Closing Bell - Manifest Space: Valuing Space with Summit Ridge Founder Armand Musey 10/12/23

Episode Date: October 12, 2023

While Q3 closed out with some green shoots in the IPO market, the days of SPACs may be over. Morgan discusses valuations, commercial space trends & more with Summit Ridge Group founder Armand Musey.

The third quarter closed out with some green shoots in the IPO market, but the days of startups going public through special purpose acquisition companies, or SPACs, remain firmly rooted in the recent past. SPACs were popular among space companies, leading to a flurry of stocks focused on everything from human spaceflight to rockets and satellite imaging. But as the Federal Reserve has hiked interest rates and investors have focused more fundamentally on cash flow and profits, the space SPACs have gotten smashed. The SPAC bubble looked a lot like the dot-com era. There was a lot of very questionable business plans that were getting funded at extremely high valuations.

And I think that many of those are now coming home to roost. I don't think the amount of money put in was as big as the dot-com bubble. We didn't have large multimillion-dollar investments as you've had in Iridium and GlobalStar. But you had a number of several hundred-million-dollar investments, which are now not doing so well. Some have shut down. We're seeing sort of a cleanup of the industry. So the fallout hasn't been quite as bad, but we are definitely seeing the fallout from that. Armand Musi has been studying the telecom satellite and space sectors since the 90s,

named to the institutional investor All-America team three times during his tenure at Bank of America. In 2007, he founded his own research and advisory firm, Summit Ridge Group, to consult for heavy hitters like Viasat, OneWeb, SES, Qualcomm, and others. On this episode, we talk space company valuations, market trends, and why the industry may come to regret the spate of SPACs. I'm Morgan Brennan, and this is Manifest Space. Let's talk a little bit about Summit Ridge Group. What you do at Summit Ridge?

We do valuation and industry analysis in the satellite, media, and telecom sectors exclusively. So that's everything. I joke that it's work for due diligence before deals. When deals go bad, we do litigation support. And when things go really bad, we do restructuring. I say that in jest, but essentially, there's a lot of truth to it. Yeah. And you've been covering this sector for a long time, I think a couple of decades. You've seen things change quite a bit. Right. I started back in the TMT boom in the late 1990s as a satellite research analyst on Wall Street for several large firms. And then I've continued and now working as a consultant to my own firm, Summit Ridge Group. So I've seen the ups and the downs and some of the more outrageous business plans. And I've also seen some things work spectacularly successfully.

So how much does the period that we have just come out of here, the last couple of years, feel like the dot-com era and then the correction we saw there? I think the SPAC bubble looked a lot like the dot-com era. There was a lot of very questionable business plans that were getting funded at extremely high valuations. And I think that many of those are now coming home to roost. I don't think the amount of money put in was as big as the dot-com bubble. We didn't have large multimillion-dollar investments as you had in Iridium and GlobalStar. But you had a number of several hundred million dollar investments, which are now not doing so well. Some have shut down and we're seeing sort of a cleanup of the industry.

So the fallout hasn't been quite as bad, but we are definitely seeing the fallout from that. You mentioned the cleanup. Would you say we're right-sized right now, especially given the draining of liquidity, the re-falling to earth of valuations, and some of the consolidation that's happened? I think we have another year or two to go. I think there was a number of companies that did raise a fair amount of money in the SPAC bubble with that period and they still have some cash on their balance sheets and we'll you'll see some companies merging uh or restructuring or going out of business entirely i don't think we've seen the end of it um i think there's a little ways to go sounds like you're busy then yes i'm very busy uh on all those fronts um yeah busy on all those fronts? Yeah, busy on all those fronts, absolutely. There's still a number of, there's still money out there

for companies that have real revenue and are close to cashflow or have some cashflow, particularly those that have defense-related contracts. So there's still activity on the front end investment. And I think after the dot-com bubble, there was almost no investment for a couple of years. We're still seeing some here. And obviously we're seeing investors

who are not happy with what they invested in and are looking for recourse. So we're seeing some litigation support and obviously we're seeing restructuring for companies that have actually run out of cash. So maybe we haven't been here before then. Maybe this time is a little different. Because I feel like there's a lot of these technologies and capabilities we were talking about in the late 90s and that money was being put to work, but it just didn't materialize.

And now it seems like maybe some of the technologies, some of the costs associated with those technologies and getting them to space, et cetera, that it's a new chapter. It is, I think. In the 1990s, a lot of money was put, late 1990s, 2000, a lot of money was put into low-earth orbit satellite technology. And the cost of launch at that point, the cost of developing satellites, made the business plans just not work. So Iridium is a perfect example. Roughly $6 billion was invested into Iridium, and then it was sold in bankruptcy for a total of $25 million.

So it went from $6 billion to $25 million. And that included some working capital, about 19 million of working capital. So it really sold for approximately 6 million. So those, at that point, the technology just could not support a viable business plan. Now we're seeing companies like Starlink being very successful with its low Earth orbit satellite system. Iridium has put up another generation of satellites. Looks like that is going to be successful. Global Apple is putting some money into Global Star

to put up another generation of Global Star satellites. It looks like that's been successful. So now I think the cost curve on the low Earth orbit satellites has actually gotten to the point where a business model can actually work under the right conditions. Gotcha. So when we talk about areas within the space sector where maybe you are seeing, you know,

more regular revenue being generated, you are seeing the possibility or at least positive, or I'll say positive cashflow, or at least the possibility of it on the horizon. Is it some of these satellite businesses or is it other areas? Well, definitely you're seeing it in satellite businesses. There are companies that I can say are now viable or potentially viable. Unfortunately, a lot of it is still dependent upon or disproportionately dependent on government revenue. You, a lot of it is still dependent upon or disproportionately dependent on government revenue.

You have a lot of imaging services that are dependent on government revenue, a number of component manufacturers or satellites that are dependent on government revenue. But, yeah, you're definitely seeing it in the satellite sector. But I think you're also seeing many of the same technologies from space in the terrestrial telecom sector. So, for example, the newer satellites going up are increasingly software-defined. And you're also seeing software-defined hardware in terrestrial communications as well. So the difference between what you see in space and what you see on Earth in terms of the technology cycles are becoming increasingly similar. So what does that mean for the future? Does that mean the competitive landscape has just expanded?

Well, I sometimes joke that it wasn't until a few years ago the satellite sector finally discovered Moore's Law. I said that in jest, but the rate of development of the space sector has increased massively in the last five to 10 years. It used to be very much an industry that was dominated by the big aerospace companies. And now increasingly folks with more of a technology or a Silicon Valley type mindset have entered the industry. And you're seeing much faster development cycles, much faster iterations. And part of that's been made possible by the fact that the cost of launch has come down.

And so it's possible to try things over and over again because the cost of launch is not what it once was. Back in the 1990s, the cost of launching a satellite was so high that there was less focus on innovation and more focus on making sure nothing went wrong. But that's changed. And so now you're finally seeing both the satellite industry, in terms of

development, catch up with terrestrial wireless and terrestrial even wireline technology. And you're also seeing those networks starting to be integrated. You've seen announcements from Starlink doing an alliance with T-Mobile to bring satellite reception to your T-Mobile phone. Apple's made a similar announcement with GlobalStar. You're seeing these networks become increasingly integrated as their, I think, technology development cycles become more and more similar. Yeah. I mean, you might even put the EchoStar Dish re-merger in that bucket,

I think, to a certain extent, too. And it kind of speaks to this need for connectivity and the digitization of everything and what space brings to the table, or I guess space-based technologies bring to the table as that becomes a bigger and bigger demand and a bigger, bigger, what's the word, tax on more terrestrial infrastructure. Yeah. And part of it is that people's expectations are increasing. I know that I was extremely frustrated last week coming back from a conference in Paris, and there was no satellite internet on the plane. People are starting to come to expect 24-7 connectivity no matter where you are, whether you're on a plane or on a cruise boat or on a train. And in many of those cases,

the only way to bridge that gap and bring connectivity in those areas is by satellite. And finally, the price points are coming down to the level where that's cost effective to do. What were your takeaways from the Paris conference? Wow, that was a, you know, the big Paris conference. One of the biggest takeaways is that the industry has changed in the sense that, not only for the reasons that we've discussed, but that it's increasingly under the control of a couple of billionaires. Elon Musk, Jeff Bezos, Richard Benson was trying.

And they're increasingly dominating the industry. And to the extent that space is important for national defense purposes, the government is a little bit out of the loop. Back in the old days, the old days being 10 years ago, the government, major governments around the world knew exactly where satellite development was going. Lockheed or Boeing would go to the government and say, you know, if you give us a few hundred million dollars, we can add this capability. And the government would decide yes or no. And they knew exactly where things were going. Now you have individuals who are completely out innovating the big aerospace defense companies. And governments around the world really have no idea what's going to be coming out a year or two or three years down the line.

And I think that's a huge change for the industry and is probably fairly scary for the defense departments of different countries. Europe right now, for example, does not have a viable launch industry. They don't have a launcher. They can't get to the International Space Station. And until a couple of years ago, Ariane, the French launch company, really dominated the Western launch industry. Now they're nowhere. And that's really because SpaceX has lowered prices and essentially made them non-competitive. So what does this look like moving forward then? Because you are starting to see governments. I mean, I think about here in the U.S., NASA was sort of on the forefront of it,

but even, you know, the DOD is moving towards this to the extent the bureaucracy enables. But this idea of more, you know, public-private partnerships and partnerships with commercial space in a way that maybe didn't exist even a couple of years ago? Yeah, the government has no choice. If they want to know what's happening in space and want to be somewhere near the cutting edge, they have to be very involved much more deeply in the supply chain and really understand, really be interacting with these companies at earlier stages. It's no longer essentially waiting for Lockheed or Boeing to call them and suggest something. They really have to be deeply involved. And then in Europe,

for example, where they don't have an Elon Musk or Jeff Bezos, they're sort of stuck. They've resorted to essentially putting together committees of bureaucrats with huge budget to try to figure out how to become more entrepreneurial, which I don't think it's likely to be very successful. But they're just really struggling to figure out how to be competitive going forward. But you're right, the governments have to become more deeply involved. Otherwise, they're going to have no idea what's going on. And then they're going to be surprised by something that comes out of another country and has some capability that the U.S. government would really like to have.

Are there certain capabilities that you're watching or keeping close tabs on that are under development right now that would benefit that bill? Sure. A huge one is in-space servicing, so the ability to go up to a satellite and repair it or keep it stabilized if it runs out of fuel. That's a new idea.

And it's marginally commercially viable, I think. But it's incredibly important for the defense agencies around the world because that same technology could grab onto a Russian satellite or a Chinese satellite and put it out of commission. So you're probably going to see governments around the world subsidizing that kind of technology, even though it's not commercially viable, because the defense agencies want to have access to that technology. They want to be able to attach to an enemy country's satellite and put it out of commission or be able to go and fix a very important US satellite that may be disabled for some reason and can be repaired. But I think you see a lot of activity there. Yeah. I actually was just with Northrop Grumman at their space headquarters down outside of DC. And got to see a little bit of the space logistics business and these capabilities

that they're building out and sort of where that's headed and how that's going to evolve, to your point. So Northrop has, I believe, sold a total of three of those in the last five years or so, which is not very many. But I don't think that the U.S. government has any option to continue to subsidize that in one form or another because they absolutely want that capability if they need to, like I said, disable a Russian satellite or something like that. Yeah. So then I guess in terms of where companies that are coming up with

ideas or where the investor dollars that are still circulating right now are going, is it really focused on these companies that are working on stuff around the government? I guess, is that the most compelling part of the market right now? Is that the market that's going to have legs through this cycle? Yeah, that's the simplest market, right? If you're an investor, there's guaranteed money when you have government contracts. And that's the simplest way to make sure that some budding technology actually makes it to market. Longer term, though, to be highly successful, these companies do need to develop a commercial market to really help them grow. Most of the government contracts are going to be cost plus or allow some sort of standardized margin.

To be really successful, they're going to need to find a way to develop a robust commercial market. And that, in many cases, seems to be lagging a little bit. A place where we've seen the most progress has been on broadband, consumer broadband. If you look at Starlink or what's happening with Amazon's Project Kuiper or Telesat's Lightspeed project, prices are coming down so fast on broadband and the price of the consumer terminals have come down so much that it's actually viable for consumers in many markets to use satellite for consumer broadband, which would have been unthinkable even five five years ago wow um we're seeing a lot of m a uh to your point earlier including among the satellite industry and the communications uh satellite companies is that going to continue yeah margins are you know prices are coming down

uh there are so many companies that were funded earlier that I think there's no choice but for M&A to happen. And then you have many of the existing old timers, the SESs, the Intelsats, the Utilsats of the world, formerly the Inmarsats of the world, they're kind of, in many cases, their assets are becoming stranded because they have debt from satellites put up five and ten years ago. Prices are coming down. And they're being out-engineered by new entrants like Biasat. And so I think you're going to see more M&A, horizontal M&A between providers to get economies of scale,

to get new technology. But then I think you'll also see, because prices are coming down for services, you're gonna see more vertical M&A. Companies are trying to become more vertically integrated and cut out the middleman. So you've seen Intelsat acquire GoGo's commercial aviation, or passenger aviation business.

You're gonna see more activity like that. And if you sort of look at the companies that have been most successful, it's the ones that have been vertically integrated, whether it's Viasat or EchoStar or it's Starlink, they've been vertically integrated and that seemed to serve those companies quite well. Have you been surprised to see that some of the SPAC companies, for example, there hasn't been more consolidation or more deal making activity amongst some of those? Yeah, well, I mean, the challenge there is that I think you'll see more consolidation,

but some of them don't have much to sell. If you have, all you have is some IP that didn't work, there's not much to offer in a merger. And so you may see some of those just shut down. So I'm going to ask a question then about, cause I've heard pros and cons. So I'm curious to get your thoughts on this. Was the wave of SPACs for space companies a good thing

or a bad thing for the industry? I think long-term it's a bad thing. I mean, it did provide a lot of money to the industry, which funded R&D, which will be used somewhere because some of that R&D will have some value. But I think it also distorts the market. It prevented companies that maybe were more deserving from getting money I think even now you have some stacks that have a war chest of money that are moving forward and crowding out companies that may be developed without raising money at those kind of artificially high levels. So I think any time when you have money put in at an inappropriate valuation, it ends up destroying the market and harming folks

who sort of did things right. And so ultimately, I think we'll look back in 10 years and say this wasn't a great thing. But there will be some R&D that we'll be using for a long time, just as when we had the TMT bubble in 2000. A lot of that technology is being used today. Even the technology that was developed by companies that went bankrupt a long time ago. A lot of software programmers were trained during that era who are still working today. But I think long term, it's not healthy. Got it. where programmers were trained during that era who are still working today.

But I think long-term it's not healthy. Got it. The fact that we're starting to see the IPO market crack open, the traditional IPO market, open back up with a couple of offerings here. Are there contenders out there that are private in the space world that you could actually see go public as, for lack of a better term, a more grown-up company with more traditional regulatory process? I think a lot of people are waiting to see if SpaceX or Starlink goes public. Although, given Elon Musk's continued challenges with the Securities and Exchange Commission. He may not be eager to do that.

That's the most obvious one, the top of my head. Okay. But I think there's a never-ending supply of creative people in the satellite industry, and they're always looking for ways to raise money. So I wouldn't be surprised. I think a lot of the exciting things that are going to happen are going to be on the equipment side. And so that actually might be a place to look for potential IPO candidates.

Interesting. One of the things that's happened in equipment in the last several years is that for a leo flat panel antenna a couple of years ago from kaimetta was thirty thousand dollars or thirty five thousand dollars uh now starlink in paris indicated that they are not subsidizing their antennas uh which they're selling at $599. So the prices come from $30,000 down to $600. They're $600. Wow.

And suddenly you've gone from something that's not a consumer price point for really anybody, except maybe some of the billionaire on a yacht, to something that actually could be consumer-friendly, at least in some markets. I think a lot of the that's actually a sort of an under appreciated a part of the industry in cash flows that are often more regular. And sometimes that lends them better to, um, to IPOs. Got it. Any other sort of, you know, big trends or factors that you're watching right now?

Takeaways? I said the big one is vertical integration. The other item that's happening in the industry is there's a lot of talk about implementing AI. and I know that's kind of a buzzword everywhere. But there's some real reasons that that can be important in space, particularly in space management. When you have Starlink has 5,000 satellites up, and there's probably going to be 1,000 satellites launched a year for the next several years, is preventing those from running into each other and running into space debris. And one of the things AI can do is help essentially manage the satellite fleet to take automatic corrective action to prevent satellite crashing. You can also use it to optimize frequencies. So when you have a plane, for instance, going in and out of clouds or bad weather and you

need to adjust the power levels on the transmitter or change the compression or something like that in relation to the atmospheric conditions. A lot that AI can do, also downloading images. You have these remote sensing satellites gathering enormous amount of data but they don't have the capacity to download at all but you can use ai to essentially scan the images or scan the data and only download the good data not the pictures of the tops of clouds for example got it all right final question for you. Winners and losers.

Sorry, where is what? Winners and losers. Like we talked about, you know, are there, there's a lot, there is a lot of concepts that are kicking around right now and a lot of projects and capabilities that folks are working on. I mean, are there certain things that you go, this is crazy, this has no viability, or is it still just too soon to tell, especially before Starship comes online? Okay, so winners, I think it's really already looking

like Starlink and SpaceX are winners, and it doesn't look like that's changing too much in the future. There may be one or two other LEO broadband systems that are successful. But I think after that, it's going to be very, very hard for additional entrants. Another potential winner, and this

will be an interesting one to look at, is Viasat, which is focused on geostationary broadband. And it has really pushed the envelope with technology, so much so that their last satellite, Viasat 3, was having some challenges. And we'll know the full extent of that in a few weeks. They've really been at the cutting edge of getting more bandwidth on a single satellite. And that may be very effective at being able to put large amounts of capacity over concentrated areas, like Indonesia, for example, or certain parts of Latin America, where the Leos have to spread their capacity around the world. So that's another interesting one to uh to look at uh the other losers i would look without naming names i would look at the many

up-and-coming launch companies i think there are 60 launch companies that have received funding to date there's no way that anywhere near that is going to be successful. Yeah, and you see it even with the launch companies that are successful and are already operating, that they diversify beyond launch to stuff that maybe has got a higher margin and is a more economically attractive business model. Yeah, launch is a really hard business that it seems too many people want to go into,

kind of like the restaurant business in New York. It's just, you just look at these companies going in and think, why? Yeah, nobody's looking at the margins, I guess. If you want to go into the launch business, you must really not like yourself or something. It's going to be very painful. That does it for this episode of Manifest Space. Make sure you never miss a launch by following us wherever you get your podcasts

and by watching our coverage on Closing Bell Overtime. I'm Morgan Brennan.