz network platform. And that effort is now evolving and expanding. This Wireless Comms Committee or WCC UCC has now elevated Andas to the senior operating committees for the rails in order to formally ratify the establishment of the MC IoT Rail Lab in Sunnyvale. We expect purchase orders related to this decision this quarter and the critical takeaway is that the users of the network, those in charge of field area operations, A function such as train control, switching, crossing safety and other applications, including drones, those folks are now engaged with their networking peers The planning for the new network. This approval will be a very important strategic development in further validating this large opportunity for Andas. We continue to expect commercial deployments on the 900 megahertz network to begin in the second half of twenty twenty one. We're not able to share Detailed guidance on the timing of these deployments when we know we will share that with you, but we are making progress. Moving to Siemens, our strategic partnership here continues to pay dividends for both parties. Andas' platform creates systems upgrades opportunities for Siemens with the potential for them to drive additional revenues from the critical training systems they provide the Class 1s. We are seeing Siemens gain traction and build awareness with the field operating groups I referred to earlier across the board with all of the Class 1 rails. And again, these business operating units that use the network for critical train system operations. Awareness is building rapidly beyond the network engineers as the users of the network begin to anticipate the increased bandwidth and all the benefits that entails. So let's turn to Siemens and Siemens ordering activity. Call that the initial 900 megahertz ATCS product development is complete and is now being qualified for sale. We expect Siemens to place orders for ATCS In addition, we noted on the last call that Siemens initiated a new product development program with us during Q1. That revenue generating program is underway and expected to be completed by the end of the year. I want to remind you that this new product with Siemens is for a separate application on a different frequency band away from the 900 megahertz network. This product will also be marketed globally by Siemens. This is clear evidence of the broader rail opportunity that we have been highlighting. We expect to secure additional development programs with Siemens during the year with our Foamax software defined platform being embedded in additional critical train systems globally. Let's turn to Aura. Our work with Aura has continued to move forward in 2021 with Aura achieving their own key development milestones. In January, Aura received an TC waiver for their air to ground radio spectrum license in the 4 50 megahertz band. This waiver allows for the drone navigation network they're planning. As Stuart mentioned, we're now completing work on the optimization of the Foamax platform to create transitional network equipment for Aura's UAS application. This work has included extensive aerial testing and we are very pleased with the results to date. This will allow Andas and Aura to provide testing and demonstration networks for Aura's UAS customers. We will realize product sales for this Aura optimized equipment soon. In parallel, Andas and Or are scoping the development program, technical roadmap and expanded partnership Structures for a significant FAA commercialization program related to this nationwide Command and Control or C2 UAS Network. We expect a big ecosystem play here with additional partners to emerge. And we look forward to sharing more details on the expanding oral relationship and program, road map and time line soon. Now let's turn back to American Robotics. I want to start by saying that this is an incredible company with massive talent and vision. Importantly, AR is an American drone company located just outside of Boston. And Boston is a region many people consider to be a robotics and drone capital of the world. And American Robotics stands out as a leader in this community. Recent VJ and team have solved the biggest problem there is in UAS And that is commercializing a complete fully automated drone system, a drone in a box specialized for industrial use cases. This is called the Scout system. The Scout system enables the operation of drones beyond visual line of sight with FAA approval. With no on the ground human operation, Scout is the 1st and only truly scalable drone platform on the market. Of course, the drone is the ultimate MC IoT weapon for Andas. It's a mobile data gathering solution and we believe this groundbreaking We love huge TAMs and we love platform businesses and this is exactly what we have here with American Robotics and their patented Scout system. Pricewaterhouse sizes the UAS markets addressed by AR as $100,000,000,000 or more. It's a huge opportunity. American Robotics also brings a high margin, high return on capital business, also known as a robot as a service Business model. We believe this model is great for customers and it can lead to very attractive returns for Andas investors. Reese is going to share more on that robot as a service business model and the value of bringing e turnkey platform to the market and how the very 1st mover advantage via the FAA approval will allow American Robotics and Andas to define the commercial drone market in the years ahead. Andas and AR couldn't be a better fit to drive market penetration of the Scout system. The synergies between Andas and American Robotics are significant. The combination of Andas' wireless connectivity with AR's commercial drone in a box system is powerful. Again, the drone is the ultimate Mobile data gathering device at the edge of a mission critical network. The value to our customers to gather valuable information at a Frequency they've never before been able to access is huge, and we believe the pent up demand is significant. Today, railroads, Utilities, oil and gas field operators, in addition to the critical industrial, public safety and government markets are spending significant CapEx And at OpEx dollars on drones. The drone provides valuable data services and the budgets are in place and growing. So the marketing synergies with Andas and AR are very real and valuable as are the technical. The value of a reliable, secure Foamax wireless network reinforces the value of the Scout drone platform and vice versa. The customers are going to love this. Andas and AR attack the same end markets and Andas' robust networking capability will expand the market for America Robotics Scout drones. The drone is the most scalable and the most valuable when it's attached to a reliable, secure, mission critical wireless network. For Onondock, the benefit is clear. Broader customer solutions combined with an even greater ability to lay claim For example, drones can be an application for the rails and other industrial government customers for Andas. And of course, the C2 market extends to American Robotics In the local, beyond visual line of sight markets, the Scout system is defining. Andesk can now take a leadership position in the critical navigation link, which It is needed to address FAA requirements for the deployment of drones flying beyond visual line of sight at scale. American Robotics puts us squarely in the huge market for smaller drones that fly shorter missions beyond visual line of sight at lower altitudes. AR also has overlap with the private industrial networks we're deploying where customers operate both small and large drones often at low altitudes. We expect to see immediate interest from our customers who are already engaging on us, asking us to solve their drone radio network challenges. And of course, in addition to the local and private wide area network applications, we are tackling the high end drone missions with Aura. While American Robotics Scout System is a crown jewel and a terrific standalone platform, the acquisition brings the added value Avandas' full Max software defined network being positioned as a navigation backbone or the nervous system potentially for all industrial drone applications. Infrastructure solutions for drones is a big opportunity and you will see Andas play an important and valuable role bringing the picks and shovels I want to now hand the call to American Robotics CEO, Reese Moser, so he can provide more information on American Robotics in this best in class Scout system. Reese? Thank you, Eric. Good morning, everybody. Great to meet you all in this new chapter of American Robotics and on to us. So my name is Rhys Moser, And I'm the Co Founder and CEO of American Robotics. American Robotics is a developer of Fully automated industrial drug systems. And as Eric mentioned at the beginning Of his presentation, in January, we became the 1st company approved by the FAA to operate Fully automated drones with no humans on-site. And so the most important Thing to understand about American Robotics and the commercial drone industry is the problem. So drones have been talked about for a long time now. And there's been a lot of success with drones In the military sector, there's been a lot of success with drones in the consumer sector. But in the middle is this very large opportunity for commercial drones that Today, we are still barely scratching the surface up. And the reason for that is For the vast majority of commercial drone applications, using a manually operated drone is simply not practical. It takes way too much time and ends up not being an economical solution because When you look at these industries and these use cases, whether it's oil and gas or agriculture, Railways, stockpile monitoring, you have to operate this drone and collect data and analyze data multiple times a day every day for it to have value. And having a person stand out there in the field with a remote control while that's occurring Quickly doesn't make sense. On top of that, default FAA regulations prohibit this kind of automated operation. So today, any time a drone is flying, a human has to be present on the ground with that drone, typically with eyes on it at all times, Obviously prohibiting the ability to operate in this fully autonomous manner. And so we have solved this problem with the Scout system. The Scout system is a truly automated platform And it consists of a number of software and hardware systems that are proprietary to American Robotics that were developed from the ground up to work together to create this completely hands off experience and really change the dynamic of what it means to use a drone in the commercial sector. So comprises our autonomous drone, our automated base station, our detect and avoid sensors, and the software to That altogether both at the back end and at the front end. And so everything has been automated. You know, Flight is actually just one component of what it takes to use a drone for a business purpose. And at the end of the day, what our product is, is data, not the drone itself. And so we've automated mission planning, precision landing, Charging, data processing, data storage, data transmission, physical storage, All of that together and now you can install these systems in your field and they will live there indefinitely conducting 10, 20 missions per day every day, processing that data at the edge and transferring it back to the customer. And so this again changes the dynamic of what it means to use a drone and it changes the economics as well. So, as it's been mentioned a few times now, American Robotics in January of this year became the first company approved by the FAA for fully automated drone operation with no humans on-site. Now this is the most important approval that has Heard, yes, in the commercial drone space. And as of right now, we're actually the only company that has this approval, which means, at the moment, American Robotics has exclusive access to any of those markets, which require this degree of automation, which by our estimation incorporates about 90% of all commercial drone markets. So, and to recap, our system can fly beyond line of sight with no visual observers or no humans on the ground at any time. That means before, during or after flight, at no point does A person have to be co located with this drone, which again, completely changes the dynamic and the economics of what drones can do for commercial businesses. So The number of markets and the number of use cases for this type of technology is incredibly broad. As I mentioned, 90% of all commercial applications require this level of automation for drones to actually be a scalable solution. And we divide this into 3 overarching categories, the industrial market, the agricultural market and the defense market. And within each one of those, you have things like oil and gas, solar, nuclear, railways, utilities, Stockpile yards, row crops and specialty crops, just to name a few. And the use cases Our broad, but the common theme among all of them is you want to be able to Monitor your assets on a frequent basis, whether you have 500 well pads or 10,000 acres of farmland, Our system is able to digitize that physical world and allow you to monitor those assets remotely and increase the efficiencies of your business. So The final piece of the puzzle is once you can achieve this type of automation, you can now combine it with the robot as a service model. We've extracted what is historically the most expensive part of operating a drone, which was the pilot. And with that removed from the equation, now we can focus on the service that the system provides. And so instead of customers Purchasing this hardware, this is provided in terms of an annual subscription. And this has two effects. This lowers the annual cost Update acquisition for our customers, and it also provides American Robotics, now American Robotics and Andas with recurring software like margins. And so Eric, I'll hand it off to you from here. All right. Thanks, Rhys. So let me wrap it up before we move on to Q and A. Andas continues Position itself for huge growth in our large open ended markets. We have momentum and we're executing on our critical initiatives Driving platform adoption. It starts with the rails and Siemens and Aura Networks. We are establishing our mission critical IoT platform as the default Next generation wide area mission critical network. And now we integrate American Robotics. American Robotics drone in a box scout platform is best in class And it will be in high demand in our end markets and beyond. This also positions Andas as a leading player in all C2 markets with drones of all sizes and applications ranging from very large to small and for altitude ranging from high to low and for flight missions spanning local Regional for long durations. The drone ages here and Andas will be a key player driving innovation, infrastructure and end to end solutions as well as market penetration. So operator, let's move to Q and A. Thank you. We will now begin the question and answer session. Today's first question comes from Mike Latimore with Northland Capital Markets. Please go ahead. Thanks. Yes, congratulations on the acquisition and quarter here. I guess just starting with a couple of questions on the acquisition. This may be kind of basic, but what do you sort of charge per month? Like what's the ARPU on a specific drone? And then maybe just what is your ROI pitch to customers? Like what's the ROI, can you improve there? All right. I'm going to ask Reese to answer the question. We're going to be a little sensitive on the price points at this moment and we will be providing a lot more information regarding this. And as a we should know that the acquisition is expected to close in August. So we got a couple of months here, but we will be providing more details. Arris, can you share some perspective on this for Mike? Yes, absolutely. And As Eric mentioned, not disclosing specific pricing at this time, but we do look forward to sharing that publicly soon. I can say, when you look at the pricing, as a result of this rollout as a service model, we are able to deliver the highest Quality data at the lowest cost. Our system, again, because that human is removed from that operation, It can run continuously, at essentially marginal increase in costs all day every day. And so that allows an entirely new category of data that has never even been feasible to collect before. So we're talking about sub centimeter resolution, multiple times a day every day, which most importantly unlocks A new category of data analytics that was never possible for which we're excited to get Talking more into that concept as we move ahead, but hopefully that answers some of that question. Yes. And let me just add a couple of things, Mike, just to think about conceptually how it works. When American Robotics deploys a Scout system in a They're typically going to get a long term contract from the customers, say, 5 years. And the idea is in the initial year, that subscription agreement covers the cost Deploy the system and then you get extremely high margins in years 2, 3, 4 and 5. Okay. Makes sense. And then just to be clear on the data that you're gathering, is this largely kind of video imagery data you're gathering and then I'm guessing that pulls in a lot of data. So maybe is there some AI in the background that sort of boil analyzes the data And sends back the most important stuff for the user? Yes, absolutely. And so it's been a focus of ours to create and deliver a full stack Complete solution, which is again one of the reasons why we've joined up with Andas. And so one of the aspects of that is not just delivering raw data to the customer, but Actual analytics and actual actionable information. So that's part of our product stack as well. And there's multiple steps to that. So actually going back to the first part of your question, what type of data do we collect? That depends on the market and the use case. Our system is largely Payload agnostic. So within agriculture that is RGB and multispectral, within The industrial markets, it's typically, RGB and thermal. And there are other types of sensors on the horizon, things like methane sensors, for example. And so typically we're talking about collecting a very large amount of image data On the order of 20 gigabytes a day, that is all offloaded to the base station. And within that base station, again, these also function as edge computing centers, which is a key step to making this work. And so those images are stitched together, processed and to some degree analyzed at the edge and then that finished product is uploaded The cloud through our front end software called ScoutView. And then from that point on, you can apply additional, AI to analyze that data. Okay, great. Thank you. And then just on the core business here. Maybe Can you talk a little bit about the timing of there's this lab, took some orders from the lab trial, I think this quarter. Is that is the success of that critical to the eventual commercial orders you get in the second half? Or are there a couple Rails that might sort of vibe irregardless of that lab. There is going to be rail activity irregardless of the lab. However, the lab is important and it's a place where all the rails can come to collaborate on that shared system we've talked about. So it is an important step. And as I highlighted earlier, it's really it validates the market opportunity even further Because we're now emerging not just with this wireless comms committee, but we're sort of now interacting, engaging with those senior operating committees, Yes. Hey, Eric, maybe I can jump in too. I think Although they work collectively, they also, obviously the rails work independently. And so the number of applications continue to grow And the interest, so I think the lab is critical, but also lots of activity going on individually with the reels. All right. Thanks a lot. Good luck. Thanks, Mike. Today's next question comes from William Morrison of National Securities. Please go ahead. Hi, Eric. Hi, Reese. Great. Hi, Bill. A couple of questions. Sorry, if you hear any How are you doing? There's hammering in the background. We have construction going on here. Sorry. No problem. Couple of questions. Rhys, Do you have is CloudLink also a WiMAX radio too or do you have a radio in there? And if so, are you going to Migrate this to OnDAS WiMAX radio or software. And Do you interoperate with any AI cloud platform in the cloud, like C3 dotai or Palantir? Yes, that's a great question. So, the to the question of how we get the data to the cloud, Sorry, my AirPods just died. The answer depends on the site. The short answer is yes, integrating with the full MACs to help us get that information to the cloud. But if cellular connectivity is available in the site that we're operating in, which It's sometimes the case. We can also use that method. Okay. And then, when you get into the cloud, does it interoperate with a different AI platform or Is it your platform in the cloud too? It is our platform in the cloud, but the system is developed in such a way where we have To integrate with other softwares as well, whether that's a third party or that is something developed by the customer that we work with. Okay. Good. And on the drone itself, is there any compute Resources like Intel NUC or anything like that? On the drone itself, The computing intelligence focus is mainly on mission planning, intelligent flight dynamics, things like precision landing. The data itself from a customer perspective is stored on there in a raw format and then that's offloaded to the base for processing after the flight occurs. Okay. So, I mean, can you Kind of give us an idea, Reese, of what your pipeline looks like and when you're when do you expect to start to ramp in orders? Yes, absolutely. So in coordination with our R and D efforts over the past 5 years, we've been building up A deep customer pipeline in anticipation of our recent FAA approval. Now that we've achieved that milestone Back in January of this year, we're looking ahead to deployments with a number of Fortune 500 companies across The U. S. And across multiple sectors, including energy, agriculture and rail, our media focus now turns to building out of our team and inventory to support this interest with initial target deployments in Q3 and Q4 of this year. Great. Thanks. I'll circle back. Ladies and and gentlemen, this concludes the question and answer session. I'd like to turn it back to the management team for any final remarks. Excellent. Thank you, operator. I'd like to close by reminding our investors that Andas is bringing tremendous value to the critical industrial and government markets we're targeting. We're focusing on delivering big networks for important end markets and we're proving this with the rails and aura in the flywheel is working. Today's announcement with American Robotics is proof of our commitment to bring valuable and complete next generation solutions to these markets. Adding the industrial market's best drone platform via American Robotics Scout System is a huge win for our customers and investors. So to close, I want to thank you again for joining the call. I also want to express gratitude on behalf of the entire team at Andas for your support. We began the year with terrific momentum and we look forward to sharing updates on our key initiatives over the course of the year. Thanks again for joining us this morning. And thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.