Rocket Lab Corporation (RKLB) Earnings Call Transcript & Summary

Cool. Can you hear me?

Yes.

Good. All right. So let's start with.

Can you talk about the company's financial strategy around contract exposure, CapEx and M&A?

Sure. So we lean in 100% fixed price trying not to do cost plus work, referring to -- relative to defense primes, and that enabled us to kind of take a better risk-reward train that delivers what we view as best-in-class value for our customers as well as better margins for Rocket Lab. In terms of kind of the CapEx and M&A front, we continue to view it as a risk-reward trade where we work to make smart bets on customers that we think have great models and are involved in healthy end markets and kind of the similar fronts on M&A, where as we see a combination of capability gaps as well as supply demand constraints. We're going to spend the dollars to go ahead and buy things that -- that we view as critical to the end customer and critical to our portfolio. But at the end of the day, we're not going to overpay. So whatever we come to market with or whatever we kind of integrate into our portfolio, we want to make sure that it delivers the best value for our shareholders.

Yes. And maybe you can give us a couple of examples of the strategy at work. And then what are some of the risks?

Yes. Yes. So what has been done in the past in terms of great examples of commercially developed portfolios working as equity stories and some really good examples of this. And it's a combination, I would say, of contract exposure, capital intensity on the M&A front, and that kind of rolls up into what I would say is invested dollars ahead of need. And some really good examples of this are obviously Hico and Harris as well as Mercury Systems and Kratos, right, where wage inflation and supply chain disruptions have caused, I would argue some near-term pain. But with the worst of that behind us and as well as Rocket Labs were vertically integrated strategy. We feel that we're in a good spot to continue to kind of focus ahead of what we view is not just the best needs for our customer, but also something that delivers the best value and something that's wholly commercial, something that can help us sustain cash flow so we can live to fight another day.

And then thinking about the strategy. I mean, how does the strategy work when you're dealing with a flat to down budget environment? I mean, obviously, it's going to work in an up environment, but when times get tougher, how do you think it works?

Yes. No, it's a good question. So typically, the way that we think about space budgets is that in a flat-to-down environment, space budgets are usually protected, right? As Army becomes kind of the bill payer for other acquisition and advanced capability programs that I would say our government customers definitely need. And that applies similarly so in the civil budgets, right, where there are pieces of the civil budget that can continue to grow versus kind of larger scale acquisition programs that are kind of easy fruit to pick from a kind of budget perspective. So as we think about those budget line items, our strategy will still squarely fit within the affordability domain. And that's something that as you go back to kind of the mid-2010s of government acquisition strategy, we've seen various iterations of kind of better buying power where the government customer needs to get more for less given the fiscal constraint. And we're definitely one of the teams that we think we can lean into that and deliver not just best value, but kind of the capability that government customers need. I'd say where that kind of interacts to with our financial strategy is that we're going to continue to view and take a kind of stance that we're going to deliver best value, but we need to do it in a commercial manner. And so if we invest ahead of need, whether it's CapEx, M&A or contract risk, we're going to continue to strive to deliver the kind of best cash flow outcomes within that matrix.

Got it. Got it. And then how should we think about some of the, call it, financial targets. So for example, when we think about the margin runway and the cash flow, how should we be thinking about that?

Yes. Yes, we'll start with margins, and then we'll talk cash. So in terms of the margins, as we kind of stated on our call yesterday, we continue to be constructive around our ability to hit both the launch and space systems kind of target model that we laid out at our 2022 Investor Day. Within launch, that still contemplates kind of roughly 45% to 50% adjusted gross margin adjusting for stock-based compensation. And that contemplates about 24 year of launches. 50% of those missions recoverable as well as some production and overhead savings that we flow through. And that's for Electron. So within the Neutron matrix, we continue to view that rocket as similar in terms of kind of that launch target margin potential. But I would articulate that the launch business is one that relies on cadence. And so we feel good about Neutron being able to hit those target margins, although obviously, it will be dependent on our ability to spread the fixed cost base over a higher number of launches. Pivoting to the Space Systems side of the business, we had originally put out in the 2022 investor deck, a 30% adjusted gross margin target by 1Q '24, specifically for the SolAero asset. And so that -- that was essentially 2 years after close. And I'd say that the commentary that we provided on the call yesterday suggested that we're closer to hitting that target than we had previously thought. So if we go back to 1Q -- excuse me, 4Q '22 earnings, we had kind of flagged some, what I'd say is some mix shift pressures within the SolAero business. But fortunately, the efficiencies and the investment that we've made in the business are continuing to deliver increasingly better margins such that we feel good about getting closer to that target that we originally outlined.

Got it. Got it. Maybe -- I mean, just before I kind of switch to some other stuff. Are you cool if I open up for a question or two to see if anybody has a question?

Of course.

Yes, if you want to ask a question, raise your hand and do unmute yourself. If not, I've got plenty more questions to go, but I'm trying to make this interactive. So if anybody has a question, just raise your hand. We'll wait for a couple of seconds and see if that happens. If it doesn't happen, I'll just keep marching along the path I was in. So I think that is no. We have no questions. So moving right along. And you started to talk about it already. Can you talk about the investment strategy for space systems, meaning, I think a lot of people who aren't as familiar with the company, think about Rocket Lab, maybe in large part because of its name, think about it as a launch company. So if you could talk to space systems and the strategy there.

Yes. So it's definitely an exciting opportunity set between, I would say, a lot of kind of dormant or kind of pent-up commercial demand as well as the flow-through of better government budgets, all are providing probably one of the more constructive environments that we've seen in terms of kind of the overall growth. And so if you think about investing ahead of that need, as I've previously articulated, we view that as a combination of contract exposure, CapEx and M&A as well as the R&D line item, but we also kind of view investment as a function of how we take on our customers. So within the matrix that I outlined, it's important to invest ahead of need. But within the contract exposure that you take, it's also important to take on customers that you view are not just financially sound, but in a healthy end market and continue to deliver the value that you think that their tech enables. So a really good example of this is our in-space manufacturing customer, Varda, as well as some of our Earth Intelligence customers and direct to mobile customers, where those various end markets including both the government budget as well as the commercial domain are really exciting. And there's a really, really constructive tail that you can gain by being involved with the right customers and utilizing the right contract exposure to basically scale both their businesses and yours by delivering value and cash flow of your shareholders.

Got you. Got you. And then can you talk about maybe the interplay between how space systems and the launch of business from a cash perspective, right, I mean what's generating more cash, what's generating more margin? Is one kind of helping pay for the other vice versa? How should we think about that?

Yes. So taking a step back, the integrated launch and space systems model is something that we view as something that works. If you go back to kind of how the genesis of SpaceX has gone from being a Falcon 9 provider to a StarLink provider, the interoperability of those strategies can provide some really healthy feedback dynamics where if you have cheap internal launch, you can deliver significantly more cost affordable products in the space systems domain. Now that's assuming that you're scaling the levels of capital raising that you can have within that construct, within our kind of capital reality, we still feel really good about it. And we feel really good about what Neutron is going to enable from a customer demand perspective. And so the way to that works is that if you go to a customer and say, "Hey, we want to sell you this satellite constellation or we want to sell you this end market application, they're going to go. They're going to put it through the design team, come back to you with an RFP and then go out and by launch separately, right? And so that's something that we think that as the market kind of matures in terms of the constellation dynamics, those will increasingly work together where you can put a joint bid of launch plus spacecraft design, end-to-end space company as we term it. It can provide some really, really kind of helpful knock-on effects, not just in terms of the pricing for the customer but also managing the capital and managing the risk of the contracts. So keeping those supply chains in-house and vertically integrating is something that we view as works. We view that definitely works. And so as you think about the cash algorithm and bringing it home to kind of where our results and where we view kind of multiyear outlook is that we're going to continue to burn cash as we invest in Neutron. The things that are within that cash envelope, we start to and have been pretty articulate about in terms of the $250 million development wallet required, half of that being CapEx, half OpEx, roughly speaking. And so as we think about the Neutron development cycle, it's going to continue to ramp in earnest this year into next year with a 4Q '24 targeted launch. And what that enables is that once we have a competitive medium launch vehicle offering, hopefully in a continuously supply-constrained environment that will enable us to have not just the launch contracts that come on the back of that, but hopefully, end-to-end space contracts that deliver those kind of outcomes that we're targeting.

And if I kind of go down the list, I mean, acquisitions have been like SolAero, PSC, ASI, Sinclair and some of the Virgin Orbit assets. Is the company looking to do more M&A? Or is the message that to the market that we're -- we have enough for now.

Yes, I think that we're happy with our current portfolio. In terms of kind of the key assets that we've acquired, that enables us to take some really big swings in the market. If you think about the square footage of the facilities that we brought through the Virgin Orbit, the acquisition of selected Virgin Orbit assets, 144,000 square feet in addition to our existing New Zealand and Long Beach facilities on top of the other facilities that we have via M&A is a really, really healthy fit footprint that we view that we can optimize to some pretty healthy opportunities within the, I'd say, the kind of satellite design domain across what I'd say is commercial and government opportunities. So there's a really, really high influx of these dollars flowing through to these opportunities. The constellations that are in play, we hope to be -- continue to be involved with. And as we think about how that interacts down the road from a cash generation perspective, being efficient in terms of the CapEx build out of the business and being efficient about our footprint, hopefully, is going to be the kind of dynamic that allows us to be a sustainable kind of third-party aggregator for space assets and deliver cash flow to our shareholders.

And maybe one final question on space systems. What are some of the key opportunities ahead that as outsiders we can be looking for?

Sure. I think that if you think about -- it's a multiyear -- so space procurement is typically a multiyear domain, right? And we know what the broadband constellations look like. We know what the aspirational direct to mobile constellations look like. I think that as you go from here, it's going to be how that tech interacts with the ecosystems that we have and how those ecosystems evolve into the 2030 time frame. If you think about it also from a kind of government perspective, the clear ones are SDA. There's going to continue to be this kind of serialized production of what I'd say is disaggregated government solutions. And so it's a mix within government acquisition. We've seen, I would say, the exquisite satellites continue to have a healthy run rate. There are certain capabilities within those that will never chase just by virtue of both the existing capability that we have as well as our view on kind of the margin and cash dynamics of those businesses. But if you think about evolving into a serialized producer, we feel really good about our ability to service that market, whether it's as a prime or whether it's as a subcomponent supplier. So buses, solar, software, reaction wheels, separation systems, we're going to continue to come to market with what we view as the best cash outcomes and what we view as kind of the best value for our customers.

Got it. Got it. And before I move on to launch, let me just take a moment and see if we've got any questions. So -- if you've got a question, raise your hand or jump in going once, going twice. So that's not. All right. So let's move on to launch. All right. So -- and when we think about launch, one of the biggest incremental drivers for that business now? And what -- how do we think about that incremental growth? And then how is that going to fold between both Electron and Neutron platforms?

Correct. sure. So as we think about our target of 15 launches this year, building into next year, it's getting to that 20 launches that we're still signing on for feathering in a higher ASP from the government launches that supports our target ASP of $7.5 million for Electron. And then beyond that, it's getting Neutron to path. As you think about the opportunities that continue to arise, both in the current kind of supply-demand environment and as well as what we view as the likely 2025 supply-demand environment. If you take current demand today, you add in SDA constellations, you add in Kuiper, you add another big tech potential. If the supply-demand environment is only going to get more constrained. And especially when you take out -- if you consider big tech demand at SpaceX, there's billions of dollars have been spent if you think about the Amazon Kuiper launch contracts across Blue Origin, Orion and Vulcan. And so within that construct, we feel really, really good about how Neutron is going to come to market and kind of that end of '24 time frame, being able to be scaled to the opportunity as we see it in 2025, 2026 and so on and so on.

Got it. Got it. How much of a portion of Electron business do you expect paced to contribute at maturity?

Sure. So tough to define maturity in a hypersonics domain. I would say that overall, if you think about what the hypersonics demand looks like now and how that evolves over the next few years, there will be a mix of both defense and civil demand for the hypersonics testing regime. And that when you get to kind of the mid-2020s, we've seen Defense Prime executive commentary suggest that the bigger opportunity is actually in Counter-Hypersonics, and we're keen to service that as well. So in terms of what that works like at maturity, it's tough to define, but we're happy doing low single-digit numbers of haste launches between this year and next. And as we think about 2024 or 2025, operationalizing these hypersonic capabilities is something that might require test regimes in the 10s of launches. But it's still too early to tell kind of what that is for sure going to look like, especially when you consider the growth adjacency of Counter-Hypersonics.

Got it. And then when we think about how margins could evolve over time in this business, how should we be thinking about that, the drivers and the triggers and that sort of thing?

Yes. So referring back to the Electron launch math. If we go back to the 2022 Investor Day slide that 45% to 50% adjusted gross margin target, we still feel good about all those drivers, the volume savings, the production efficiencies. Those are all pretty clear and what we view as healthy drivers. Reusability as well is something that we continue to operationalize, where as we think about production potential in 2020 -- or production potential this year, influencing 2024 launch cadence. The 50% target of kind of recoverability is something that we're going to continue to strive for. But I'd say that we'll continue to optimize our schedule and our launch cadence to best value. So if you take, for example, doing a $7.5 million launch that's recoverable versus a $10 million launch that's nonrecoverable. The cadence is going to be what fits into the schedule best, where we're going to prioritize continuing to get the cadence that delivers healthy margins with recover and ability being something that we continue to operationalize. And so that -- we've done a good job so far in our mind of waterproofing certain parts of the rocket and bringing back components. And as you amortize the cost of those reusable Electrons down and especially reusable Neutrons, the margins only get better and better.

Got you. So let's open it up again and see if there's any questions on launch. I think there might be one. Let's give it a second here.

Of course.

Any questions? 1, 2, 3. I think that would be -- I think we got one.

We have one from Andre.

Right. yes, Andre, if you could do it.

Yes. Colin, can you hear me?

Yes.

A quick question on, I guess, I don't think we've really touched on Photon too much. Can you maybe just explain where you expect that to sit in the broader [indiscernible] environment? I guess I would say. I know it seems as though the offering is more bespoke as opposed to what some competitors are providing, which is kind of just like wide-scale production like Terran Orbital, what they're doing there. Could you maybe explain how you guys think that will fit into the broader fabric of the [indiscernible] segment.

Yes. That's a great question. I wouldn't say that these are bespoke products so much as bets on the end markets that we view as healthy. And if you think about the customers that we've taken on between Varda and GlobalStar, those bus architectures are ones that we feel really good about in terms of leveraging for the future. And so if we think about the Photon architecture and kind of the broader architecture of satellite craft that were -- the spacecraft that we're building, you get obviously a margin benefit by stacking all the components that we typically would have bought out of house by bringing those in-house. And so on top of that, the margin profile of serializing something like Varda spacecrafts or utilizing the bus architecture of Globalstar for future opportunities, whether it's commercial or government, the kind of margin profile of the spacecraft now are obviously burdened with kind of the upfront R&D that takes to get them operationalized. But as we prove out the capabilities, we continue to expect that the demand from both commercial and government customers to fill in really well and help us kind of serialize towards the model that you described with customers that we're going to be very selective on and we view are going to be the best drivers of cash flow in the future. We're not going to come on and, let's say, get too aspirational on kind of the number of satellites we can do, but more kind of provide shareholders updates when we have definitized work contracts with healthy line of sight on cash funding.

And then maybe another one, right, what milestones should we be looking for on Neutron later this year into next year?

Yes. So it's still frosty -- hot fire and frosty tanks, the frosty tanks is the near-term one. And that's the stage 2 cryogenic testing for the upper stage of the Neutron and then as well as the Archimedes test campaign, which we're working to kind of start near the end of the year. And so essentially, from the outside end, if you see the frosty tank photos from our Stage II cryogenic testing and then you see the hot fire from the Archimedes test campaign. Those will be kind of the key drivers and the key milestones for the market to watch.

Got it. Got it. Got it. Got it. And then maybe let's, can we switch gears a little bit here and talk a bit about competition. Can you talk a bit about who Rocket Lab identifies as their kind of biggest competitors in launch and space systems.

Yes. So starting with the launch, if you think about the small launch domain, the real operationalized competitor is Northrop Minotaur. If you think about what the rest of the small launch market has done either by a variety of failed launches or issues with separation or issues with the capital raising, we're very quickly seeing this market dissipate. And so if we think about what the real competitors are, it's the rockets that are in service today in the small launch domain. And for us, that's Northrop Minotaur. And that's, call it, roughly $30 million to $40 million of launch versus Electron, which is a $7.5 million ASP. So we feel really good about that competitive matrix. Within the medium launch domain, it's definitely the Neutron versus the Falcon9. And as we kind of work to get that operationalized, we think that a Methalox engine with the kind of architecture we're targeting versus a typical Kerolox engine even with the kind of benefits of the first-mover advantage and benefits of scale, we think Neutron will be a very competitive rocket. The kind of metrics that we're targeting in terms of reuse are about 20x for our Neutron and that's comparable to maybe 10x reuse for a Falcon 9. And so as we kind of, I'd say, operationalize the learnings too of reusability both from Electron as well as getting Neutron to pad and reusing that, that will be something we're going to hope to push the envelope higher over time, and that's the same across all launch programs. But right now, we feel really good about what that will bring to market in terms of a competitive offering, especially when you consider the level of kind of big tech demand X Falcon 9.

Got it. And what's the key enabler for the increase in reusability?

Yes. So if you think about -- it's really propulsion. If you think about kind of the rocket structure, right, the real challenge that we've seen in the market over the last, I would say, 6 to 12 months is getting a Methalox engine operationalized and affordable. And so if we think about the existing Methalox engines in the market today, it's Raptor and BE-4, right, that are truly planning to be operational or close to operational by virtue of either their test campaigns. And so as you get to what I'd say is commerciality, the focus is going to be for us, utilizing the learnings that we've generated by virtue of our Rutherford engine, which if you think about kind of our core DNA, it's really 3D printing, the engines and automating them as much as possible. And we feel that if you think about those competitors versus ours, the way to the utilization of those engines kind of notionally works, stressing the engines to the theoretical limit of what they do. That's not what we're targeting. We're going to continue to target an Archimedes engine that is less stressful on the architecture of the propulsion, but enables better reusability. Think of it -- if you take an aircraft engine apart and you stress the aircraft engine to 90% of capacity every flight, the reusability of that engine is going to be less competitive versus an arguably 50% utilization engine.

Got it. That makes sense. That makes a ton of sense. And then maybe can you talk about competition on the subcomponent level where some of the other companies that you guys own compete?

Yes. So the key ones are Spectrolab at Boeing and AZUR in Germany for our solar business. And that's the real for the market to watch. That's the real kind of driver. And so the way that we think about the recent win or the kind of past wins over the last year split between those 2 competitors. We've been happy to let those competitors fill up their fabs with lower margin work. And so if you think about the bid environment now, space-grade solar, especially space-grade solar that's as good as our IMM technology is incredibly constrained. And so if we think about the next few years of satellite production, and you have seen it. So you've seen it across not just the U.S. primes but across the European primes this earning season where when they're citing supply chain issues, a lot of that has to do with how constrained solar is. And so if you think about our ability to leverage our solar and having it in-house, we feel really good about taking on the right contracts and the right opportunities that allow us to either deliver the solar to a third party that we can -- we view as a strategic customer or use it in-house and margin stack it to make a pretty good solution.

And then maybe as a final question, kind of within that competitive framework, where does Rocket lab see itself 5 to 10 years from now?

Yes, that's a good question. So if you think about, let's call it, like 2030, right. If you think about the stack of what launch plus space systems domain looks like, you can make the argument that the downstream of broadband is also a software application and social media application. And so if we think about where that kind of stack of arguably Twitter, SpaceX or Starlink, shakes out, we're going to continue to service the rest of the remaining kind of spend items within the big tech domain, and we think that we can continue to scale to be the supplier of choice within that structure. So if you think about accessing emerging market demand by virtue of being a direct to mobile or broadband, within that construct, we're going to continue to scale to what we view as kind of the best value for the remaining market [ ex ] that stack.

Got it. Got it. Well, Colin, thank you for taking the time that's everything. So...

Yes, I appreciate it, Ron.

Yes, you bet. Yes. Have a good afternoon.

Yes. Take care.