Redwire Corporation (NYSE:RDW) Q3 2023 Earnings Call Transcript

Redwire Corporation (NYSE:RDW) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Greetings. Welcome to the Redwire's Space Q3 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the conference over to your host, Jeff Zeunik, Senior Vice President-Financial Planning & Analysis and Investor Relations. You may begin.

Jeff Zeunik: Thank you, Shamali, and good morning, everyone. Welcome to Redwire's third quarter 2023 earnings call. We hope that you've seen our earnings release, which we issued yesterday afternoon. It has also been posted in the Investor Relations section of our website at redwirespace.com. Let me remind everyone that during the call, Redwire management may make forward-looking statements that reflect our beliefs, expectations, intentions, or predictions of the future. Our forward-looking statements are subject to risk and uncertainties that are described in more detail on Slide 2. Additionally, to the extent we discuss non-GAAP measures during the call, please see Slide 3, our earnings release or the investor presentation on our website for the calculation of these measures and GAAP reconciliations.

A satellite being released from a launch vehicle, heading into space.

As previously mentioned, I am Jeff Zeunik, Redwire's Senior Vice President of Financial Planning and Analysis and Investor Relations. Joining me on today's call are Peter Cannito, Chairman and Chief Executive Officer; and Jonathan Baliff, Chief Financial Officer. With that, I would like to turn the call over to Pete. Pete?

Peter Cannito: Thank you, Jeff. During today's call, I will take you through a discussion of our key accomplishments in the third quarter of 2023, followed by Jonathan, who will present the financial highlights for the same period. We will also discuss our continuing outlook for the remainder of 2023, after which we will open the floor for Q&A. Please move to Slide 6. I'm pleased to report that the third quarter was another record quarter for financial performance at Redwire. Our ability to deliver a wide breadth of high quality solutions and products to our customers is enabling us to deliver tangible financial results for our shareholders. During the third quarter of 2023, we once again achieved record revenues, gross profit and adjusted EBITDA.

We expanded our margins with a beneficial shift in product mix. We continued to balance top line and bottom line growth which supports our sustainable financial position and we demonstrated resilience from our diversity of products, customers and end markets during a highly dynamic period in the space industry. Please turn to Slide 7. The third quarter of 2023 was another excellent quarter for Redwire, during which we continued our momentum from the first half of 2023. We have now delivered 3 consecutive quarters of positive adjusted EBITDA and revenue growth. We achieved $62.6 million in Q3 revenue, a year-over-year quarterly growth of 68.1% from the third quarter of 2022 to the third quarter of 2023. We achieved positive adjusted EBITDA of $4.9 million in Q3, a $6.4 million increase on a year-over-year basis from the third quarter of 2022 to the third quarter of 2023.

We achieved a net loss of $6.3 million, a $4.1 million year-over-year improvement from the third quarter of 2022 to the third quarter of 2023 and we achieved free cash flow of negative $5.9 million, a year-over-year improvement of $6.7 million. Lastly, we also achieved cash from operations of negative $3.3 million, a year-over-year improvement of $8 million. It is important to note that we achieved these positive financial results by developing and delivering critical innovations for our customers. In Q3, we continued our established track record of delivering dependable, flight-worthy products and launched 5 solutions on 3 launches in the quarter. Beyond the numbers, this reliable performance for our customers provides a foundation for future growth.

Please turn to Slide 8. At Redwire, our breadth of products and customers provide strength and resilience to the business. Our ability to balance our focus across multiple customer markets provides stability to the organization. Therefore, it can be instructive to discuss some of the trends we see across these markets. First the national security market which encompasses U.S. and allied national security organizations including classified projects. It is important to note that we see this as our fastest growing target market in the near future. Current geopolitical dynamics most notably in emerging space race with China are driving significant growth in the market and we are well positioned to capitalize on this growth trend. As example, we are participating on the Space Development Agency programs with multiple prime contractors on multiple tranches, providing critical capabilities that will enable the Space Force National Security Space Architectures.

One particular differentiator worth noting is our ability to perform on classified contracts. These contracts require facilities and personnel that take time and funding to put in place. Redwire already has this capability, which puts us ahead of some of our competitors. This barrier to entry increases our total addressable market, or TAM, with limited competition. Another customer market we serve is the commercial space market. This market predominantly includes commercial space companies providing commercial services for a variety of end customers. At Redwire, it is our opinion that the commercial space market has tremendous opportunity for growth. However, recent volatility in the capital markets has created a near-term headwind for this market.

A reduction in capital for commercial space companies is delaying awards in this target market and we're seeing some significant pipeline opportunities pushing out into the future quarters. However, large well-funded commercial entities still show demand for Redwire's capabilities because of our spaceflight heritage. Fortunately, the growth in national security should offset this near-term trend and in some cases, our commercial customers are also ultimately targeting growth with national security customers. Lastly, we are also working in the civil space market, which includes civil space agencies such as NASA and ESA. It is appropriate to acknowledge that there is some risk associated with the NASA budget due to potential congressional budgeting outcomes playing out in the U.S. government.

However, again, our diversity here provides us some mitigation as demand for the European Space Agency remains strong. In addition, we are seeing strong demand signals from other multinational civil space agencies across the globe. So the bottom line is this, the space industry has entered a dynamic period with a number of different market trends affecting overall market demand. However, Redwire's access to a rapidly growing national security market to include classified budgets provides balance to some emerging headwinds in commercial and U.S. civil space markets. Additionally, our global footprint allows us to participate in multinational civil space opportunities with expanding budgets, such as in Europe. The net result is a resilient position across diverse markets that provides many pathways to growth.

Turning to Slide 9. As Redwire continues on its path to profitability, one of our key approaches is to balance top line growth and bottom line profitability. As a result, Redwire's approach to growth balances risk with profitability, avoiding growth at any cost. This disciplined approach drives our financial performance through selective bidding. In addition, as discussed last quarter, Redwire continues to make prudent strategic investments that drive our return on investment. We'll discuss these investments in additional detail later in the presentation. Balancing top line and bottom line growth ensures we create value in the present while maintaining a strong foundation for the future. Turning to Slide 10. As I just mentioned, our strong financial performance is driven by our proven ability to deliver differentiated solutions for our customers today, which is why we are confident that it is sustainable.

On the next few slides we will share some examples of our recent operational successes and investments. As I mentioned, national security spend is on the ride. The U.S. Space Force budget request for fiscal year 2024 of $30 billion is $3.9 billion or almost 15% higher than the FY 2023 enacted budget. In addition, the Department of the Air Force's comprehensive strategy for the Space Force for August showed a sizable portion of the Space Force budget dedicated to classified projects through 2028. With secure facilities in multiple geographies, cleared employees with critical skill sets and leadership with proven national security experience, Redwire is well positioned to continue building its classified national security business. For the year-to-date period through September 30, 2023, 21.2% of revenues were from national security.

Please turn to Slide 11. In our mission enabler focus area, Redwire is proud to have delivered 10 coarse sun sensors for the Psyche spacecraft, which will journey to an asteroid located between Mars and Jupiter. Redwire's sun sensors will help the Psyche spacecraft to accurately navigate the stars throughout its 2.2 billion mile journey. This is only the latest space mission to rely on Redwire's sun sensors which have supported a variety of high profile missions from multiple rover missions to Mars to NASA's Double Asteroid Redirection Test in 2022, an excellent example of the power of our space heritage. Please turn to Slide 12. Redwire recently announced first spaceflight mission for its cutting edge in space pharmaceutical manufacturing platform PIL-BOX aboard SpaceX commercial resupply services 29.

The inaugural mission in partnership with Eli Lilly & Company will conduct 3 experiments focused on developing advanced treatments for diabetes, cardiovascular disease, and pain. To commemorate this breakthrough flight, Redwire developed the mission patch shown on the right of this slide. Building on Redwire's multi decade space crystallization flight heritage dating back to the space shuttle era, PIL-BOX is a striking example of Redwire's ongoing leadership in space biotech solutions. Please turn to Slide 13. Finally, space is a multinational endeavor and Redwire Space continues to be a global leader in international space missions. Redwire recently announced that it has been awarded a contract with OHB Italy to provide the onboard computer for the European Space Agency's Comet Interceptor Mission.

Comet Interceptor will be the first spacecraft to visit a long period dynamically new comet. The onboard computer is a part of Redwire's third-generation advanced data and power management system, and as the brains of the spacecraft, it is designed to monitor and control other critical components. With our expanded multinational operations, we are very proud to have been selected to support exciting ESA activities including Comet Interceptor. Please turn to Slide 14. Turning to our bookings and backlogs. Our bookings during the third quarter were $46.5 million, an increase over our contracted awards for the second quarter of 2023, which totaled $45.6 million. Our last 12 months book-to-bill ratio was 1.38x as of Q3 2023. Finally, as you can see on the right hand side of this slide, our contracted backlog has increased 59.5% since September 30th of last year to a contracted backlog at the end of Q3 2023 of $253.4 million.

The growth in contracted backlog is one factor that gives us confidence in our future growth and stability. We continue to have healthy pipeline with an estimated $4.5 billion of identified opportunities including approximately $714 million in proposals submitted year-to-date through September 30, 2023. Please turn to Slide 15. Not only did Redwire achieve positive adjusted EBITDA during the first 3 quarters of 2023, we did so while continuing to make prudent strategic investments. During the year-to-date period ending September 30, 2023, we have made $5.2 million in capital expenditures, $4 million in investments in research and development and $3 million in a variety of corporate investments in systems and infrastructure that flow through the SG&A line.

Clearly, we continue to demonstrate our ability to perform and deliver now while also investing in our future. Please turn to Slide 16. With that, I'd now like to turn the call over to Jonathan Baliff, Redwire's Chief Financial Officer. Jonathan?

Jonathan Baliff: Thank you, Pete. Before I turn to the financial results, let me just highlight on this slide it's rendering for NASA's upcoming Dragonfly mission. Redwire is proud to have been selected to supply critical navigation technology for this groundbreaking mission to advance humanity search for building blocks of life on Saturn's largest moon, Titan. Please turn to Slide 17. Similar to the other quarters this year, the next few pages will quantify and expound on a number of themes that Pete just talked about, including key financial takeaways starting with the financial quarterly metrics shown on these charts and then continuing on with other quarterly, year-to-date, and last 12-month financial information. An important point to reiterate in detail for this third quarter's financials is that Redwire's excellence and execution initiatives and our global team continue to deliver on our growth promises and our path to profitability as we scale our business with record revenues, record gross margin and profit, and record adjusted EBITDA once again this quarter.

So, let's discuss the specifics. As Pete spoke about in his introduction, this chart shows the continuing 2023 trend of positive year-over-year results across all our financial metrics, starting with the achievement of record revenue of $62.6 million in the third quarter of 2023. We achieved our third quarter -- our third consecutive positive adjusted EBITDA quarter since becoming a public company, again a record adjusted EBITDA of $4.9 million in this third quarter. Similar to the last two quarters, better adjusted EBITDA occurred primarily due to a more than doubling of gross profit year-over-year and is attributable to disciplined program management and continued cost controls. These same factors also contributed to a $4.1 million year-over-year improvement in a net loss of $6.3 million in the third quarter of 2023.

In the third quarter of 2023, we also achieved year-over-year improvement in free cash flow of $6.7 million, with that improvement and free cash flow being driven by the improvement in cash from operations of $8.0 million. Please turn to Slide 18. Specifically for quarterly revenue, as you can see from the chart and as I talked about before, this quarter's record $62.6 million represented a 68.1% increase on a year-over-year basis and an increase of 4.2% on a sequential basis. On a full year last 12-month basis, Redwire grew revenue at 58.2% rate, an acceleration of the revenue growth from last quarter's similar period of 45.6%. With more than 85% of our revenue derived from funded government programs or from global marquee customers that Pete talked, we're delivering in the national security area, LEO commercialization, and the exploration of space to name just a few.

Excluding the revenue contributed by Space NV, our third quarter revenues were $49.1 million, an excellent organic growth rate of 31.8% on a comparable year-over-year basis, especially as this is more profitable growth. Please turn to Slide 19. For the year-to-date, for first 9 months of 2023, Redwire recorded $180.3 million of revenue, which is a 68.8% year-over-year revenue growth. Excluding the revenue contributed by Space NV, we grew organically at 31.3% compared to the first 9 months of 2022. We saw growth across all three of our primary focus areas, with space systems and subsystems as an integrated mission enabler, payloads and infrastructure to explore, live and work in space, and with Redwire Europe spearheading our multinational space leadership.

The revenue percentage breakdown by customer type for year-to-date through September shown on this slide also shows the diversification of our revenue and adjusted EBITDA and cash flow streams with 45.9% of our revenue from civil, 32.9% from commercial, and 21.2% from national security customers, echoing Pete's comments about the strength from balance and resiliency of our operations. Of note, for the year-to-date period through September, our commercial customer revenues have seen the largest growth percentages of 90.2% year-over-year, our civil customer revenues grew at 78.5% year-over-year, and our national security revenues grew year-over-year by 30.5% through September. Please turn to Slide 20. Redwire's path to profitability that we've discussed on prior calls continued successfully in this quarter, as you can see from the progress made on the chart on the right, with a steady march of quarterly financial improvement in 2022 now continuing through 2023 third quarter.

The 2023 adjusted EBITDA is improving $6.4 million year-over-year to a record $4.9 million. Once again, our record adjusted EBITDA improvement was primarily driven by our improvement in gross profit with the year-over-year third quarter gross profit growing 2.2x higher from $7.9 million to $17.1 million. The significant gross profit and gross margin improvement was primarily driven by better contract mix and the maturing of our program management. Our adjusted EBITDA improvement was also supported by excellent cost control with Redwire third quarter SG&A expenses at 29.2% of revenue, a significant drop from the 41.4% in the third quarter of fiscal year 2022. Please turn to Slide 21. Similar to last quarter, on the left hand chart, we show free cash flow.

As a reminder, free cash flow provides a metric based on our U.S. GAAP, cash from operations minus capital expenditures or CapEx. On a year-over-year basis, quarterly free cash flow improved by $6.7 million to a use of cash of $5.9 million and this is due to an $8 million improvement in year-over-year cash from operations. Credit goes to the revenue growth and profitability improvements already discussed, but in addition, we had more efficient and effective working capital management over the third quarter, as you can see by the narrowing of our operating cash from operations. This is helped by our diversity of cash flow that is not dependent on any one product or solution or any one customer class. Improvement in year-over-year quarterly cash used in operating activities was also offset by over $5 million of planned capital expenditures and other expenses associated with growth and resiliency initiatives like our radio frequency test chamber and our ERP implementation in the third quarter of 2023, just to name a few.

These expenditures are intended to grow and diversify our revenue, scale our operations and accelerate our path to profitability. On the right hand chart, we show our available liquidity as of September 30, 2023, which totaled $30.9 million. This quarter's liquidity has much improved from a year ago as we continue our path to profitability. And I want to thank all of the Redwire's teams for this quarter's excellent results, a total global effort that we will work to continue and improve upon through 2023 and beyond. Please turn to Slide 22, and I will now turn the presentation back over to Pete to provide a brief outlook for the remainder of 2023. Pete?

Peter Cannito: Thank you, Jonathan. Please turn to Slide 23 for a brief discussion of the outlook for the remainder of 2023. For 2023, we reaffirm our full year guidance range of $220 million to $250 million, which represents 46% year-over-year growth at the midpoint of the range. As you can see from our presentation, Redwire continues on our path to profitability and continues to deliver now with strong operational and financial performance, while investing in our future, resulting in a strong pipeline and future backlog. With that, I'd like to thank all of the Redwire professionals around the world for their hard work and an excellent third quarter, and all our customers for trusting Redwire. We will now open the floor for questions.

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