Thank you for joining the BigBear.ai first quarter conference call. This call is being recorded. [Operator Instructions] I will now turn the call over to Shane Karp, Vice President, Marketing and Communications. Please go ahead, Mr. Karp.

Good afternoon, everyone, and welcome to BigBear.ai 2023 First Quarter Conference Call. I'm joined by Mandy Long, our Chief Executive Officer; 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 BigBarry.ai 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, Shane, and thank you all for joining today's call. The results we posted in Q1 are a testament to our capabilities across autonomous systems, cybersecurity and supply chain and logistics. Our 16% revenue growth year-over-year despite a challenging macroeconomic environment is a remarkable achievement for the entire team and speaks volumes to the value we are bringing to our clients. We're winning in complex markets, setting us apart in the industries we operate in and positioning us for long-term growth. Our established position and ability to execute are evident in new partnerships, new wins and extensions of our business with existing customers. As you may have seen in our recent press release, we are excited about our new strategic partnership with L3Harris. BigBear.ai is now their exclusive partner to deliver AI/ML-based forecasting, situational awareness analytics and computer vision capabilities for L3Harris unmanned service vessels. This integrated and collaborative approach brings significant long-term opportunities, and our partnership with L3Harris is another proof point in our continued focus on execution and long-term growth. We are also continuing to bring our autonomous system software capabilities to market, like with the U.S. Navy, where our analytics and computer vision capabilities continue to be assessed and demonstrated in live exercises as shown most recently with Task Force 59 and IMX 2023. We are incredibly excited by the Navy's April announcement to continue to scale unmanned platforms, integrating unmanned systems into their Fourth Fleet in Central and South America and operationalizing the concept Task Force 59 has worked tirelessly to develop. In addition, we believe the Navy's decision to scale unmanned platforms to the Fourth Fleet and their engagement with us through Task Force 59 underscores the importance of autonomous systems in future battlefield. Our advanced AI/ML capabilities enable autonomous systems to operate with…

Thank you, Mandy. Before I dive into the financials, I'd like to address the consolidation of our legacy Cyber & Engineering and Analytics segment into one reportable segment beginning this quarter. As Mandy discussed, we continue to reorganize the business to drive improved operational efficiencies. And as part of the leadership announcements we've made today, we're moving into a more functional structure that will ensure we go to market, develop products and solutions and drive delivery execution as one team. Segment changes were implemented as of Q1 2023 and historical data in the new segment is available as a consolidated view. Now let's turn to our first quarter results. Revenue for the quarter was $42.2 million, up 16% year-over-year and compared to $36.4 million in the first quarter of 2022. This is primarily driven by growth with our Army customer through contracts such as Global Force Information Management, or GFIM Phase 2 and other key programs. As we have stated in the past, I do want to reemphasize that our revenue can be lumpy and can fluctuate meaningfully depending on the quarter in which contracts are awarded, milestones achieved or contracts complete. Total gross margin was 24% in the quarter, a 300 basis point decrease from 27% in Q1 2022, driven by additional cost on the GFIM Phase 2 program, which completes in the second quarter of 2023. We're performing well on this program, but continue to invest in critical capabilities to maintain our strong position as we move towards the production contract. We are in active discussions to continue this important work through GAAP funding until the production contract can be funded with 2024 government fiscal year funding. Backlog was $197 million at the end of the first quarter, which is down 10% or $22 million compared to fourth…

Thank you, Julie. I'm extremely excited about the pipeline ahead and our ability to deliver as we move forward. Our cost-cutting initiatives have been challenging, but we continue to be proud of the focus and the agility of the BigBerry.ai to collaborate and innovate in changing times. Operator, we are ready for questions. Thank you.

[Operator Instructions] And our first question comes from Mike Latimore.

Super results, very nice to see, and congrats on the new partnership there. Yes, I guess just starting with that autonomous vessel program partnership, can you just provide a little more color there? Maybe start with the type of revenues you would see, the software, professional services data. Could we sort of simplistically say you get a certain amount of revenue per vessel shift? Or maybe just characterize that kind of opportunity a little more.

Absolutely happy to. So as we articulated in our joint press release, one of the things that we're really excited about in this is that it's a comprehensive teaming agreement that allows us to deliver AI for their autonomous surface vessels. Now what this means for us, right, and where we've been working is our current projects have been focused on the Office of Naval Research doing operational demonstrations with the integrated solution, right, which is our capabilities running on L3Harris' autonomous surface vessel. And at the conclusion of the exercise, our intent at that point is to kind of gain a deeper understanding of not only the progress that we've made, but how we really look to scale it. So I think the short answer, Mike, is that we're still in the early days of figuring out how with this embedded capability, we bring it and kind of go faster, right, from an execution standpoint in terms of delivering more to the customer, but I think it's fair to assume that it's really at a per vessel basis, right? Because as the vessel base grows, we will deploy more of our instances, and we will see growth from that. Does that answer your question?

Yes, that's fine. And clearly, the forecast for these autonomous vessels is for a pretty steep curve here, right? That's right. It's, I think, one of the most dynamic and rapidly growing parts of our industry, and we feel really privileged to be able to partner with such a great organization like L3Harris.

Great. Great. And then on the GFIM, you mentioned I think you said that the Phase 2 concludes this quarter, and then you might get some GAAP funding until the production phase. Is that what you said?

Yes. So we are doing really well in terms of the U.S. Army's Global Force Information Management program, and that is the one where we're sole force for Phase 2. And as we talked about previously, while the final contract winner for Phase 2 has not yet set now, we are really well-positioned following that work, continuing our delivery and our relationship with the customer. We are anticipating a 6-month extension to the current phase of GFIM to complete some added functionality before moving to the production contract. And we're expecting a more normal margin profile associated with this project as it moves into production.

Okay. So it sounds like with that extension you would continue to do work and see revenue.

That's correct, yes. And then the next phase of the contract is obviously being finalized by the U.S. Army, but it's our intent to continue to work and progress so that when it's time to go to production, we're as ready as possible.

Very good. That sounds good. And then just last on the consolidation of the reporting segments. Is it fair to say that a lot of the projects you're working on basically are using the resources from analytics and cyber, just sort of makes sense to kind of have it as one now. And maybe can you just touch on that and how much crossover there actually is?

Yes. I mean basically, Mike, we are instead of continuing to focus on these 2 segments what we recognize is in order to streamline and really focus. And part of this is the announcements we've made today with Greg and with Norm joining the team. We are thinking that we're much more functionally organized. And this is really going to help us just to streamline the way we deliver our services to our customers as well as just operationally much more efficient. So it's really just a combination of those 2, and it just allows us to be much more efficient in how we're thinking about the business.

Great. It makes my modeling a little easier too.

We like that.

Anything we can do.

Our next question comes from Louie Dipalma of William Blair.

Congrats on the partnership with L3Harris. We're incredibly proud. You may have mentioned this in the prepared remarks, but what is the scale of the L3Harris partnership in terms of the number of unmanned vessels that you will be deployed on. I think in the answer to the previous question, you suggested that you'd be paid based upon the number of vessels, but did you actually give out the number of vessels that are planned for the initial phase?

We did not because the -- I mean, frankly, the plan is that we will scale together. Our role in the partnership is to supply L3Harris with its computer vision, predictive analytics and related AI applications to improve the unmanned teaming that's on the water. So our -- how we're looking at it is that as additional vessels are built and are released and begin to operate, that our software will be running on that.

Okay. So will it be focused more on new vessels versus the existing fleet? Or will it be a combination of both?

No, it's a combination of both, and that's a great question. So there is obviously a go-forward market associated with new unmanned surface vessels that are built, but there's also a market associated with retrofitting existing vessels that are on the water and our intent to be able to support and service both.

Great. And somewhat on the same topic, L3Harris, they're obviously a huge contractor and they do a lot more than just these unmanned vessels in which it seems that there are like many more partnership opportunities for you. Is there the potential that your data analytics platform can also work with their space systems and their tactical communication systems and their cameras that are deployed on aerial drones? Are you in discussions for any of those other opportunities?

It's a great question. I think something that's important to note as a part of our relationship with L3Harris is that we have had a relationship with L3Harris for a long time. We're already in many ways an integrated partner. We work in a variety of different parts of their business. This particular strategic partnership is focused on the maritime use cases for autonomous surface vessels. I would love to say in the future. And I think as we continue to be successful together in market, I have no doubt that additional market opportunities will open up, and it's our job to be a great partner in that so that we are in that race together.

And for Julie, I think you referenced the upfront costs associated with the Phase 2 of the GFIM contract, because you're incurring these upfront costs, is the margin profile for the production contract expected to be more attractive than the margin profile for GFIM Phase 2?

Yes, absolutely. I mean that is part of the overall OTA structure of the way the federal government is now doing some of their contract. And so as we move forward from a Phase 1, which is basically an investment upfront to a Phase 2, which is some investment as well as hopefully some share -- some profitability, you're proving out your capabilities, you're making sure that things are working correctly. And then as you move into production, that's when you would expect the margin to significantly get better. So we are looking forward to that day when we can prove out that capability and we move into the production. But that is just to be clear on that, we would expect that to be very late this year based on the timing that we're currently hearing. I mean we're hoping sooner but we know that they're going to continue to support us with GAAP lending until that can happen. So that probably will not happen until later in the year, it's FY '24 funding.

Great. And in terms of your end markets, there's been a lot of focus on the macro economy and the recession, but you seem to indicate that your software is gaining traction for supply chain use cases. And you mentioned how your software is deployed in different hospitals. Are you continuing to like see growth even in this difficult macroeconomic environment from your commercial customer base?

It's a great question. And I think the short answer is, yes, the longer answer is that our software capabilities in the commercial side, right, the core area where we're seeing a lot of growth is related to our discrete event simulation capabilities. And if you think about what those are and the purpose that they serve, they really sit in the critical path from an operational decision-making standpoint. And so if you're an organization that's dealing with the macroeconomic pressures that we've been talking about and you're looking for opportunities to be able to deploy capital as efficiently as possible to be able to scale and optimize the work that you do, either from a manufacturing standpoint or a distribution standpoint or even how you're running your warehouses, our tools fit right into that. And as a lot of companies are going through the process of figuring out how to deal with shifts in demand as well as continued shift in technology, right, in the evolution of their products, we fit into the modeling capabilities around that because that's our core, right? We do digital twin, we do simulation scenarios for that type of planning. So we do continue to see that part of our business grow, particularly when paired not only with the product side but also with the services side associated with the subject matter expertise that we bring to a lot of those use cases, right? Like we talked about previously, hospitals and health systems, life sciences, manufacturing, big shipyards, that's what we know how to do.

And our next question is from Param Singh of Oppenheimer.

This is Param Singh on behalf of Ittai Kidron. So firstly, there's been a lot of talk in the last few months on generative AI and then you've seen a lot of things in the public domain. I wanted to get a sense from you, Mandy. How does that figure into what BigBear is offering today? What are you working on, whether it helps your commercial side, your government side of the business because now it seems -- a lot of this is, selling did commoditize.

Sure. I mean, I think as we talked a little bit about on the last earnings call, right, large language models and these capabilities have been in use, right, by ourselves as well as others for a while. I think what's really extraordinary about what's happening today is that we're seeing the scaled implementation and availability of them in a really democratized fashion. We're still very early days in how this type of technology is going to be used in the broader consumer community. But from an application to the industries that we service, right, focused on defense, intel, complex manufacturing, industrial, we absolutely leverage those types of models as a part of our portfolio of offerings and the services that we deliver and we'll continue to do so.

So maybe just diving into that, some of the things that have been beneficial, you just mentioned digital twins that have been very machine learning type models, right? And now we're seeing things that are based on transformer model. So it seems to be a bit of a leapfrog here. I want to get a sense -- just broader in terms of technology, what is your view of transformer models getting adopted in domain-specific region? I mean I would imagine you talked about discrete events within manufacturing and health care, that would be the next step, right? I believe they are not an implementation today, but how do you view that in like 2 to 5 years?

Yes. It's a fair question. I think you have to break apart the use cases. And I think your point on verticalization is important because there are going to be certain environments that we are going to see the applicability of these types of models be earlier, right, just as a result of whether it's a regulatory environment or security environment, they may be better-suited, right, for early adoption in those use cases. I think your point about discrete event simulation is excellent because we do see a lot of use cases emerging around things like predictive maintenance, right, being able to do further optimization as a derivative of running past scenarios and being able to really lean into the infinite compute that we can tap into today. So yes, it is there a transformation happening under our feet? Unquestionably. Are we starting to, I think, wrap our arms around the multi-threaded implications of it. Also, yes. We're seeing a lot of announcements to the market in terms of being able to put these types of interfaces in front of traditionally kind of engineering-focused experiences. Most of the markets that kind of we service and fit in tend to be highly technical and tend to require a little bit more, right, hands-on in terms of the data science and the role of the engineer. But do I see opportunities for efficiency and scale? Yes, right. We're continuing to make investments in those.

Great. So maybe you could help me just tie this into what you're seeing on the commercial revenue side. Obviously that used to be an area of growth for BigBear. But now you've also combined your Analytics division into C&A. So is there a shift in the way where you view your commercial business? Or should we also view that as an optionality going forward and something that would be more than 10% at some point in the next few years?

As I mentioned previously, we're continuing to see our commercial business grow just as we're seeing our broader federal business grow. So that's -- I continue to believe that both of those sides of our portfolio are going to be successful. And as we cross that threshold, we will certainly begin to talk about them in that way.

Got it. And I would imagine the gross margin profile of that business would be closer towards software than towards services one that you see within your defense contracts? Would that be a --

I think what's important to remember is that at the end of the day, we're a technology-led solutions organization. So the products that we offer, the software capabilities that we offer in most cases are highly tailored to very complex environments, right? The industrial community, we bring services along with those because the subject matter expertise is so specific. So I would say we'll probably be in the realm of other tech-lead services providers.

That's helpful, Mandy. Then maybe looking at your full year revenue guidance, you had a pretty solid quarter. It just seems that it's going to be flat for the rest of the year, right? It's pretty standard across the board for the remaining 3Qs. Given all the contracts and the relationships that you talked about today, the LCV relationship, the progression with GFIM and potentially something from the [IDIT] contract coming into play. Why wouldn't we see revenue improve through the rest of the year?

Yes. I was going to say, just as a reminder, that we mentioned this in our statement earlier, but our -- because of the nature of the work that we do, our revenue can be lumpy. It's based on when contracts start, it's based on milestones. It's based on when some contracts are completing. And so I would be just -- I'd advise you to make sure you're thinking about that overall structure of our type of business, I mean I think that will smooth out over time as we become more mature and get larger, but as of right now, actually lumpy. And so we're just really looking at our profile in terms of what we have is ability to as of now and as of today and what we see down the pipe. So we just want to make sure that we're providing the right guidance based on what we're seeing. And as those things come up, we'll assess them and decide if that's the right time to make a change. But right now, this is our guidance.

That's fair. And then maybe one last question, [indiscernible] registration. The takeaway, should it be that you would need maybe one other round of funding before you get to cash flow positive, is that the take away from it? Or it's just something to keep on the back burner as a safety net?

Well, no, I would say in terms of our liquidity and our cash flow forecast, I mean, we are saying that we believe that with our cost -- with our restructuring efforts that we've done so far and with our cost structure that we have in place based on our profile, that we expect to be cash flow positive in the back half of the year on an operational basis in nonrecurring. So what I mean by that being, if you look at our true operations, our recurring operations and take out, I'll say, interest payments and things like tax payments on vesting, truly recurring operations, we expect to be positive. That said, we did do the shelf to allow us to have access to those capital markets so that we can go much more easily look at opportunities, whether that's through inorganic growth or through just overall operations and accelerating our pace that we can go to the capital markets if we need to. But right now, we're saying, as we stand today with our liquidity profile, we feel okay about the back half of the year being cash flow positive from an operational perspective.

There are no further questions at this time. This concludes the conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.