Good morning, ladies and gentlemen, and welcome to BlackSky Technology's First 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 an update on the business. Henry will then review the company's first 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 p.m. Easter Time today through May 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 guidance for 2023, and that actual results may differ from the expectations reflected in these statements due to factors such as long and unpredictable sales cycles, customer demand, and our ability to estimate resources for fixed price contracts, expenses and other 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 security 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. 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. Let's begin with Slide 4. I'm pleased with the strong performance that we delivered in 2022 and how that momentum has carried over into 2023. We are making great progress across all aspects of our business. As demand for our high frequency imagery and analytics remain strong, and we continue to secure more new customers and expand the services that we are delivering to existing customers. We continue to demonstrate strong operating leverage. As revenue growth from our high margin imagery and analytics continues to deliver improving operating margins, which is putting us on a clear trajectory towards sustainable long-term profitable growth. I'm happy to report that Q1 was another strong quarter that included the following key highlights. First, we continue to deliver strong year-over-year revenue growth. Our imagery and analytics revenue, which represents our core service business increased 114% over the prior year, as revenues ramped up from a number of new contracts signed throughout last year. Second, we delivered a 97% incremental contribution margin as a result of increased revenues from our high margin imagery and analytics business. With our company's low fixed cost structure, we're continuing to prove strong operating leverage with our existing assets, which is enabling our business to scale and deliver improving EBITDA performance. Third, we won over a dozen new contracts and renewal agreements, supporting international and U.S government agencies. These contracts are in addition to the $150 million contract when we announced in March, further demonstrating the strong global demand for BlackSky's, high frequency imagery and advanced analytics. Fourth, we successfully deployed two new Gen 2 satellites into orbit, providing BlackSky with additional imaging capacity and redundancy. This was a major milestone as we have now completed the…

Thank you, Brian, and good morning, everyone. I'm pleased that our first quarter financial results contained the strong momentum we experienced last year. Beginning with Slide 12, total revenue for the first quarter of 2023 was $18.4 million, an increase of $4.5 million, or 32% over the prior year quarter. Imagery and analytics revenue grew to $15.8 million or 114% increase over the prior year period, primarily driven by greater volumes of imagery delivered to new and existing U.S and international government customers. The largest contributor to the year-over-year increase in imagery comes from the daily delivery of high volume imagery under the EOCL contract with the NRO. We've experienced significant growth in customer demand for our imagery and analytics over the past year. And as a result, this line of business contributed 86% of total revenues in Q1 this year, compared to about 50% in Q1 last year. Professional and engineering services revenue was $2.6 million in the first quarter of 2023 compared to $6.5 million in the prior year quarter, primarily due to a couple of R&D programs that are nearing completion this year, whereas these programs were in full swing back in Q1 last year. Also, keep in mind, revenues recognized from these types of projects are largely milestone based, which means they can introduce quarter-to-quarter variability. This is in contrast to our imagery and analytic services, which is typically subscription-based revenue. As a reminder, these professional and engineering service projects provide us with government funded R&D and enable us to build long-term relationships with strategic customers. These programs are oftentimes precursors to securing long-term subscription contracts for imagery and analytic services with these customers. Moving on to Slide 13, our imagery and analytics business continue to demonstrate strong operating leverage. Excluding stock-based compensation, depreciation and amortization…

Thank you, Henry. We're pleased to report another strong quarter driven by significant demand for our high frequency imagery and analytics from customers around the world. We are continuing to build significant multiyear backlog by winning new customers and expanding the contracts we have with existing customers. We have built a foundation that puts us on a clear path to deliver another strong year of revenue growth, while providing a clear line of sight towards sustainable, long-term profitability. Our team is laser focused on executing against a growth plan that includes the following key imperatives. First, continuing to drive long-term high visibility revenue growth by winning new multiyear subscription contracts, with a base of major government and industrial customers around the world. Second, expanding our sales pipeline and customer base to an aggressive go-to-market strategy as we continue to expand our sales force and global partner network. Third, continuing to deliver strong operating margins through the sale of high margin imagery and analytic services, while controlling expenses through prudent costs and capital management. And finally, continuing to invest in our next generation space and AI capabilities that extend our competitive advantage, meet the strong market demand for our Gen 3 capabilities and capitalize on a large and rapidly growing market opportunity for space based intelligence solutions. In closing, were pleased with the progress we made this quarter and look forward to continuing this momentum as we advance our leadership and real time geospatial intelligence. This concludes our remarks for the call. And we'll now take your questions.

[Operator Instructions] Thank you. Our first question is from Griffin Boss with B. Riley. Please proceed with your question.

Hi. Thanks for taking my question. Yes, so off the bat, I was just curious if you could elaborate on the situation with your Global 7 and Global 8 satellites, saw that you requested for an FTA with the FCC. So curious if you can -- if you're able to give us more color on that?

Thanks, Griffin. Good morning. So just as a reminder, we are coming at this a little differently than the rest of the market. We've built an integrated constellation of small satellites that unlike traditional architectures were designed to deliver these high revisit imaging and analytic services without a dependency on any given satellite. And this agile approach enables us to deploy capacity where and when we need it to meet customer service levels. And systems designed with significant reserve and redundant capacity and eliminates the impacts of any individual satellites that as we expect will come in or out of service over time, especially when they reached the end of their expected service life. So we -- as we said earlier, we successfully launched two additional satellites in March, because of this additional capacity and redundancy that's consistent with our sustainment plan. With respect to the FCC filing, we will occasionally raise or lower altitudes of individual satellites as part of our normal course of operations, which can extend our mission life or deliver increased performance or support our maintenance operations.

Okay, great. And just to confirm those two satellites were launched in 2020, right? So they're -- I mean, you have a 3 to 5-year lifespan, right. So they're -- I mean it's within the 3 years, right?

They're approaching their anticipated end of life in 3 years.

Okay. All right. Got it. Thanks for that. Appreciate it. And then so in terms of the Gen 3 capacity, I know you mentioned you have -- and you mentioned in the past you have contracts in hand and capacity lock down. Can you just tell us or can you provide any more color on how much of that Gen 3 capacity is contracted right now? Is it all of it, or substantial portion or just a nominal amount?

We're just getting started on selling that capacity. The $150 million contract we announced in March is for Gen 3 capability. And a number of the customers we are -- that we have today that are subscribing to our Gen 2 capacity are looking forward to transitioning into Gen 3 as that comes online.

Okay, great. Thanks. Thanks, Brian. And then so just last one for me too. Given the reaffirmed revenue guidance for the year, would we be correct in assuming that most of these new awards you're winning are more heavily weighted towards revenue generation in 2024 and beyond? Or these contracts that you expected to win and were already perhaps incorporated in the 2023 guide?

There's a mix. So the $150 million award is a multiyear contract. The dozen or so contracts that we announced we close this quarter will contribute to 2023 revenues, and some of that will contribute to '24 revenues.

Okay, great. Thanks, Brian. Appreciate the color.

Thank you, Griffin.

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

Hey, good morning.

Good morning, Josh.

As far as LeoStella, what opportunities do you see to potentially help fill the line, their size dynamics or technology inputs for the buses that maybe could open up new opportunities there, what are you seeing out there?

Obviously, there's a growing market for small satellite -- for small satellites. And with LeoStella we have invested in next generation bus technology that we're applying to our Gen 3 and future satellites. We see that there's an opportunity to take that capability to market for different applications beyond BlackSky.

And then just given the proliferation of language models here, BlackSky's AI backbone, I'd be curious to understand how you view the language models, given you're the originator of the imagery data, potentially see new [indiscernible] for the intelligence community, how do you plan to hold on to the value there?

Josh, could you maybe -- what do you mean by language models, just unclear?

Yes, just as we see new, obviously, AI enabled solutions and using your data to create those solutions. And we're seeing a lot of those products proliferate in [indiscernible] early stage here. Just curious on BlackSky's approach to as the intelligence community accesses some of those AI technologies, how you're going to stay up in front and capture that value?

Yes, definitely. So we've been employing AI technology across our platform now for several years. As an example, I think where you're going is we've been applying AI to natural language processing to monitor global activity from news and social media that can automatically tip and cue collections of our satellites. This is an important capability as we are reducing response times around emerging events in recognizing activities that are important to our customers, which is ultimately going to give them a first to know advantage. AI is also applied in our imagery interpretation and analysis. And so we've been -- we've made significant investments in our AI team over the years. And as I outlined in our remarks, we are winning contracts, such as the EIM contract based on the performance of our AI algorithms. So this is a key part of our future. And we built a strong set of capabilities that we believe are a key part of our competitive differentiation.

Okay. Thank you for the time.

Thank you. Our next question is from Caleb Henry with Quilty Space. Please proceed with your question.

Hi, guys. Three questions from me. First, can you give any more color on the Gen 3 satellites in terms of their launch status and cadence?

Good morning, Caleb. As we have already commented that those Gen 3 satellites remain on track. We secure long lead item components and those satellites are now in production and we expect to begin launching those satellites in 2024.

Okay. So regarding the, I guess, spending on those in general CapEx, is BlackSky planning on maintaining a yearly spend of around $40 million with Gen 3, or does that change at all?

Caleb, this is Henry Dubois speaking. I mean, as we look at our CapEx, as you know, we're guiding this year to that $40 million, $45 million. We're not providing guidance beyond that at the moment. But you can kind of work through as we go through sending up our satellites that we will have CapEx associated with that.

Okay. And then last question, which is related to the BlackSky Global 7 and 8 satellites that you're seeking to lower the altitude of. Lowering that altitude presumably means that they will have a shorter lifespan. So are you anticipating that those will have their full 3-year lifespan? Are you sacrificing some of that time to get a sharper resolution or some other advantage?

As I mentioned earlier, those satellites are approaching the end of their 3-year life and raising or lowering them for improving performance is part of our normal course of operations.

Again, will they obtain a 3-year life, or no?

We expect them to maintain their life expectancy.

Okay, thank you.

[Operator Instructions] Thank you. Our next question is from Jaeson Schmidt with Lake Street Capital Markets. Please proceed with your question.

Hey, guys. Thanks for taking my questions. Just curious if you could update us on the traction in the commercial market. Obviously, it sounds like some of these recent wins are still in the government space, but any additional color on the commercial space would be helpful.

Yes, good morning, Jason. Yes, as you know, commercial revenues are still a small part of our overall business right now. We are starting to see traction with major industrial opportunities, particularly in the monitoring of commodities and supply chain. So as it goes, that type of examples what I just outlined, and we're seeing those opportunities with other customers. And so, we're still early days, but we're encouraged by what we're seeing in terms of interest and demand.

Okay, that's helpful. And then just as a follow-up, when you look at towards the end of this year, do you think the mix between sort of U.S versus International is going to remain fairly stable?

Well, I think generally you're seeing good -- a strong revenue diversification. So we -- revenue -- international revenues are now almost 25% of our overall revenues, which is up from last year. So we are seeing strong international demand and we expect to see this diversification trend continue.

Thanks a lot, guys.

Thank you.

Thank you.

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.

I want to thank everyone for joining us on the call today. We will be participating in several upcoming conferences over the coming weeks. So keep an eye out for those announcements. 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.