BigBear.ai (BBAI) 14 Aug 222022 Q2 Earnings call transcript

Thank you for joining the BigBear.ai Second Quarter 2022 Conference Call. This call is being recorded. And at this time, all participants are in a listen-only mode. And a question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the call over to Josh Kinley of BigBear.ai. Mr. ahead, go Please Kinley.

with and company I'm BigBear.ai's CFO Josh Development CFO, I'm Chief everyone, Julie CEO; earnings our June. Peffer, and second conference Corporate new here BigBear.ai. of call. Kinley, joined Officer Reggie welcome afternoon, Brothers, XXXX and the to who quarter now Dr. in Good the former

BigBear.ai obligation events this made reliance forward-looking differ call. risks cautioned not Many are update statements expectations factors could the call. today, a on the forward-looking and from statements be During cause the Listeners that are statements to call any actual we result, discussed statements. forward-looking may specifically assumptions, statements, uncertainties. on forward-looking the during subject current to and and and the These put based to make undue materially on as disclaims certain may to are

today section Forward-looking For earnings press more to refer information the issued our about please these of the uncertainties, and and SEC Statements risks release filings.

discuss also measures not today. non-GAAP replacement some financial will read with We call GAAP for, should considered a together results. financial be should during These be measures the and non-GAAP

can reconciliations earnings within and GAAP release. find our the You non-GAAP

like the over I'd call Now to turn Reggie. to

high have vision. a on our and Despite strong people, And also is right results BigBear.ai make you AI-powered a confident foundational technology with deliver for rest to backlog. we thank products using outlook growth, second aggressive and growth. and for the a Josh, the remain you, continue led This Thank some the requires challenging business customers joining is the company at that and empowers the public early We're infrastructure our to operate It scalable transform our to margin, multi-year affecting we investments all as efficiently. year, achieve into requires our right successful quarter of high business the in a analytics. in a and significant circumstances call. involving in that transformation. of ability maturation effectively stages company to decisions to time process services led

likely governance our and had Ukraine our you second later a our announcement we changes of the spend created the to As not both quarter impact at anticipated. war pace seen Internally, have the we expected guidance today, the more margins quarter. these expenses propel call. revenue issued delays remainder and requirements on model, Externally, and increased approach our us slowing the QX we operating US details are we accordingly. in as performance operating and year, in earnings revenue are a our support to and taking forward in their expecting well on in growth cash as company, economy XXXX the forecast which our for did of as these the the will public reduced on financial conservative circumstances reserves. in Julie provide Based recalibrating more in

and of with continue for of demand First, near-term current on also Ukraine. delayed have responding timing we awards some to economic in strong projects, through contracting see with on funds federal associated the our become government increasingly contracts. March our has focus delays continues and and anticipated with but timing the from revenue the given its our this some market clear, pipeline. more To difficult customers, to has but experienced to and I'd services products be to to these through war the our contract climate. in flow Unfortunately, engagements like geopolitical predict appropriations in dynamics, individual agencies starting in customer are on The process how provide the we signed our way bill the color work we the

solutions our is in our awards contract need included behalf certain relationships. we've enable for to of of and foster relationships activities us supported timing to of margin on forecast the uncertain the backlog Further, are value while long-term historically build the our customers fundamental enduring. and and Importantly, the frustrating, they lower government's procurement

XX% diverted on services regularity and are our certain of lower margin long-term. explain projections increased building the we the and And revised However, as over calculations, revenue result forecast, be for the of will of approximately reflects taking Therefore, months. are a including in demand business approach lumpiness introduces will reflected in backlog going anticipated continued XX predictable has strong new projections describe. these government by solutions. QX forward. estimates it within type firm margin over funding our backlog. the We longer products, and we believe Julie earnings our this the we categories focus Similarly, in in no this Julie Despite it With reduce our the more believe numbers is our in and last calculate prudent our believe is our under backlog higher being we which as engagements, will our will further certain conservative our to XXXX to a changes awards Ukraine, guidance, better reflect some to more pressure. strategic of our reflected and our

intelligence environments. we the deals, in areas delaying and complex highlights geopolitical new cyber enhanced environment current highly detection, timing solutions success While is record have of that it provide for outstanding the in need where threat AI also the an advanced of track

to these on areas. prototype projects We in well continue perform

large relationships resulted developed exercises cyber the demonstrated military is at that full fact, invitations several new prototyping to place of in an participate development technology. In in the in new awarded as new June, us one accelerated Command for in contracts, first held team US second Cyber event expanded we quarter, production in our and business just and to AI/ML BigBear.ai phases highlighting This customers. leader was spectrum a prototypes introducing

with potential have significant lead investments they contracts significant even Although prototype work to frequently the upfront to occurs multi-year or very margins. better low margins, with negative much

prototypes awards through latest continuing our new expect beginning with We and month this see XXXX. to associated

We with the government us current more the for budget AI future. well adoption new also into the increase to defense funds opportunities and expect for in earmarked in generate customers

Cyber technology our and the With Analytics as pipeline to well for drive growth led continue larger be capture both our projects with business, we business & Engineering to customers. as growing positioned well government

Now I'd like to address our with progress ProModel.

acquisition and earnings to QX work. mergers the simulation occurred QX and growth in in us is great year, acquisition has call mentioned our us accretive This part will rapidly entry ProModel this key that has our portfolio with product a foothold a high and that a into During and this I health strategy of given modeling care at and growth growing allowing manufacturing be the enriched markets. strategy of products example our The advanced accelerate markets. roadmap acquisitions

to COVID of health of we in health hospitals optimize continue effects FutureFlow the to in capacity, example, care care and loads, For predict product one centers signed patient improve for are as helping and In new our care the platform health we financial and the the care health a seeing systems with States, hospital United sector and a Eastern Rx the care largest growth quarter, shortage of the our performance. hospitals provides and patient flow for patient feel workers. deal rapid simulation second pipeline

repair similar resource and in facilities capacity struggle shipbuilding seeing operations intense in domestically planning are with We and shipyard demand challenges utilization. abroad, and as

of dramatically applicable demonstrate to is production discrete additional markets and working we AI-powered Our opportunities the the efficiency into customers. ability to our are of And building These examples accuracy, global yard and to with on XXXX AI network, and segments more integrate beyond. are forecasting from track. and twitter analytics which and to And extend expand in a gained wide are processes. a will These relationships processes chain. ProModel. we of for manufacturing with operational perspective, fraction integration, just range optimization, customer leverage the supply geographies our The improves benefits across acquisition shipyard technical business the product our industrial and expanded new both base from address partner of

to-date. commercial with due our bookings sales are more Although are our pleased uncertainty, cycles economic to slowly moving we

We subscription-based on the year a half this more year impact positive back next revenue impact offerings. expect with significantly as with common to see in of is

call expenses. like the I'd to turning Julie, our Before operating address to briefly over

predictable mentioned SaaS of transition commercial these Many and the investment our the a during strategy quarter as as to lean future margin second to such fuel go-to-market in we earlier, us requirements support steadier, acquisition our growth. future. I our to investments, will forward higher of growing in our business more help contracts public business As and the company and ProModel organization,

and call cash our for new the experience and many core stringent one our maturation Peffer, Increasing transformation is reducing are years health and process, subscription CFO, in strategy. be business great other over forecasting versed running XX However, others. and remainder delays the contracting helping With growth that, G&A are of addition operational brings this strengths plan in She's component taking our will to functions of in the efficiency departments Julie government manufacturing to team. to is we unexpected many year. Julie efficient to and a efficiency, as we SaaS of mature, more details for a processes, of as our result provide light and seeing cycles in operating aggressive also the remainder the for and building expenses Julie improve finance conserving global sales that operating executive well model. our I'm made capabilities longer approach of Flowserve, slowed care pleased on of we in AWS, economy, public a a year. governance companies, and of QX the revenue transformation Raytheon turn guidance like BigBear.ai and recalibrated instrumental and execute earnings industries Julie? more fidelity She to our and

I'm earnings to the help of Officer to here on you, and call the excited for Chief transformation. guide Reggie. BigBear.ai, exciting as be my first Financial Thank company

and our by operational be these maturation and and I As said, believe help the investments, accelerate disciplined all aggressive governance, improve company's can efficiency where experience must diligent are areas our growth balanced my and performance. strategy expertise financial Reggie

largely for second and results compared Revenue Approximately let's turn programs $XX.X $XX.X attributable the XXXX, commercial of segment of quarter commercial of to from for an growing prior to Now by quarter. compared revenue revenue awards to as expansion driven of of increase $XX engagement. the as in contracts addition XXXX, key our well XX% is the $XX won growth was million to million in from second quarter year, million analytics ProModel. in backlog the in the the the million execution the from our

came or susceptible general, revenue mentioned was the has contracts and of margin & engagements. C&E prior need we is a quarter analytics the compared year reflection period. million business slowing our more expect that to million to sales software from elongated our shift this lower earlier. great $XX.X the cycles, The and lumpy in to to growing, services with long-term result of attributed portion model. our sharpen in are $XX.X the current procurement of economy In especially revenue of new While the business, reliable, Cyber on higher the Reggie revenue Engineering customers changes to continue related focus priority underscoring our largely activity the

us end categories: Our backlog priced when the awards. would the a new reflects changes at Historically, continuing five unpriced backlog backlog reporting, our on approach healthy backlog follow remains prior two unexercised quarter options a and versus work. This under a loss Previously, anticipated follow included backlog, coming a in to currently in notified were not on unexercised awards anticipated unfunded in program quarter. reduction contract. contractual $XXX we to million customer support at be funded options, added our that backlog, of

of recompete record considered were certifications these Given track our winning remarkably highly business, reliable. high

keep on However, remove due contracts with to we until on our they as are of of have follow category decided these these from experienced calculation our delays backlog and pipeline this awards, part the contracted. we've to follow contracting the

to current The unexercised our second geopolitical pertains environment. light we the which unpriced to in backlog, backlog of change our reassessed have

other funds clear, of not contract, under be estimates more we our While to Ukraine still work or project we've trends have reflect contractual disruptions. To unforeseen funding work. such as, have recent to this lost diversion we reduced

than We on we trending, are a the our a approach quarter simply would of be contracts. in how give taking higher if existing to you what QX backlog conservative future will second sense estimates To of a backlog in quarter. better the apply revised our be our is approach backlog, more X% funded last

signed strength and as which Reggie our XX% in our by our has into converting GAAP of addition, consists second margin on our stated, approximately since quarter, basis. XXXX. This significant price pipeline a and funded, December unfunded In unexercised firm increased highlights XX% the priced of backlog, contracts. growth options In was gross

where segment XX% direct to period. prior in projects engagements, but large multi-year XX% various lengthy participation gross This was prior compared request of Reggie Our the margin to committing prototype these we rate margin impact evident. federal in for analytics have mentioned, deals. on customers on very our high was is a a year demonstrations the to result adjusted Historically, success change near-term that

Our discussed. activity this was On XX% due XX%, compared points due a & in is Cyber flat of adjusted percentage reported adjusted year higher for the investment, the Engineering quarter, segment which margin quarter the than in last. mix shift gross year-over-year consolidated of margin to lower adjusted margin procurement prototype to previously basis, gross XX% XXXX second the gross to X was

expect both federal private see increasing margins sector we significantly We growth over with and in and continue to customers, time. business analytics to our see

Additionally, by acquisition, to costs linked and level of go-to-market and earnings a our ProModel R&D, to commercial. higher the integration impacted expenses operating strategy transaction and were related

in IT a second expenses $X.X costs, goodwill segment related $XX.X Excluding expenses costs, noncash million quarter, compensation $XX.X in million. million and of quarter, were new SG&A the in SG&A operating by public expenses primarily people requirements. company and The Engineering & of of including was and impairment the driven our R&D increased to million equity-based increase charge Cyber $XX.X

just our segment. we million due to the in goodwill by growth million $XX.X assumed driven described. because growth contract negative loss contracting factors EBITDA recorded microeconomic have the increased rate Adjusted we second For driven the $X.X I and customer impairment primarily conducted million, the charge also Engineering lower expenses goodwill posted was the and The second the quarter, net investment. assessment primarily and a charge of of delayed investments operating was and for Cyber the delays impairment was awards discussed, $XX.X & the the continued quarter, and by

ProModel We sheet. to through rigorous Now cash turning of of as expect cost savings going forward, quarter, process in conducting structure. equivalents we the disciplined of significantly the to cash was our And burn operations of fully our end approximately burn in cost one integrating acquisition the at and initiatives, And are the a aggressive and reduce and balance million $XX had high assessment streamlining cash business. QX. to cash the abnormally we due

progress provide third during to expect We quarter an call. update on our our

Now turning to outlook. our

are elements low that and As our of business procurement Reggie lumpy are there mentioned, historical by margin nature, difficult forecast. to

and geopolitical our follow current process climate the the economic the to certain removing addition, from and even In has are our lengthened and Therefore, outlook business we awards this of contracting difficult forecast revising predict. on timing made more accordingly.

appropriate projects and prudent customer will procurement we business to our as these an arise. request We to it's due needs believe support But today. us unpredictable to handle core nature, change gives their of as conservative our continue outliers view this

XXXX complete for more cost to commercial million. and second million reduction half year, now we experienced the our our include result growth as in be plan, EBITDA of in more gaining year, ProModel negative. half revenue a of in adjusted strategic factors, half second Factoring growth. challenges the to Due expect our we the our traction targeted revenue. external investments affecting required and commercial $XXX business, expect to the In to of reductions we we total aggressive first XX% be these losses revenue the anticipate revenue for and expect comprise we to which SG&A As in focused approximately of integration $XXX approximately

half EBITDA reduced in second year. single millions the significantly the expect in losses of negative with digit We

rigorous operating taking capital processes a improve our expense more and management Looking pursuing profitable approach to Reggie while as stated, our allocation efficiency, growth. are ahead, to we strategic

Our increasing full remains and year year-over-year backlog are revenues our and gross margins strong.

And larger in to our While commercial greater from strategy within companies will we turn on efficiencies and to operating go-to-market invest focus over our driving Reggie efforts, closing increased model. continue I'll it product for synergies back and that, acquired remarks. with we

Julie. Thanks,

in climate. growing challenging are heard you current despite Julie's As report, still we the

disciplined and cash make needed managing we are to on the expenses as position our accelerate growth. rigorously We focused our investments

transition made profitable, scalable, in in presented also today. have our substantial high guidance we confidence a company. we the We become And to have progress first more recalibrated technology

to a While aid do we we for government in near-term, the increased Ukraine federal activity the expect award year. in to government be of priority continue the half back anticipate and the contract

of footholds our on the growing and Across government We tremendous our substantially. in are both horizon. pipeline market opportunities commercial also establishing ProModel, to and we business markets ramping commercial, opportunity with continue our see strategic

factors outlook our not solve necessary mitigation the our now, changes So unique in is of record, macroeconomic and the track guidance play complex, near-term most our given representative or of backlog while strong are the ability some our the evidenced our successful right risk to XXXX intelligence at revised by to needs world.

it the to that much needs have offer we're We and for long-term. market the in

We be trajectory. future continue our confident to in growth

Julie turn Jeff I where ProModel plan. and be has Dyer, to our growth who leading and I Now been by Commercial, over for it the Josh, of operator integration will will joined Q&A, President

And be Louie Blair. the Instructions] Please at this question-and-answer proceed with [Operator time, comes first we'll from our with of session. question William line questions. your And DiPalma a conducting

Julie, and Good Jeff. Josh afternoon, Reggie,

Louie. Hi,

are how doing? you Louie, Hi,

you doing? are How

care health other be more need for care to do care invest already realize order care an plug the for addressable how Great. you potential analytics United the health other systems health for for could wins What additional products? States? mentioned won contract Reggie, opportunities? systems established Or for market data you US. health your you or care do offering in in one And the still that the opportunity a you the to of have and in hospital largest is health play

offering, Jeff the do let question. that I'll the much So, who greater Louie, in an thank you Dyer, answer have very and President, Commercial we Yes, for is detail.

our those Louie. Thanks, has the lots customers X,XXX alone as offering rich our commercial go ProModel and market focus for of the our logical has our or It's aspects been to a already we hospital try has established product and learning of efficient business, in going thanks United but accelerate out leveraging accelerating the strategy of product I'll their leverage to our that to in into for you well is that sales room believe Reggie, the advanced to potential be invest very visibility to ideas had we each as and addressable capabilities, success selling that The market. a There us side of that success ProModel, that go-to more in with we've cases addressed. their respect transparency use bringing and over algorithms additional in in with that and build predictive on general questions, room operations, as machine States to helping able already that's creates analytics operating hospitals Rx. we're commercial be are through day-to-day force significant product business. more our emergency significant their tackle operations. FutureFlow called also the federal

that the So but success we're excited that about feedback in early we're about encouraged the And now excited roadmap. seeing. the ProModel, opportunity. by We're that's the that base integration we're of we're the the getting still certainly in that innovations from our customer encouraged accelerating we're we're young

margins you large prototype contracts What for costs, have in contracts Julie, long-term is production? prototype your depressing Thanks, to certain potential investing right how as for are that you shift upfront BigBear now. EBITDA the referenced margin are Jeff. And that

this are do we of We you. and for to those expecting relates kind some Yes, to some But prototype that on on in. projects on question, that making Louie, profitable of larger, rest the are follow we have contracts the meet XXXX as thanks are we in for year. prototype working to contracts next get much currently more Yes, production we're some year still great this. investments it

And that those impact a be continuing for work better some definitely normally contracts. fixed more prototype perspective, of significantly margin to margins our from a those areas typical much gross typical are from price business the of what going of of standpoint the of are analytics expecting XX% don't contracts. you than levels. because the our we margins getting we on see would necessarily are are we But going range in margin in year So to the gross we short-term in for think see be short-term, higher the our XX% the rest very to spend to those

of are relate verticals Great. you prototypes to? do And able to what types these share

as is have And call several One with this funded Louie. one vulnerabilities this it talk you the system we one have cyber us that capability partners, a Spacecraft. we so we our an we needed in do - concerns, with has and is with about. a ones funded this constellations. satellites Yes. commercial something point. And a know enables Redwire collaboration, including to uncover extremely cyber Spacecraft led satellite in proliferation is Sure, LEO And to has There this couple and including to can at Space. of collaboration opportunities of developed several

So about that. we're excited

area. one that's So

really Another do of and has service has to vision identification to others. with another one do fortes, with target that's several our the a And one then as that's with have One do that our forecasting, computer to data-as-a-service. and we special one. behavior has

as government them past based it's inside longer in work we the cyber but our the analytics they're cross-pollinating, you - Cyber side investment, well near-term The about. Julie bases, to So entry margin. does have in prototypes. a us to create Command, just something. prototypes having make US me, has you we're with this we're you And performance, think as it's are we're starting respect is us, have what as have with I what no leveraging to opportunity. customer the that's it these to And do. skill an is And other as brought show probably and to side doing said, great our to really win that show right? know into actually we allowed on all challenge as on, So contract allowed But questioned, excited requiring up about prototypes based have these these that I - to gain requires sets and us upfront as

we for and opportunities show one these can both advanced areas. cross-pollinate, that those as off us and see So in analytics additional strategic capabilities our open cyber to investments, in up

makes in Ukraine more, be Great. opportunities? also the a sense, referenced remarks, associated mentioned Reggie. headwinds. with terms And war that do you were your there of prepared you That ultimately, BigBear And the should actually in pipeline you at least, Ukraine feel how near-term headwinds long-term positive for your

great and thanks, Louie. that's a Yes, question

So interest saw this continuing with products issue think services. in interest Ukraine, we I early analytic and and our

from I talking contributed - funded the investment about and is challenge the that think well run some was as into the one to taken unexpectedly them lumpiness that from earlier. as of away lumpiness has of programs, we've Julie already

the giving is in us it So actually near-term some headwinds.

in about also and not think kind in Asia, of I in South change that Ukraine, in we right? have There but see as intelligence for going intelligence, long-term, climate, think capabilities, the what's well. particularly the for see longer-term on. is value tremendous need advanced that's predictive to because only we so need the the where geopolitical of We

of. immediate longer going that Now months, are these because XX, take delays we're XX take advantage things on, placed can us to necessarily see to contracting strategically are not said, government but things that the that XX, of which return for are

in strategic all to tensions BigBear.ai. South success the Ukraine, think for contribute Asia I So

me. Reggie, Jeff. Julie, it from Sounds Josh That's and good. Thanks,

Thanks, Louie.

Thank you.

proceed line Mike the Markets. Latimore from comes question Northland of your next question. with Our Please with Capital

Thanks. Great. afternoon, good Yes, everybody.

Mike. Hi,

Mike. Hi,

Hello.

How - about that, as category, think so should services. mostly see backlog you guess? I the the those Are here? highlight of so procurement a we analytics the On & kind in the we Engineering increase change, percent should Cyber

Yes, be that's Cyber out. & - call Engineering Yes, it would it's a segment. great mostly in

coverage covers? And think that of Under point kind revenue of half second a then - the at backlog calculation, rough the percent do given revenues. I backlog had what one new much have you of how of future you Yes.

is half already second How much in of revenues backlog? the

second How your much in already backlog? of Is the is half revenues question? that

Yes, yes.

that but Yes. backlog. I most I that calculation, in have is don't it already suggest specific would of

- of is coming in amount anticipate of We backlog. in have signals those starting had closer, we already are but most, if get significant not to that growth we some it we're because a getting

kind Okay. Great. here. And I by thinking talked was of where what end you year-end? And of then the just second guess, that the end the might about at improvements you're OpEx headcount quarter?

and I a and the say SG&A the a the would end at that's lot like take back a invest into on look after back right those the So strategy, to all really of in that we're in structure were quarter. that maybe make that need as perspective. right things continued in investing creating the growth kind the continuing and say, look of investment we're just like public in the in was softness a broader quarter, making company, public to really corporate terms felt well we're at the around I sure first growth headcount investments when investments feel give we focus step specifically around expenses as we about we've people. would strategy were a our of SG&A our the I been in because second headcount, talk take that headcount, a our continuing But and pretty we of in and to in that strategy, company terms step at the pace in of we when think looking, we we place and a because - harder good at second terms about XXX costs, quarter you in general But let's of bit to

that still then And kind lower out you are just here, seen or - the - on a they're are projects just your they're they're outright cancelled now is general, guess, it's and deals there federal in guess? is have Yes. priority the I I out not vertical. there of view,

the we any there side. haven't as been will both frustration is you an projects honest, just of the the cancelled. our on to as seen side, on kind actually seen be is general obviously customer well I of elongation across No, cycle. tell have that What we've board,

to I offices backlogged the and money reprioritize war function. think contracting the just these they're are - opportunities to getting on send Ukraine to focus

are sure we that just trying where slower. they've been in we understand make to So, the they cycle, are but

is that any It's longer indication get nobody taking contract. them changed. to have under So us things giving just

thanks rest the of lot. Well, year. luck Okay. a Good

Thank you.

Mike. Thanks,

Thanks, Mike.

line Instructions] next Management. with Asset question Cho [Operator the Our proceed question. from Please with Marathon comes Michael of

the SG&A, the Hi seems million my quarter. sequentially forward, my taking cost this in in line question $XX.X according especially internally, Thank There going call. And a kind guys. for number is What's be rate it second your delayed - kind of year-over-year is, a reduction expected hard of and run you time to Thanks the right for you. increase also have still reasonably rewards? SG&A reward of to million plan? those increase predict? the do $X Or light that

sorry. again? couldn't the one, question. I'm catch I second you Could say the second

Yes.

those an reasonable that expected it's rewards, - delayed a So do kind you that have time of it's internally? line

take that first. want We to

expect month. one rewards delayed have we by hopefully next we So

So got awards delayed we've year. almost a

at some but this to the and we end be quarter beyond. of So of expect those - coming coming in

yes. So,

to - give your go to first So question. back

we have on yes, the in year-over-year you're our year. picture about for mean, to function. SG&A. comp, we've of those related which - talk significant business increases seen SG&A big our is didn't in stock increases again, right. And Let's I sure last some We've SG&A had

public last expenses of that company year. have a didn't we lot We have

our investments there seven run I'm to the some point it here about I past. can't be expect But dive streamline? you deep Where than the yet, and to adding that be rate, back lower. a we But I into it have exactly can been growth team on I but on do have to to - I give we QX, in we been get weeks understand. a efficiencies really and pretty for rate. run made. in to I the guess, that to we our focus I'm answer where operating had are company, is model? in do cost clear I right as How now need you wish factor expect dive has been the - I've there to number new lower do doing about now it a in the to QX with So in So significant I to how

costs some those in transaction our well the as it as transactions, of for well. related ProModel the onetime step our had of related some also is cost third cost as legal some as year of to our We to activities

you. Thank

And your today's conference. we concludes And this have reached you do And thank time. session. this the disconnect the you lines end at of your participation. for may also, We question-and-answer