homophonic
Black Sky Technology Co., Ltd. (NYSE: BKSY) is a company that utilizes its satellites and constellation of satellites to provide geospatial intelligence and data analysis products and services to solve problems for its clients.
Operating in a capital intensive business, concerns about capacity Longer-duration fund operations have baffled some analysts and investors for some time.
If the company makes more profits, some of that profit will be mitigated by improvements in associated costs as the business scales, while it may work on finding ways to reduce more expenses in the business.
The company appears to have begun to gain traction in diversifying its revenue streams — primarily government and international. It’s already starting to take some business from the commercial account, which I think is important for it to eventually become profitable going forward.
In this article, we’ll take a look at some recent numbers from its latest earnings report, and what it may ultimately need to do to raise capital to stay afloat until it turns the corner.
latest figures
Revenue for the third quarter was $16.9 million, an increase of $9 million or 113% year-over-year. Image and software analytics revenues accounted for $15 million of total revenue, a 130% increase from the third quarter of 2021. Most of the revenue comes from government customers in the United States and other parts of the world. The remainder of the $1.9 million in revenue generated in the quarter came from engineering and systems integration services.
BKSY’s cost of sales as a percentage of revenue improved to 46% in the reported period compared to 159% in the third quarter of 2021. In its imaging and software analysis services business, cost of sales as a percentage of revenue rose 35% in the third quarter, up from 111% in the third quarter of last year.
Growth in its high-margin imaging and analytics business is key to improving margins and reducing cost of sales as a percentage of revenue in the coming quarters.
Excluding stock-based compensation, operating expenses in the third quarter were $25.6 million, up from $18.6 million in the third quarter of 2021. The increase was due to higher operating costs as well as higher depreciation expense to place more satellites into orbit in the fourth quarter of 2021.
Operating loss fell to $19.4 billion for the quarter, compared with an operating loss of $48.9 million a year earlier. Improved gross profit from lower stock-based compensation and revenue from its imaging and software analysis services. Much of this comes from lower stock-based compensation, which is positive to me because it shows me that management isn’t using the company primarily as a personal piggy bank.
Adjusted EBITDA was negative $6.5 million in the third quarter of 2022, compared to an adjusted EBITDA loss of $16.3 million in the third quarter of 2021. This improvement was attributed to revenue growth exceeding incremental costs.
The year-over-year increase of $9.8 million was primarily due to significant operating leverage achieved as revenue growth significantly outpaced incremental costs.
At the end of the third quarter, the company had cash and cash equivalents of $37.2 million, or $90.7 million, including restricted cash and short-term investments. That’s well below the $165 million in cash and cash equivalents at the end of calendar 2021, which is why concerns about cash burn continue to weigh on the company.
Capital expenditures for the third quarter of 2022 were $8.8 million, compared to $34.3 million for the first nine months of 2022.
On its earnings call, management said it had filed an S-3 layoff with the SEC, which means the company can raise capital through the capital markets. I know diluting shares is generally viewed as a negative by most investors, but for a company like BKSY that seems to have a legitimate chance of successfully growing its business over time to profitability, I don’t think that’s the case is a big problem in its development. I’d be more concerned if it was just burning cash and just offering hope with no real backing, but with margins growing, especially in the high-margin imaging and analytics business, it looks like I think it has a path to Path to profitability over time.
With that in mind, if it has to issue more shares to get the capital it needs to implement its strategy, it’s worth diluting the stock; after all, it can always turn that around by buying back shares, given the means.
I don’t think BKSY will do this in the near future, as it will wait to see if it wins enough high-margin business to slow its cash burn and grow organically. If spending exceeds available capital, the company will then go to the capital market to raise funds.
Differentiation
Asked how the company differentiates itself in the competitive arena, management cited the EIM contract with the NGA as an example of its ability to provide real-time, “actionable intelligence.” It should be understood here that this is about information and analysis, not images. The company believes this is why it was able to win $14 million of the $30 million contract offered to the market over five years.
In other words, the company says it’s not the high-quality imagery that sets it apart from its competitors, but the accompanying real-time information and analytics.
A legitimate question might be as to why the company points to its ability to collect up to 15 images per day, given that its constellation is believed to be a differentiator driving demand for its service. The answer is that the information and analysis extracted from images is the most valuable to customers.
diversification
As for diversification, BKSY has been making progress by winning business, not only in different branches of the US government, but also slowly starting to develop its commercial presence in other governments outside of the US, which opens the door for the company if it can begin to win significant market share there .
Momentum in the international market has been picking up, based on the need for “significant geospatial information related to strategic assets and locations within the country’s borders and in areas of interest.”
The company cited the example of an international DoD customer based in Asia renewing a subscription contract in the third quarter. In this case, it received a $10 million contract to provide imagery and analysis services for one year.
Last year, the company said revenue more than doubled from the previous year. This was attributed to growing demand and the expansion of its international sales force, which is translating growing demand into expanding contracts.
This of course requires funding, which is why we have to keep a close eye on the company’s financials moving forward.
To further enrich its customer base, the company has reportedly entered into a number of “strategic partnerships.” Management said it now generates seven-figure revenue from business customers as a result of the move.
Judging from management’s comments, the new data the company is incorporating into its Spectra AI platform appears to be targeting the needs of commercial enterprises rather than government entities. This would actually increase the value of its product suite, offering growth opportunities in important commercial aspects of the commercial sector.
in conclusion
BKSY competes in an increasingly crowded industry and claims that it sets itself apart from the competition in the way it differentiates itself through real-time information and analytics.
While its primary focus remains on winning the types of government contracts that provide predictable revenue streams, it also recognizes that it must diversify those contracts across agencies as well as other governments. It is also extending its services to commercial enterprises by adding more data to address unique problems that differ from government wants and needs.
The big challenge for the company in the coming quarters will be whether it can scale up fast enough to offset the substantial costs that limit its need to raise more capital. Of course, it will eventually have to raise more money, but to reduce the amount of money it has to raise, either by adding debt (which is increasingly costly) or by issuing more stock (which dilutes shareholders), it puts the company in a bind or Being able to generate revenue based on improving gross margins and making it a profitable company.
In order to do that, it has to scale, and it has to do it in a diversified way to reduce risk while increasing revenue while reducing costs by expanding its operations.
The ones to watch are available cash, government contracts won in various markets, and how it’s successfully growing the commercial side of its business.