|Letter to shareholders from Q3 report|
FLYHT’s third quarter was not as strong as we had anticipated; however, the fundamentals of the business remain strong, and we continue positioning ourselves for success in the market. We are ahead of last year from a revenue perspective, we are generating cash through normal operations, we continue to win business around the globe and grow our $27M undelivered backlog of AFIRS hardware and voice and data services (V&DS) sales contracts and purchase orders. We also continue to work with industry heavyweights to demonstrate our patented, flight data streaming technology as an answer to forthcoming industry regulations. We have hired critical staff who can bring new ideas to energize our capital markets and investor relations activities. I am quite pleased with this progress.
FLYHT’s third quarter revenue in 2017 was 18% below that of 2016, primarily due to shortfalls in Parts and V&DS revenues, which were down 45% and 11%, respectively. The Parts revenue category includes our spare parts, but primarily is comprised of our Iridium MODEM and licensing revenues for the A320/A330 program. FLYHT’s product remains the only available Satcom option today for these aircraft, however our OEM partner lowered its forecast for the rest of this year and next year. We will investigate this further and provide guidance if we can.
One primary reason for the slowdown in V&DS - the software as a service (SaaS), subscription-based service - was outlined in the letter to shareholders in our second quarter report, where I highlighted that one of our larger contracts was suspended while the prime contractor renegotiated the services with this customer. We had hoped this situation would have been resolved at this point, but it is our understanding that these negotiations continue. This negatively impacted V&DS both in June of the second quarter and the entire third quarter. In addition, FLYHT is behind in our goals for selling and turning on V&DS revenue, so it is down a net 11% relative to last year’s quarter.
The good revenue news is that FLYHT had a relatively strong quarter for recognition of AFIRS hardware, exceeding the same quarter of last year by 3%. I had mentioned on the second quarter conference call that we had a record value of shipments month in July, which significantly helped in this revenue category. As noted in our Third Quarter 2017 Update (October 3, 2017), we are behind the goal for this revenue category, due in part to delays in the test flight and on-aircraft inspection for the Embraer E-190 aircraft. The test flight has been completed and the Transport Canada Supplemental Type Certificate (STC) and associated Chinese VSTC have been received, allowing us to make some shipments in the third quarter. The on-aircraft inspection is scheduled, and we are still working toward the Federal Aviation Administration STC and associated Chinese VSTC required by a certain customer and anticipate accomplishing this prior to the end of this year. While this situation is not ideal, we are confident the business is still there for us once we obtain these certifications and the expected revenues will begin to be recognized about two quarters later than we had planned. FLYHT has demonstrated exceptional competence in earning these necessary STC’s, owning what we believe to be the most extensive Satcom STC library in the world.
Year-to-date, we are ahead of last year’s revenue by more than 2% and are ahead of last year’s revenue in each of the major revenue categories of AFIRS hardware, Parts, and V&DS - despite the headwinds described above. It will be difficult to achieve our stated goal of 25% revenue growth at this point, but we believe we will have a solid fourth quarter in AFIRS hardware shipments. However, it may be difficult to be earnings-positive for the year if the A320/A330 OEM shipments stay at forecasted levels, due to the loss of margin associated with this part of FLYHT’s revenue base.
Why am I positive about FLYHT’s future?
First, the company is doing quite well with working capital and the business is generating cash. We began the year with more than $700K of cash and cash equivalents after paying the final matured debenture last year, and finished the third quarter with approximately $2.6M in cash. This increase was the result of generating cash from operations in the year as well as a net cash inflow from financing and investing activities in the period. We have a line of credit with a major banking institution for $1.5M, which we have not drawn upon, to date. We have been drawing against the $2.4M Western Economic Canada WINN contribution agreement according to plan, with approximately $800K received to date.
FLYHT provided a sales update on October 3, 2017, which captured the newly contracted sales in the quarter. The sales totaled approximately USD $3.1M and included both AFIRS hardware and V&DS sales for Bahamasair, two Chinese cargo operators, our first ever Korean operator, a military logistics company and our second aircraft leasing company. Along with the agreement with Azure Airlines, a middle eastern operator, our sales contracts and purchase orders for the year total nearly USD $16M. It is particularly exciting to see our customer base diversifying as we close sales contracts in regions other than China. Our total undelivered backlog of AFIRS hardware and V&DS now exceeds $27M, delivery of which depends upon the achievement of specific STC’s, aircraft delivery and availability, and customers executing the orders, among other factors.
We now have three Chinese operators and approximately 50 aircraft using our subscription-based, SaaS V&DS in China, and we are making good progress in launching an Amazon Web Services UpTimeTM Cloud instance inside of China; which is one of our unpublished goals and we expect to have this completed during this calendar year. All of this has been accomplished since June of last year, when you recall we first launched V&DS in China. Overall, we have successfully signed 23 of 57 Chinese operators to use AFIRS. We feel that we can secure more operators in China and that we can continue to convert these operators to use our V&DS subscriptions.
Additional optimism lies with our STC program, which allows FLYHT to install its hardware and software on approximately 95% of aircraft used for commercial air transport. I reported in the October 3rd Sales update that FLYHT has received an STC that will allow us to target many of the aircraft that have been installed with AFIRS, but which are not currently capable of providing recurring SaaS subscription services. This STC provides instructions to convert the installation in an overnight maintenance session to a status that allows FLYHT to provide recurring data services. We believe that this STC can significantly improve our ability to grow the V&DS revenue component in 2018 and beyond. Approximately 30% of last year’s revenue came from a monthly average of 312 aircraft using these services, so we are bullish about our ability to grow this number by selling subscription services via this new STC.
FLYHT has been preparing for trials with industry giants Boeing and Inmarsat. As previously announced, the Boeing trial is being conducted on a FedEx owned B-777 as part of Boeing’s ecoDemonstrator program. Boeing is conducting several technology investigations on this aircraft, but only FLYHT was chosen to implement streaming flight data in order to demonstrate a means of future compliance with new regulations created by the International Civil Aviation Organization (ICAO). These regulations include Autonomous Distress Tracking and Timely Access to Flight Data (outlined in a two-part CEO Letter to Investors available online: part 1, part 2). It is Boeing’s intent to take the data collected from this trial, which will feature FLYHTStreamTM implemented through both the Iridium and Inmarsat constellations, to industry committee to support the validation of rules and standards for a streaming solution to meet these new regulations. FLYHT is excited to have been chosen as the technology partner of Boeing for this activity, which we feel was precipitated by our technological maturity and intellectual property in this area.
The Inmarsat trial is a joint effort to validate their approach to the Global Aeronautical Distress and Safety System (GADSS), using the SwiftBroadband-Safety satellite communications platform (SB-S) to implement their “Black Box in the Cloud.” A white paper description is found here: White paper. To better understand the possible relationship that could emerge from this trial, in section 3.5 of this paper, it states that “Inmarsat will partner with an experienced application manufacturer to implement an interface device between the SB-S satellite data unit on the aircraft and the relevant digital and analogue aircraft data sources and systems, as specified by airframe manufacturers, that formats the information, and provides it to sources such as flight data recorders.” FLYHT has modified the AFIRS equipment to deliver aircraft data for streaming via an Ethernet link, and therefore we believe our equipment is a perfect answer and FLYHT is a perfect partner!
Finally, I would like to highlight the efforts we have been making to raise FLYHT’s visibility in the investment community. In addition to attending several microcap conferences this year, as well as regular marketing trips, we have hired an internal resource and brought the Investor Relations function in-house as of November 1 with Ivan Peill. We believe we are at the point where we can better synergize the Investor Relations function with other business functions and ultimately would like more exposure in the U.S. equity markets. Further, we hired a very experienced Chief Financial Officer with exceptional capital market experience in Derek Payne. I believe that we are doing the right things and we will be rewarded.