Greetings, and welcome to Spire Global's Third Quarter 2023 Conference Call. Our host for today's call is Ben Hackman, head of investor relations. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session I would now like to turn the call over to your host. Mr. Hackman, the floor is yours.

Thank you. Hello, everyone, and thank you for joining us for our third quarter 2023 earnings conference call. Our earnings press release and SEC filings can be found on our IR website at ir.spire.com. A replay of today's call will also be made available. With me on the call today is Peter Platzer, CEO; and Leo Basola, CFO. As a reminder, our commentary today will include non-GAAP items, reconciliations between our GAAP and non-GAAP results, as well as our guidance can be found in our earnings press release and in our investor presentation, both of which can be found on our IR website at ir.spire.com. Some of our comments today may contain forward-looking statements that are subjects to risks, uncertainties, and assumptions. In particular, our expectations around our results of operations and financial conditions are uncertain and subject to change. Should any of these expectations fail to materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description of these risks, uncertainties, and assumptions, and other factors that could affect our financial results, is included in our SEC filings. With that, let me hand the call over to Peter.

Thank you, Ben. The third quarter was yet another quarter of strong revenue growth and steady progress towards profitability. Spire added a ninth quarter to our consecutive uninterrupted record of revenue growth since becoming public. Additionally, we exceeded expectations by delivering more revenue than anticipated, while continuing to drive operational leverage and increase non-GAAP gross margins to nearly 70%. We are holding firm on our now near-term timeline to profitability as becoming operating cash flow positive, adjusted EBITDA positive, and free cash flow positive remain some of the most important near-term objectives for Spire. Leo will talk more about this in his section, but I am very excited about producing our own cash, and that means we can start looking into activities like paying down debt, buying back shares, or investing for even more growth. Additionally, in the coming weeks, we are looking forward to a significant launch that will allow us to provide new data and insights to continue our sustainable growth. The Transporter nine mission will carry 11 Lima satellites aloft, largely for four of our space services customers, and enable an expected recurring multi-year revenue stream. Customers continue to turn to Spire for our comprehensive space services solution, making it easier for them to implement and benefit a space strategy. The demand for Spire solutions continues to be grounded in two large-scale secular trends, climate change and global security challenges. Geopolitical events like the recent armed conflict have once again highlighted the importance of information and transparency in difficult times, and the rapid intensification of Hurricane Otis reminds us of the scale and speed at which climate change is occurring. Spire's global constellation is providing insights that inform decision makers and increase the safety for people across the world. Our solutions continue to be highly sought after…

Thank you, Peter. We had another strong quarter of execution as we progress on our path towards profitability and positive free cash flow generation. For the third quarter in a row, we exceeded the top end of our revenue guidance with Q3 revenues of $27.3 million. This represented 34% growth year over year and was the ninth consecutive quarter of growth above 30% on a year-over-year basis. Gross margins expanded to 65% on a gap basis and 69% on a non-GAAP basis, an improvement of about 15 percentage points over Q3 2022 on a gap basis and 14 percentage points on a non-gap basis. Our operationally leveraged business model across our four solutions continues to translate into strong gross margin accretion as we deliver on our sales targets and march towards our targeted gross margins in the low to mid-70s. ARR at quarter end was $103.1 million, which reflects a previously announced radio occultation or RO order renewal that we were not awarded by our largest weather customer during the last bidding process. We have very close relationships with this customer and have won new contracts with them this quarter. This relatively large RO contract is only one of many contracts we have with them. We are a proven provider of high-quality RO data with a strong delivery record and look forward to participating in the upcoming bid for RO data with this customer before year end. Let me make a quick side note here. At $103 million, we missed our ARR guidance by $5 million in Q3 2023. However, most of that variance was driven by a contract with NASA for a microwave sounder that Peter mentioned earlier. We anticipated this contract would include a follow-up commitment for continued services, but that ended up not being the case. We…

[Operator instructions] Your first question comes from Austin Moeller with Canaccord. Your line is open.

Hi, good afternoon, Peter. Hey, Austin. So just my first question here, within the quarter, are you able to talk about the percentage of ARR solution customers that were associated with weather relative to maritime or global security?

We do not break this out at this point in time, Austin, partially because there are some customers which consume multiple solutions from us. We are looking into finding ways to point to that a little bit more in the future. Is there something particular you are trying to learn? Because maybe there is a different question that I can answer.

Sure. Maybe a second question. Can you talk about the quality of the imagery for wildfire monitoring collected by the LEO satellites that you are building with Aurora Tech relative to perhaps imagery that you might be able to collect from a surveillance plane?

Yes. So as with all space-based products versus aviation products, the tradeoff is coverage and response time and the cost associated with it. Of course, when you fly a plane over a wildfire directly, you will have higher resolution imagery, right? But you might actually have a bit of a more difficult time getting the right perspective. And then you have to dispatch a plane to launch from somewhere when you know that something is happening. So using planes for early detection is very, very tricky or very, very costly and is often not the preferred method. People try to use other kind of means often to have an early warning system. I think the power of the system from SPI and Aurora Tech is the global coverage that as we are adding more assets to it, and as you've heard, building the world's first dedicated constellation for wildfire monitoring, early detection, and then resource allocation to fight wildfires is the global coverage area and the ability to detect things before you find out on the ground. It's also particularly once there is a fire, flying over those fires with smoke and the high turbulence is not necessarily the safest and easiest thing versus what you can do from space. So I'm extremely excited about the capabilities that Aurora Tech and SPI bring to bear here. The combination of AI and machine learning now being pushed onto the spacecraft, given the super-compute power capabilities that the SPI, LEMURF spacecraft has, combined with the SPI weather forecasting capabilities from soil moisture to wind forecast to temperature forecast, I think is really starting to put together a package that arms humanity and our customers with a very, very powerful weapon to tackle that menace of wildfires that unfortunately is impacting more and more countries, communities, and people.

Great. That's very exciting. And then just a follow-up for Leo. Did you say that your expectations for 2024 CapEx was $8 million?

For the fourth quarter of 2023. We're still not providing guidance for 2024, but once we close Q4, we will give you some guidance on that.

Your next question comes from Eric Rasmussen with Stifel. Your line is open.

Yeah, thanks for taking the questions and congrats on the steady results, especially on the profitability. Maybe just on the NASA IDIQ award, how should we think about Spire's opportunity and potential, given there are six others who have been named in that award? How do you separate yourself to potentially win a higher share of this award?

Yeah. Well, I mean, I can't tell you exactly how we are thinking about it, other than we're quite excited about it. I mean, it's certainly a quite sizable award here. But when you think about it from a customer's perspective, what is the customer looking for? one thing that is relevant for the customer is high temporal resolution of the data, which basically means you need to have a large number of spacecraft. Someone has to go and run the actual numbers, but I think Spire might have more spacecraft than the other awardees combined. We have a very, very substantial spacecraft contingent on orbit. So I think that's the first one, right? The next one that the customer is looking for is for, a broad set of data, not just, one or two things, but a broad set of data that describes the Earth environment and helps them monitoring anything from weather to climate to space weather to other kind of areas. Now, Spire is known for having the world's largest multipurpose constellation that has the ability to bring down a large number of very, very diverse data sets. So we have the temperature data sets from our RO. We have altitude measurements from grazing angle RO. We have soil moisture measurements from GNS and R. We have ocean surface wind speeds also from GNSSR. We have space weather measurements, right? We have, a new contract where we provide images from our star trackers, given that we have so many satellites, very, very interesting data points with regards to space situational awareness. There is a data source for our relationship, which is microspace debris on orbit. And the list goes on and on and on. So Spire has a very, very broad set of data that makes us really excited about being able to solve not just one or two use cases for the customer and the PI, the principal investigators that this customer supports, but many, many broad set of customers and use cases.

Great, thanks. That's helpful. And maybe just this speaks to maybe the growth. Obviously, it's been, pretty impressive. But, you had to make some adjustments given the macro challenges you faced. But what is the current view from your customer base? Are you getting the right signals where you can maybe be more aggressive on the sales front to achieve even higher growth rates?

You know, I think overall, I wish I could say that the world is getting calmer and more peaceful. But unfortunately, that is not quite the case. And the big macro trends that we have based our product on, over a decade ago, climate change, extreme weather and global security continue to dominate headlines. And as such, we continue to see very, very high demand for the products that we provide. And they start to now encompass not just, the more obvious areas, right, maritime, aviation, weather, maritime, weather and space services, but also we started to see this in aviation. We talked about in the past how aviation due to COVID, was a little bit of a smaller segment for us, but recently has picked up tremendously, starting with the contract we talked about recently, Uri Alo for independent air traffic surveillance of GPS constellations to geo-locate civilian aircraft through a constellation and that multilateral or RF geo-location of those aircraft independent of any kind of GPS jamming or interference or degradation or denial in certain areas. And generally speaking, the air traffic control is absolutely at its limit as air traffic continues to grow actually now and is now reaching and starting to reach beyond the pre-COVID levels. So there is an absolutely massive demand for making more use of that limited resource. Whenever you find that there is a limited resource that is like a economic blood vessel into a country, people get very, very creative in squeezing the last bit of efficiency out of that vein. Be that, the early days where we got ever more creative in using phone lines for faster internet speed, or how we now are getting ever more creative in using different modulation schemes to get more and more bandwidth out of frequency spectrum as it becomes a scarce resource. The same thing is happening with maritime shipping ways and with the aviation ways where traffic is starting to overwhelm, I would say, a more pedestrian simple way of managing it and more data, more insights, more tracking further away from an airport or a harbor if needed so that we can do this. Right. I think overall, we see a lot of that land and expand strategy working for us. On our data side, we just talked about that. But also on the space services side, we're now more and more customers are coming to us and expanding their number of assets that they want on orbit from one or two to four or eight. You just heard me talk about wildfires, but we had a couple other customers in this quarter, GHG one, for example, which is also expanding dramatically because the global demand for these types of solutions keeps on rising rapidly.

Your next question comes from Rick Prentiss with Raymond James. Your line is open.

Thanks, Stephanie, everybody. A couple of quick questions. One, appreciate you're looking at the cash and the working capital policies. What do you think you need on a normal basis cash to run the business? Where would you like to see the balance to stay at?

Yeah, so I think that the balance will remain between $40 million and $50 million for the foreseeable future. So we talked about Q4 being a operating cash flow positive quarter with about $8 million of CapEx. So we're going to be landing year end north of $40 million of cash. Going forward, and as we described, there is two components of cash, right? So we talked about the Spire cash for replenishment of our assets and our fully deployed constellation. But then on top of that, we have the pre-space CapEx that we have that is mostly funded by our customers. So you need to think about that as timing, right? So you may see a month or a quarter with a peak on receivables and a peak on CapEx that kind of come hand in hand. But very shortly after, we'll receive the cash from the customers to really fund those cash outlays. So generally speaking, I don't expect the cash flow to really swing more than maybe $10 to -- $10 million to $15 million of where we sit right now as of today.

And I appreciate you all looking at your debt and thinking you could get better rates or different situations where you're at if you put up several quarters of positive results. But remind us what the new current debt has as far as covenants and requirements on ARR and any other items out there?

Yeah, so the negotiation with Blue Torch was very interesting. They were very open and we had a very good relationship with them as we negotiated the deal we had with them. Actively, we have reduced some of the covenants that we had before. So you know this was triggered basically by an ARR covenant that we missed in July. So we were able to lower our ARR covenant all the way through June, which is when we shift from ARR to EBITDA. And we think we are fairly covered with those because they allowed us to put the covenants where we expect to have a comfortable buffer for ARR and for EBITDA going forward. From a cash standpoint, we have a minimum liquidity covenant that was increased from $25 million to $30 million. And again, as I mentioned before, we feel we have significant amount of buffer to operate with the level of cash that we have at the moment, plus the cash improvements that I discussed earlier on in the call. So we are actively putting in place some working capital cash flow actions, which is really block and tackle. It's really a playbook that you can have for most industrial settings where you work on receivables, you work on payables, you work basically on your inventory management. And that in itself will free up a significant amount of cash. And then as I said, from a CapEx standpoint, we think we have a very good plan and a very good strategy in terms of our design of our contracts where most of the CapEx that you see for pre-space, which people may look into this and say, oh, you're spending $20 million of CapEx. What's going on? Well, what's going on is I'm setting up a paycheck for four years with assets that I'm building. And by the way, the customers are helping us fund these deployments of the assets in the pre-space portion of the deals. So I feel very comfortable that our cash position is way sufficient for us to continue to operate without any problems going forward.

Your next question comes from the line of Jeff Mueller with Baird. Your line is open.

Yeah, thank you. Stephen Bolligon for Jeff. Any comments you can give around how sales are trending? It sounded like last quarter things were stabilizing. Just how that's evolving, whether new business or the latest expansion strategy?

Well, I mean, I don't know. We just delivered more revenue than we thought we would deliver. We just came in and rise to revenue guidance for the full year. I don't know what else to tell you. I think it's going pretty well. We see customers coming to us both from a new customer perspective. And we see customers coming for us for more, which is always a great sign from an expand perspective. We see customers coming to us sometimes with very, very large contracts, unfortunately related often to imminent negative events, be it on the climate side or be it on the global security side, that we get to monetize very quickly, even though we don't chalk them up immediately as ARR because they're negative. But they're now coming in very quickly, even though we feel very confident they will eventually turn into very large, often multi-year ARR contracts. So I would say the underlying premise that we had a long time ago, that climate change, extreme weather and global security is going to continue to be a secular, massive trend that is exponential and it is driving demand that is impacting massive portions of the global economy and creating tens if not hundreds of billions dollar markets for companies to operate in, continues to be absolutely true. I mean, we have set out a profitability target almost two years ago now, way before wars happened, before inflation happened, before extreme risk happened, before a whole bunch of things happened. And we have been able to hold that course without any deviation and on the margin have delivered better profitability results almost every single quarter because of the diversified nature of our portfolio. We're not a one trick pony. We have a balanced book, 55% commercial, 45% government roughly, right? we have at least four different solutions, aviation, maritime, weather, space services, now added RLGL to it. That is all supported from one single shared infrastructure that we get to monetize in many, many ways. And that has allowed us to keep on growing at a rapid pace and improve our profitability at an even more rapid pace. So, I don't know what to tell you. I think the numbers speak for themselves when it comes to how is the growth going and how is the prospect from that perspective.

Appreciate that. And I hear you on the sort of the ARR per customer strategy. I guess just how are you balancing, achieving that with sort of not leaving customers at the table? And then as far as the Salesforce goes, is just a change in priority or is there like a change in incentive? Can you comment on that?

It is a change in strategy, right? But I mean, Spire has one of its six values to be collaborative. And that is not just how we operate internally with each other, but that is how we operate with all of our stakeholders. And first and foremost, top of the stack with our customers. So, of course, we will never let the customers in the dark, right? We're not a bully. But we do have to look at like, okay, what is efficient for us, right? And, do we maybe have to create different mechanisms for customers? maybe make them completely self-serve and we have nothing to do with that, right? It's just, we do have to take care of a customer that writes me a check for $250,000 different than for a customer that writes me a check for, $2,500, right? I think that's very understandable for everyone. And I think we also like taking over a large number of customers throughout the prior company that we incorporated a couple of years ago, where they probably got away with paying a rock bottom price for very, very high value, right? And that's a prerogative. That's what those customers do. They find diamonds and pay for them as if it were, like a crystal, right? I think we just need to have like, in some of those instances, a bit more of a fair relationship between the value of our data and the value that the customers provide to us. Honestly, I think that's just par for a business growing and getting better. We have added a large number of customers over a short period of time. And so now you go back and you just, you structure it a little bit better, a little bit more profitable so that you can match the service that you provide to the customer and the value that you provide to every single customer with the value that the customer provides back to you. I think that's totally fair. We're not going to leave anyone, in the lurch, but we need to like, maybe restructure things here, there a little bit to make them more fair, which I think in the end of the day will create better value for our customers. It will allow us to have together with and through our customers a larger positive impact on planet Earth. And I think it will please our shareholders as well as we continue to drive profitability.

At this time, there are no further questions. This concludes today's Spire Global third quarter 2023 conference call. Thank you for attending and have a wonderful rest of your day.