Rocket Lab USA Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 9 speakers on the call.

Operator

Hello, and thank you for standing by. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the ROCCAT Labs First Quarter 2003 Financial Results Update and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the conference over to Colin Canfield, Investor Relations Manager. Please go ahead, sir.

Speaker 1

Hey, thank you. Hello, everyone. We're glad to have you join us today for today's conference call to discuss Rocket Lab's Q1 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 Safe Harbor protection from liability established by the Private Securities Litigation Reform Act.

Speaker 1

Any such statements are not guarantees of 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 to comparable financial measures calculated in accordance with GAAP.

Speaker 1

This call is also being webcast with a supporting presentation and a replay and copy of the presentation will be available on our website. Our presenters today are ROCCAT Labs 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. Beck.

Speaker 2

Thanks, Colin, and welcome, everybody, and thank you for joining us. Today's presentation will go over our key business accomplishments for the Q1 of 2023 as well as further achievements we've made since the end of the quarter. Adam will then take us through our financial results for the Q1 before covering the financial outlook for Q2 2023. After that, we'll take some questions and finish today's call with the near term conferences we'll be attending. All right.

Speaker 2

On to what we achieved for the Q1 of the year. We started the year strong with 3 successful electron launches matching our expectations for the quarter. Each of these missions achieved an important company milestone. In January, we launched our first mission from U. S.

Speaker 2

Soil. We quickly followed that up Our second U. S. Launch from NASA Wallops in March. And then just 7 days later, we had had a successful launch from our LC-one launch site in New Zealand.

Speaker 2

Not only was this our fastest turnaround for launch to date, but by doing it from 2 different launch sites and countries really demonstrated The level of flexibility and responsiveness that we're delivering to customers now. Achieving this high launch cadence early in the year sets us up well to hit our 15 Electron Missions for 2023 as Planned. At a time when we're seeing many small launch companies fail to service the market, We're continuing to deliver successful missions for our customers. We're experiencing a correlated increase in launch bookings for Elektron in 2023 and beyond from our new and returning customers across government and commercial sectors. Our progress with Neutron is strong as well.

Speaker 2

We started off the year with a payment from the U. S. Space Force As part of a formal program milestone we met, this was recognized revenue in the Q1, which is great. Later in the presentation, I'll delve into some of the key launch Vehicle and program development updates for Neutron. Our Space Systems business also ticked some really big wins this quarter with Rocket Lab satellite components We are featuring on 18 spacecraft across 8 missions.

Speaker 2

We're seeing continued booking strength in our solar power division and we also hit some major program milestones 2 of the most significant satellite builds that I'll take you through as well. As mentioned, strong Q1 for Electron launches, Two missions from Launch Complex 2 in Virginia and a third from Launch Complex 1 in New Zealand, including that rapid 7 day turnaround between the 2 launch sites. All of these missions were for commercial constellation operators, all of whom have signed bulk dedicated launch contracts. Across more than 36 Electron launches, it has proven itself as a reliable workhorse for commercial and government providers alike. Commercial satellite operators need dependable rides to unique orbits and Electron remains the only small launch vehicle delivering this consistently.

Speaker 2

In fact, Even today, Elektron is the only U. S. Small launch vehicle to successfully deliver satellites in orbit in all of 2023. One of the latest multi launch deals was signed in February with Capella Space. The deal will see us fly 4 more dedicated Electron missions for Capella in from Launch Complex 1.

Speaker 2

With Launch Complex 2 now operational, we have the flexibility to move any of those missions to the U. S. If we need to meet our customer or mission requirements. On to big Rockets now. Development of Neutron continues at pace The team hitting some key development milestones in Q1.

Speaker 2

We're working steadily towards our 1st full scale Neutron booster at our U. S. Facilities, While at the same time closing in on a full scale Neutron second stage, including all composite parts ahead of flight hardware tank test in Q2. These latest photos from the factory show the size of those tanks. In Q1, we also reached a U.

Speaker 2

S. Base force payment milestone for completing successful development phases of Neutron. This payment is part of a $24,000,000 contract awarded to us by the Space Force To develop Neutron's upper stage to maximize mass to orbit capability, orbit insertion accuracy and responsive dedicated launch. These are all capabilities that position Neutron well to launch the highest priority national defense and security missions awarded through Lane 1 of the National Security Space Launch Phase 3 Program or NSSL Phase 3. Meanwhile, we're progressing well with Neutron's reusable engines, the Archimedes.

Speaker 2

Full scale Archimedes engine components are coming off the 3 d printers including injectors, combustion chambers. This is a great progression in the Archimedes development and it proves out the advanced Additive manufacturing techniques that we have planned for these engines. But as I've always said, the Rocket is only 1 third of the puzzle when developing an orbital launch capability at You also need advanced launch, test and manufacturing facilities and systems. So while the vehicle team advances Neutron's development, our ground systems and Teams have made significant progress developing test infrastructure, progressing the construction of Launch Complex 3 for Neutron and commissioning several new large scale 3 d printing machines and vehicle assembly facilities to enable rapid production. Last but not least, we're well into flight simulation flight software simulations now that the vehicle design is advanced and production is underway.

Speaker 2

Software has always been a key differentiator for Rocket Lab, whether it's Electron or a Photon spacecraft. We develop, test and fly our own tailored software, enabling us to drive Peak performance out of our vehicles. I'm pleased to report that we are flying successful orbital mission simulations to a range of orbit Mission profiles with our GNC or guidance navigation control and flight codes to the set to the current vehicle's design and configuration. We fly thousands of these flight simulations for every single Electron mission and this has been a key factor in delivering reliable successful missions for years. So it's important to be achieving this for Neutron this early.

Speaker 2

Onto our space systems now. This part of our business just keeps going from strength to strength. 2022 was the year that we cemented Rocket Lab's position as a leading spacecraft and Spacecraft Component Manufacturer. And now, we've truly moved into large scale manufacturing and execution. There have been more milestones and achievements than we can probably we won't have time to cover in this presentation, so I'll just hit some highlights.

Speaker 2

8 launches in Q1 deployed more than 18 spacecraft featuring Rocket Lab software or hardware, including missions for commercial constellation customers like BlackSky, Capella and OneWeb. We have more than 25 spacecraft in development for various customers, including a NASA mission to Mars, a communications constellation for Globalstar, in space manufacturing satellites and an on orbit fueling depot. To achieve this, we've scaled our space systems teams, expanded our manufacturing and development facilities And of course, vertically integrated all of our 4 space systems acquisitions into our photon spacecraft manufacturing programs. As part of that growth, we're seeing continued booking strength in our Solar Solutions division in particular and several major production milestones hit for up and coming missions. Production is now well underway for our twin spacecraft that we're building for the NASA Escapade mission to Mars.

Speaker 2

A 2024 launch date has now been set, allowing us to move forward with the assembly integration and testing at our satellite production facility in Long Beach. Now on to our key achievements since the end of Q1. Just 2 days ago, we successfully launched the first of 2 dedicated missions for NASA to deploy the tropics constellation.

Speaker 3

This is

Speaker 2

a really critical constellation that will monitor tropical storms with higher revisit times Than typical weather satellites, providing forecasters with more accurate storm data and to provide advanced warnings and ultimately to save lives. With this first mission now complete, we'll be following up with the second one in about 12 days, and that will complete the constellation in time for the North American Speaking of NASA, we've been awarded another mission by the agency. Electron will launch NASA's Starling mission, A multi cubesat mission to test and demonstrate autonomous swarm technologies. We're set to deploy these 4 satellites to orbit within just 3 months of contract signing. They were previously manifested on a different launch vehicle, but due to long delays and continued uncertainty, they have remained They have been re manifested on Elektron for Q3 this year.

Speaker 2

We recently signed multiple dedicated and rideshare launch contracts on Elektron, Including many with new customers who were previously manifested on other small launch vehicles, but have moved to Elektron after facing lengthy delays and uncertainty with other providers. This migration is a testament to Elektron's demonstrated position as the reliable, dependable right to orbit for small sats. Hypersonics. So hypersonic and suborbital test capabilities are key priorities for the nation. Despite how critical these capabilities are, the supply of sustainable and suitable vehicles and wind tunnels is severely constrained, And this is proven this is a problem that we can actually solve right now.

Speaker 2

This quarter, we formally introduced H. A. S. T, the hypersonic accelerator suborbital test Electron, A suborbital test launch vehicle that is derived from the Electron. HACE provides reliable high cadence flight test opportunities needed to advance hypersonic systems.

Speaker 2

This isn't the promise of a future capability. In fact, the first ROCKET is at LC2 Virginia undergoing its final preparations for launch right now. HACE has been selected for a range of government programs, including the Navy Crane's MARC TB project, DIU's HICAT program and Mr. Defense Agency's Targets and Countermeasures Study. For more on haste, I encourage you and refer you to the press release issued on April 17 available on our website.

Speaker 2

This quarter, we also completed extensive final qualification and testing on the 1st Rutherford engine that will be flown Into space for a second time. This is an engine that we launched last year as part of our reusability program and now we brought it back to the factory, run it through a gauntlet of tests And put it back into the production flow to join a ROCCAT for launch in Q3 later this year. This is a big step forward in our reusability program and one of Few remaining milestones before moving into full stage reuse. Last week, we shipped our first of 4 Photon spacecraft for VARTA Space Industries, an in space manufacturing company planning to manufacture high value products in pharmaceuticals in space. This is a big milestone for our space systems team and a great way to start a busy year of satellite production that will see us work on NASA's ETA NASA and ETA Space's Lockset, Photon and also Spacecraft Bus to support Fuel Depots in Space.

Speaker 2

Photon Spacecraft Mission for Mars Also is in development and plus 17 spacecraft satellite buses for Globalstar. And last but not least, this quarter we introduced a new star tracker designed specifically for constellations. The latest star tracker is a new version of our existing high performance Star Trekker, but is evolved for mass manufacturing and can be used as a responsive small satellite solution. It joins a growing list of spacecraft components that we've recently developed and released, including reaction wheels, satellite radios to make best in class off the shelf space systems hardware available for commercially and also at Scale. So with that, I'll hand over to Adam to present the financial highlights and outlook.

Speaker 2

Thanks, Pete. 1st quarter 2023 revenue was $54,900,000

Speaker 4

which was above the high end of our prior guidance of $51,000,000 to $54,000,000 Q1 2023 revenue reflects sequential growth of 6% and the result of 3 successful launches and continued strong contribution from our space systems business. Our Launch Services business delivered revenue of $19,600,000 in the quarter off of 3 launches, which was modestly above our prior guidance of $19,000,000 The resulting average revenue per launch came in below our standard pricing due to a partially filled rideshare mission where we prioritize getting our 1st LC2 launch off versus opting to delay the launch to fill out the remaining rideshare capacity. As we progress through the year, including what is embedded in the current Q2 guide to be discussed later, Our manifest indicates a trend towards higher priced emissions. Our Space Systems business delivered $35,300,000 in the quarter, Which exceeded the high end of our prior guidance range of $32,000,000 to $35,000,000 With strength in key programs across defense, civil and commercial customers And despite delayed revenue recognition impacts from vertically integrated supply of components for photon satellite build programs. Now turn to gross margin.

Speaker 4

GAAP gross margin for the Q1 was 11.6%, well above the high end of our guidance range of negative 5% to negative 3%. Non GAAP gross margin for the Q1 was 17.9%, which was also well above our guidance range of 7% to 9%. GAAP and non GAAP gross margin improvements relative to our Q4 2022 results reflect a combination of increased launch cadence, An increase in average launch price and a favorable mix within our Solero and PSC businesses as well as improved mix between components and services at the segment level. Additionally, gross margins benefited from greater electron production efficiency, which has allowed us to shift or redirect production to support Neutron and Photon R and D programs, thereby moderating incremental R and D headcount hiring. Relatedly, we ended Q1 with production related headcount of 757, down 61 from the prior quarter.

Speaker 4

Turning to operating expenses. GAAP operating expenses for the Q1 of 2023 were $52,400,000 above the high end of our guidance range of $44,000,000 to $46,000,000 Non GAAP operating expenses for the Q1 were $40,200,000 which was also above our guidance range of $33,000,000 to $35,000,000 The increase in both GAAP and non GAAP total operating expenses versus the Q4 of 2022 was primarily driven by a step up in staff cost and material to supporting Neutron and Photon development, partially offset by a $1,700,000 employee retention credit recorded in Q1. In R and D specifically, GAAP and non GAAP expenses were up $8,900,000 quarter on quarter as we continue to aggressively ramp up our Neutron development efforts through both new hires and redeployment of existing production resources. Q1 ending R and D headcount was 456, representing an increase of 90 from 348 in the prior quarter. In SG and A, GAAP expenses increased $4,400,000 quarter on quarter, Driven primarily by staff costs, including stock based compensation and outside services, in particular, our year end audit and stocks related costs.

Speaker 4

Non GAAP SG and A expenses increased by $3,900,000 driven by the same items excluding stock based compensation. Q1 ending SG and A headcount was 219 representing an increase of 22 from the prior quarter. In summary, total headcount was 1432 as of March 31, 2023, up 51 heads from the prior quarter. Cash consumed from operations was $25,400,000 in the Q1 of 2023 compared to $18,900,000 in the Q4 of 2022. The sequential increase of $6,400,000 was driven primarily by an increase in GAAP loss as working capital was flattish during Q1.

Speaker 4

Purchases of property, equipment and capitalized software licenses decreased from $15,000,000 in Q4 of 2022 to $12,700,000 in Q1 of 2023. This sequential decline is largely related to the timing of goods received and payment terms as we continue our investments in Neutron and Photon Production Equipment and Facilities Enhancements. Overall, Non GAAP free cash flow defined as GAAP operating cash flow reduced by purchases of property, equipment and capitalized software In the Q1 of 2023 was $38,100,000 compared to $33,900,000 in the Q4 of 2022. The ending balance of cash, cash equivalents, restricted cash and marketable securities was $450,000,000 as of the Q1 of 2023. And with that, we'll take a look at our Q2 results in 2020 3.

Speaker 4

We expect revenue in the Q2 to range between $60,000,000 $63,000,000 which reflects $37,000,000 to $40,000,000 of contribution from Space Systems and $23,000,000 from launch services, which assumes 3 launches for 2 months in the quarter. 1 of the 3 launches forecasted in Q2 was Sunday's successful NASA tropics mission out of LC-1 in New Zealand. As referenced earlier, based on our manifested launch backlog, we continue to expect 15 launches in 2023 and our average selling price to trend to our standard pricing as we We expect 2nd quarter GAAP gross margin to range between 14% to 16% and non GAAP gross margin to range between 22% to 24%. These forecasted GAAP and non GAAP gross margin improvements Reflect continued efficiency improvements, launch average selling price improvement and a modest improvement in mix within our Space Systems segment. We expect 2nd quarter GAAP operating expenses to range between $55,000,000 $57,000,000 and non GAAP operating To range between $41,000,000 $43,000,000 The quarter on quarter increases are driven primarily by continued step up in staff costs prototyping and material spend supporting Neutron and Photon Development Programs.

Speaker 4

We expect 2nd quarter GAAP and non GAAP net interest expense to be $1,000,000 We expect 2nd quarter adjusted EBITDA loss to range between $22,000,000 $24,000,000 and basic shares outstanding to be approximately 480,000,000 shares. And with that, we'll hand over the call to the operator for questions.

Operator

Your first question comes from the line of Rasmussen, Eric.

Speaker 3

Yes. Thanks and congratulations on a good Q1. I wanted to talk about launch. It Look like there's a lot of positives in the quarter and obviously there's some washout if you will with some of the other smaller players that were Obviously, having challenges. You mentioned increase in the launch bookings given strong demand.

Speaker 3

What would be the limiting factor to maybe not achieving a higher launch cadence in the 15 that you're currently targeting?

Speaker 2

Yes. Hi, Eric. It will be customer readiness as usual. We continue to see customers moving around And we're fully booked for the year, and that will be the determining factor. The factory continues to produce rockets at the rate that's required.

Speaker 2

Like I say, that's the usual factor.

Speaker 3

Great. And maybe just staying with launch, your NSSL opportunity, any updates on That you can share on how things are progressing with the RFP process and maybe how big of an opportunity could this be for Rocket Lab?

Speaker 2

Yes. We're naturally very happy with the approach that the NSSL folks have taken. The 2 lane approach Ensures a good balance of ensuring the nation has assured access to space through the 2 incumbents. But the additional Lane 1 gives us the opportunity to onboard and provide extra services. We're really happy with the overall constraints of the program.

Speaker 2

We're advocating to keep the bar high, which is what's happened. And the mass class is squarely suited for Neutron. So we think Neutron is very well positioned to play in that lane one amongst a very small group of vehicles that will be ready in time to do so.

Speaker 3

Great. And then maybe just my last question. You talked and you introduced the HACE ROCCAT. How should we think about these in sort of the context of launch overall and what you've sort of guided for 2023 and the 15 total launches?

Speaker 2

Yes. So the hypersonic flights will be included in that fifteen number.

Speaker 3

Very good. Thank you.

Operator

And your next question comes from the line of ROTH Capital.

Speaker 5

Hi, Peter, Adam. It's CJS. So congrats on the progress. So the 7 day turnaround you just had was pretty impressive. Just curious generally, what were some of the proprietary elements that allow you to Turn around that quickly.

Speaker 5

I know your competitors are having trouble just launching it all, but what allows you to kind of be able to turn around that quickly?

Speaker 6

And will reuse further improve that?

Speaker 2

Yes, it's a good question, Sujit. I mean, the ROCCAT is only 1 third of the part of the equation here. Having both the facilities in order to do that and also cross train teams that can do that. So we can support launch out of Multiple different sites. And also having the rockets coming off the production line at a rate that Enables that kind of launch frequency.

Speaker 2

So it's not trivial to do. It requires a lot of Coordination and planning, but that's kind of where we've got to. We built a factory that was capable of a really high Production cadence and that's delivering and the launch teams are very well tuned and honed now The launch vehicle is very well bid in. So those are things that will enable us to achieve that.

Speaker 4

Yes. Suji, I would add to that too that really Pete talked about the infrastructure. I mean, it really is a key piece. The fact that we have 2 operational launch locations And one of those where it's in private control, right? We control the manifest entirely.

Speaker 4

So it gives us a tremendous amount of flexibility. I think it would probably be impossible to do this if you didn't own one of the 2 ranges, right? So I think that level of flexibility allows us to do things that

Speaker 5

Okay, great. And then my other question is on Space Systems on the upcoming the MDA Globalstar program, which I imagine would start ramping more aggressively in the second half and into calendar 24. Is that still timing unchanged and is the when the initial revenue contribution there expected? Thanks.

Speaker 4

Yes. So we'll start to see meaningful revenue contribution from that in Q3. So it will be a fairly significant step up in Q3 from Q2 And then continue on from that into Q4 and obviously into the first half of twenty twenty four. So yes, everything is on schedule, everything looks good, Consistent with everything that we've kind of articulated in the past.

Speaker 6

Okay, great. Thanks guys.

Operator

Your next question comes from the line of Morgan Stanley.

Speaker 7

Hey, good afternoon, everyone. Following up on HACE, right, looking at the payload for Elektron, your previous guidance was 15 launches for the full year, but that was with Electron about 300 kilograms per payload. So with having haste included and you now have Some of these launches having 700 kilograms of payload. Can you talk about the economics of it? Are they at the same total price or are you getting paid the same price per kilogram?

Speaker 7

How do we think about overall economics of electron versus paste in terms of revenue and margin?

Speaker 2

Yes, sure. So I mean, when someone comes to us, they buy the entire launch vehicle. When you buy a dedicated rocket, you buy the whole rocket. So it's not priced out as a cost per kilogram. In fact, the whole cost per kilogram metric is really only applicable to kind of rideshare missions where you may actually Pay cost per kilogram.

Speaker 2

So whether it's an orbital mission or a suborbital mission, someone's coming to us and buying the complete launch vehicle. And the missions like HACE that have an element of mission assurance, Extra mission assurance and obviously more complex trajectories typically will demand a higher ASP than a very standard electron orbital

Speaker 4

Yes. Christine, there's also a launch premium for launches out of LC2 in Virginia, because again, that's a range That's operated by NASA versus our range in New Zealand. So there's a variety of things that drive and right now all the hypersonics Opportunities are going to be flying out of LC2. So for all the reasons Pete mentioned around Mission Assurance, but also kind of locational premium Drives kind of an upward bias to the ASP.

Speaker 7

I see. And in terms of margin economics between an electron launch versus a HACE launch. How do we differentiate between the 2?

Speaker 4

Well, I mean, I would say the Probably the biggest difference would again be launching out of LC2. We pay range fees to NASA, but again, Largely, those are kind of factored in. So from a margin contribution perspective, they should be kind of equal to Kind of your ordinary kind of Rocket Lab launch.

Speaker 7

I see. And then following up on the reused Rutherford engine in Q3. Do you have an idea of how quickly you can turn around these engines for reflites down the line? And Also, how many times can a single engine be used?

Speaker 2

Yes, that's a great question. So answering your question kind of backwards, The qualification tests we did on the recovered engines, we've put a number of them through a total of Full duration hot fires. That's like going to orbit 16 times and so no degradation in their performance Or an engine at all. So the Rutherford engine is a mighty nuggety engine and with very good margins. So the kind of limit to reuse would be in excess of probably 10 times.

Speaker 2

But The caveat to that is we need to slowly step our way through this and we're being very conservative here. You noticed that we've taken the most difficult and critical element and are re flying that kind of independently of a whole new stage first. As we believe once we have built confidence in the reflying engines, then that's kind of the hardest piece of the whole puzzle complete.

Speaker 7

Great. Thank you for the color.

Speaker 5

My pleasure.

Operator

And your next question comes from the line of Madhur A.

Speaker 6

Hello?

Speaker 2

Hello, maybe we can hear you.

Speaker 6

Hey, how are you guys? Sorry about that. It's Andre. Could you just provide a little bit of color? So it looks like production had come down.

Speaker 6

Could you give A little reasoning as to why that happened?

Speaker 4

Yes. So again, I was trying to convey earlier that We've been fortunate that we've been able to repurpose our production resources to support the Neutron and Photon R and D initiatives. So it's really a case where we've gotten to be much more efficient building electrons that we have these resources. So rather than higher incremental R and D heads to support those programs, We can now just basically move or reclass those resources from production to support R and D. So that kind of just speaks to the kind of The fungibility and flexibility of the types of resources that we have, where again, our production folks are equally capable performing very complex R and D tasks.

Speaker 4

And so it's Super helpful for us to be able to have a really fungible workforce that we can kind of move around as need be. So that's really what's driving it. As I Mentioned earlier, total headcount increased. It's just kind of the mix within changed quite a bit as again, we kind of hit that new stride in production efficiency on Elektron.

Speaker 6

Got you. Got you. Yes, that makes sense. And then I kind of want to touch on maybe just the If you could just quantify the order momentum at Space Systems and maybe give a little update on some of that low margin Sol Aero backlog, Where you guys are at burning that down?

Speaker 4

Yes. So on the space system side, we are getting a lot of increased Kind of high value opportunities for not only on the component side, but also on the full spacecraft side of things. This is the way that we've constructed the Space Systems business is that We're not going after kind of small onesie twosie opportunities. We're going after large chunky programs. Then when they do close, we'll be meaningful movers to overall backlog.

Speaker 4

So I would say that we continue to see momentum and kind of progress towards, but those deals are taking a little bit longer to close, I would say than smaller deals, which kind of makes sense. And then when you look at the margin profile of Solera business, I can tell you, Pete and I have been incredibly impressed with the way over the last couple of quarters, All the new business that we're closing and putting into backlog is significantly higher gross margin than what came with the deal acquisition and really kind of supports this transition to get the business to be north of a 30 point gross margin business. We talked about this on a prior call. It's probably going to take us about a year longer than we originally anticipated to burn through that lower margin backlog And have it be replaced with all this new business that's being placed. And at the same time too, there's a dynamic of Fulfilling demand for internal programs.

Speaker 4

So we're only obviously continue to sell the solar solutions out to the merchant market at higher margins, But obviously, we're vertically integrated into our Photon build. So we have goodness there as well. I don't know if

Speaker 2

you want to add anything. Yes. Just as As Adam mentioned, we've been very selective on which orders we take on. To Adam's point, we're not looking to do little things here and there. We're looking for Pretty serious needle moving things.

Speaker 2

And naturally, they take longer to close than smaller things. And then I would say that We've been harping on for a while now that solar space solar is a constrained environment, constrained supply. And, if you only need to look across all the spacecraft that are in development or manufacture right now, and it's fairly clear that a solar crunch has started to occur. And we're investing in more capacity, but obviously, solar constraint is helping to drive some of those margins.

Speaker 6

That's all very helpful. Thanks, guys.

Operator

Lab. Your next question comes from the line of Jason Gursky.

Speaker 8

Hello, everybody. Hey, Peter, I wanted to give you an Maybe to talk about the competitive landscape as you see it today, how things are evolving and maybe Talk about the next 4, 5 years and see get a sense from you on how you see the competitive landscape Shaking out here over the next several years. And kind of tied to that, then maybe Adam, you can I've been here on this particular question. Just kind of the pricing environment that you're seeing on the new orders and whether we're beginning to see Some upward lift in the backlog that you're building relative to the backlog that you're chewing through.

Speaker 2

Yes. Thanks, Jason. I'll get out my crystal ball here for you. But I would say On small launch, I think my personal view is it's pretty tough To enter that market at this point, I mean, Elektron has demonstrated just such great reliability and a good service That becomes harder and harder to break into that. Not being as arrogant as to think that nobody can't do that, but Certainly, it will be difficult.

Speaker 2

So we've seen a failure of a lot of small launch vehicles or a failure to deliver Over the years and even more recently in more dramatic ways. So I think on the small launch side, it's a great market. It's a nice little niche market and Electron will probably continue to do well there. And I'm not sure if I really see Too many small launch vehicles coming online in the future. Now on kind of the medium to large, I think that's a very different environment.

Speaker 2

And the fact that, look, there's a launch crunch coming in that sort of 20 5 to 20 maybe even up to 30 timeframe. You don't need to be a rocket scientist to figure that out. Like if you look at all of the spacecraft that are in development And I'm looking for manifest. You look at the likes of Kuiper who bought up most of the launch Available globally, kind of Ariane 6 delayed and other launch vehicles delayed as well. That is going to be a really, really interesting time.

Speaker 2

And of course, our whole approach here and philosophy is to bring Neutron online right at the peak of that crunch. So we think that vehicle will do well. If you look at things like the NSSLP Phase Pre program, Neutron is ideally situated to provide a good and play a good role in that. So I think in a new capital constrained environment where real kind of products and real businesses have to survive, I think it's there's going to be somewhat of a whittling of the wood and really Strong executives are going to be the ones that are left over to supply. And then on the really heavy stuff, I think that's an interesting market.

Speaker 2

That's more of a the creation of a market rather than the servicing of a market. So I think that will be Super interesting over the next 4 to 5 years. So over to you, Adam. Yes.

Speaker 4

I'd say, Jason, with regards to Pricing dynamics, I would say certainly things like you're seeing with missions being re manifested from other providers to us has been Very supportive to pricing. I think it's going to continue to do so. I think, as Pete mentioned, there's just been a lack of execution on delivering payloads from others. So I think people are starting to realize that there this is a really difficult thing to do. Program delays are incredibly costly to customers.

Speaker 4

And so the ability to basically Have a high degree of confidence that you're going to deliver their satellite on orbit on time. Again, It's something that we're seeing customers are willing to pay a premium for. So again, I think that's all very supportive towards launch pricing. And then on the Space Systems side, it's really we're starting to see some very significant benefits to kind of the end to end strategy that we've put in place. So, Unlike some other satellite manufacturers who have the issue of multiple levels and degrees of margin stacking, We really control so many of the key subsystems within our platforms that we can have we have a lot of different knobs that we can turn.

Speaker 4

And oftentimes, we do that in ways that kind of can deliver very good, very attractive margin profiles for the programs. And again, I don't think that would be doable without the level of vertical integration that we've pulled together here. So right now, I'm as optimistic on pricing Both launch and space systems as I've been, we just continue to see all the pieces move in the right direction. And I think we don't see any kind of change in trend on that front.

Speaker 8

Okay, great. Okay, if I sneak in one more?

Speaker 2

Yes.

Speaker 8

Yes. Okay, great. So just going back to Globalstar, it sounds like the revenue ramp begins In the second half of the year. Can you maybe just talk a little bit about technical milestones, any risk retirement that you'll We'll be working on either now or as you get going here

Speaker 4

that we should all Be kind

Speaker 8

of aware of and kind of appreciate as you retire that risk. And are there any risk to your expectations on Margins for that program to the extent that the risk retirement doesn't go as planned.

Speaker 2

Well, I can talk briefly to the technical milestones and I have to say that I'm just incredibly impressed with the team. It's a very difficult spacecraft. It Operates in a very difficult environment. Of course, it needs incredible uptime. But the team continues to knock down major milestones like PDRs and the supply chain team continue to work their magic to make sure everything that's not Rocket Lab produced It's arriving on time.

Speaker 2

So I think we're very we're all very happy with the way that project is coming together. We've got a big team working super hard to make sure it does. But certainly on my horizon, there's nothing that I can foresee that's causing likely to cause issues. But I can let Adam talk to more of the

Speaker 4

less technical issues. Yes. So on the margin profile, I would say that we were very aggressive early on in this program to do to get a lot of the long lead procured items In hand, so long lead purchase contracts that were done like a year or so ago. So we have very good visibility as to what the input costs are for the program For 3rd party source elements. And then obviously, we have a tremendous amount of vertical integration on this platform in particular and we Absolutely know kind of what our costs are there because we've been selling the same solutions in a large part into the merchant market for many years.

Speaker 4

So I I would say that the margin risk on the program is actually quite low. There's always things that can come up and bite you on a program, whether it's a rocket or a satellite. But right now, we're as we as more time gets behind us, as we get much closer to actually starting to deliver these platforms, We're seeing a lot of the risk get retired and start to be in the rearview mirror. So yes, I think We feel pretty good about where we're at as far as again derisking the program from margin perspective and no huge technical obstacles have kind of surfaced that would cause Kind of program to phase either. So I think we're in good shape on both timeline and on margin.

Speaker 8

Okay, great. Appreciate the time guys.

Operator

And your final question comes from the line of Daiya Yoo.

Speaker 6

Hey, it's Edison Yu from Deutsche Bank. I think the name goofed a little bit. First question, I want to come back to the gross margin. I don't think you broke it out yet, but where did you see more upside relative to the expectations in the quarter? Was it more on a launch or space systems?

Speaker 4

Well, there was a bunch of things that we're moving around. Obviously, we the exceeding the Former guidance on gross margin was again really go into the quarter with as much, I would say optimism on being able to kind of reposition the resources From production into R and D. So a lot of that came into focus kind of a late stage as we were kind of in the quarter, we only managed to get A bunch of that realized. I would say there's if you look at margin improvement, certainly I think the biggest area for upside is going to be on the launch side of things. Because if you look at the fact right now, we have we're still dealing with the fact that we've got a cadence kind of Dynamic that's driving overhead absorption.

Speaker 4

So now we have 2 launch ranges that we have to kind of support. 1 we obviously own. So if you look at LC-one in New Zealand, it's a relatively high fixed cost, so very dependent upon cadence out of that site. And with the NASA range in Virginia, we have kind of variable costs that drive that plus a little bit of fixed costs that go along with it. It really, really again, our business on the launch side is very, very leveraged to the number of launches per quarter.

Speaker 4

And even now increasingly where those launch So theoretically, like in Q1 where you had 2 of our 3 launches came out of Virginia, I think that left a lot of unallocated costs to be absorbed over those over the one mission that did come out of LC-1 in New Zealand. Now in Q2, the mix is going to be different where the launches are coming out of. You'll have 2 out of LC, 1 in New Zealand, 1 out of LC2. So you'll be able to absorb more of those fixed costs The 2 launches coming out of New Zealand and you'll have one variable cost intensive mission coming out of Wallops. So I really do think as we Scale to the 15 launches this year and as we've talked in the past, shooting for 20 launches next year with 6 in the 4th quarter kind of establishing that exit Great out of 2024 to get to our target model for margin.

Speaker 4

Cadence is an overwhelming Driver of getting to those margin targets. And again, there's a tremendous amount of room to go from where we're at right now to where we're going to get to. And then the other piece, of course, is recovery of the 1st stage booster. So Pete mentioned the progress that we've been making on that, particularly with the engine that's going to fly a little bit later this year. But Space Systems is, it's got there are pockets of that business that have very nice gross margins.

Speaker 4

There's others like we talked about in the past, that suffered from a little bit lower gross margins that are kind of being upgraded as we churn through that lower kind of historical backlog. But really, if you look at where the ROCC biggest increase can come from, it really can come from electron scaling through the cadence and recovery.

Speaker 6

Appreciate the color. And just one follow-up on, I guess, Space Systems More specifically, I know it outperformed in the quarter. Any specific product lines you would call out? And I think also you announced And you win on Solero. So just curious kind of the trajectory going forward.

Speaker 6

Is there some products that are sort of outperforming?

Speaker 4

Well, yes. So I mean, the big grower really from a percentage perspective has really been the Photon business, right? So the satellite manufacturing piece. And so as Pete mentioned earlier, we were able to ship the first VARTA spacecraft. And really it's Q3 where you're going to start to see a very meaningful up Tick in revenue recognition on the MDA Globalstar satellites.

Speaker 4

So that is by far going to be kind of the biggest Kind of percentage grower in the second half of the year, again, continued again from programs that we've identified previously.

Speaker 6

Great. Thank you.

Operator

And you do have a final question from the line of Madhir.

Speaker 6

Hello?

Speaker 2

Hello. Yes.

Speaker 6

Yes. Okay. Yes. Just one more to follow-up. Given that you guys are pretty certain of the manifest going through 2023, I mean, When can we start to see some more long term targets being outlined?

Speaker 4

Well, I think of the manifest, we've been pretty clear You're growing to 15 launches. Next year, we've set a target for 20, but exiting the year at a rate of 24. And that's very consistent with the long term model that we've had. We think there's enough market opportunity to drive Up to in our model, we had over 30 launches per year. And that remains pretty consistent.

Speaker 4

And that's of course separate and distinct from Neutron's opportunity. But I think that There's again, there's I would say nothing that's going to cause us to revisit what the kind of volume opportunity is for Elektron. The small dedicated launch market continues to be pretty strong. We continue to be outperforming relative to our peer group. So Yes, I don't think we're going to give kind of longer term kind of outlook for launches beyond kind of what we've already articulated, which I think is pretty far out.

Speaker 4

We're basically telling you And what you can expect for launches through the end of next year. Once we get into 2025, it's kind of anybody's guess at this point. We do have some booking and some visibility, Obviously, into 25, in some cases, even longer than that. But we're also we've kind of recognized a pattern here where We've got great visibility within 12 months. Once you get outside of 12 months, it starts to get a little bit more kind of unclear.

Speaker 4

We kind of track what all the opportunities are out there. It just becomes a question of what percentage capture do we have in the market or what our market share is going to be. And obviously, right now, we have a tremendously high market share. We believe that we'll be able to maintain pretty high market share. But I would say again, we're on track to 15 this year, Next year on exiting at a rate of 24 and then we'll see where it goes from there.

Speaker 6

Got you. Thanks.

Operator

And there are no further questions at this time.

Speaker 2

Okay. Well, that wraps up today's presentation then. And thank you everyone for joining us on the call. Adam and I will be speaking at these up and coming conferences and look forward to the opportunity to share more exciting news and updates with you then. Thanks again, and we look forward to seeing you and speaking to you about the exciting progress being made at Rocket Lab.

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Earnings Conference Call
Rocket Lab USA Q1 2023
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