Rocket Lab USA Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 7 speakers on the call.

Operator

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rocket Lab Q3 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

I would now like to turn the call over to Colin Canfield, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, Eric. Hello, everyone. We're glad to have you join us for today's conference call to discuss Rocket Lab's Q3 2023 financial results. Before we begin the call, I'd like to remind you that our remarks may contain forward looking statements that relate to the future performance of the company. And these statements are intended to qualify for the Safe Harbor protection from the liability established by Private Securities Litigation Reform Act.

Speaker 1

Any such statements are not guarantees of our future performance And factors that could influence our results are highlighted in today's press release and others are contained in our filings with the Securities and Exchange Commission. Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update these statements. Our remarks and press release today also contain non GAAP financial measures Within the meaning of Regulation G enacted by the SEC, included in such release and our supplemental materials are reconciliations of these historical non GAAP financial measures and the company's comparable financial measures calculated in accordance with GAAP. This call is also being webcast for the supporting presentation and a replay and copy of the presentation will be available on our website.

Speaker 1

Our presenters today are Rocket Lab's Founder and Chief Executive Officer, Peter Beck and Chief Financial Officer, Adam Spies. After our prepared comments, we will take questions. And now, let me turn the call over to Mr. Batty.

Speaker 2

Thanks, Colin, and welcome everybody for joining us. Today's presentation, we will go over our key business accomplishments for the Q3 of 2023 as well as further achievements we've made since the end of the quarter. Adam will then talk through our financial results for the Q3 before covering the financial outlook for Q4 2023. After that, we'll take questions and finish today's call with the near term conferences where we'll be attending. All right, on to what we achieved in the Q3 for the Starting with Elektron.

Speaker 2

In July, we launched a mission with several satellites for NASA and others, which was the first of the 2 back to back reusability focused missions. After successfully deploying the 1st Mission 7 spacecraft, Elektron's first stage was back to earth and recovered from the ocean. Then we followed that up with our 40th Elektron launch and even more recovery milestones, including A return first stage and a first to launch a reflow in a rubber bit engine previously flown on our 26th mission there and back again. The engine performed flawlessly like a new one, completely validating our pursuit of reusability for Elektron and setting us up well to refly an entire engine set as our next major reusability goal. So next, I'll provide a bit of an update for Electron.

Speaker 2

Following those 2 successful flights, as you know, we unfortunately experienced an anomaly on our 41st mission. It's important to remember that up until this launch, we have had 37 successful orbital missions to place 171 satellites in orbit, And the past 2 years have been flawless with a record of 20 successful missions one after the other. For Flight 41, as soon as the issue occurred, The team jumped into action. In the weeks since, the team has been scouring through thousands of channels of flight data and manufacturing data to determine what was the probable root cause. I'll take you through their investigation in detail over the next couple of slides.

Speaker 2

Working in parallel with the FAA, The FAA has conducted its own review of the mission safety processes, plans and procedures, which concluded that they all worked as they should to keep the public safe, and I am pleased to confirm that the FAA has since given us approval to resume launching from Launch Complex 1. With our investigation in its final stages and our launch license remaining active, we are fully anticipating to return to flight within the next few weeks. Following updates and changes to our testing and manufacturing processes, we will be returning to the pad with an even more reliable vehicle to meet our busy launch manifest for the remainder of 2023 and into 2024. Now let me take you through what happened and what we've learned. So here's a slide on the anomaly timeline.

Speaker 2

The anomaly that ended the mission happened incredibly quickly. From the first action in the chain of events when Electron cut off its data relay, the team only had 1.6 seconds of anomaly flight data to work with. This was always going to be a highly complex issue to figure out, but with deep Diligence and analysis, here's what we've been able to determine. On a 41st mission launched September 19 from LC1, It completed all the usual launch milestones through liftoff, maxq stage separations. And at 151 seconds, The 2nd stage engine tried to ignite, which is confirmed by flight telemetry that showed the igniter pressures building and the locks and kerosene pump speed rising to pump propellants into the combustion chamber.

Speaker 2

The voltage levels from the battery packs that power the engine and the motor controllers are nominal at this point And normal at that point of ignition, but within milliseconds, in fact, 151.7 seconds, we get our first indication of the anomaly. The system's high level voltage levels take a sudden dip and rise of about 100 volts within 30 milliseconds, indicating an energy escape from the system that then led to a full loss of power to the 2nd stage lower avionics, cutting off telemetry and communication with the 2nd stage. And with that, it was all over. So we'll move on to the issues. So you have to bear with me on this, there's a little bit to talk about here.

Speaker 2

But with good visual evidence with the onboarded cameras and over 12,000 channels of data And this high level time line to draw from, the investigation narrowed in on the issue. More than 200 sub investigations were launched to rule out hypothetical causes of the anomaly. After more than 7 weeks of extensive analysis of the mission's manufacturing test and flight data, The findings of the Rocket Lab investigation team overwhelmingly indicate an unexpected electrical arc occurred within the tower system. Shown in the image on the top right, the team did some tricky optical triangulation and image processing of a small shadow on the engine bell caused by the arc. From that, they are able to pinpoint and re triangulate the failure point Origin to an area where the 2 battery packs connect known as the fixed pack to supply the high voltage power.

Speaker 2

So now we're all going to take a little lesson in Paschen Law and Paschen Curves. So, Paschen law describes how in partial pressure environments, the likelihood of an arc to occur changes in high voltage systems depending on the environment composition. An approximate guide that can then be applied across different situations called the Paschen curve, which uses the relationship between voltage, pressure multiplied by distance to indicate what the range of danger is for an act to form through various gases like helium, argon, nitrogen, etcetera. So the graph on the bottom right It's what's known as a highly simplified Paschen curve. So basically, the easiest way to think about this As if you have a positive and a negative terminal of a battery at 500 volts down here on earth, you could place those 2 terminals of the battery about 0 point 3 millimeters or 1 third of the thickness of a human hair beside each other and they would not create an arc or jump a spark between them.

Speaker 2

Now take the same 500 volt battery and terminals and put them in the worst part of the Paschen curve, which just happens to be Just after stage separation and stage 2 ignition of Elektron and the same 500 volt battery and terminals We'll now arc to each other when they are nearly 1 meter apart. So different gases, different pressures affect this distance And there's also other things like AC Ripple that can have a huge negative fix. But for now, let's just keep it simple. For Elektron, with its high voltage 500 volt rail power supply, we have to ensure that every connection is essentially hermetically sealed. A tiny pinprick or insulation failure will result in arcs, given that they can travel over large distances within the Paschen curve.

Speaker 2

All of this is in flux and very transient because as we ascend higher during the 2nd stage burn and go into the hard vacuum of space, The arcing distance goes back the other way and it becomes hard to arc again. It's really just at stage separation where things are The worst and we bottomed out the Paschen curve. As you can imagine, this is extremely difficult to test for down on earth. We actually currently put the whole rear engine assembly in a vacuum chamber, pull it down and inject gases like argon to try and aggravate the phenomenon. But even the smallest installation compromise cannot always be detected, especially when you compile that with other factors like AC ripple and trace gases.

Speaker 2

So now that everybody understands Paschen curves, during the 2nd stage ignition, we're at the worst part of the curve And we had a small concentration of helium in the vicinity of the open stage, which is normal, and a high voltage AC ripple that lowers the spark threshold even lower, and a tiny undetectable fault in the HV Loom insulation, all of which combined allowed for an arc to briefly occur. If any of these things were not present, then the failure would not have occurred. All four had to be there and to be honest with all the testing we did before flight, you would also have to be incredibly unlucky to have the installation failure point Also line up with an electrical path to be able to act to chassis. And look, I don't generally believe in luck as an engineer, but This but in this instance, I would say that so many things had to line up that most people would say that this the probability of this occurring would be largely Improbable. So with that, now that we kind of understand and we've explained the failure, What are we going to do to get back to flight?

Speaker 2

So the failure is obviously a highly complete set of conditions that are extremely difficult to predict. Our team's top priority through the investigation has been to find a way to make sure that this never happens again. And as a result, there's a couple of key corrective measures. The first is to increase the fidelity of stage level vacuum testing. We now have a much more sensitive instruments implemented in the preflight tests, Both at the component level and the stage level that can sense partial discharge all the way down to a picocoulomb now.

Speaker 2

This gives us much more confidence in the testing. However, I was not happy to stop there, and so we've implemented a rather brute force solution. What we've done is seal up the battery frame that contains all the high voltage connections and equipment and then pressurize it to about 0.5 of PSI. I'll draw your attention to the graph on the top right, surprise, surprise, it's another partial curve that shows that by pressurizing the high voltage area, we shift the partial curve to the left out of the red zone and into the green zone, meaning Basically, we're back to what it's like on earth where it's not really possible for big arc distances to occur. Now this has been a lot of work to implement by the team and is a fairly extreme solution, but really I thought it was the only way we could put the passion more well back in its box.

Speaker 2

So the best way to solve a problem, in my opinion, is always to eliminate the problem, and that's what we've done. Getting to the bottom of the issue and back to the pad for our customers It's been the team's number one priority. It's been incredible to witness their perseverance dedication over these past few weeks, Not only on the anomaly investigation, but in the work that they've completed in parallel to make sure that we're good to go as soon as we get back to the pad. The launch window for our return to flight mission will open on November 28 and extend into December. This dedicated mission will be for QPS, a Japanese based earth imaging company, with the rocket for that mission going through pre launch testing on the pad at Launch Complex right now.

Speaker 2

To move on to Elektron Launch Benefit. So in 2024, we have a really big year ahead of us. Even with their pause in operations, Elektron remains the world's most frequently launched small orbital rocket. Dedicated missions for small satellites continue to experience Strong demand, which we've seen in multiple bulk buys by returning customers and constellation operators. In fact, we've booked out Electron launches next year, completely booked.

Speaker 2

We see the market for the Elektron product being very strong and this manifest validates that. Frequent launch opportunities, flexibility over schedule and control over orbital deployment are what our customers are looking for, and that's what Elektron has been providing and will continue to provide in the New Year. And all that, all we have to do really, in with our 2024 manifest is Execute, as in with anything in the space industry. By ramping electron production and keeping on top of demand with recent As well as continuous improvement in automation across our manufacturing processes, we look to continue improving on our already impressive performance in Manufacturing. We also note that the scaling is coming with improved gross margins.

Speaker 2

In Q3 2023, we achieved a 27 GAAP launch gross margin, which should look to enable to progress our profitability targets for Elektron as we drive scale and efficiency into the business. I now want to take you through and highlight some of their accomplishments in so far in Q4. So, Neutron Structures. We'll start with a Neutron update. Earlier this quarter, we reached a major milestone It had a Frosty second stage tank up on the stand for structural and cryogenic testing, which is really a key marker for our Neutron program development and Event program.

Speaker 2

The team's job was to push the tank to its absolute limits by loading it up with cryogenic fluids and test to destruction. Something like 96,000 liters of liquid nitrogen was used for this test campaign and an exploded tank in this instance is very much a good thing what we wanted to achieve. The team took the tank past MEOP or maximum expected operation pressure at more than 7x atmospheric pressure. What they've learned in the campaign has been applied to the next stage 2 tank and currently under production, really to bake in structural reliability early as we get closer to our date with Speaking of baking, this is quite literally what our Carbon Composites team has been up to with our next full scale Neutron Structures and Components. The images on this slide here show you the scale of some of the in tank devices being produced, More than 7 feet in diameter for those circular propellant management devices and the Stage 2 dome being laminated in the bottom section.

Speaker 2

Models for Neutron's fixed bearing sections are coming together nicely and of course we have another second stage Neutron tank being built for our next test end to go on our next test in the first half of twenty twenty four. Then over to Neutron's Archimedes engine, another test we're celebrating was a critical Question test that the team achieved with Neutron's Archimedes engine. There's plenty of benefits to pursuing methane LOCKS propellants, but it does come with some of its own challenges. The critical piece really and one of the challenges was in using methane and liquid oxygen for our communities is getting the preburner dialed in, Where generally you want a fuel mixture ratio in a chamber of something like 3:one oxygen fuel, we're running an oxygen rich preburner cycle on Archimedes that force to flow all of our oxygen through the combustion device. Therefore, our ideal mix is something between 6 to 100 to 1, which is a challenging thing to achieve without all the excess oxygen, extinguishment and combustion.

Speaker 2

Archimedes also has an extremely benign operating point, making it great for reliability and reusability, but it does mean that the pressures are low and ironically, harder for the preburner. I'm happy to say that we met all the operating points that we wanted to on those tests. That was a great accomplishment by the team. At the same time, the Archimedes team have been producing and testing full scale hardware like valves, chambers, injectors, controllers and assemblies in preparation for development and propulsion tests, making for a really impressive site when all the pieces come together like you see in the photo on the slide as well. Over to Neutron Infrastructure.

Speaker 2

So supporting infrastructure for Neutron has also scaled quickly over the past few months. Groundworks are being completed in Virginia where our Neutron pad will be, test facilities and support services will be based there as well. And we're ready for construction to begin at a launch site located close to our key government customers, which will enjoy the benefits of a less congested launch site than obviously the Cape. In Q4, we opened our new engine development center in Long Beach that will support the development and production of the Archimedes engine. And once the engines are completed at EDC, they'll go to testing at our standard NASA Stennis Space Centre, where the Neutron team has been busy with site improvements to accept the engine for hot fires.

Speaker 2

And then finally, Neutron timeline. All of these achievements across Q3 and Q4 that I've mentioned and several others are shown here have been great to tick off along with along the on time line. We've completed 2nd stage tank testing, printed Kia Commedia's engine parts and components, had success with our combustion testing devices, Completed qualification testing of our composite overhead pressure vessel, run through separation lock deployment testing and stage pusher system testing, completed our actuator motor controller testing, Finished test on our power management module, confirmed Neutron's engine and stage controller functions as it should, completed avionics controller testing, successfully tested Vehicle thermal protection system stood up the test rig for upcoming Neutron Kennard and Kennard system testing. The team is obviously working hard to keep our ambitious schedule for the rest of the year and into 'twenty four with the same With some of the next year milestones to look out for, including 1st stage qualification tank test completed, our committee's engine testing campaign and the 1st simulated flight to orbit with hardware connected to our flight computers. Now we will continue to provide updates on how Neutron is tracking outside our quarterly reviews.

Speaker 2

Beyond Electron and Neutron, our hypersonic test vehicle, Haist, has seen significant amounts of interest from new and returning government customers looking to further develop the nation's hypersonic testing capability. We've actually booked 7 launch contracts in the 6 months since A HACE program was introduced, including our latest mission announced today, a HACE launch from Virginia from the U. S. Department of Defense Innovation Unit. This mission will demonstrate to haste direct inject capability by deploying its payload during ascent, While still within the earth's atmosphere, a long sought after capability for the nation's strategic defense and civil needs at a fraction of the cost of the current full scale tests.

Speaker 2

Onto Space Systems now, and we have a new spacecraft order on the books for a confidential constellation customer that builds on a strong demand for our satellite products. This particular spacecraft will include a full suite of our own satellite components and subsystems, including star trackers, reaction wheels, solar panels, S band radios, flight software and so on and so forth. This contract in particular speaks to the popularity and configurability of our spacecraft bus, but the confidence also in our satellite components in the market and our ability to grow an end to end mission grow as an end to end mission partner for the space industry. Now importantly, we'll also be managing the mission's operations and a further demonstration of our end to end business model of building and operating satellites that we build for our customers. Continuous Space Systems to our largest space system contract now, the $143,000,000 contract we have with MDA Globalstar.

Speaker 2

We're getting close to the delivery of our first of 17 spacecraft for the program by the end of Q1 next year, Having cleared significant milestones in the contract in the past few months, the spacecraft critical design review and delivery of a structural thermal model for the customer, We expect to recognize revenue from those invoice payments to MDA in the Q4 of 2023. This sets the stage for a more meaningful revenue contribution from contract as we enter 2024. We continue to pursue increasingly complex and financially needle moving space system opportunities and are encouraged by progress being made as part of our business. And we believe that these pursuits position us to continue scaling as an end to end space solutions leader. Lastly, in Space Systems updates, we're proud to have directly supported the success of NASA's groundbreaking Psyche mission launched in October, with our solar panels pairing the spacecraft on its 6 year journey into deep space.

Speaker 2

These solar panels we provided to the mission hold the record for being the largest solar panels ever installed on an Essa JPL satellite, which we're immensely proud of. And then finally into post quarter achievements, I'm thrilled to welcome retired U. S. Space Force Lieutenant General Nina Emanio to Rocket Lab's Board of Directors. Lieutenant General Emanuele served more than 35 years in leadership positions across the U.

Speaker 2

S. Space Force and U. S. Space Force, including U. S.

Speaker 2

Air Force and U. S. Space Force, including being the 1st Lieutenant General Officer appointed to and Director of Staff for the Space Force, where she established America's 1st new military branch in 72 years. She's had an accomplished and distinguished career in the military and will be an invaluable asset to the Board. And now over to Adam for the Q3 financial highlights.

Speaker 3

Thanks, Pete. 3rd quarter 2023 revenue was $67,700,000 which is near the high end of our Prior revised guidance of $66,000,000 to $68,000,000 Q3 2023 revenue reflects sequential growth of 9%, the result of 3 launches and continued growth in our Space Systems business. Our Launch Services segment delivered revenue of $21,300,000 in the quarter from 3 launches and is in line with post anomaly revised guidance of $22,000,000 with the slight underage due to timing of revenue under our launch study contract. The resulting average revenue per launch came in at $7,100,000 below our target average selling price of $7,500,000 for 2023 and the results of less favorable mix in the quarter. Our current backlog continues to reflect our target average revenue per launch with variability tied to LSA volume commitments, launch location and unique mission assurance requirements.

Speaker 3

Our Space Systems segment delivered $46,300,000 in the quarter, which was up 17% sequentially and modestly above the high end of our prior revised guidance range of $44,000,000 to $46,000,000 driven by a step up in our NDA contract revenue offset somewhat by a reduction in our components business, which is poised to rebound in the 4th quarter guide that we'll discuss later. Now turning to gross margin. GAAP gross margin for the 3rd quarter was 22.1%, above the high end of our prior revised guidance range of 18% to 20%. Non GAAP gross margin for the 3rd quarter was 29.5%, which was also above our prior revised guidance range of 26% to 28%. GAAP and non GAAP gross margin improvements relative to our revised Q3 2023 guidance reflect continued efficiencies in both our launch and satellite manufacturing businesses.

Speaker 3

We ended Q3 with production weighted headcount of 816, up 49 from the prior quarter. We also note that non GAAP gross margins reflect a 430 basis point improvement versus Q2 2023 When adjusting for Q2's one time $4,100,000 release of a loss reserve related to a legacy launch contract. We're encouraged by the trend in gross margin improvement and expect this trend to continue into 2024 as we return to launch and resume growth in Elektron's launch cadence against Turning to backlog, we ended Q3 2023 With $582,400,000 of total backlog, with launch backlog of $250,700,000 and Space Systems backlog of 331,700,000 Relative to Q2 2023, total backlog was up 9% sequentially or $48,100,000 Thanks to healthy bookings in our launch business, partially offset by declines in Space Systems. For launch specifically, backlog was up 55% sequentially or $88,800,000 as Electron continues to benefit from return orders of both commercial and HACE customers. For Space Systems, backlog was down 11% sequentially or $40,700,000 as we continue to work through our larger satellite manufacturing contracts And the timing of additions to Space Systems backlog are lumpy due to the increasing complexity and magnitude of these contract opportunities.

Speaker 3

We expect approximately 57% of current backlog to be recognized as revenues within 12 months. I expect continued meaningful growth in our backlog as we exit 2023 and progress through 2024, thanks to continued demand for our Elektron platform as well as anticipated orders For significant satellite manufacturing opportunities, we've aggressively been pursuing over the last year or so. Turning to operating expenses. GAAP operating expenses for the Q3 of 2023 were $53,800,000 Modestly above the high end of our original and unrevised guidance range of $51,000,000 to $53,000,000 Non GAAP operating expenses for the 3rd quarter were $39,800,000 which is at the high end of our original and unrevised guidance range of $38,000,000 to $40,000,000 The decreases in both GAAP and non GAAP operating expenses versus the Q2 of 2023 were primarily driven by contra R and D credits related to Neutron upper stage development from our U. S.

Speaker 3

Government partners, partially offset by higher Neutron development spending, increases in headcount and higher depreciation and amortization expenses. In SG and A, GAAP expenses decreased $1,500,000 quarter on quarter Due to a change in contingent consideration related to our PSC acquisition due to a lower average stock price in the quarter. Non GAAP SG and A expenses increased by $700,000 primarily due to increase in headcount along with a step up in depreciation and amortization primarily related to additions to corporate IT and security infrastructure to further enable efficient scaling of the business. Q3 ending SG and A headcount was 236, representing an increase of 8 from the prior quarter. In R and D specifically, GAAP expenses were down $4,400,000 quarter on quarter to the increased contra R and D credits related to previously referenced Neutron upper stage development, Partially offset by a step up in Neutron development spending, and non GAAP expenses were down $4,300,000 quarter on quarter, driven similarly to GAAP expenses by Neutron related contra R and D credit and development spend.

Speaker 3

Q3 ending R and D headcount was 520, representing an increase of 2 from the prior quarter. In summary, total third quarter headcount was 1572, up 59 heads from the prior quarter. Purchase of property, equipment and capitalized software licenses was The sequential increase was due to our continued investment in Neutron Research, testing and production infrastructure projects, along with the expansion of our satellite production and space solar solutions Cash consumed from operations was $25,200,000 in the Q3 of 2023 compared to $6,100,000 in the Q2 of 20 The sequential increase of $19,100,000 was driven primarily by timing of receipts and payments associated with our satellite production programs, which for some of our larger programs have significant periods between milestone achievement, invoicing and ultimately collections, which at the end of the day are purely timing related. More specifically, Q2 was a quarter that benefited from working capital dynamic where we collected on material milestone invoices that were invoiced in the prior quarter More payment terms are more lengthy than our target 30 to 45 days. Cash consumed by asset acquisition and business combinations was $800,000 in the Q3 of 2023, a decrease from $16,100,000 in the Q2 of 2023.

Speaker 3

The sequential decrease of $15,300,000 was driven by the majority of our Virgin Orbit select asset acquisitions being realized in the 2nd quarter. Overall, non GAAP free cash flow defined as GAAP operating cash flow reduced by purchase of property equipment and capitalized software in the Q3 of 2023 was a use of $47,000,000 compared to $16,700,000 in the Q2 of 2023 or a more apples to apples comparison of $32,800,000 when including the impact of our acquisition of select virgin urban assets, most of which were classified as PP and E. The material step up in negative non cash free negative free cash flow was as noted in my early GAAP operating cash flow commentary As a result of lumpy timing of payments and receipts associated with our space systems manufacturing operations and we expect a reversal of this negative working capital cycle in early 2024. The ending balance of cash, cash equivalents, restricted cash and marketable securities was $374,000,000 at the end of the Q3 of 2023. Reflecting the past 4 quarters, we have made meaningful progress towards our long term financial model.

Speaker 3

We have delivered consistent revenue growth and when adjusting for the one time release of a loss reserve in Q2, gross margin expansion and shrinking adjusted EBITDA losses each quarter. With a strong launch manifest and greater contribution from space systems contract execution in 2024, We expect this trend to continue. Overall, we expect gross margin trends will continue to improve over time, thanks to the same factors that have helped drive improvement we've seen this year. In terms of when we can get to adjusted EBITDA breakeven, our Neutron investment, especially R and D spend continues to be the pacing item to achieving this critical milestone. Although we view that Rocket Lab has demonstrated that its existing businesses are on a trajectory to offset the weight of this Neutron investment spend.

Speaker 3

With that, let's turn to our guidance for the Q4 of 2023. We expect revenue in the Q4 to range between 65 at $69,000,000 which reflects $48,500,000 to $52,500,000 of contribution from Space Systems and $16,500,000 from launch services, which assumes 2 launches. As referenced earlier, based on our manifested launch backlog, now expect 11 launches in 2023 and 22 launches in 2024 with the expectation that our average selling price that continues to trend towards our current target of $7,500,000 through the remainder of 2023 and into 2024. We expect 4th quarter GAAP gross margin to range between 24% to 26% and non GAAP gross margin to range between 30% to 32%. These forecasted GAAP Non GAAP gross margin improvements reflect a favorable mix between launch and Space Systems along with a favorable mix within Space Systems.

Speaker 3

We expect 4th quarter GAAP operating expenses to range between $61,000,000 $63,000,000 and non GAAP operating expenses to range between $50,000,000 $52,000,000 The quarter on quarter increases are driven primarily by having recognized a substantial amount of contra R and D credit related to our Neutron upper stage development agreement with U. S. In the prior quarter, along with increases in staff costs, prototyping and material spend as we continue ramping our Neutron development program. We expect 4th quarter GAAP and non GAAP net interest expense to be $2,000,000 We expect 4th quarter adjusted EBITDA loss to range between $23,000,000 $27,000,000 and basic shares outstanding to be approximately 487,000,000 shares. Additionally, the unique situation created by the anomaly and related pent up impacts to the launch manifest as we prepare to return to flight Ahead into 2024, combined with better visibility on Space Systems program execution and revenue recognition as we prepare to ship the 1st spacecraft Against the MDA Globalstar program in the middle of the first half of twenty twenty four, provides us with the visibility and confidence to estimate Q1 twenty twenty four revenue to range between $95,000,000 $105,000,000 putting in sight our first $100,000,000 revenue quarter.

Speaker 3

This forecast would be the result of 4 to 5 launches in the quarter yielding between $30,000,000 $37,000,000 of launch revenue and $65,000,000 to $68,000,000 of contribution from Space Systems. This would represent a significant milestone for the company and we believe a strong endorsement of the end to end space solutions business model we're delivering on. And with that, we'll hand the call over to the operator for questions. Thank

Operator

you. Your first question comes from the line of Edison Yu with Deutsche Bank. Please go ahead.

Speaker 4

Thanks for taking our questions and appreciate the level of detail you provided on the investigation. First question on the manifest For next year, can you give us a sense of your confidence level on the 22? Is that sort of your base case? Or in other words, the ranges are 20% to 24% and the midpoint will be 22% or do you need kind of everything to go right to hit that 22% Target?

Speaker 2

Well, hi, Edison. As with any launch contract, right, We are always somewhat susceptible to factors that we can't control like customer readiness is always a big The customers need to turn up with their satellites on time. We there and of course, as I mentioned in my commentary, we have to execute from a manufacturing standpoint. But I think the key takeaway there is we have a completely sold out manifest for next year at a number that is really solid. I would say that we have to execute and there's always some Uncertainty from some things that we don't control, but that's certainly what we're targeting.

Speaker 4

Understood. And then just a follow-up to that. Can you give us a sense or maybe a bridge on the margin And launch, you had a very good quarter actually in 3Q. How does that margin trajectory look if you can get to that '22 launch cadence.

Speaker 3

Yes, I'll take it past that, Pete. So, yes, I mean, we've We've long stated that when we get to our target model for non GAAP gross margins of around 50%, That requires launching 24 times a year. So, we're going to make significant progress towards that as we launch as we kind of strike at that 22 number next year. So, if you look at any given quarter, if we have Again, 6 launches in the quarter that should be at or very close to our long term 50% non GAAP gross margin target.

Speaker 1

Got it. And if I

Speaker 4

can just speak one more in on Neutron. To correct on the milestones, Do we feel comfortable with the timeline? Should we interpret that as you guys feeling comfortable with the timeline on next year?

Speaker 2

Well, look, there's still a lot of work to go and the year is not finished yet. So we're pushing hard, but at this stage, we're not making Any adjustments to our predicted time line, but I'd just highlight there are still some really significant tests to be completed. But right now, we're not making any major changes.

Speaker 4

Got it. Thank you very much.

Operator

Thank you. Your next question comes from the line of Matt Akers with Wells Fargo. Please go ahead.

Speaker 5

Yes. Hey, guys. Good afternoon. Thanks for the question. I wanted to ask on Neutron.

Speaker 5

After that first launch, What sort of rate do you envision doing Neutron launches? And what rate are you kind of capacitized to support now? At what point would you need

Speaker 3

to sort of add Capacity, Derek.

Speaker 2

Yes. Hi, Matt. It's a good question. So, we're not trying to do anything herculean On Neutron, we've lived through the pain of creating a launch vehicle and standing it up and bringing it into production. So it follows a pretty similar cadence profile to what we were able to achieve with Electron.

Speaker 2

So we'll do a test flight or a couple of test flights and then move into sort of 3 or 4 a year and then continue to bootstrap and grow that and really follow the same model that we followed with Electron where we launched a little bit, we generate some revenue and we make improvements to the vehicle and we make improvements to the infrastructure. And we found that to be by far the most cost effective way rather than going out and building a giant factory to do huge volumes from day 1 And just consuming tremendous amount of capital, we've kind of always bootstrapped our way along and increased flight rate and cadence along with that and facilities along with that.

Speaker 5

Got it. Thanks. That's helpful. And then if I could ask on, I guess, free cash flow, How much sort of additional expense was there around kind of the investigation in Q3 and maybe into Q4 and sort of how are you thinking about free cash flow into

Speaker 3

2024. Yes. We didn't see a tremendous amount of, I would say resource diversion, a lot of these kind of anomaly investigations take a select group of very People to dive in and do the analysis and investigation there. There's not a lot of capital spend associated with it and we continue to Keep our foot on the gas when it came to production of Elektron. So, the anomaly that's going to itself really won't have any kind of noticeable material effect on cash flow in the 4th quarter.

Speaker 3

Yes, I think the biggest thing for us for cash flow is really around timing for the big space systems contracts. I mean, if you look at Our launch business, people typical model is you get people pay a 10% deposit at contract signing And then there's milestone payments along the way and typically, there's only 10% left to collect at the time that we actually launch the mission. So that's always been a good cash flow model. It's just all about that getting that business to scale, which again we're making great strides with being able to do. When it comes to Space Systems, they're large contracts.

Speaker 3

I mentioned lumpy a few times in the prepared commentary and that's Really true because you can have the achievement you have some delays of achievement of critical design milestones. You got to get through those gates before You can turn that over into the AIT phase of the program where you're doing the assembly, integration and test side of it. And so you can have periods depending what your payment terms are with your customers and On our largest space systems contracts, we're dealing with pretty sophisticated organizations that had pretty tough terms. It was we were chasing our first Large and meaningful space systems contracts, so we weren't necessarily in the best position to negotiate those types of terms to our advantage. So it leads to some I would say some A little bit of interim to near term pain on that side.

Speaker 3

We've experienced that in 2023. We expect that dynamic from the operating parts of our business to turn around and be much stronger from a cash flow perspective in 2024. Now, we'll continue to see consumption when it comes to Neutron, particularly around prototyping and particularly around infrastructure because we still have Infrastructure investments that DeNeese continue to make to prepare for that first launch at the end of 2024. That's great. Thanks for the color.

Operator

Thank you. Your next question comes from the line of Cai von Rumohr with TD Cowen. Please go ahead.

Speaker 6

Yes. Thanks so much. So, Q1, it looks like You have a target price of $7,500,000 Is that the price likely to be for the entire

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Earnings Conference Call
Rocket Lab USA Q3 2023
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