Surf Air Mobility Inc. Q3 FY2025 earnings call

• Financially, the company improved its capital structure by securing a $50 million credit facility, raising $50 million through equity issuances, reducing debt by $52 million, and announcing a $100 million strategic financing. The $100 million strategic financing includes $26 million for Surf OS development and $74 million as a zero-coupon convertible note to refinance debt.
• Operationally, the third quarter marked the seventh consecutive quarter of meeting or exceeding revenue and adjusted EBITDA guidance. The commuter airline produced strong results with two consecutive quarters of profitability. The on-demand business saw a 40% revenue increase, and expenses were reduced by 36% since adopting Surf OS. The Surf OS team made progress with features launched in scheduling tools, mobile crew apps, and CRM functionality, with seven LOIs secured from brokers and operators interested in purchasing Surf OS.
• Strategically, Surf OS is set to be commercialized in 2026 with three flagship products: Broker OS, Operator OS, and Owner OS. The company is pursuing strategies to showcase new technology in airline operations and new markets, including a pilot program for electrified aircraft in Hawaii and a Part 145 maintenance program. Efforts to grow the on-demand business include securing supply advantages through operator partnerships and acquiring broker talent. Electrification efforts target securing a supplemental type certificate for electrified powertrains in 2027.

Third quarter revenue was $29.2 million, exceeding the guidance range of $27 million to $28.5 million and rising 6% sequentially from the second quarter. On-demand revenue saw an approximate 40% increase compared to both the second quarter and the same quarter of the prior year. Scheduled service revenue had a 4% decrease sequentially. The on-demand business contributed significantly to the revenue growth, while scheduled service experienced a reduction. The on-demand segment's revenue increase was driven by a shift in flight mix from turboprop to jet aircraft and from domestic to international flights, resulting in a 14% increase in revenue per flight.

• Raised 2025 revenue guidance to at least $105 million and remains on track for full-year profitability in airline operations.
• For the fourth quarter, expects revenue to be within $25.5 million to $27.5 million and adjusted EBITDA loss to be within $6.5 million to $8 million.
• Surf OS development and commercialization to shift from beta phase to commercial phase in 2026 with launch of three flagship products: Broker OS, Operator OS, and Owner OS.

• Market volatility and regulatory changes could impact the company's operations and financial performance.
• Variables in debt repayment and conversion could affect the company's path to being debt-free.
• Delays in commercialization of Surf OS or challenges in executing strategic plans could hinder growth.

Q: With this financing, what kind of cash runway do you have in terms of commercializing Surf OS?

A: Hi, Amit. As you saw, there were really two uses for the financing. One is obviously the investment into Surf OS, and we believe that that will give us a runway of between eighteen and twenty-four months.

Q: Are there any features of Surf OS that you plan to make exclusive for your on-demand or scheduled business, or will all of your beta testers have access to all of the features of the stack?

A: Our intention is to have all the features available to third parties. We represent a great staging ground and testing ground because we have a unique ability to be both a broker and an operator. We bring insights into what is needed. So when you're working hand in hand with the tech team and Palantir, to bring insights into the product requirements, we're able to make an amazing state-of-the-art tool that we are using in our own space. And we want that product to be deployed to other folks in the space and bring those people into the commercial and the ecosystem that that software develops for the industry.

Q: You had a comment in your prepared remarks that you see a path for the company to be debt-free. I was just hoping you could speak a little more to maybe some of the variables that you would see impacting that and a sense of a timeline there.

A: Well, as you see, the convertible was designed with features that would allow us to gradually delever our balance sheet. So we feel that over time, this is a much better path for us rather than facing high interest or high cash interest debt and then bullet payments. So we feel pretty good about that across the duration of the convert, which, as you see, has a maturity of October 31, 2028. So as that converts and as we succeed, hopefully, before then, we have a great path to becoming debt-free.

Q: Just any commentary around the recent government shutdown. Has that impacted your business model in Q4 here?

A: Yeah. So our company's business is impacted in two ways from the government shutdown. I'll speak to the first because it's most on top of people's minds. It's the traffic reductions that were recently announced by the FAA. None of those traffic reductions targeted us or any of our operations or any of the regional flying. They were more directed at larger hubs in the major airports. So we did not have any capacity reductions, and we continued on operating and carrying our customers without any disruptions. The second area that we can be impacted from is we do participate in the Essential Air Service Program. We do routes in the rural areas under that program. That program includes subsidies to the companies who operate those flights. The DOT did, during the shutdown period, notify those carriers and say that there would potentially be a suspension of those fundings. That has not happened, but even if it was, we would continue to operate until the government came back up. We want to support all the communities in our Essential Air Service program, and we are committed to doing that. Right now, the current letter from the DOT talks about a suspension starting November 18, but, hopefully, the government can get back in this week and not be affected by that at all. So those are the two areas that we would have been affected, and so far we haven't. We've gotten all our EIS subsidies that we have billed, and haven't had any flight cancellations.