AAC Clyde Space AB (publ) (AAC) Earnings Call Transcript

[Foreign Language] Luis, nice to see you again. How are things in Glasgow?

Nice to see you, Kaarlo. It's actually a very nice day here in Glasgow.

Yes, for a change. For a change. Luis, last time we spoke, you guided for a very busy second quarter or a quarter ahead. And as far as press releases and the figures are concerned, I would say that you've been proven right there. So please take it away.

Thank you. Thank you, Kaarlo. It was indeed a very busy quarter. We have -- I say it was a foundational quarter. And if you see -- if we take a look at the presentation, we have a slide on listing those. So we have not only we finished signing the second part of the Sterna contract and effectively, the whole payload and avionics contract came into life during this quarter with the work starting in earnest on all the parts of this contract. So it was a very busy quarter from that perspective. But also, it's the quarter where we signed the next phase of INFLECION for the 12 satellites, this is when we really start the work to build the constellation, the work to actually start preparing all the services. So that's an extremely important milestone for us. And of course, we have launched VIREON-1 and 2 back in March. We're going to go through the commissioning. We announced the first light on VIREON-1. We are going through the process of focusing and calibrating that camera, while we work on VIREON-2 also. And what we saw was growth on both business segments, both on the Products & Missions and on the Data & Services. And overall, what this is a backlog that is approaching SEK 1.2 billion. So a very busy quarter. And if we go on to the next slide, we can also see that it was a quarter where we achieved good numbers. We achieved good results, very much in line with what we were expecting. So we have growth, about 51% growth on net sales in relation to last year, the same quarter last year. We achieved a positive EBITDA of SEK 2.7 million (sic) [ SEK 10.7 million ], again, quite a big growth in relation to last year. But importantly, is another strong quarter in terms of EBITDA. And we have a very positive operational cash flow, something that we would expect with the kind of contracts we've got right now, but it is something that we have been working towards for some time. And as I said, an order backlog approaching the SEK 1.2 billion. It's very healthy. It means that a lot of our revenues are already in our order book. So that's actually a very good position to be in. If we go on to the next slide, we are now very much focusing on execution and expansion. So over the next few months, we continue to see strong demand for our products and satellites. So we are working with potential customers. We are working through our pipeline of opportunities right now. But a lot of our focus is now on expanding our Data and Services. So bringing VIREON-1 and 2 online, getting 3 and 4 through the build so that we can reinforce our maritime data intelligence gathering, and we can start monetizing those satellites and of course, focusing on the INFLECION program and growing our constellation on the maritime side with new services, not just tracking, but also communications and other associated services. So we continue to do that. But as I said, we have strong demand and a lot of our focus now is actually on delivering Products & Missions to customers, governments and commercial customers. We continue to do that. We see strong demand for our products. So, if we go on to the next slide, we keep our full year guidance. As I said before, this quarter 2 was in line with our expectations. So we keep our guidance of SEK 440 million to SEK 510 million in net sales for the year with an EBITDA of 10% and an operational -- positive operational cash flow. So we continue to maintain that guidance. As I said, quarter 2 was in line with our expectation. So we are very, very happy to maintain our guidance. And so this is in summary the quarter. I don't know if there are some questions now, but that's very much -- it was a positive quarter for us.

So thank you for that, short and snappy. And in summary here, if I can just recap the first slide where you're referring to foundational 6 months being foundational here. You're talking about 2 separate things that will be connected to see if I got this right. Firstly, we have the Sterna orders, strengthening the hardware side and proves that you're now operating on a much larger scale, which we can see that the figures here are delivering. And secondly, you have the launch of the VIREON and progress with INFLECION. So driving future data and service growth. So, A, you have one part that is delivering and another part that will drive the growth. Would you -- I mean, do you buy into my interpretation there?

Absolutely. So we very much have that bedrock of our business that is hardware, but we see quite a lot of opportunities on the growth of our Data & Services business to expand the company, to grow the company. So the first quarter -- the first half of the year is very much a good example of how we operate, building on our success as a hardware producer and then delivering on Data & Services as a growth engine for the future.

And would one or the other of those 2 developments be more important than the other?

I'd say they are equally important in their different ways. So when you look at something like Sterna is a very large contract, is technically challenging, but perfectly achievable. We have done a prototype before on the Arctic Weather Satellite. So we are very comfortable with the design and build of this constellation. So it's a big contract, but it is an important contract for Europe. It shows our ability in terms of hardware, our design engineering. And then -- and that is something that we will continue to do. It's something that will continue for the future. As I say, it's very much the foundation of the company, the foundation of the company, the hardware capability, the engineering capability. But then we see huge potential on the growth of data and services. And that, of course, is an area we are investing. It's an area that we expect to grow. And in the long term, we expect those areas to be about 50-50 of our business. And so this is -- we are in that journey right now.

And I have some complementary questions here regarding this from you here coming in. And VIREON-2, is it doing well?

We go through its commissioning. We are -- we are focused very much on VIREON-1 at this stage because we want to start service. So we are putting more effort into that. VIREON-2 is going through its commissioning, doing its test as normal. So yes, but the focus has been on VIREON-1 because we want to start revenue from those satellites on quarter 3.

So more to come from VIREON-2 then. And then we have another few of questions here. For the Product & Mission revenue, how much of the revenue came from Sterna for the quarter?

A large amount. It was a big part of our big part of our revenue, but it was not the only one, but yes, it was. I can't tell you the immediate number on top of my head, but it was an important part. And it will be the case for the rest of the -- for the next 2 years. It will always be a big part of our revenue on products because it's our biggest contract. It is the dominant contract on our products business line.

Yes. And I can see that we have some questions about Sterna here. But I'm coming to that a little bit later because I would like to stay on VIREON satellite. When will VIREON start generating revenue following commission? And how would investors think about the commercial ramp-up for the first revenues to a more meaningful contribution? If you can elaborate a little bit of that, and then we'll jump into South Africa.

So we expect revenues to start on quarter 3. As I said, we're already capturing imagery. We're already doing some of the work in preparation for our customers. So we expect, let's say, Q3 to already start delivering some revenue. But then we expect a normal ramp-up on the project. We have customers lined up. We have people wanting to take on contracts on the satellite. We expect what would be a normal ramp-up on a Data & Services contract. We expect to be in full revenue for those satellites towards next year. So there will be a ramp-up from here until then. So -- it's difficult to go into that detail without going through the detail on contracts and customers, but it's what I'd expect the normal approach for a satellite, data and services satellite that we see also on our maritime side, for instance.

And if we go back to a press release from last week, I think, if you could elaborate a little bit about the SKAO project, what is SKAO and what to expect going forward? And I have some detailed questions here. So we'll see how much you can answer here. But just in round terms here, this is a large organization, as I understood.

Yes. So SKAO stands for square kilometer array Observatory. So Square Kilometre Array is a telescope that's basically several antennas in places in South Africa and Australia. We are focusing -- we are working on the one in South Africa. So we provide one equipment, one part of that network of antennas and the receivers for a specific band. So the objective is to look at the universe and measure certain amounts of microwave radiation coming from different stars and different celestial bodies. It's a big international organization. So it's actually headquartered in the U.K., but it's financed by many different countries. And as I say, the antennas, the telescopes are based in South Africa, the ones we are working on. And we are supplying the feeds for those. We're building them in Gothenburg. It is a project that has been running for quite some time. What we announced is that we shipped the first of those -- the prototypes of those feeds to South Africa. But we are very much dependent on the time lines of that large international organization. So they have to build antenna, they have to expand their site in South Africa. So we have been working on that, and we have been very -- and we are very happy to have those feeds there. They are now being tested. We will have results later this year for those tests. But it just shows the progress that we have done. The design is pretty much done. We are now in a phase where we are just waiting for our customers to say, okay, start delivering these units. And we have quite a lot of those units to deliver. So it's a great start. It's a great progress. But we are very much on the time lines of our customer on it.

And we have a more granular question here regarding it. So I'll just read it through. You recently delivered the first preproduction Band 1 feed systems to the Observatory as a part of the EUR 12 million contract. How much revenue remains for the project? What can you say?

I would say that there is still substantial revenue on that program. We have done the design phase and the production of the first units. So the bulk of the production is still to be done. So I won't go into the detail of the numbers, but I would say that a large amount of the revenue is still to come.

And coming into the future here, though, a large European satellite programs like IRIS 2 are increasingly moving towards procurement. So how well positioned would you say that AAC Clyde Space power and data handling products would be for larger LEO and MEO platforms?

I think it will be the ideal part. We will only do that work if it's actually profitable. What we have seen in many of these very large constellations and very large programs is that they are actually quite margins are usually expected to be quite low. They are usually very commercially aggressive. They also tend to attract lots of people, of course, lots of suppliers. So there is a huge competition that they are seen as large programs. What depresses margins. And we have walked away in the past from 1 or 2 of these opportunities because when we get to the negotiation, the discussion with the customer, eventually, they want us to do that at ridiculously low margins that would barely pay our cost. And if there are any problems, any issues on the design, we could actually lose money. So although the promise is good, the reality is that in some cases, this is just not what it is. So we will of course, we are having -- we are in the discussions. We are talking to these potential customers, but we only actually do that if the business makes sense. It has to make sense. And in some cases, in the past, for these kind of things, we prefer to negotiate, for instance, a license agreement with the customer. If they are going to build a lot of satellites, they might be more interested in doing these things themselves through the production themselves. So these are things that we are in discussion right now. But as I said, we are part of this conversation. We are talking with the different potential customers. And so we are in that space. But as I said, we will only do it if it's actually -- if it makes sense for us. I think we have a very strong product, actually probably the best for what they are looking for, but we'll have to see if the business makes sense.

So not -- well, coming away, not having an order doesn't necessarily mean that -- well, it could be that you will not suffer margins going forward?

Yes. As I said, we have in the past, we have been approached for other constellations. We have been asked to bid. And technically, we, of course, offer a very compelling offer to the customers, but the kind of prices they are looking for, the kind of conditions even that they impose on are such that it becomes -- it's a risky business, and you can actually lose quite a lot of money. So in those cases, we walked away. We've got a few others that we are ongoing, not on IRIS Square. We've got a few other discussions ongoing on products for constellations. -- of tens, probably not hundreds, but tens of satellites. But again, it has to make sense. It is something that it's very appealing because the number is very large, but a lot of revenue with a loss makes no sense. So that's what we are always looking for. Does it actually make sense for us to bid on this or to win these things. So that's always a discussion. And we'll see what terms, what conditions we are offered and then we'll decide.