Once in a while we like to highlight a speculative name worthy of further research for our public followers. For those who know our service, we feature a secondary trading room dedicated to highlighting a high-risk, high-reward, speculative ideas once a month. However, we have heard the call, and our public followers have interest in such ideas as well. As such, in today’s “quick pick” we are flagging a company that is in a very foundational year. Yes, it has “AI” in the name, but it is not just a gimmick. It is a young company, that of course is losing money to grow, but is landing some big wins. It is a dice roll, though. The name in question is BigBear.ai (NYSE:BBAI).
BigBear.ai is headquartered in Columbia, Maryland. It seeks to turn data into information to help companies and governments make complex decisions. The company has its own algorithmic powered decision intelligence solution. Primarily the company targets three core markets, including global supply chains & logistics, autonomous systems, and cyber intelligence. If we were to compare it to a well-known company, we could argue it is a distant cousin of intelligence company Palantir (PLTR), just to give you a super higher level idea of what the company does. BigBear.ai has some similar customers too, which include the U.S. Intelligence Community, as well as the Department of Defense, and other branches of the U.S. Federal Government. Further, it has other customers in manufacturing, distribution, and healthcare.
The company is in the midst of a year where it is building a foundation, but has seen some fiscal pressure on margins. Growth this year, while present, is not overwhelming. In the just reported quarter, revenue grew just 2% from a year ago. It came in at $38.5 million. The company is losing money too, which is not uncommon for a growing company that is still young. Now, before getting into some more fiscal metrics, we do want to point out the company just did another offering to bring in cash. The company recently completed a registered direct offering of common stock and warrants for aggregate gross proceeds of approximately $25 million, so the company has cash to operate at such losses for more quarters.
The company saw some short-term narrowing gross margins to 23.3% in Q2 2023, a decrease from 25.5% in Q2 2022. This was of course driven by the loss of a key customer for lack of a better term as BigBear.ai lost revenue and gross margin from Virgin Orbit due to their bankruptcy announcement in Q2 2023. Adjusted EBITDA was a loss of $3.2 million, but this was a big year-over-year improvement compared to a loss of $7.7 million a year ago as there were reduced operating expenses. Further, net loss narrowed to $16.9 million compared to a net loss of $56.8 million a year ago. Overall, the company lost $0.12 per share.
So, the company is cutting its losses. While revenue growth stalled, it is set to ramp back up. Commenting on the quarter, CEO Mandy Long said:
“We continue to accomplish our goals in this foundational year for BigBear.ai. Our recent Army Test and Evaluation Command Integrated Mission Management System (AIMMS) win and Global Force Information Management (GFIM) Phase II system extension are evidence that we have momentum in the markets we serve.”
So what are these deals? First BigBear was selected as the single provider by the U.S. Army to implement Phase 2 of the U.S. Army Test and Evaluation Command Integrated Mission Management System (or AIMMS) in a single award contract worth over $7.7 million dollars over seven months. This came after a competition following Phase 1. This prototype contract has the potential to result in a follow-on production, sole-source, contract. That is exciting. Then it also saw a 6-month extension from the U.S. Army as the prime contractor for continuing work on the Global Force Information Management Objective Environment system. This was a 6-month contract valued at just over $8.5 million. The extension builds on previous work in Phase 1 and Phase 2.
As we move forward, the company also has a $206 million backlog, which was up 5%. As we look ahead fiscally, the company is guiding for annual revenue between $155 million and $170 million, and sees single digit negative adjusted EBITDA margin. This is an improvement over last year. Further, lower margin contracts are winding down, while higher margin contracts are ramping up, and this bodes well for future performance.
There are risks here, such as the inability to secure new contracts, the inability to deliver on contracts. There is cash burn risk, though the balance sheet is in much better shape. There is also a ton of competition here too. That said, this is being highlighted as a quick pick for further research. We view it as a speculative, high-risk, high-reward play.
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