Adacel - ATOP Business Discussion

The long awaited ATOP news is out and Adacel has resigned as sub-contractor with Leidos on their ATOP program, for 12 Years (1 base year and 11 optional years) on similar terms as previous.

By way of background 

Adacel Technologies (ADA) was established in 1987 and has three distinct businesses, employing 200 staff many out of Montreal, Canada.

• ADA sells Air Traffic Control (ATC) simulation hardware, software and training services (370 installations of MaxSim).
• ADA provides software development services to the US Federal Aviation Administration (FAA) Advanced Technologies & Oceanic Procedures (ATOP) Program (circa $12 - $16 million annually over recent years).
• ADA sells Air Traffic Management (ATM) systems under the product name Aurora  (14 installations currently).  A typical sale includes hardware, software and professional services.  ADA's Aurora ATM systems are relevant to island-based air systems/airports particularly in the South Pacific.  

The companies revenues were split 74% North America and 26% international in 2020 with civil making up 77% and military 23% of revenue.

ATM and international simulation and training is based in Montreal, Canada, while US simulation, training and customer support is based in Orlando, Florida, USA.

The FAA ATOP program provides key flight-path messaging and data processing satellite linked software functionality for three United States Oceanic areas as below.

- New York

- Oakland (Key South Pacific air space)

- Anchorage

 Key functionality of FAA ATOP includes:

1.      Fully integrates flight and radar data processing.

2.      Detects conflicts between aircraft.

3.      Provides satellite data link communication and surveillance capabilities.

4.      Removes the need for paper flight strips.

5.      Automates the manual processes.

6.      Allows customers to take advantage of investments made in cockpit digital communications.

The ATOP system incorporates ADA's Air Traffic Management software "Aurora" together with a number of other satellite technology, communications and software product functionalities.  ATOP is comprised of hardware and software components that provide an automated platform to support air traffic control operations. 

ADA's key contribution to ATOP released to the ASX at the time of extending the deal in 2013 were in the design and maintenance of critical software for :

(1) 4D profile protection

(2) Automated conflict detection

(3) Dynamic airspace allocation

(4) Automated coordination between centres and controller pilot data link communications

The prime contractor on the FAA ATOP Program is large-cap defence contractor Leidos Holdings Inc (NYSE: LDOS; $14.2B capitalisation - 29/06/2021).  

The existing prime contract technology expires 31 July 2021.  There is risk around ADA being cut from the ATOP Program however ADA's level of engagement was elevated in the 2020 FY so it feels, with Leidos winning an number of long term contracts with the FAA so appears unlikely in the near term.  

It's unclear how the ADA subcontracts with LDOS in terms of charging professional services/license fees /maintenance revenue.  ADA retain intellectual property around oceanic flight travel, communication and analysis.    There may be circa 60 ADA staff permanently allocated to the FAA ATOP Program at any one time (200 employees in total).

The first FAA ATOP program was fully operational in 2007, with a technology refresh occurring in 2020.  The expectation is the refresh will support the ATOP program until 2028.  The FAA have itemised five large-scale capabilities below planned for deployment between 2021 to 2024 in four yearly ATOP software releases.

With ADA maintaining they have oceanic software IP and the pubic information from the FAA ATOP Program it reads like ADA's ATOP revenues will not go away for the foreseeable future (overlap between ADA core functionality and 2021-2024 planned functionality improvements) .

The more transparent upside for ADA shareholders in 2021-2024 comes from improved sales of ATC simulator and training services as well as sales of the Aurora ATM (and other software oriented products) products while ATOP should be a reliable contributor for the next few years , but very very opaque.  The degree to which air traffic controller personnel being stood down during Covid-19 may provide some upside in simulation and training revenues. 

The ability to retain core oceanic IP while incorporating technology learnings from ATOP/Aurora software into new commercialion opportunities is the real opportunity for ADA.   The company has developed enroute, terminal, approach, and control tower capabilities over recent years in addition to its core oceanic functionality.

In the 2020 Annual Report ADA noted that learnings from recent Aurora ATM installations (Fiji, Guadeloupe) has given the company confidence around delivering small footprint and land based ATM systems.  ADA through the FAA ATOP program has very strong domain knowledge around oceanic ATM but with recent incremental delivery of tower based functionality in Fiji and Guadeloupe this has broadened capability.

The company is also interested in acquiring additional software products to sell into their core ATC and ATM markets globally.  The company does not appear to have ambitions to take Aurora ATM outside low traffic, island based locations, so likely to remain niche.