Rocket Lab Corporation (RKLB) Earnings Call Transcript & Summary

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 Rocket Lab First Quarter 2023 Financial Results Update and Conference Call. [Operator Instructions] I would now like to turn the conference over to Colin Canfield, Investor Relations Manager. Please go ahead, sir.

Thank you. Hello, everyone. We're glad to have you join us today for today's conference call to discuss Rocket Lab's First Quarter 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 liability established by the Private Securities Litigation Reform Act. 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 the comparable financial measures calculated in accordance with GAAP. 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 Rocket Lab Founder and Chief Executive Officer, Peter Beck; and Chief Financial Officer, Adam Spice. After our prepared comments, we will take questions. And now let me turn the call over to Mr. Beck.

Thanks, Colin, and welcome, everybody, and thank you for joining us. Today's presentation will go over our key business accomplishments for the first quarter 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 first quarter 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, on to what we achieved for the first quarter 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. soil. We quickly followed that up by a second U.S. launch from NASA Wallops in March. And then just 7 days later, we had a successful launch from our LC1 launch site in New Zealand. 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 Electron in 2023 and beyond from our new and returning customers across government and commercial sectors. Our progress with Neutron is strong as well. 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 first quarter, which is great. Later in the presentation, I'll delve into some of the key launch vehicle and program development updates for Neutron. Space systems business also took some really big wins this quarter with Rocket Lab satellite components or software featuring on 18 spacecrafts across 8 missions. We're seeing continued booking strength in our solar power division, and we also had some major program milestones in 2 of our most significant satellite builds that I'll take you through as well. As mentioned, a strong first quarter 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 workforce for commercial and government providers alike. Commercial satellite operators need to pin satellites to unique orbits and Electron remains the only small launch vehicle delivering this consistently. In fact, even today, Electron 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 from Launch Complex 1. With Launch Complex 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 with the team hitting some key development milestones in Q1. We are working steadily towards our first full-scale neutron booster at our U.S. facilities, while at the same time closing on a full-scale Neutron second stage, including all composite parts ahead of flight hardware tank tested in Q2. These latest photos from the factory show the size of those tanks. In Q1, we also reached a U.S. Space Force payment milestone for completing successful development phases of Neutron. This payment is part of a $24 million contract awarded to us by the Space Force to develop Neutrons upper stage to maximize mass-to-orbit capability, orbital 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 Neutrons for usable engines, the Archimedes. Full-scale Archimedes engine components are coming off the 3D 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, a rocket is only 1/3 of the puzzle when developing an orbital launch capability at scale. We also need advanced launch tests and manufacturing facilities and systems. So while the vehicle team advances Neutrons development, our ground systems and manufacturing teams have made significant progress developing test infrastructure, progressing the construction of Launch Complex 3 for Neutron, and commissioning several new large-scale 3D printing machines and vehicle assembly facilities to enable rapid production. Last but not least, we are well into flight software simulations now that the vehicle design is advanced and production is underway. 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 orbits and mission profiles with our GNC or guidance navigation control and flight codes to fit to the current vehicles 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. On to 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. Eight launches in Q1, deployed more than 18 spacecrafts featuring Rocket Lab software or hardware, including missions for commercial constellation customers like BlackSky, Capella and OneWeb. We have more than 25 spacecrafts 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 have scaled our Space Systems teams, expanded our manufacturing and development facilities and of course, vertically integrated all of our four 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. 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. This is a really critical constellation that will monitor tropical storms with higher revisit time than typical weather satellites, providing forecasters with more accurate storm data and to provide advance warnings and ultimately to save lives. With this first mission now complete, we'll be following up with a second one in about 12 days, and that will complete the constellation in time for the North American hurricane season. 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 been remanifested on Electron for Q3 this year. We recently signed multiple dedicated and rideshare launch contracts on Electron, including many with new customers who were previously manifested on other small launch vehicles, but have moved to Electron after facing lengthy delays and uncertainty with other providers. This migration is a testament to Electron's demonstrated position as the reliable, dependable ride 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 has proven this is a problem that we can actually solve right now. This quarter, we formally introduced HASTE, the hypersonic accelerator suborbital test Electron, a suborbital test launch vehicle that is derived from the Electron. HASTE provides reliable, high-cadence, flight test opportunities needed to advance hypersonic systems. 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. HASTE has been selected for a range of government programs, including the Navy Crane's MACH-TB project, DIU's HyCAT program, and Missile Defense Agency's Targets and Countermeasures. For more on HASTE, I encourage and refer you to the press release issued on April 17 available on our website. This quarter, we also completed extensive final qualification and testing on the first Rutherford engine that will be flying into space for a second time. This is an engine that we launched last year as part of our reusability program, and now we've brought it back to the factory, run it through a gauntlet of tests and have put it back into the production flow to join a rocket for launch in Q3 later this year. This is a big step forward in our reusability program and one of the few remaining milestones before moving into full stage reuse. Last week, we shipped our first of 4 Photon spacecrafts for Varda Space Industries, an in-space manufacturing company planning to manufacture high-value products and 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 and Eta Space's LOXSAT, Photon, and also spacecraft bus to support fuel depots in space. Photon spacecraft mission for Mars also is in development, 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 tracker, but is evolved for mass manufacturing and can be used as a responsive small satellite solution that 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.

Thanks, Pete. First quarter 2023 revenue was $54.9 million, which was above the high end of our prior guidance of $51 million to $54 million. First quarter 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 $19.6 million in the quarter off of 3 launches, which was modestly above our prior guidance of $19 million. The resulting average revenue per launch came in below our standard pricing due to a partially filled rideshare mission where we prioritized getting our first LC2 launch off versus opting to delay the launch to fill up 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 missions. Our Space Systems business delivered $35.3 million in the quarter, which exceeded the high end of our prior guidance range of $32 million to $35 million, 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 turning to gross margin. GAAP gross margin for the first quarter was 11.6%, well above the high end of our guidance range of negative 5% to negative 3%. Non-GAAP gross margin for the first quarter 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 '22 results reflect a combination of increased launch cadence, an increase in average launch price, and a favorable mix within our SolAero 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 resources to support Neutron and Photon R&D programs, thereby moderating incremental R&D headcount hiring. Relatedly, we ended Q1 with production-related headcount of 757, down 61 from the prior quarter. Turning to operating expenses. GAAP operating expenses for the first quarter of 2023 were $52.4 million, above the high end of our guidance range of $44 million to $46 million. Non-GAAP operating expenses for the first quarter were $40.2 million, which was also above our guidance range of $33 million to $35 million. The increase in both GAAP and non-GAAP total operating expenses versus the fourth quarter of 2022 was primarily driven by a step-up in staff cost and material purchases supporting Neutron and Photon development, partially offset by a $1.7 million employee retention credit recorded in Q1. In R&D specifically, GAAP and non-GAAP expenses were up $8.9 million quarter-on-quarter as we continued to aggressively ramp up our Neutron development efforts through both new hires and redeployment of existing production resources. Q1 ending R&D headcount was 456, representing an increase of 90 from 348 in the prior quarter. In SG&A, GAAP expenses increased $4.4 million quarter-on-quarter, driven primarily by staff costs, including stock-based compensation and outside services, in particular, our year-end audit and SOX-related costs. Non-GAAP SG&A expenses increased by $3.9 million, driven by the same items excluding stock-based compensation. Q1 ending SG&A headcount was 219, representing an increase of 22% from the prior quarter. In summary, total headcount was 1,432 as of March 31, 2023, up 51 heads from the prior quarter. Cash consumed from operations was $25.4 million in the first quarter of 2023, compared to $18.9 million in the fourth quarter of 2022. The sequential increase of $6.4 million was driven primarily by an increase in GAAP loss as working capital was flattish during Q1. Purchases of property, equipment and capitalized software licenses decreased from $15 million in Q4 of 2022 to $12.7 million 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 first quarter of 2023 was $38.1 million compared to $33.9 million in the fourth quarter of 2022. The ending balance of cash, cash equivalents, restricted cash and marketable securities was $450 million as of the [Audio Gap] first quarter of 2023. And with that, [Audio Gap]. We expect revenue in the second quarter to range between $60 million and $63 million, which reflects $37 million to $40 million of contribution from Space Systems and $23 million from Launch Services, which assumes 3 launches or 2 [Audio Gap] quarter. One of the 3 launches forecasted in Q2 was Sunday's successful NASA TROPICS mission out of LC1 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 progress through the remainder of 2023. We expect second 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 second quarter GAAP operating expenses to range between $55 million and $57 million, and non-GAAP operating expenses to range between $41 million and $43 million. The quarter-on-quarter increases are driven primarily by continued step-up in staff costs and prototyping and material spend supporting Neutron and Photon development programs. We expect second quarter GAAP and non-GAAP net interest expense to be $1 million. We expect second quarter adjusted EBITDA loss to range between $22 million and $24 million, and basic shares outstanding to be approximately 480 million shares. And with that, we'll hand over the call to the operator for questions.

[Operator Instructions] Your first question comes from the line of Erik Rasmussen.

Yes. Congratulations on a good Q1. I wanted to talk about launch. It looked like there was a lot of positives in the quarter. And obviously, there is 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. What would be the limiting factor to maybe not achieving a higher launch cadence than the 15 that you're currently targeting?

Yes, Erik, 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 to the rate that's required. Yes, and like I said, that's the usual factor.

Great. And maybe just staying with launch, your NSSL opportunity. Any updates 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?

Yes. We are naturally very happy with the approach that the NSSL folks have taken. The 2-line 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. we're advocating to keep the bar high, which is what's happened. And the math class is clearly suited for Neutron. So we think Neutron is very well-positioned to play in that Lane 1 amongst a very small group of vehicles that will be ready in time to do so.

Great. And then maybe just my last question. You talked and you introduced the HASTE rocket. 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?

Yes. So the hypersonic flights will be included in that 15 number.

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

Peter, Adam, it's Suji here. So congrats on the progress. So the 7-day turnaround you just had was pretty impressive. Just curious, generally, what are some of the proprietary elements that allow you to turn around that quickly. I know your competitors are having trouble just launching at all, but what allows you to kind of be able to turn around that quickly and what we use to further improve that?

Yes. It's a good question, Suji. I mean the rocket is only 1/3 of the part of the equation here, having both the facilities in order to do that and also cross-trained 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. 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 and the launch vehicle is very well bid in. So those are things that will enable us to achieve that.

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. 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 two ranges, right? So I think that level of flexibility really allows us to do things that really nobody else really could do.

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

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 2024. So yes, everything is on schedule, everything looks good, consistent with everything that we've kind of articulated in the past.

Your next question comes from the line of Morgan Stanley.

Good afternoon, everyone. Following up on HASTE, right, looking at the payload for Electron, your previous guidance was for 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? How do we think about overall economics of Electron versus HASTE in terms of revenue and margins?

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. 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 HASTE 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 mission.

Yes. And Kristine, 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 -- right now, all of 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.

I see. And in terms of margin economics between an Electron launch versus a HASTE launch, how do we differentiate between the two?

Well, I mean, I would say 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.

I see. And then following up on the reuse or Rutherford engine in the third quarter. Do you have an idea of how quickly you can turn around these engines for re-flight down the line? And also, how many times can a single engine be used?

Yes, it's a great question. So answering your question kind of backwards, the qualification test we did on the recovered engines, and we've put a number of them through a total of 16 full duration hot fires, that's like going to orbit 16 times until no degradation in the performance or in the engine at all. So the Rutherford engine is a mighty nuggety engine with very good margins. So the kind of limit to reuse would be in excess of probably 10 times. But the caveat to that is, we need to slowly step our way through this. And we're being very conservative here. You notice that we've taken the most difficult and critical element and are reflying that kind of independently of a whole new stage first, because we believe once we build confidence in the reflown engines, then that's kind of the hardest piece of the whole puzzle complete.

And your next question comes from the line of Andre Madrid.