Good morning, ladies and gentlemen, and welcome to BlackSky Technology's Second Quarter 2023 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 2023. 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 23rd. 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 certain statements made during today’s conference call regarding our future plans, objectives and expected performance including our financial guidance for 2023, are forward-looking statements. Actual results may differ materially as these statements are based on our current expectations as of today and are subject to risks and uncertainties including those stated in our Form 10-K. We encourage you to review our press release, Form 10-K and other 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 by applicable laws. In addition, during today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, adjusted imagery and software analytical services cost of sales and cash operating expenses. A reconciliation of these non-GAAP financial measures to their most comparable GAAP measures are included in today's accompanying presentation, which can be viewed and downloaded from our Investor Relations website. At this point, I'll turn the call over to Brian O'Toole. Brian?

Thanks, Aly, and good morning, everyone. Thank you for joining us on today's call. I'm pleased to report that BlackSky delivered another strong quarter, as we continue to demonstrate revenue growth, substantial operating leverage, and effective cost management that has us on a path towards profitable growth. Our progress is being driven by strong demand to our high frequency imagery and analytics for major defense and intelligence customers around the world. BlackSky’s unique dawn to dust monitoring capabilities are relied upon every day to deliver critical intelligence to decision makers and some of the world’s most important events. A relevant example illustrated on Slide 4 is related to the recent rebellion in Russia by the Wagner crew. In this case, BlackSky was monitoring activities related to location of Wagner leader Prigozhin days after the failed coup attempt. By combining our high frequency monitoring capabilities with other data sources, we were able to capture imagery of two planes linked to the Wagner leader at a Belarus Airfield outside the country's capital city. The intelligence collected by BlackSky was used by an independent third-party analyst to corroborate the findings and was featured in exclusive reporting by CNN. Over the days leading up to this discovery, BlackSky monitored this location over 170 times, which was an essential part of capturing this critical event. Our unique time-diverse constellation allows us to do this in a way no one else can. Another example is shown on Slide 5, where our dynamic monitoring capabilities were used to reveal critical strategic activities by China, associated with a rapid construction of a major naval facility in Cambodia. Here you can see two images taken about a year apart showing the rapid construction of a Chinese military naval station off the Coast of Ream, Cambodia. Although only two images…

Thank you, Brian, and good morning, everyone. I'm pleased with the execution we’ve made across many aspects of our business and with our second quarter financial results. Beginning with Slide 12, total revenue for the second quarter of 2023 was $19.3 million, an increase of $4.2 million or 28% over the prior year quarter. Imagery and analytics revenue grew to $15.3 million a 51% increase over the prior year period, primarily driven by greater volumes of imagery delivered to customers worldwide. Professional and engineering services revenue was $4 million in the second quarter of 2023, compared to $4.9 million in the prior year quarter. The decrease of $900,000 was primarily due to timing of some R&D programs as a few new projects began to ramp up this year, while a few large projects from last year came to an end. Keep in mind, revenues recognized from these types of projects are largely milestone-based and can fluctuate significantly quarter-over-quarter depending on a project estimated costs and percentage of completion. Turning to cost of sales, we continue to demonstrate strong operating leverage in our imagery and analytics business as shown on Slide 13. Excluding stock-based compensation, depreciation and amortization expenses, imagery and analytics cost of sales was $7 million in the first half of 2023, compared to $6.7 million in the first half of 2022. The small, $300,000 increase in cost of sales on a revenue growth of $13.5 million results in a high incremental contribution margin of 97% for the first half of the year. This performance is in line with the incremental contribution margins in the prior year and further demonstrates our consistent and strong track record of operating leverage. We've always said that BlackSky’s core business of imagery and analytic services has an inherently low marginal cost for each…

Thank you, Henry. In closing, we are pleased with the strong second quarter performance and the momentum we are carrying into the second half of the year. Demand for our products and services has never been higher, as we continue to see an increasing number of defense and intelligence customers turn to BlackSky for their mission-critical needs. Our unique high-frequency hourly monitoring in AI-enabled analytics is what differentiates us in the market and is becoming an essential capability for national security missions around the world. Our strategy to focus on this market is paying dividends as this increased demand has translated into a large and growing pipeline of sales opportunities, which we are successfully converting into sizeable multi-year contracts with highly strategic and long-term customers. The revenue growth from our high-margin imagery and analytics sales is demonstrating the operating leverage of our business model. In combined with prudent and responsible cost management, has us on track to achieve positive adjusted EBITDA in the fourth quarter and beyond. While our focus is on profitable long-term growth, we continue to invest in the future and in technologies that provide the highest long-term value to meet our customers’ needs. We are growing our expertise and capabilities in AI, while advancing our space architecture to include very high resolution Gen-3 satellites, which remain on track for initial deployment next year. We look forward to the next phase of expansion of our constellation to meet the strong demand for these capabilities. Finally, I want to thank the entire BlackSky team for their hard work and dedication has they work every day to deliver on our commitments to customers around the world that have come to rely on Black Sky. We are all very proud to be partnered with these customers and most importantly that our capabilities are being used to shine a light on events that threaten the security of our country and our allies around the world. This concludes our remarks for the call and we will now take your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Jaeson Schmidt with Lake Street. Please proceed with your question.

Hey guys. Thanks for taking my questions. I just want to start with the updated guidance. Curious if this is more related to contracts that you guys had previously won that are getting pushed to the right or contracts that you had previously expected to close at this time that just won't start contributing until later this year.

Hi, good morning, Jason. Thanks for the question. It's primarily timing and it's related to both renewals and new contracts. So we're, as we mentioned, we're actively working with several major customers on a number of new sizable contracts. And as the case of contracts of this nature, the sales cycle sometimes takes longer, especially contracts to new government customers, especially to internationally. So, this can introduce variability quarter-to-quarter. So that's why we ultimately widened our guidance here to address that variability.

Okay. Understood. And then just following up on that, I mean, that pipeline of contracts are in negotiations with, are those primarily with existing customers looking at expanding or new customers coming online?

Combination of both. There are several expansion contracts, but also several contracts with new customers.

Okay. Great. I'll jump back into queue. Thanks a lot guys.

Thanks, Jaeson.

Our next question comes from the line of Edison Yu with Deutsche Bank. Please proceed with your question.

Okay. Thanks. Good morning was wondering, you obviously have a lot of momentum on the booking side. Can you give any sense of the cadence or the timeframe on how you would recognize some of the bigger ones, for example the $30 million renewal, how does this sort of start flowing through either this year or next?

Yeah. Thanks, Edison. I think as we stated, many of these contracts are multi-year contracts and are subscription-based. And so, those contracts will start to be recognized over the course of that couple year period as we deliver capacity and in some cases these are take-or-pay type contracts where they subscribe to our capacity and they pay on a quarterly basis to access that capacity.

All right. And then, I guess, more broadly speaking, I think, one of the - one of your competitors out there has been seeing a decent amount of slow down on the commercial side. Can you maybe just talk about on the government side? Is that the case? It sounds like it's not but, just any thoughts around how you're seeing the various end-markets as they compare to each other?

Yeah, we're not seeing a slowdown in our core markets. We've been, as you know, we've been primarily focused on the global defense and intelligence sector. And we're seeing that that market rapidly growing and where there's clear demand for our products and services. And so, for us, this has always been our strategy and this focus is paying off as you can see in the growth of our sales pipeline, the quality of our bookings and the growth of our customer base. So, this is about our strategy all along and we're continuing to see strong demand there.

Great. If I could take one more and on the Gen-3. Obviously, great to see that the Rocket Lab contract. Do you have any sense of how many Gen-3 you may be contemplating for next year?

We have a – Edison, we've said in the past, we will deploy satellites as we need to, to replace and replenish what we have on orbit we will expand that over time. So we commenced a pipeline of production of Gen-3 satellites. And as we get into next year, we'll get closer to those deployments, we will provide an update on timing and how many.

Great. Thank you.

Our next question comes from the line of Josh Sullivan with The Benchmark Company. Please proceed with your question.

Hey, good morning.

Good morning, Josh.

These contract renewals, you mentioned the $30 million renewal almost 3x the previous one. What is your recompete or renewal rate look like over the next 12 months?

Josh, I would say, generally, the majority of our customers renew with us. And as I mentioned, we go through a process where they typically start with a initial pilot capability and they expand that over time. We're seeing almost no churn with the customers that we have, and most cases they are all expanding.

And then, as far as the EBITDA breakeven target, how much of that is volume or how much of that is controlled by cost at this point to get you there?

Josh, this is Henry. Thanks for that question. The way we look at it is, I mean, we have been responsible in our cost management all along. So we're very comfortable with where we are. And we are continuing to grow and hire people. But we don't need to do that ahead of our need. And so, the way we're looking at it is we do have some revenue growth that we’re expecting throughout the rest of this year. I mean, as you see with our guidance we will be growing in the second half. But we feel comfortable that we will be hitting that that EBITDA positive in Q4.

And then maybe just one, last one. How's the relationship with SPIRE evolving? What does the customer interest look like? And then, how are you sharing the value between yourself and SPIRE?

Yeah, Josh as we mentioned, we're seeing really significant interest in maritime-related solutions worldwide, particularly in the national security sector. The - and in order to, in order to address that need, it's important to combine the RF type of capabilities with SPIRE with high-frequency imaging capabilities, and AI analytics that we offer through our Spectra AI software platform. So, we are in the process of bringing that joint offering to market and bringing those to customers around the world.

Okay. Thank you for the time.

Our next question comes from the line of Greg Mesniaeff with WestPark Capital. Please proceed with your question.

Yes. Thank you for taking my question. As your customers renew, can you talk about any changes or adjustments to the subscription terms that you have put in into your contracts regarding episodic ordering as opposed to commitments in frequency and volume. Thanks.

Thanks for the question, Greg. I think most of the – these larger renewals are, you can think of them as take-or-pay type agreements where they're subscribing to a certain amount of capacity on a quarterly basis? And they have access to that capacity as part of their subscription-based revenue and visibility into where and when those customers need our capacity.

Thank you.

[Operator Instructions] Our next question comes from the line of Griffin Boss with B. Riley Securities. Please proceed with your questions.

Hi, thanks. Good morning. So, back to the Gen-3 launches, just thinking back to your launch in March, that satellite entered revenue-generating operations within 18 hours I think it was. And you mentioned, you're already selling capacity for Gen-3. So, when we're thinking about those future Gen-3 deployments, I understand part of this new capacity is going to replace existing capacity, but generally, will we be correct to look at these launches sort of as revenue inflection points or essentially a day after you launch your firing up new contracts and capabilities with customers or is it not so much a step function?

I think the way to look at it, Griffin is, initially these Gen-3 satellites will replace existing capacity. So, you'll see continued revenue growth as we've been experiencing in the last couple years. So that'll continue. As we reach a certain level of Gen-3 capacity over the coming years, you will begin to see a step function related to certain contracts.

Okay. Understood. Thanks for the color there. And then, I wanted to jump back to the previous question on SPIRE and get clarification. What's the go-to-market strategy with this? Is this an add-on feature to the Spectra platform or sold as a separate service from both you and SPIRE?

It's an add-on feature to the Spectra platform and it's a capability that we're bringing to our existing and targeted customers.

Great. Okay. Thanks for taking my questions. Appreciate it.

Thank you.

And our next question comes from the line of Caleb Henry. Quilty Space. Please proceed with your question.

Hey guys. Couple questions. I also want to kind of revisit the topic of the Gen-3. The wording on the Rocket Lab deal, it sounds like not all of the launches are for Gen-3. Just wondering if you could clarify if that means you guys have decided to launch some Gen-2s there or even continue production of Gen-2, before moving up?

Well, the general aspect of the deal is that, with Rocket Labs as we can deploy capacity in different types of satellites where and when we want to. The primary - primarily, those launches are for Gen-3 capability.

Okay. And then, just a question about the current solar context. There's been a lot of solar weather that's been impacting constellation operators. We’ve seen this with the SkySats and others is that having an impact on your current fleet operations, as well as you're planning for a Gen-3. Just to be in an environment where atmosphere has kind of been inflated and it's having an impact on spacecraft lifetimes and lower earth orbit.

Let me just start with, our constellation is healthy and performing as expected. We designed our satellites to deal with that type of environment in space. And we've reached a point where we've incrementally deployed this constellation over the course of last couple years and have deployed significant amount of capacity to meet our growth objectives. And we're now entering a point in time where some of those satellites are reaching end of life. So you'll start seeing us replace those. It has really reflected in the contract we designed with Rocket Lab and the progress we made on Gen-3.

Okay. And then, can you talk about the imaging capacity that you expect the Gen-3 will have. I understand that they're slightly bigger satellites, but typically a higher resolution, sometimes high resolution comes at the expense of surface area that can be covered. And so just wonder if you can share some color on that.

The satellites will have volumetric capacity similar to our Gen-2 satellites. But as you mentioned, they will have increased resolution up to 35 centimeters and also will include a shortwave IR capability.

Okay, and then just the last question, a quick one LeoStella had announced a new larger bus the other day I think for the Small Sat Conference in Utah. Is that what BlackSky plans to use for Gen-3?

Gen-3 is utilizing a different technology. But I think what you're seeing with LeoStella is - as a strategic investor and JV partner in that company, that type of progress in there and their bus technology over time is something we can take advantage of as part of our business.

All right. Those are all my questions. Thanks guys.

And at this time, there are no further questions. I'll turn it back over to Aly Bonilla, BlackSky’s, Vice President of Investor Relations. Go ahead, Aly.

Thank you. I want to thank everybody for joining us on the call today. We will be participating in several upcoming investor conferences and we look forward to speaking to you again soon. Have a great day everybody.

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