NextNav Inc. (NASDAQ:NN) Q3 2023 Earnings Call Transcript
NextNav Inc. (NASDAQ:NN) Q3 2023 Earnings Call Transcript November 11, 2023
Operator: Ladies and gentlemen, thank you for standing by. My name is Shubro and I will be your conference operator today. At this time, I would like to welcome everyone to the NextNav Q3 '23 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] Thank you. I would now like to turn the call over to Erica Bartsch. Please go ahead.
Erica Bartsch: Good afternoon, everyone, and welcome to NextNav third quarter 2023 earnings conference call. Participating on today's call are Gary Parsons, NextNav's Chairman, Ganesh Pattabiraman, NextNav's Co-Founder and CEO; and Chris Gates, NextNav Chief Financial Officer. Before we begin, please note that during today's presentation, the Company may make forward-looking statements either in our prepared remarks or in the associated question-and-answer session. In particular, such forward-looking statements may include statements about NextNav's business plans, objectives, expectations and intentions to drive growth in its 3D geolocation businesses and expansion of its next-generation GPS platform to maximize the value of its IT portfolio and spectrum, its international business as well as NextNav's partnerships and the potential success thereof, NextNav's estimated and future business strategies, competitive position, industry environment and other potential growth opportunities.
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These statements are based on current expectations or beliefs. However, such forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside NextNav's control that could cause actual results to differ materially from the results discussed in the forward-looking statements. These statements may relate to, but are not limited to, expectations regarding our strategies and future financial performance, including future business plans or objectives, expected functionality of our geolocation services, anticipated timing and level of deployment of our services, anticipated demand and acceptance of our services, prospective performance and commercial opportunities and competitors, the timing of obtaining regulatory approvals, commercial partnership acquisition and retention, products and services, pricing, marketing plans, our ability to realize the anticipated technical and business benefits, associated acquisitions and any subsequent mergers, acquisitions or other similar transactions, factors relating to our future operations, projected capital resources and financial position, estimated revenue and losses, projected costs and capital expenditures and expectations about international markets, projections of market growth and size, including the level of market acceptance for our services, our ability to adequately protect key intellectual property rights or property technology, our ability to maintain our location monitoring -- excuse me, location and monitoring service licenses and obtain additional LMS licenses as necessary.
Our ability to maintain adequate operational financial resources, including for research and development or raise additional capital or generate sufficient cash flows, our ability to develop and maintain effective internal controls, our success in recruiting and/or retaining officers, key employees or directors, expansion plans and opportunities, costs related to being a public company, our ability to maintain the listing of our securities on NASDAQ, macroeconomic factors and their effects on our operations and the outcome of any known and unknown litigation and regulatory proceedings as well as assumptions relating to the foregoing. Accordingly, forward-looking statements should not be relied upon as representing our views of any subsequent date, and we do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Following our prepared remarks, the Company will host an operator live question-and-answer session. In addition, at the conclusion of today's call, a replay of our discussion will be posted to the Company's Investor Relations website. With that, I'll turn the call over to NextNav's Chairman, Gary Parsons. Please go ahead.
Gary Parsons: Thanks very much, Erica, and good afternoon, everyone. Welcome to NextNav third quarter call. As Erica mentioned, joining me on today's call is Ganesh Pattabiraman, NextNav's Co-Founder and CEO and Chris Gates, NextNav's Executive Vice President and Chief Financial Officer. This past quarter saw a significant progress on a number of our key initiatives, both on the spectrum front and with continued public safety and GPS resiliency efforts. Ganesh will provide more detail on like individual contracts and government agency activities, but from an overall strategic perspective, I'm frankly pleased with the ongoing traction of our government and public safety efforts, both on the E911 three-dimensional geolocation front, and with the growing consensus on GPS vulnerabilities and the true need for PNT or GPS resiliency to protect critical infrastructure.
NextNav is the acknowledged leader in this area. And we see growing opportunities to expand that leadership position, both here in the United States as well as around the world. A number of these resilient GPS or position navigation and timing PNT initiatives or either demonstration programs or initial implementations that are expected to lead to expanded deployment in future phases. Chris will get into that in more detail in his section. Additionally, as we've shared in prior quarters, the specifics of some of these programs, including the contracting agencies, all remain confidential at this stage due to national security issues, but we will try to share as much insight as we can consistent with those non-disclosure responsibilities. As the team will discuss in more detail, several of these opportunities involve partnerships, either with state and federal agencies or leading research universities, responding to RFPs or RFIs in advance of the executive order 13905 finalization.
From a purely political standpoint, it probably is worth reiterating a substantial bipartisan support that continues to exist with securing the nation's critical infrastructure and providing a resilient layer to GPS. Regardless of the continuing uncertainty in the federal government's overall budgeting process, there is clear support for current and even growing funding for these initiatives. We expect substantial revenue growth from this sector as we go through 2024. Next, on the spectrum front, on last quarter's call, you remember we announced the granting of an FCC experimental license and disclosed that we would design and deploy a 5G TerraPoiNT network in the Bay Area. We have now, in fact, now deployed a network in Palo Alto, California, capable of numerous 5G carrier bandwidth and power levels and have begun a formal testing program.
We expect that those testing results will validate our ability to provide highly reliable 3D geolocation and resilient PNT capabilities, using the 5G waveform, while simultaneously using the 5G signal for significant data throughput. We expect that testing program to be largely complete by the end of this year, following which we would expect to file for appropriate license waivers with the SEC to provide commercial service using these configurations. Overall, a solid quarter of progress towards our key strategic priorities. And with that, let me go ahead and turn it over to Ganesh to go into more depth on the recent contract awards and our operational performance on government and public safety efforts, both with Pinnacle and TerraPoiNT services.
Ganesh?
Ganesh Pattabiraman: Thanks, Gary, and good afternoon, everyone. It's been another productive quarter, and we're seeing growing momentum out of key partners and federal and state government agencies as the need for solutions tied to PNT resilience grows in importance. Notably, in September, we participated at ION or the Institute of Navigation Conference in Denver where we demonstrated our TerraPoiNT hybrid systems timing and 3D positioning capabilities, leveraging LTE signals from cellular operators. While at the conference, we were able to meet with government officials from the Department of Transportation, Department of Homeland Security and Department of Energy and other partners and held very productive conversations. This reinforced our belief that the government is now actively moving from discussion towards tangible action phase.
At this same conference, the Department of Transportation announced its complementary PNT action plan. The plan lays out the key milestones, time lines and establishment of a PNT services clearinghouse or PNT marketplace. As part of this framework, we see DOT issuing RFPs in the coming months that will sponsor several initial implementations of Brazilian PNT systems like TerraPoiNT in critical infrastructure providers equipment. This is to establish a framework for complementary PNT systems to operate in conjunction with GPS and GNSS systems that may be in operation today. A good example of this is in the telecommunication systems; we could see both GPS and complementary PNT systems-based timing to be integrated as part of the core infrastructure of the operator and to ensure that the two systems can function in a seamless manner.
The DOT also plans to establish a clear designated clearinghouse for federal users and critical infrastructure operators. This would be a place to find a list of vetted and qualified complementary TNT providers like NextNav, to help advance their resilient PNT needs and procure services to be in compliance with executive order 13905 beginning in 2025. This is very similar to the federal acquisitions process, where the pre-vetted list of technologies is made available for different federal government agencies to procure against. Here, the intent is broader to not only affect federal government acquisitions, but also critical infrastructure operators and eventually commercial entities, too. In essence, what we see in 2024 and the early part of 2025, our funded initial implementations in various critical infrastructure use cases that will pave the way for wider adoption across the sectors.
These time lines and frameworks are captured in our investor deck on slide 5. As we noted last quarter, we're starting to see many state and federal agencies begin to take proactive steps towards building PNT resilience. As part of that strategy, I'm happy to report that we recently signed a contract to support the federal government in their PNT strategy. While we can't speak to the specifics of the contract due to the sensitive nature of our work, we can say that the project will leverage our existing infrastructure to provide persistent PNT characterization initially in select markets around the country. And upon successful completion of this phase, we expect to expand our capabilities nationwide, and this would likely represent our largest contract to date.
In addition, many state and federal agencies and critical infrastructure providers are taking steps towards commercial implementation of resilient PNT systems, using federally funded test beds and in some cases, plans around commercial enablement in anticipation of procurement language for executive order 13905. For instance, we have submitted multiple proposals in partnership with state and local agencies as well as research universities in areas as diverse as timing for land mobile radio systems with Texas and automotive use cases with Ohio, as part of smart and cybersecurity grants sponsored by Department of Transportation and Department of Homeland Security, respectively. We expect to be notified of the status of many of these opportunities over the coming months and in the first half of 2024.
I must add here that although the process of implementing the complementary PNT strategy is going smoothly within the departments and agencies, we do see a short-term impact from the current stalemate in Congress, including the release of procurement language in support of executive order 13905. We now anticipate this order will be released in Q1 of 2024. However, we currently don't see that impacting either the overall 2025 implementation time line or the grants to be issued in 2024. Turning now to our Pinnacle technology, we continue to see ongoing progress in the E911 and public safety domain. Notably, we recently announced an agreement with the Iris flip-phone which will be sold on consumer cellular, one of the largest MVNOs or mobile virtual network operators in the country.
This is our first device with this carrier. Beyond this agreement, Verizon is continuing to expand its integration of Pinnacle services across devices on their portfolio, and we expect to reach double-digit device models with them in the coming months. With these arrangements, we are now contracted to be on five wireless carriers across the country, including the top four nationwide carriers. As we have shared before, we operate through different business models depending on the specific carrier. In some cases, we have agreements at the carrier level for all devices within their portfolio or we just have a licensing model for each device for the life of that specific device. Either way, these relationships put us in a clear leadership position in E911 and public safety domains.
And as we move forward, we look forward to bringing more adoption and integration of our Pinnacle technology to additional devices. On the international front, with the U.S. government moving forward with initial test beds, we expect to see similar actions from foreign governments as well. In Japan, the Japanese Ministry of Information and Communication or Ministry of Internal Affairs and Communication is going through a public comment period on the spectrum, which is likely to be followed by an ICC or Information and Communications Council process. In Europe, the European Commission as part of its recommendation on critical technology areas for EU economic security included PNT as a critical technology. This now leads to a consultation phase with a number of states before moving to the EU legislation phase.
And in the U.K., the British government recently released a PNT policy framework and a plan around PNT resilience. In all, we feel very energized by the activities we're seeing across the U.S. government and globally as the importance of PNT resilience gains traction. We believe we have a real opportunity to be a leader in this area, and the growing roster of partnerships and agreements is a testament to this fact. With that, I'll turn over the call to Chris. Chris?
Chris Gates: Thanks, Ganesh, and good afternoon, everyone. Thank you for joining us for our third quarter earnings call. As both Gary and Ganesh highlighted, we made important progress in our efforts to expand the utilization of our spectrum licenses in the third quarter and are starting to see tangible results from the PNT resiliency programs underway in the federal government. With respect to our financial results, third quarter revenue increased 104% to $1.0 million compared to $500,000 in the prior year period, primarily due to an increase in recurring revenue from technology and services contracts with commercial customers. Sequentially, revenue was up $200,000. Year-to-date, revenue decreased 15% to $2.7 million versus the prior year period, driven by decreased integration revenue, partially offset by an increase in recurring service revenue from technology and services contracts with commercial customers.
Our operating expenses were $15.6 million, down from $18.4 million in the same period last year, with much of the difference due to lower stock-based compensation expense, partially offset by higher depreciation and amortization. Excluding stock-based compensation and depreciation and amortization, operating expenses were $10 million compared to $10.9 million in the prior period and $10.3 million in the second quarter of 2023. Year-to-date, operating expenses were $46.3 million, down from $54.1 million in the prior year, with the reduction driven by the same drivers. Excluding stock-based compensation and depreciation and amortization, year-to-date operating expenses were essentially flat at $30.1 million in the current period and $30.9 million in the prior year.
Third quarter net loss was $23.2 million compared to a loss of $18.7 million in the prior year. The primary drivers for the increase were net interest expense of $1.7 million and a change in the fair value of our warrant liability of $6.7 million compared to net interest income of $0.3 million and a change in the fair value of warrant liability of $1 million in the prior year. Year-to-date, net loss was $55.3 million as compared to a loss of $27.6 million in the prior year period. Here, again, the primary drivers were net interest expense of $1.6 million and a loss associated with the change in fair value of our warrant liability of $9.8 million compared to net interest income of $0.4 million and a gain associated with the change in fair value of our warrant liability of $23.2 million in the prior year.
Touching on our balance sheet, we previously covered the $20 million of additional senior secured notes, and I note that we finished the quarter with $97.1 million in cash, cash equivalents and short-term investments. Also included in that amount is $882,000 of warrant strike price exercise. As you may recall, the warrants we issued as part of our debt financing are only exercisable for cash and partially callable beginning in 2025. Whether called or exercised otherwise, these warrants may provide a source of additional liquidity as they did in the current quarter. As we've stated in the past, we continue to closely manage and refine our cost base as we build value on our assets and bring new customers into service. And I'd also like to provide some additional insight into the revenue side of the federal and state government activities and process highlighted by Gary and Ganesh.
The first contract discussed by Ganesh is in implementation with an initial phase covering a limited number of metropolitan markets with the potential to approach $0.5 million through 2024, starting in the fourth quarter of this year. If the second phase is contracted, it would be expected to encompass a broader geographic area and could be our largest single contract to date, approximately an order of magnitude greater than the initial phase. While complementary PNT remains in the earliest stages of adoption, we are pursuing additional state and federal grant programs for 2024. Under these programs and in partnership with federal or state entities, we will begin implementation of our complementary PNT services in support of different applications and use cases, as Ganesh highlighted previously.
We expect per contract for grant values in this phase to range from hundreds of thousands to low millions with durations between one and two years. This will set the foundation for a service provision over longer durations, broader geographic areas and substantially larger grant or contract amounts starting in late 2024 or 2025. Finally, we anticipate incorporation into DOT's complementary PNT clearinghouse, which as Ganesh highlighted, should result in streamlined procurement of our services at the federal level beginning in 2025 and broader-based integration of our resilient PNT capabilities across federal, state and critical infrastructure sectors in 2025 and beyond. Thank you. And with that, I'll hand the call back over to the operator for questions.
Operator: [Operator Instructions] Our first question comes from the line of Griffin Boss with B. Riley Securities. Griffin, your line is open.
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