2023-08-18 09:23:30 ET
Summary
- Overall, the earnings result did offer more clarity, but at the same time, it also raised further questions that I anticipate they will address in the future.
- Technology is ready now, investors are expecting when will the business also be ready, with five Block 1 satellites to be launched Q1 2024 earliest.
- New debt financings which are non-dilutive are welcomed, but investors should be careful of the underlying terms.
- Initial hints about the strategic investment from big players created expectations, it is important for the management to deliver within a reasonable timeframe.
- Long-term rating remains a Buy.
AST SpaceMobile (ASTS), the company building the first and only space-based cellular broadband network accessible directly by standard mobile phones, released its second quarter earnings results on Monday, August 14 th ,2023. Remaining in alignment with expectations, the company reported no revenue during the quarter, coupled with a net loss of $18.4 million. ASTS stock rose as much as 8% in after-hours trading because of the enhanced liquidity position and reassured timeline of its 5 batch 1 satellites. However, this optimism waned as the stock took a steep dive of 15% in the following trading day.
The stock price trend of initial rise and ending up with a decline mirrors my view on ASTS earnings – it presented many positive results, but it was not completely reassuring upon deeper consideration. Let us delve into the specific aspects that investors should look at in the earnings.
The tech is working unlike what Lynk Global’s CEO claimed, how about the business?
The company started its earnings call with a strong statement, or actually, a series of statements from the big industry players, that history is made that the company is capable of providing both phone calls and 4G LTE broadband capabilities to unmodified smart phones. When executives from AT&T, Vodafone, and Nokia stand behind a company, it bolsters investor confidence, indicating that the company possesses the technological prowess for the next phase – commercial readiness .
Investment is forward-looking and revolves around expectation. When the company announced the successful achievement of two-way phone calls, its stock price surged by 15%. Hence, the reaffirmation of its technological success had already been expected and factored into the stock price well ahead of this earnings call. It should not be perceived as a development likely to trigger investor excitement.
Conversely, the forthcoming pivotal milestone that investors eagerly anticipate centers around the company's commercialization capability, on which the management has provided, in my opinion, insufficient information to satisfy investors. Although the CEO discussed the insights garnered from BlueWalker-3 and its role in Block 1, it became evident that the manufacturing ramp-up is slated for late 2024 and the management remained lip-tight regarding revenue projections of the Block 1. CFO Scott Wisniewski's use of the term "interesting opportunities" is intriguing, since it did not speak much about the management’s estimates.
The timeline for the deployment of the 5 Block 1 BlueBird satellites remains largely unchanged, with a scheduled launch expected by Q1, 2024, followed by a calibration and testing phase spanning approximately 3 months. While assuming no delays may be ambitious, any deviations from the schedule wouldn't be unexpected. In such a scenario, the revenue projection put forth by analysts like Deutsche Bank – envisioning $200 million in earnings for 2024 – might necessitate a downward revision.
Following the launch, deployment and testing of five Block 1 BB satellites, we currently plan to initiate a limited, noncontinuous SpaceMobile Service in targeted geographical areas, including in the United States, and seek to generate revenue from such service.
For strong believer in ASTS, this might not undermine their conviction. However, to attract long-term and institutional investors, on which we are seeing an increasing trend as shown below, and bolster trading volume, establishing a sense of stability and predictability is critical – two elements that regrettably were absent from this earnings call. I think this explains why there was a sell-off after the results announcement.
“Nondilutive” is good, but more debt still worries investors
Every ASTS investors know for certain that more financing actions will keep coming because of the company's expansive satellite communication blueprint inherently demands an extended phase of capital consumption. In this context, non-dilutive debt financing consistently is better than a dilutive equity offering.
During this quarter, the company announced two new debt financing initiatives. These encompass a $100 million Senior Secured Credit Facility, with $48.5 million having been drawn, alongside an Equipment-Backed Loan. The company's capital structure is shown below.
Yet, despite the investor preference for debt financing over equity offerings, there exist two noteworthy caveats:
- A loan term is attached to the Senior Secured Credit Facility . To unlock the remaining $51.5 million, the company must concurrently raise capital through an equity offering. This implies that while this new debt facility has been introduced, it harbors the potential inclusion of an equity offering – an option that investors are most worried about.
- The two fresh loans exposes the company to interest rate risks . This is primarily due to the base interest rate being linked to both the prime rate and the Secured Overnight Financing Rate. Despite approaching the end of an interest rate hike cycle, it is worth noting that the interest rate applicable to these new loans is unlikely to recede in the immediate future.
This is precisely why I think, as indicated in the title, that while the financing decision is good, it is not completely reassuring to me. The prospect of another round of dilutive equity issuance looms on the horizon, underscoring the inevitability of such a move at some point.
Lastly, what intrigues me the most is a convenant within the new $15 million equipment-backed loan agreement. It mandates the company to “retain its current Chief Executive Officer”, in conjunction with other covenants related to the company's minimum cash balance.
Abel, your position is now worth at least $15 million of cash!
Strategic support from industry players is always encouraging
On a positive note, the management has communicated that they have received interest from strategic, large, and sophisticated partners with regard to "forging financial and strategic connections that will aid in funding our business plan." Although the specifics regarding the identities of these partners, the nature of the agreements, and the monetary aspects remain unclear, this certainly created some imagination for investors who will look for answers. It is worth noting that the company's 10Q provides little to no information related to this matter.
The pressing question now is whether the company will deliver a satisfactory response within a reasonable timeframe. It is important to remember, as I mentioned earlier, that the company has set this expectation, and failing to meet it could be ugly.
Valuation
In my opinion, announcements made during the latest earnings call have not significantly altered the core fundamentals of the company, either in a positive or negative direction. I am not overly satisfied by the earnings call – it did offer more clarity, but at the same time, it also raised further questions that I anticipate they will address in the future.
Consequently, my valuation model for ASTS largely maintains its previous form, aligning with my last analysis on the company. However, certain adjustments might be made in light of the new information:
- Downward revision of the 2024 revenue projection, as the initiation of commercial operations for Block 1 is anticipated to commence only in the latter half of 2024
- Upward adjustment to interest expenses and the cost of capital, given the interest rate fluctuations exposure
- Upward adjustment of the probability of the Boom scenario
Conclusion
Those who read my earlier analysis on ASTS (For those who may have missed it, here is the link) are likely aware of my positive assessment of the company's risk-reward ratio, particularly given the proven viability of the BlueWalker-3 satellite. However, this perspective remains opportunistic in nature. In order for the company to capture the attention of long-term, mainstream, and institutional investors, three prerequisites must be met: stable cash flow, better debt-equity ratio, and lower volatility. Without these three, the company may still be perceived as a speculative investment.
For further details see:
AST SpaceMobile Q2 Earnings Review: More Clarity But Not Completely Reassuring