Hello, and welcome to the Spire Global Fourth Quarter and Full Year 2023 Conference Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] It's now my pleasure to turn the call over to Ben Hackman, Head of Investor Relations. Please go ahead, Ben.

Thank you. Hello, everyone, and thank you for joining us for our Fourth 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 today on the call 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 contain forward-looking statements that are subject 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. Good afternoon, everyone. I am thrilled to welcome you to today's call. As we embark on this discussion, I want to extend my deepest gratitude to our dedicated team. Their resilience and innovation propelled us from pre profitability to a landmark year. In 2023, we achieved not only positive operating cash flow, but also positive adjusted EBITDA that surpassed our expectations for Q4. Our journey last year was nothing short of remarkable. We rallied together as a team with grit and determination to be a reliably collaborative partner for our customers. We captured the surging demand for our radio frequency geolocation data, vital for addressing global security threats, and we forged strong partnerships to build powerful solutions for the future. This translated into significant achievements for Spire. We secured multiple million-dollar contracts, reinforcing our market value and trust with our customers. We celebrated the signing of three pivotal significant Space services deals, involving 18 satellites showcasing our expanding capabilities. Our launch of 23 satellites across multiple missions marked a record for the operational versatility and applicability of our solutions. The introduction of our deep vision platform and high-resolution weather model revolutionized for our customers how they can understand and prepare for imminent weather patterns. The deployment of our satellite mission operations platform signified a leap forward for the industry in efficiency, reliability and management of Space assets. And the signing of a strategic partnership and investment in AI/ML-powered solutions set the foundation for cutting-edge advancements in maritime domain awareness. These milestones contributed to our 10th consecutive quarter of record revenue and a substantial 32% annual revenue growth rate. We met and exceeded our objective of generating positive operating cash flow and we achieved positive adjusted EBITDA earlier than anticipated. These milestones also align with two global megatrends…

Thank you, Peter. I hope listeners are as excited as I am about Spire. For any CPA, that would be a tough act to follow, but let me keep the energy high. Our results clearly support that level of excitement. The fourth quarter was yet another quarter of strong execution. At $27.7 million of revenue, we met our expectations for the fourth quarter, an even more significant achievement considering that the launch of our NorthStar constellation moved from December 2023 to January 2024, and delayed some revenue recognition. Our Q4 results yet again saw a trend of continued record revenue for the 10 quarters we have been a public company. Our full year revenues of $105.7 million fell within our guidance range and at 32% growth, met our expectations for annual revenue, year-over-year growth of over 30%. Reported ARR at quarter end was $106.8 million. This excludes a $9.4 million, eight-month contract for Radio Occultation or RO weather data. This award was received January 4, 2024, only 96 hours after close, due to an administrative systems issue on our customer side. As a result of this contract not being formally awarded by December 31, we prepaid $2 million of principal on our Blue Torch debt to remain in compliance with the ARR covenant through the end of 2023. Including this Ro contract awarded in early 2024, which represents $14.1 million ARR, we are currently at over $120 million in ARR, a level over the highest ARR required by our debt covenants. With this achievement, we will no longer be providing guidance on this metric, but we'll continue to report our ARR results in our quarterly and annual financials. Consistent with the maturing of the company, our covenants will shift to adjusted EBITDA. We will provide guidance on adjusted EBITDA as…

[Operator Instructions] Our first question is coming from Austin Moeller from Canaccord Genuity. Your line is now live.

Hi. Good afternoon. Great quarter. My first question here, probably for Leo, since free cash flow use was so low in Q4, can you detail what working capital or other CapEx items are leading you to maintain positive free cash flow guidance in Q2 to Q3? Or does summer technically indicate that it's moved to the left a little bit?

Austin, thank you. And listen, the free cash flow for summer is what we said before. Around Q2-Q3 is the timeline where we expect that to be the case. Free cash flow includes CapEx, and our CapEx in total is also subject to the Space Services launches and the Space Services activities. So when you think about our free cash flow becoming positive, it's combination of the timing of the Space Services activities that we do, the build and the launch, and also our ability to turn on some of those data provision contracts that, as I described, and you can see in our presentation, are extremely positive cash flow generator after they go effectively in service. So we have a bunch of those that launched late in 2024 and early in Q1. As those become operational, they will become a significant contributor to our cash flow position.

Great. And just to follow up, this question might be for Peter, but when do you expect that ESA might award a follow on contract with the EURIALO constellation, after you finish the first demo satellite?

So the timeline -- thanks Austin for the question, is that towards the end of the EURIALO project, which was always targeted to be a two to three year project, the European Commission has come out and said like that's roughly when we want to get going and have a massive constellation of probably a few hundred spacecraft that provide a few second latency of civilian aircraft tracking over the European area without the need for the GPS signal that is embedded in the ADS-B information. So I would expect, given the timeline of European institutions, that those discussions will start to get underway as the EURIALO project reaches kind of like its midpoint, maybe a little bit further. But I do not expect them to be actually awarded much before, if at all, the end of the EURIALO project.

Great. That’s very helpful. Thanks for the details.

Of course.

Thank you. Your next question is coming from Rick Prentiss from Raymond James. Your line is now live.

Thanks. Good evening, everybody.

Good evening.

Good evening.

Yeah. Hey. A couple of questions first. Appreciate the calendar year, calendar quarter guidance to say, okay, here's what we're going to do. Revenue in the year. That's much appreciated. The couple of questions I had is, obviously, you've got the new Space assets. Did that hit cost of service depreciation in 4Q? And is that kind of the levels we should expect, or was there something unusual in that going from kind of below $10 million to almost $13 million in the quarter?

Yeah. So I think one thing that you need to consider is every year we do an assessment of our asset lives, and this is not different from any other year where we basically assess the asset lives that we have. One of the things that came out in Q4 was a new study on the solar cycle that NOAA and NASA gave us. We were able to reassess the extent of the impact of that solar cycle in the useful life of our satellites. Some of the older satellites basically will deorbit a little bit earlier than we had anticipated, and we had to reset the useful lives for some of the satellites. That's really all you're seeing in that -- in our reset.

And then, what are the useful lives...

Guys, let me just geek out a little bit for a second here. As you know, the sun has a cycle of roughly 11 years where its activity increases and then decreases. And when the activity of the sun increases, it kind of like expands the Earth's atmosphere a little bit, and that is impacting all activities in Space. If you go to higher orbits, you also have certain events, they're called a single event upsets and total ionizing dose that are above the Van Allen belts where things get a little bit more rough. In the lower orbit, you have a certain Spacecraft that just the orbit a little bit quicker. I think, what is very, very beneficial for Spire is the great resilience of our constellation that is deployed, as well as the constant increase in capabilities. A spacecraft today might do something that three years ago took 10 spacecraft. So I would expect that over time, the total number of spacecraft that deliver the data that we deliver today to customers and beyond is actually going to come down rather than go up, simply because more and more assets that we launch are more and more effective compared to the assets that are currently in orbit. As this 10x performance improvement every five-year principle is so deeply embedded, not just in the industry, but in particular in Spire, given the full vertical integration of the company.

And what kind of useful life are you seeing across the different types of your satellites?

So a huge. Sorry, go ahead, Leo.

I think it depends significantly on the timing of when you launch them and the size of the asset, and then whether they do or don't have propulsion and the type of mission that we have. So in average, our own constellation still has a four year average useful life, which is kind of what we expect. And we said four to five years is usually what we would have expected to see. Some of the larger assets tend to have propulsion and they tend to last a bit longer. So for Space Services, we have some assets that could be in the air longer than the five year average, four to five year that we have on our assets.

Okay. And you mentioned that some of your, as you produce free cash flow. Glad to see that's still on track for summer. Positive free cash flow. Invest back in growth with likely sales, products and marketing. If we look at the fourth quarter, the sales and marketing was a little lighter and G&A was a little lighter. Is that what we should expect going forward? Unless you're ready to start investing some of that free cash flow or how should we think about investing in sales and marketing versus what we've seen kind of as the year ended out?

Yes. So I would say that that is exactly what you should expect. I mean, there are a couple of things that we certainly would want to invest in. Our offering is heavily skewed towards the data provision and we want to invest a bit more in analytics and predictive analytics. We also will expand kind of our product offerings and launch new products. And you will see a bit more spend in marketing and sales feed-on-the-street activities as we start to generate that free cash flow. We described also the lifetime value to cost of acquiring a customer. And that's effectively where we think the biggest return would be for the shareholders at this point, because we have very, very strong returns on those investments on the acquisition side. Yes.

Okay. And then, obviously the replenished CapEx. Appreciate you breaking that out, $5 million to $7 million, somewhere to '22 and '23. But obviously the Space Services can be kind of lumpy and chunky. For the guidance of positive free cash flow by summertime, does that assume that some of those Space Services projects are more latter in the year or is it?

So they are basically -- so the launch happens at one particular time. There's a significant amount of cost associated to the launch. If you go to the page where we tried to illustrate how the Space Services deal works from a cash inflow and outflow standpoint, you will see that all of that CapEx is prefunded by the customer. There are fees that basically support that. But it's lumpy because you can see money that comes at design, manufacturing, a big bar that goes out when we pay for the launch, prepare for the launch, and then launch happens. And then from there on, the cash inflows are very material. So of course, from a P&L standpoint, the GAAP profit is fairly leveled because we start depreciating those assets that we own. But from a cash standpoint, yes, it can be somewhat lumpy depending on when the assets get launched effectively. But generally speaking, you should expect us to have, as we said, $5 million to $7 million of replenishment CapEx of our own that will go through the year, right? As we said, like we just said, we replenish satellites. They last for five years, four to five years. And as we put new satellites in orbit, they do way more than what the older ones did. So we don't need to replenish one for one. And then we continue to invest in our capabilities on the type of antennas that we have in our ground stations and the bands and the speed of the downlink and all of that jazz. I would say that for Space Services, it can be a bit lumpy. But generally speaking, you should think about this as when you see more CapEx, that's actually good. It means more growth, it means more revenue, it means more cash in the future.

Okay. Very good. Thanks, everyone.

Thank you. Your next question is coming from Jeff Meuler from Baird. Your line is now live.

Yeah. Thank you. Good afternoon. So it was helpful commentary on the impact from the timing of, I think, the NOAA contract as it relates to ARR. And I get that normalized for that. There's good progression, but I think it would have still been below your guidance normalized for that contract timing. Can you just comment on that dynamic as well as on the ARR solution customer trend? I know, you were deemphasizing smaller customers. It just looks like it stepped down more sequentially than I would have expected?

Yeah. So you're right. And Jeff, thanks for your question. The ARR guidance was around $130 million, and we would have been at $120 million with the NOAA contract. And the issue is really, you can see it in the news, some of our orders on the federal side were actually delayed because we had the continuing resolution giving some of the agencies a bit of pause on when to place those orders. And then on top of that, we saw -- we delayed the launch from our constellation for NorthStar. And of course, when that moves from December to January, there are domino effects on their side and the customer side on proving that these assets work and that they get additional funding for a subsequent order. So those are the kind of things that impacted our estimate. And you can go line-by-line and the reconciliation is actually a little bit of push out into Q1 or first half of 2024 on those orders.

Got it. And then...

I would say, generally Austin (ph), it's like -- that's the nature of ARR, that a small move in timing can like make a very different change in what you report. We have not seen any change in the demand and interest from the customer for our products. It's quite the opposite. We are scrambling everywhere we can to have enough capacity inside the system to fulfill the demands that customers are throwing our way.

Yeah. That makes sense. And I guess this is just related to that. But as you hit free cash flow positive and start to invest more in sales, product marketing, et cetera, just given that that's through the income statement in period, can you give us any sort of framework around multiyear margin expansion? Like, should we expect margins to be more flattish for a few years or are you just signaling that we should expect a more moderated pace of margin expansion? Just anything you can say to help us better model what you're trying to signal?

Yeah. The trajectory that we continue to operate against and we have talked about and we feel very positive and strong about, is about 30% growth on the top line above 70% gross margin on the gross margin side, free cash flow positive. I think that is a very, very good framework to think about how this will continue to shake out and move.

Okay. Thank you.

Thank you. Your next question is coming from Erik Rasmussen from Stifel. Your line is now live.

Yeah. Thanks and congrats on the results and the positive operating cash flow.

Thank you.

So just wanted to follow on with that gross margin comment. So obviously, margins stepped down a little bit on an adjusted basis from Q3. But if we were going to think about that 70% sort of target, is that something that is more of a second half that you -- as you sort of get to that free cash flow? And also sort of coincides with the top line sort of picking up as the Space Services piece starts to generate data and you start to be able to get revenue recognition from that?

Yeah. I would say that you should expect margins to accrete as our revenue continues to grow, as we have told. And in effect, I would say that you should model margin expansion like we said, and our expected target is to go to 70% gross profit, and that's what you should use in your models. I cannot tell you more than that, I think. A lot of leverage on our model. So every time we get one of those Space Services deals on, right, and they start generating data, they generate very good margins both on the cash and the gross profit side. Every time we sell a new contract, like you just saw with basically the maritime contract that we just announced, they come with a significant amount of leverage, right. So there's not incremental investment on our side, on the gross profit side to achieve that revenue, value generation, and effectively that generates expansion.

Great. And then just the revenue guidance, Q1, that's essentially flat at the midpoint from Q4, but it sounds like that's all again related to the Space Services. And you expect then Q2 to be the step up and then step up throughout the rest of the year, or is there any -- and is Q1 sort of a low point for the year? And what could sort of bring Q2 a little bit lighter than expected versus sort of comments earlier, Q2 being a little bit of a step up?

Yeah. I think I mentioned one of the things that needs to unlock for us to see that step up is the continuing resolution. So as we do that, some of the agency demand that we have seen since Q4 and hasn't really materialized, will materialize in Q1 and then deliver revenue for Q2, Q3 and forward. I would say that after Q2, you should expect things to remain relatively flat, increasing slightly from Q2 to Q3 to Q4. But there is a material step up between Q1 and Q2 as we deploy some of these Space Services agreements.

That's helpful. Great. And then, it seems like the Space Services business is picking up. Can you just maybe comment on how revenues have trended? What's the split in relation to your data services business? And then how do you see that sort of split progressing throughout 2024?

Yeah. Perfect. We talked about the four main business units that we have, right? So Maritime, Weather, Aviation and Space Services. I would say that the three big ones, and you can consider to them kind of in a similar range, are Maritime, Weather and Space Services. The fourth one, Aviation, is emerging. I would say that it's a fraction of the other three. So if you do the math, you can come up with, you can do the simple math on 3-3-10, 3-3-3-10, (ph) right? Something like that. But my -- you asked, how we're going to grow? All of the business units are growing double-digit. Aviation starts from a smaller base, and they're going to grow high double-digit as the EURIALO project and the technology that ensues from that project turns into one or two or three or four commercial agreements when we're able to deploy real time ADS-B data sets to our customers, right? So there's a significant amount of upside potential on the Aviation solutions.

Great. And then maybe just the last question, just maybe, can you talk about the transition of the large accounts you mentioned last quarter or two, of the change in strategy? I know, we're still sort of early in that process, but any sort of observations you could share in terms of the momentum or potential upside that you've seen from that change?

Yeah. I think, Eric, you can see it in our numbers, right? So we have already seen the result of our price actions and our conscious decision to not to pursue very, very small accounts. They tend to be the least accretive and they don't continue to grow. They don't expand. So our strategy of land and expand is a very important factor of our growth equation. And the smaller accounts tend to be small forever. So we want accounts that have an opportunity to really buy more of what we can offer, and we want a larger share of wallet, but we also need a larger wallet. So our decision to really deemphasize that and reprice some of the smaller accounts. You can see already in some of the numbers that we have published for our ARR customer solutions that came down significantly, but that's because of our conscious approach to really not invest time in things that don't have the right payback.

Great. That’s helpful. Appreciate it.

Thank you. Your next question is coming from Suji Desilva from ROTH MKM. Your line is now live.

Hi, Peter. Hi, Leo. Congrats on the strong quarter. On the NorthStar win and just the opportunity in National Security. I want to know in terms of targeting that the U.S. and global governments, how large is the incremental opportunity from beyond NorthStar? And how soon can that come online? Is it being delayed by some of what's going on in the government? Just curious some thoughts there.

Yeah. So it's cleverly packing two questions into one, so I will try to answer both of them sequentially. NorthStar is really a customer, who is -- I would say overserved with humanity, we are particularly proud of supporting. They are generating more Space Situational Awareness information with their assets than I think anyone else, definitely commercially, has been able to do. That data is of relevance indeed in the commercial sector, but it is also, as you rightfully point out, of great relevance on the defense side. And overall, the conversation that we have on planet Earth is often about wildfire and greenhouse gases. The conversation we have in Space is generally equally intense and heated up about Space Situational Awareness. And so I think we're quite excited for the growth of NorthStar's business. And the powerful thing of the business, as I think Leo had mentioned in some of his remarks, is that something that starts off at one, two, three, four spacecraft can then very, very rapidly grow to eight, 16, 32 spacecrafts and beyond. So the upsell opportunities to grow with our customers’ business is very, very rapid, as Spire has the ability to answer the demand from our customers, which are trying to answer the demand from their customers very, very rapidly. And certainly demand for Space Situational Awareness, who is doing what, where and when and how is certainly increasing both on the civil side and the defense side. But overall, the defense side is definitely a market which for, I guess, better or worse, is one where we see tremendous amount of opportunity for Spire to contribute to a more safe and balanced and transparent world. As the intensity of conflict increases all across the world, the ability to generate activity reports, the ability to geolocate assets that use radio frequency, which is just about any asset on planet Earth, is becoming more and more valuable. And it's certainly something where we are excited to be a provider of the transparency in supporting those that are trying to shine a light into those activities and be a contributor to a more safer world. And we certainly see a lot of future possibilities there for Spire as a company.

Okay. Great. And then my other question is, on the maritime market, you've talked in your materials and talked much in materials about it being lagging other logistics and transportation, industries and digitization. I'm curious how the partnership with Signal Ocean and the AI/ML assets they have kind of maybe accelerates maritime into that better? Any color there would be helpful to understand as we go forward.

Yeah. We believe that the maritime industry is just on the cusp of a new era of digitalization as more and more companies recognize the value of the data that can enhance the operations, that can enhance what is happening on like -- on the oceans, which is driving over 90% of global trade. It is feeding the planet. It is doing not just the transportation, it's feeding a commodity market. So it is an incredibly rich economy that some people say is like $4 trillion, but it is driving an even much larger portion of the global $100 trillion economy. And so, the digitalization is really at the cusp. And Spire really sees itself as wanting to be the premier data provider in this universe, enabling other companies to grow based on that best-in-class data set. AI and machine learning now is a technology that really enhances the value of this data if you have the right AI and machine learning technologies and capabilities yourself. And I think that is really where Signal Ocean shines in having some exceptional capabilities there. And I believe that this partnership can enable other players to make the most of the combined value of more data that can be generating more insights through AI and machine learning. And so, we're quite excited of continuing to be a positive force for change towards this digitalization curve with our partnership with Signal Ocean, but also a lot of other conversations that we have here in parallel for those partnerships to drive the digitalization of the maritime economy as one of the, if not the largest, provider of clean, valuable, premier data of what is happening on the oceans every single day, every single minute.

Okay. Thanks, Peter. Appreciate the color. Thanks, guys.

Of course.

Thank you. We reached the end of our question-and-answer session. And that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.