Good morning, ladies and gentlemen, and welcome to BlackSky Technologies Second Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Please note, this conference call is being recorded. I would now like to turn the call over to Aly Bonilla, BlackSky’s Vice President of Investor Relations. Please go ahead, Aly.

Good morning, and thank you for joining us. Today, I'm joined by our Chief Executive Officer, Brian O’Toole; and our Chief Financial Officer. Henry Dubois. On today's call, Brian will provide some highlights on the quarter and give a strategic update on the business. Henry will then review the company's second quarter financial results and outlook for 2022. Following our prepared remarks, we will open the line for your questions. A replay of this conference call will be available from approximately 12:30 PM Eastern Time today through August 24. Information to access the replay can be found in today's press release. Additionally, a webcast of this earnings call will be available in the Investor Relations section of our website at www.blacksky.com. In conjunction with today's call we, have posted a quarterly earnings presentation on the Investor Relations website that you may use to follow along with our prepared remarks. Before we begin, let me remind you that today's conference call includes forward-looking statements including financial performance and guidance for the full year 2022 and that actual results may differ from the expectations reflected in these statements due to factors such as long sales cycles, customer demand and our ability to estimate expense, operational and liquidity needs. We encourage you to review our press release and most recent SEC filings for a full discussion of the risks and uncertainties that pertain to these statements, and that may affect future results or the market price of our stock. BlackSky assumes no obligation to update forward-looking statements except as may be required under applicable securities laws. In addition, during today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA. A reconciliation of adjusted EBITDA to net loss, the most comparable GAAP measure is included in today's earnings press release, which…

Thank you, Brian, and good morning everyone. I'm happy to be here today and excited to lead the company's financial strategy as the CFO. As Brian mentioned earlier, I've been supporting BlackSky for several years and have worked in the geospatial intelligence industry for quite some time. I believe the company has a unique value proposition providing customers with dynamics hourly monitoring and a proven software platform delivering actionable intelligence to governments, businesses and organizations around the world. Now that I'm in this new role, I look forward to meeting many of you in the near future. With that, let me address our second quarter financial results. Starting with slide 14, customer demand for our imagery and analytics solutions continued to grow in Q2 driving another record performance in our revenue. For the second quarter of 2022 revenues reached $15.1 million or a 105% increase over the prior year period and our largest year-over-year growth rate to date. In fact, we've now reported 10 consecutive quarters for year-over-year revenue growth demonstrating the growing demand from customers for BlackSky's products and services. Imagery and software analytical services revenue grew to $13.3 million, a 161% increase over the prior year period, primarily driven by new and existing government contracts. As you know, we were awarded the EOCL contract with the NRO in May with the official start of the program beginning on June 15, resulting in minimal contribution to revenues in Q2. I am pleased with how quickly we ramped up our operations to hit daily imaging volume requirements and look forward to recognizing a full quarter's worth of subscription services revenue starting in Q3. The revenue mix for imagery and software analytical services rose to approximately 88% of total revenues, demonstrating the value customers placed in our high frequency imagery and…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Jason Schmidt with Lake Street Capital Markets. Please proceed with your question.

Hey guys, thanks for taking my questions. Brian, I know in the prepared remarks you noted kind of momentum from both existing and new customers, but curious if one or the other is really just driving this updated guidance? Brian O’Toole: Good morning, Jason. Thanks for joining today. Yeah, I would say it's a combination of both. We've been establishing a good base of customer revenue from existing US and international government customers, but we've also been adding new customers, particularly internationally, where we're seeing a lot of demand in a number of different regions around the world.

Okay. And that's a good segue to my next question on that international traction. I think revenue was about $2.7 million in Q1. I know that Q's coming out later, but can you just help us think about directionally how it was in Q2? Brian O’Toole: Well, I think it continues to grow as we've outlined. We're not getting into the specifics of different -- of those different segments, but I would say, it's in line with our plans, and there are several aspects that are growing faster than expected.

Okay. Got it. And then just last one from me and I'll jump back into queue. I understand sort of the dynamics going on kind of in the engineering and systems gross margin, but when we think about gross margin in aggregate, is it fair to assume that you can build upon that kind of 35.2%, you just posted in Q2 here in the second half of the year? Brian O’Toole: Yeah, let me have Henry take that one.

Thank you, Jason. On gross margin or cost of sales, way we're looking at it is that $35.2 million is the combination of the -- it's the mix between the margin or the cost of sales of the software and analytical support services revenue, which comprises 88% of our revenue and the engineering services revenue. If you look on the financial statements, you will see the breakdown of those two revenue and the cost of sales and we also have that on the chart where the software and analytical services revenue, our cost of sales for this year for the second quarter, I should say was only about 40%, it was about 50 -- it was about a 100% -- 40 basis points reduction from where it was last time last year. So I mean -- and as we continue to focus more on the revenue from the software and analytics, I would expect our margins to continue to improve.

Okay, that's helpful. Thanks a lot guys. Brian O’Toole: Thanks, Jason.

Thank you. Our next question is from Colin Canfield with Barclays. Please proceed with your question.

Hey, good morning guys. Can you discuss what a potential program of record looks like for the architecture from a sales and a cash perspective? And then maybe if you can flesh out how BlackSky views the kind of customer-funded R&D thesis versus cannibalization of geospatial analytics TAM? Thanks. Brian O’Toole: Yeah. Good morning, Colin. The TACGEO is a -- has been going on now for well over a year. It's an R&D type program that the government is using to explore future architectures and that's a precursor to potential programs of record that may be pursued by the army of the Space Force. And then on your second question. We look at these engineering and integration programs as funded R&D so that offset some of our capital cost. They are extremely beneficial in the sense that we establish very early on strong relationships with strategic customers and we get capital to fund future technology and we get good insight into future customer requirements. So these are highly strategic in nature, but also have the benefit of offsetting cash investments.

Got it. And then, maybe if you can talk a little bit about kind of the adjacent geospatial analytics upsides from EOCL and the sort of costs and head count that you need to service that market? Appreciating that integrating AI and your machine learning algorithms is probably a low cost type process, but at the same time you have to assume that as you approach kind of more services type work of geospatial analytics, they still going to require some headcount or is that the wrong way to think about that business? Brian O’Toole: I think, first off EOCL contract is for imagery only as I outlined in my remarks. So that gives us the opportunity to sell subscription monitoring and analytics services to other elements of the government. And so, we have that opportunity in addition to what we just outlined with tactical ISR solutions for the Space Force. With respect to kind of the AI and head count, once we develop a particular AI algorithm those run automatically in the platform. So these result in high-margin upsell analytics services. And relative to head count, the developments of those types of things are embedded in our invested software CapEx, however, that's consistent going forward.

Then maybe a last one. If you could maybe talk about the customer feedback of Airbus asset integration and how that compares to kind of early WorldView Legion traction that we've seen, maybe more on international markets than domestic but still kind of coming way to consider? Brian O’Toole: Yes, I think the main important thing there, Colin, is that, our Spectra AI platform was designed from the very beginning to integrate lots of different data. Customers want solutions that include different types of data sources, those data sources views to deliver actionable intelligence on demand and the Airbus partnership able us to bring in radar and very high resolution imagery, that's combined with our high frequency monitoring. So that's what enables us to provide a richer offering to customers going forward.

Got it. Thanks for the color.

Thank you. Our next question is from Josh Sullivan with Benchmark Company. Please proceed with your question.

Hey, good morning. Brian O’Toole: Good morning, Josh.

Just that now that you have EOCL, JAIC, what are your thoughts on EBITDA visibility? Where do you think you'll be able to give us longer-term outlook here? Brian O’Toole: I'll let Henry take that one.

Sure. Hey, Josh. How are you doing? When you take a look at kind of our -- as we were talking on that prior question from Jason, I will start with kind of looking at our gross margin is, we're improving our revenues and becoming more on the software and analytics. I would expect our cost of sales as a percent of revenue to continue to decline. If you take a look at kind of the first half of this year, when you take the increase in software and analytical revenue went up about $12 million and our cost of sales, as you'll see is, went up probably the neighborhood of about $3 million. So that says you've got about only -- on the incremental revenue you got about 25% cost of sales or for the flip side is 75% margin on that. So I was -- I would expect the cost of sales to continue to decline, our gross margin to improve. And then on our operating expenses, as we’ve discussed in the remarks, our kind of period costs, as I would call them, did increase from about $8.6 million from the second quarter of last year to $15.6 million in the second quarter of this year. That $6.6 million increase -- I'm sorry, $15.2 million -- that $6.6 million increase is a combination of investments we're making in the sales and marketing team and public company costs and some of the engineering team. Some of those expenses, particularly like public company costs is still in the more back office or kind of you get to a floor type expense level, you pretty much have a kind of on that step. But things that will continue to grow would be things like sales team and software and engineering expenses to support revenue growth. So they won't continue to grow at the same rate. So over time, we would expect, obviously, our adjusted EBITDA margin to continue improving, we saw a 55 basis points improvement this past year-over-year quarter, and we believe that we're on the right trajectory to get to positive EBITDA and some nice EBITDA margins.

Got it. And then just as your customers get more real-time experience in Ukraine and elsewhere, how is the feedback with Gen-3? I mean are you changing the strategy at all, enhancing it? Just curious on what the real-world environment is suggesting Gen-3 should either include or maybe you guys don't think you need to change where the strategy is? Brian O’Toole: We do not need to change the strategy. The Gen-3 architecture was a result of some customer input over time. Is it -- since forming things like resolution and some of the other features we're putting on the spacecraft, so Gen-3 remains on track. As I mentioned, we will start launching those satellites next year. They will deliver higher resolution imagery, and some other capabilities like short wave IR, which -- the key aspect of Gen-3 is that, with higher resolution the level of analytics that can be extracted from that type of data when you combine it with high frequency monitoring offers an extremely powerful value proposition to our customers.

Thank you.

Thank you. Our next question is from Scott Deuschle with Credit Suisse. Please proceed with your question.

Hey guys. Good morning. Thanks for taking the question. Brian O’Toole: Hi, Scott.

Henry, are you seeing much inflationary pressure in satellite construction, obviously, help the CapEx guide. I’m just curious if you're seeing anything there that’s moving the needle?

Sure. Scott, I appreciate the question, that's one -- inflation is always one that's top of our mind at the moment in the current economy. But as we're looking at it, we've got the benefit of getting our first batch of satellites under contract. So we got to understand what that -- what those costs are and we're able to manage that plus our supply chain. So for the first batch satellites, we'd expect to start getting up around the end of next year and into 2024. I think we've got those costs pretty well understood. Also given the fact that we've got a full constellation right now, we've got a little more flexibility on timing if things were to be -- become an issue.

Got it. And then just an accounting question I guess. Why isn't satellite depreciation in cost of sales?

Well, the reason we're doing it this way is, we're looking at the cost of sales as kind of our operating costs, our current period cash costs. We've got the cost of sale of staffing up there, we've got the cost of data transmission, ground station, operating costs, etcetera. So we are looking at that as things that we can control. The depreciation, we've got it as a separate line item, because that is a decision that we're making more based on our overall capital expenditure budget as opposed to the actual operating decisions. So it really comes down to more of how we go about managing the business?

Got it. That makes sense. I guess just to follow the -- we talked about incremental gross margins earlier, there's not much incremental cost on that line you were just referencing. Now with the CapEx you're spending and when we launch Gen-3 and D&A should be going up, I would think, so I guess the question is, how do you think about incremental gross margins within inventory if you were to allocate some percentage of that D&A to the five months. Brian O’Toole: Well, I think what you want to look at it is kind of what I would call kind of the maintenance CapEx over time. They kind of get into that kind of run rate of the number of satellites you have, 10 times the costs associated with those satellites divided by the expected life of those satellites. And Gen-3 and others were looking at kind of some improved life cycles on those. So whereas we going about doing our analysis we definitely make sure we look at that, and that also plays into the timing of when we get satellites up.

Okay. And what would be a good long-term maintenance CapEx level for this business?

At the moment we're not providing guidance on that number.

Okay. Thanks so much for your time.

Thank you. Our next question is from Chris Quilty with Quilty Analytics. Please proceed with your question.

Thanks. Maybe I start by beating a dead horse here on the revenue guide, the increase in the revenue guide. Would it be correct to think about it in one of two ways, either the incremental capacity that's come online or was there some uncertainty around the timing and the size of the EOCL award that gave you more confidence? Where either of those buckets more incremental in terms of the guidance raise? Brian O’Toole: Hey, hood morning, Chris. Well, first off EOCL near term was in line with our expectations. So the size and the timing of that was consistent with our forecast. Of course, now that provides us with greater revenue visibility going forward. We -- as reported in the first quarter, we are seeing strong growth internationally. And then frankly, we're also winning -- we are winning more contracts that we have had in our pipeline and are converting into long-term agreements. So I think all of those things combined are what is driving our visibility and our increase in guidance.

Thanks. That’s some good color. This one is probably for Henry. It's again a follow on the margin. With the new partnerships, both Airbus integrating and Palantir and Esri, do the revenues generated through those platforms generate a significantly different margin from just the core imagery sales and services on the base platform?

Chris, yes, as we look at that, those costs, I mean they are built into our cost of sales models and they do have an impact on that margin as you might imagine. Imagery coming off of our satellites when we're looking at it from a pure incremental cost type basis, those are very high margin. So there's a little bit of a drag, but they provide strategic benefits. And quite honestly the imagery and the revenue that we're generating from our internal capabilities is much higher and we expect to continue to leverage off that.

Great. And also a follow-up on Esri. I mean, they obviously have a pretty huge user base. Can you talk about the sort of user interface of how people would actually access and purchased the imagery, and I think I get a news article when I click on the website and I want to see it, but they want to pay and -- whatever I'm going, is that built into -- automatically build through Esri, so it's much more seamless or what would that user interface look like. Brian O’Toole: Chris, the user interface actually enables end users to task for satellites with the BlackSky application running within the ArcGIS online platform. So it's seamless from a customer experience. And then after they task that automatically -- that request goes to our platform and then we automatically collect it and deliver it right back into the -- right back into that Esri platform and to the users account. All that is seamless. The business model is essentially reselling through Esri and orders flow from their platform into ours.

Got you. And one other follow-up on Airbus with like the SAR imagery coming in right now that you're offering through the platform. Are you currently just providing imagery, or do you have plans to actually do any of the analytics around that phenomenology? Brian O’Toole: Yeah, Chris, we're planning and we already do support, we've been integrating SAR imagery in our platform now for several years. And there are certain programs that we have, one in particular is the economic indicator monitoring with NGA where we're using high frequency monitoring and SAR to deliver analytical insights to our Spectra AI platform. So we're doing all of that already. The Airbus agreement enables us to get access to a whole new data source of SAR and very high resolution imagery.

Great. And one question on -- actually it's two part question on the Gen-3 Constellation. I think in the deck you mentioned both onboard processing and space communications. On the first part, how incremental is the onboard processing relative to what you currently have on the Gen-2 platform? And is that driven primarily around reducing ground segment costs or is it more around the latency -- decreasing the latency on the data? And the second part of the question, when you talk about space communications, I know recently planet with their Pelican added a C-band relay capability with that, what sort of capability are you looking at? Brian O’Toole: Yes. So, Chris on the -- starting with the onboard processing. Let me just say generally the Gen-3 architecture and bus is very modular and was designed such that we can have plug and play types of processing, communications and other payloads. So we have a lot of flexibility in the architecture and what we've put in there over time. Onboard processing does give us the ability to shorten timelines and deliver analytic products directly off the vehicle. And then on space comps, with its capability it's going to enable us to use space links to shorten tasking timelines and delivery timelines.

Got you. And if I can a final question again on the investor deck and you showed sort of today the 2025 growth and the biggest portion, at least percentage wise in growth is on the commercial side, can you talk about where you're seeing success with commercial customers, either by application or industry. Brian O’Toole: I would say, the largest area we're seeing success commercially is the ease in which we are enabling commercial customers to access through platforms like Palantir and Esri. We have a number of other projects that we're working across different vertical markets, in things like supply chain analytics and insurance, for example. So we're seeing interest across a broad number of verticals, but I would think the platform integrations that we're demonstrating with Palantir and Esri is a first time enabling in app types of tasking and access to on-demand imagery and analytics, which we think is going to be instrumental in driving our commercial growth and our go-to-market strategy.

Great. Thank you. Brian O’Toole: Thank you, Chris.

Thank you. There are no further questions at this time. I'd like to turn the call back over to Aly Bonilla, BlackSky’s Vice President of Investor Relations. Go ahead, Aly.

Well, I want to thank everyone for participating on the call today and we look forward to speaking to you again soon. Have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.