Thank you for joining the BigBear.ai Second Quarter Conference Call. This call is being recorded. At this time, all participants are in listen-only mode and a question-and-answer session will follow the presentation. [Operator Instructions] I will now turn the call over to Norm Laudermilch, Chief Operating Officer. Please go ahead, Mr. Laudermilch.

Good afternoon everyone and welcome to BigBear.ai's 2023 second quarter conference call. I'm joined by Mandy Long, our CEO; and Julie Peffer, our Chief Financial Officer. During the call today, we may make certain forward-looking statements. Listeners are cautioned not to put undue reliance on the forward-looking statements, and BigBear.ai's specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call. Many factors could cause actual events to differ materially from the forward-looking statements made on the call. These statements are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. For more information about these risks and uncertainties, please refer to the forward-looking statements section of the earnings press release issued today and our SEC filings. We will also discuss some non-GAAP financial measures during the call today. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. You can find the GAAP and non-GAAP reconciliations within our earnings release. Now, I'd like to turn the call over to Mandy.

Thank you, Norm and thank you all for joining today's call. I'm excited to spend time with you today as the momentum at BigBear.ai continues. We've driven change across our company and are increasingly poised to capture growth opportunities across the markets we service. We're delivering on our stated goals in this foundational year, improving operational rigor and building momentum in key sectors, and our culture of execution at BigBear.ai as unlocking significant opportunities in win. We've also refreshed our branding, supporting our reintroduction to the market and more closely aligning with the end markets we serve and the solutions we provide. A key win for us this quarter was being selected as the sole provider by the US Army to implement Phase 2 of the Army, Test & Evaluation Command, integrated mission management system, and a single award contract worth over $7.7 million over seven months. BigBear.ai will provide a modern, no-code, low-code solution designed to replace ATEX legacy system with a cloud-based, API-centric platform combining project, and portfolio management, enterprise content management, workflow management, application integration, and business intelligence data analytics capabilities. The solution offers the US Army unique and democratize access to data, collaboration tools, and advanced analytics. What's important to recognize in this extension is that in moving from Phase 1 to Phase 2, the Army selected us as the sole provider after previously sharing this contract. This positions BigBear.ai well, as future work is awarded. As we continue to execute, we will see more of these types of contract progression. This award builds upon BigBear.ai's portfolio of work supporting US Army readiness, including its continued delivery of the Global Force Information Management, Objective Environment intelligent automation platform. In addition to AIMMS, we received a 6-month extension from the US Army as the prime contractor for…

Thank you, Mandy. This past quarter, we executed well in the face of market challenges, including headwinds from the bankruptcy of Virgin Orbit. Additionally, as we make progress on our transformation to a higher-margin technology-led solutions business, we are seeing our contract mix begin to shift and move away from programs like EPASS. EPASS represents a legacy program, where we operated as a subcontractor, focused on resort staffing for the US Air Force. Despite these headwinds, we delivered on what we set out to achieve. This is a testament to the team we are building, and the quality of our solutions, and our ability to execute and grow within our markets. If anything, the cure geopolitical climate has highlighted the need for advanced technologies like artificial intelligence, and our national security efforts, and we are seeing increased interest in our capabilities as a result. Now, let's turn to quarter results. Revenue for the quarter was $38.5 million, up 2% year-over-year compared to $37.6 million in the second quarter of 2022 and up 9% year-to-date. As always, I want to emphasize that our revenue can be lumpy and can fluctuate meaningfully, depending on the quarter in which contracts are awarded, milestones achieved or contracts complete. For Q2, year-over-year growth was driven by our US Army GFIM contract, partially offset by the termination of the Virgin Orbit contract and the completion of one phase of our EPASS contract. Total gross margin was 23% in the quarter, a 220 basis point decrease from 25% in Q2 2022, driven primarily by the loss in revenue and gross margin from Virgin Orbit after they're declared bankruptcy in April. In terms of this contract, we initially anticipated that the company would be sold quickly, but this has not materialized. So, we are taking further action to…

Thank you, Julie. We have already made a great deal of progress and I am extremely excited about what we're building and the path ahead. Operator, we are ready for questions. Thank you.

Thank you. [Operator Instructions] Your first question comes from Vivek Palani of Northland Capital. Your line is open.

Hi. I'm Vivek on for Mike Latimore of Northland Capital. I have a couple of questions with me. And the first one is, what is your headcount, and are you planning on adding more by the year end?

Hi there. Sorry, I missed your name. I missed the name, sorry about that.

Yes, I'm Vivek on for Mike Latimore.

Vivek. I'm sorry, I missed the name. Sorry. Sure. Great. Thank you for the question. Our headcount, we don't actually release our headcount numbers. But I will say, and I mentioned on the call on my scripted remarks that we are ramping down from a specific contract and ramping up on others that is showing that our headcount is actually coming down right now because of some of those contracts that are heavily weighted toward labor. But that is not a number that we specifically release. We will be growing headcount specifically in some areas based on key investments that we're making. But we're not releasing the specific headcount numbers at this time.

Okay. My next question is, are you expecting the large phase of GFIM to get awarded in fourth quarter of this year?

Hi, Vivek. This is Mandy. It's nice to talk with you again. And to build on Julie's previous comments in regards to headcount, we have quite a few open positions right now that we're hiring for specifically related to the contracts that we're executing on and those that are anticipated to transition to GFIM. We -- from an expectation standpoint, right, as we look at the extension, that is certainly our hope. I would say as we continue to work with the customer and reflect on timing if there are any updates, right, I think we would certainly share those. But as of right now, yes, that is our current expectation.

Okay. Thanks. And the last question is -- so where might the gross margins trend in second half of the year?

Yes. Great question. Yes. We saw some headwinds in the first half of the year. I think I talked a little bit about these, but specifically, between some contracts that we're ramping down. And as you recall, we talked about Virgin Orbit coming off our books, and that obviously is creating some headwinds for us in Q2, specifically. But we actually see that we have some contracts that are ramping down that are lower margin and other contracts that we already are anticipating that are ramping up that are going to give us that better margin in the second half of the year. We're very confident that it's going to improve in the second half of the year. So, I can provide a little bit more detail maybe offline, but happy to give you a little bit more of that when we connect later.

Sure. Thanks a lot.

And Vivek, one comment that I'll make, we talked about it a little bit in our opening remarks regarding this particular quarter. But I think it's worth reinforcing that right now, we are in the midst of very deliberately looking for places where we can shift away from businesses that are part of our large portfolio that have margin ceilings towards those with a larger opportunity for margin expansion. And that's a lot of what I think Julie was really getting at as we look at how we think about how our backlog is changing, how we think about how our mix, right, from a contract basis is changing. We are seeing great indicators, right, in terms of how we look at our mix, our fixed price mix going up quarter over quarter. And I think that those are indications when we look into the second half of the year that I think make us feel good.

[Operator Instructions] Your next question comes from Louie DiPalma with William Blair. Your line is open.

Hi Louie.

Hi, Mandy and Julie. Good afternoon.

Hi, Louie.

Julie, are you able to quantify the impact of the portion of the EPASS subcontract ending? And are you able to estimate what is the underlying growth of the business excluding this EPASS headwind?

Yes, I mean, it's fair to say that -- so let me give you a little bit of insight specifically on EPASS. Again, EPASS is a legacy program. We were a subcontractor. It really is a two-phase ramp down. So, in the quarter specifically, we were notified last quarter that they transitioned EPASS into a new prime in that prime was going with who we used to subcontract through. So that is shifting. But it's really in two parts. Part of it was completing at the end of Q1; part of it is completing within Q3. So, it is going to gradually ramp down over time. But we're not release -- specific information about exactly that it impacts. But this is why I talked about the fact that the quarters can be lumpy depending on when contracts are ramping down and when they're ramping back up. And so you can see that reflected in our results as well as always something that we consider as part of the business.

Great. Thanks, Julie. And Mandy and Julie, congrats on the GFIM six-month extension. Is BigBear expected to be awarded the production GFIM contract at the end of this year? And with the current annual run rate, roughly $17 million, should the production cash run rate roughly double that amount?

So, I can take the -- I'll take the first part of that. So, from a production award point, as we shared, it was part the extension, right? We're the sole prime vendor included in that. I think it puts us in a great position, right, when we think about what we're doing to deliver value for the customer and so our chances as we look into the production award. But ultimately, obviously, as you know, Louie, the decision lies with the customer, but we will do our best to continue to deliver. And I think that's why we are into the Phase 2 extension.

Great. And Mandy, you also mentioned you received the sole-source AIMMS OTA, and that involved like no-code/low-code solution. Is there the potential that like AIMMS AIM can be in the same total contract value size as GFIM? Or how would you like estimate the size for investors on the call?

So, I think -- so first, one thing worth noting about what you said is there is definitely a -- I would note a pattern here, right? So, as we think about the work that we've done with GFIM and continue to do the work that we're doing in AIMMS, the thing that I would reinforce this thread along those is that we absolutely have a very strong partnership and pattern of success associated with being able to do transformation work associated with core business systems and in an intelligent automation platform form factor. From a size standpoint, we -- I think we expect as most of these happen, right, as you shift from Phase 2 to Phase 2 and then into production. The size of the contract goes up significantly. I don't -- we don't have an indication of that total value at this point, but I think safe to assume a similar pattern.

Great. And another question, with the equity offering, what is the new diluted share count that we should be using?

Let me give you that; I've got that handy. Hold on just one second. Share count for the end of the quarter or for the average for the quarter? I can give you both. The ending share count is 155,453, and the average for the quarter is 145,469.

Great. And one final one, with SG&A continuing to be optimized, is there potential for further cuts into the second half of the year? Or are we currently at the optimal level?

Yes, I mean -- go ahead, sorry Mandy

No problem, Julie. So, what I would say is that we are in a very good position right now. And I think we have a lot to be proud of in terms of progress over the last -- I've been in the role for about nine months. The kinds of improvements that we're seeing year-over-year are significant. And the thing that I'm most proud of in that is that while we've really gotten our operating expenses to good level, we are still growing, right? And I think that it's a testament to the exceptional team that we have, the amount of rigor that we're putting in place associated with how we go after and grow opportunities. Now, from a -- how we look at the rest of this year, I do think that we're in a pretty balanced position right now. But we're always going to look for opportunities for further automation, right, and further optimization. And I would say I always reserve the right to get better.

Yes.

Yes. Let me add just a little bit to -- just as a reminder, I mean, we committed to deliver $20 million annualized savings last year after -- we did our reductions. And I think if you look at the members [Technical Difficulty] over $30 million in annualized savings comparison to that Q2 baseline that we established. So, as we talked about, we're very proud of the work we've done to get our cost structure back in line to where we are. I would say, even with this improvement, we are committed to continuing to drive improved operating efficiency, and that's going to come over time. And we're going to continue to have rigor within operating expenses. I would not anticipate huge shift, but as Mandy talked about, this is something we're always going to be focused on, and we'll continue to see that in the numbers.

Great. And one final one, there's obviously a lot of excitement associated with generative AI in the market for both federal, defense customers and commercial customers. Can you describe how this is impacting your pipeline of award opportunities as you have your own intellectual property here, and how is that translating? Thanks.

Yes. Absolutely. I can speak to that. And what I would say is that I think generative AI being one bucket, right, of opportunities where we see interest in our sales being able to apply. But I would say, Louie, as we look at pipeline and how we're diversifying, it is certainly not limited to that, right? The way that I -- and I think we as a business think about using advanced technologies like this is that there are a variety of different tools in the toolbar. But at the end of the day, our job and how we approach engagements with customers is that we want to understand what problems they're trying to solve, what challenges they're facing. And then we will bring the technology to bear, right, that is crossing that possible and practical line. I think what's spectacular about where we are right now as a society is that so many of these capabilities that previously lived in the lab have now crossed both, right, the possible and practical thresholds. And so we are seeing more and more opportunities to bring those in more solutions that we're delivering to our customers.

Great. Yes, I was getting along the lines of how last quarter you discussed the expansion of your partnership with L3Harris for their unmanned surface vessel. You're integrating your software into their platform and how there's probably other opportunities for similar partnerships. There's a lot of excitement in the market. Thanks.

Yes, I think that's all said. And I think you're right. I think there's this interesting intersection that we're seeing emerge between those who are building and have expertise, right, and building and delivering these physical platforms and organizations like BigBear.ai where our superpower lies in software, right, and underlying technology that when you put them together, right, it was absolutely a differentiator. And so some of the things I see as we look forward, I think we're going to have more opportunities for partnerships where two organizations can come together and say we've got some really complementary stuff and let's combine it and take that to market because it will ultimately benefit the customer.

At this time, there are no further questions. I'd like to turn the call back to management for any closing remarks.

A huge thank you to everyone for joining and for the wonderful and thoughtful questions. As I shared earlier, I think we have, in the nine months that I've been in this role, really focused on being clear, right, to the broad market around what it is that we're focused on, who we are, and what we're setting out to do. I think this quarter is another great example of what you can rely on from BigBear.ai and this leadership team associated with doing what we said. And as we look into the second half of this year, we continue to be excited. 2023 has been, from the beginning, right, since I stepped into the role, a foundational year for this organization. The world is changing around us every day as we go through the Fourth Industrial Revolution, and BigBear.ai has all of the parts to play a very significant role in moving that ball forward. We look forward to reconnecting with everyone next quarter. Thank you so much.

Thank you everyone for attending today's conference call. This does conclude today's call. You may disconnect. Have a wonderful rest of your day.