Rocket Lab Corporation (RKLB) Earnings Call Transcript & Summary

Hi, good afternoon, everyone, and I'm excited to host our next session on Rocket Lab. I'm Kristine Liwag, Head of Aerospace and Defense Research here at Morgan Stanley. And I'm excited to have Colin Canfield who is Head of Investor Relations at Rocket Lab with us today. Welcome.

Thanks, Kristine. Before we begin, I just want to make sure we get forward-looking statements out of the way. So today's discussion may contain forward-looking statements. All statements are based on Rocket Lab's current expectations and beliefs and may involve risks and uncertainties, which are beyond Rocket Lab's control. Actual results may differ from those expressed by today's statements and factors could cause actual events to differ materially from the forward-looking statements in today's presentation. So with that, I think we can begin.

Thanks. And I'll ready my disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley representative.

So with that, Colin, Rocket Lab is a leader on small launch segment with your workhorse rocket Electron. It is the second most used rocket launcher in the U.S. behind SpaceX's Falcon 9. But the strategy for Rocket Lab has evolved to be also an end-to-end space company, which is much broader than just launch. Can you help us understand the strategy and where you are in this journey?

Sure. So I think it's important to kind of frame it within a historical context. If we go back a few years back to kind of our pre-going public process and the cash that we raised during that going public process, it was important for us to kind of consider not just doing small launch, but also expanding the scope of our portfolio for a combination of, I would say, tactical and strategic regions. So if you think about the tactical reasons of kind of buying four Space Systems acquisitions over that period, it really provided a kind of better stability for the business in terms of earnings and cash flow. And just kind of pivoting that to the strategic framework, if you think about small launch, is a great way of opening the relationship with your satellite customers. Space Systems has been a really great way of expanding that relationship and kind of leveraging what I'd say is a broader opportunity into things like media launch as well as full-scale satellite manufacturing.

Great. And looking at the competitive landscape, Rocket Lab has now launched your 40th Electron mission at a time when peers and newer space companies are having difficulty getting off the pad. So this is creating a constraint, especially with the withdrawal of Russian vehicles from the international market. How are you thinking about launch capacity? And how does that impact Rocket Lab and impact on pricing for launch in the industry?

Sure. So very broadly, it's keen to -- it's important to kind of differentiate between what, I'd say, is aspirational and operational launch providers. A lot of folks that have come forward with very cool looking rocket designs have ultimately gone bankrupt or nearing bankruptcy. And I think that if you think about one having an operational launch vehicle does is, it allows you to scale some of the key elements that are constraints for other launch vehicles, things like avionics, guidance and navigation control even as kind of important as reusability. I wouldn't say, is the Electron rocket. So bridging that into kind of the supply-demand environment, we're very keen on getting Neutron to the pad. And we think that as you think about those supply-demand environment, what's really important to kind of differentiate between is, industry as well as the kind of full-scale stack players. And so within that framework, there's probably going to be multiple full-scale stack players that do both satellite manufacturing and launch. And so as we lever into -- or we kind of focus in on the key supply-demand constraints, we think that we can, not just access that for a media launch and service it from a media launch perspective, but also utilize those relationships to develop greater satellite supply relationships over time.

And the effect on pricing?

That's a good question. I think that if you think about the balance of small launch versus medium launch, I think the small launch environment in light of our competitor bankruptcies has become a lot more accommodative for price increases. Although I would say that it's important to differentiate between dedicated and ride share. Missions that are going to go on ride share, things that are agnostic to orbit insertion dynamics, things that are a little bit less sensitive to schedule, will continue to be price competitive. But the dedicated domain continues to be very price accretive, just given the lack of available competitors. It's important to kind of note that it's not just the small launch providers that have gone bankrupt in the U.S. But there's also been struggles internationally. A mix of what I'd say is new startups that have kind of either been slow to get to the pad or quasi-government organizations that have had launch issues of their own. And if you think about kind of the medium launch domain, there continues to be a competitive price environment. But what I would say is that people are willing to pay a premium in order to work with who they view are really good strategic suppliers. A really kind of great signpost for that kind of dynamic is the price that Amazon paid across three separate launch suppliers and how that compares to say, a Falcon 9. We think that's a really good signpost for where the strategic landscape will go over time and how those dollars will flow through into a Rocket Lab pricing environment.

And can you comment on the recent announcement with Telesat going to SpaceX. How does that dynamic and decision to go with a ride share versus a dedicated small launch? Can you give more color on how -- your perspective on how that came about?

Sure. I think that if you think about the capital environment, it's really key for folks to kind of secure what I'd say is the cheapest launch and the most reliable launch in the near term. It's a very competitive environment in satellite communications domain. So folks are really playing to kind of scale and live to fight another day. And so within that comes strength, people will go with what's available, given not just what I'd say is kind of the affordability dynamic, but the availability. If you think about what's happened within the construct of other launch providers in the medium domain, the only one who's launching reliably is SpaceX. And so even though you might trade what I'd say is kind of strategic considerations for price, as we get to market with a Neutron, we think it will be in a really great spot where once we prove out our vehicle, we can be a strategic supplier for folks like that.

Great. And I'll touch on Neutron in a later question, so we'll come back to that. But on launch profitability, Rocket Lab has suggested that volume is really the key to profitability. You're on track for 15 launches this year and your manifest suggest about 20 launches in 2024. So first, like what are the key gating factors in increasing launch volume? And then also second, can we see upside to the manifest if competitors continue to struggle with execution?

Sure. So focusing first on kind of the first part of that question. I think if you think about the choke points of getting launch supply out there, we remain to be a very, very vertically integrated company. A lot of the kind of key pieces of the bill of materials we developed in house as a function of kind of a, what I'd say, is the New Zealand environment, which we generated in. And so that has allowed us to control what I'd say as the key chokepoints of supply chain. As you think about -- going back to kind of the first kind of backdrop of the question, profitability versus cadence. I think that if we think about 15 launches in '23, 20 launches in '24, that's a manifest that's fully booked and has, what I'd say as a good amount of margin potential, not just from the cadence increase or the reusability, but also the pricing dynamic that comes with the more accretive pricing dedicated launches. One thing that I will note is that, if you think about the knock-on effects of reusability, it continues to be a key part of our thesis where we think that as you get to the 2020 Investor Day launch target, a 50% of mission reusability kind of set can help get us back to -- or get us towards the 45% to 50% non-GAAP gross margin that we're targeting alongside price, cadence and other elements.

So excluding the reusability, can you talk about the magnitude of margin lift you would get from -- going from 15 launches to 20 launches?

Yes, sure. I think that if you think about on a per rocket basis, the typical reusability kind of economics to consider is that the first stage of the rocket is typically 60% of that kind of that cost of goods sold, of the kind of final manufactured piece of the rocket. And so recovering that and reusing, maybe not the full piece of that rocket for reusing the key bill of material chokepoints, things like propulsion, which we've done, and which we're planning to do on our next launch within all nine of those Rutherford engines being reused. And so within that construct, it can help us bridge towards that launch target margins that we've discussed. Although I'd say that there's kind of variability within the three elements that I've talked about, which is price, cadence and what pieces get reused.

You've completed your first HASTE or Hypersonic Accelerator Suborbital Test Electron, quite a mouthful, launched out of Launch Complex 2 in June. Can you unpack this new offering a little bit? Why is hypersonics an attractive vertical for Rocket Lab? And how material could this business be over time?

Sure. So if you think about kind of the hypersonics environment and the pieces of budget that you can focus in on, if you go to kind of the FY '24 request across DOD as well as NASA, there are kind of clear identifiable budget line items that are going towards the test and development of these capabilities. And I think that if you think about as that market evolves, Rocket Lab will be a really great opportunity for both kind of the established primes as well as some of the newer defense primes for us to be essentially both the cost out and schedule reliability. If you think about what it costs to build and test your own hypersonics vehicle, it could run anywhere in the tens of millions of dollars. And we think that where Electron swaps in is a commercially available vehicle could help drive better schedule and cost effects. And then -- and as you think about how that market evolves over time, eventually the conversation will probably flip increasingly towards counter hypersonics. We're starting to see Department of Defense awards pick up around that sort of framework. And if you kind of take a line between today and 3 years out, we think Electron will be a really, really great kind of offering to simulate, not just the data on the kind of hypersonics platform, but counter hypersonics targets.

Interesting. That should be a lot of fun to watch. In terms of the Neutron, which we'll get back to now. The medium-class rocket, I mean, it's 13,000 kilograms to LEO, that's 40x the capacity of Electron. So as you approach getting your target -- that your target of getting to the first Neutron off the pad by the end of 2024, at this point, how is the demand for Neutron are shaping up? And also, what sort of customers are you targeting initially?

Sure. So if you think about what the comp is between the two vehicles, I think the really key thing to focus in on is Neutron being 13 tons down range versus a Falcon 9 at roughly 15 ton down range. So a pretty competitive weight class. I think that if you think about how you underwrite that demand, from a customer order perspective, the hope is that as we get through kind of the three key milestones that we've identified bucketed into frosty tanks and hot fire, that should help drive the order momentum. And as you think about where that goes from here, what are the key kind of line items that you can underwrite as an investor. So first and foremost, I think as the opportunity set for Rocket Lab to participate in National Security Space Launch, we've seen some headlines around Lane 1. I'd say there's nothing final until Congress is able to get the FY '24 budget passed and kind of make sure that language like that is locked in. But as you focus on that, that's kind of the founding piece of where we think we can participate. But as you think about kind of the commercial sphere, there hopefully should be good follow-on orders for folks that want to make sure they work with a strategic supplier versus a strategic competitor.

Great. Thanks for the color. And do you think it will be competitive versus SpaceX?

Yes. So a really good way to think about it is dedicated launch. It's how satellites are acquired. I know that the kind of the market is seen the rise of ride share as a means to take cost out. But at the end of the day, a lot of the satellite design dynamics that we're seeing are pulling up from that, what I'd say, is low LEO at 300- to 500-kilometer altitude, closer to the higher end of what I'd say is highly, things like 1,000 to 1,200 kilometers out. And so within that framework, it becomes a lot more difficult for ride share to be as competitive from a mission assurance or kind of mission capability perspective. And just from a pricing perspective, dedicated launch dynamic is, Falcon 9 is typically about a $70 million price tag. And I'd say that the Neutron is targeted at about a $50 million price tag. I'd say that, as launch supply/demand becomes more constrained, we reserved the right to bring price up. But it's something that we think will be a very, very competitive dynamic as the market starts to realize that it's not just a dollar per kilogram metric.

Yes. I mean, Neutron is clearly a game changer in terms of capacity for Rocket Lab. Can you update us on where you are today with the development of Neutron and what key milestones we should watch out for regarding its development?

Yes, definitely. So if you think about the two buckets of frosty tanks and hot fire. The frosty tanks being our Stage 2 cryogenic static test and then our Stage 1 cryogenic static test, both of those tests working to kind of simulate the fuel capability of the craft as well as cold fuel driving frost on the outside, thus frosty tanks. And that's going to occur through the remainder of the year. I think as we get to the end of the year, as we start to begin the hot fire element, which is the static fire test of the Archimedes engine system, that will be kind of the key milestone to focus in on and hopefully something where once we're able to prove out that operational capability and prove out that it's real and not just a vaporware rocket, that should hopefully drive, I'd say, more realization of where Rocket Lab could be over time.

Great. Recently, you scrapped the retrial of an Electron for ocean splashdown. And just a few weeks ago, Rocket Lab also flew a pre-flown Rutherford engine. So can you talk about reusability? You mentioned earlier for that first stage at 60% of the rocket cost. So the plans for helicopter recovery or recovery from the ocean and reusing, where do we stand on those? And in the long run, what percent of the first stage do you think Electron could reuse either from a helicopter recovery standpoint or from a [ sea ] recovery standpoint?

Yes. I'd say we're definitely leading in on the maritime recovery dynamic and that reusability. I think that the trade to consider within that framework that we had originally considered with the seawater would cause outside the level of damages in terms of the cost of the rocket, such that the cost of operating a helicopter and the air recovery could be a very viable option. But once we -- I'd say, let the electron take a swim, the saltwater dynamics were something that we found that even engine and the like, were calling pretty well. And so as we think about operationalizing that from here, we've proven we can flow and refly a Rutherford and where our next launch will have all nine Rutherford engines be reused. And so as you think about going forward, I think operationalizing maritime will be a pretty key kind of proof point of Rocket Lab's ability to do reusability. As you think about how that impacts, what pieces of the bill materials can we recover, the focus is the engines. But there's also separate pieces like battery packs and the like, where each launch we do, we continue to iterate different pieces of reusability so that we can recover increasing dollar amounts of that value set on the first stage.

And so for me, undersea or it's like a sea recovery, what percent do you think it would cost to refurbish? And how much of that 60% savings could you keep?

Yes. If you roughly think about an Electron cost into the bucket of what I'd say is labor, overhead and bill of materials, I think that the incremental cost around reusing a rocket is a little bit of man-hours or probably the bulk of it of man hours, right, paying for rocket scientists to get on a ship, go off to sea, get the thing, bring it back and refurbish it as well as a bit of overhead. But the kind of key point is that, reusing the big pieces of the bill of material of the rocket, that's where we really start to see the kind of margin effects within the paradigm we've put out.

Shifting over to the Space Systems side of the business. I mean you're playing both as a component provider as well as a provider of the full up spacecraft. Can you talk about the differences in being the subcomponent versus the prime? I mean you guys are subcomponent manufacturer for a Globalstar and for MDA, right, which ultimately will feed up to Apple, but you've also got your own systems. Which vertical is more profitable? And can you talk about the differences in margin?

Sure. So net-net, I think the Space Systems margin that we strive for, and this goes back to our 2022 Investor Day slides, right, where we put out that 30% adjusted gross margin target for SolAero by 2 years of close, so 1Q '24. I think labor rates have been a bit higher than we had expected and thus, kind of a little bit of, I'd say, that target moving to the right commentary from earlier this year. Fortunately, the -- I would say the capital injection that we're driving into that business is driving better efficiencies. But that 30% target of 40% adjusted gross margin is a good bogey to play for within the kind of Space Systems' domain. If you think about the trade between satellite manufacturing, full scale and being a supplier, some of the benefits of owning and investing in a lot of these acquired assets allows us to margins stat and allows us to be not just competitive on price, but also be competitive around the schedule and availability. I'd say net-net, if we think about the kind of array of options ahead of us in satellite manufacturing, the key thing to keep in mind is that it will be both an NPV and a margin trade, right? So if you think about satellite manufacturing and quality satellite manufacturing being constrained, we're going to make sure that what we fill our fabs with is the best for Rocket Lab in terms of kind of that margin and NPV dynamic.

Great. And you mentioned SolAero, that was one of the acquisitions you've done. You've also in the past 6 months, acquired others like ASI, PSC, which all seem to be bearing fruit, including SolAero. So how are you thinking about M&A going forward? What does the pipeline look like? And are there opportunities to acquire space assets to discounted price considering the capital interest rate environment?

Yes. I'd say that the interest rate environment is definitely driving what I'd say is a little bit more reality around price within the kind of private space domain. If we think about what our strategy entails, the key focus is making sure that our organic strategy is in place, right, getting Neutron done, getting our existing assets integrated, which we have, and getting them scaled to the kind of margin and sales profile we're comfortable with. With that in mind, I would say that we continue to focus on the key chokepoints within the space supply chain and kind of what I'd say is the ability of Rocket Lab's culture to accelerate, not just the strategic profile of other partners, but also allow us to help them do better on margins and the like.

In the backing of capital, capitals are tighter in this environment. How do you think about the requirements of Neutron's development program? I mean, earlier this year, Rocket Lab purchased Virgin Orbit's assets out of the bankruptcy proceedings. I mean, how did that purchase change near-term investment requirements for Rocket Lab?

Sure. So net-net, Neutron development spend, about $250 million wallet and we continue to track towards that. I think that if you think about where the Virgin Orbit acquisition benefits will be realized, I think it's still being definitized where pieces of that transaction, and we've been public for it. We paid $16.1 million for, I'd say, about $100 million of value, $20 million of leasehold improvements, $80 million of equipment. Within that framework, we feel really good that, that can help us accelerate the production of Neutron and the scaling of Neutron although that doesn't impact what I'd say is the R&D cycle. So nothing changed in terms of that acquisition versus the development timeline for Neutron. And as you think about how that shapes our CapEx plans in out years, the benefits will probably be realized. And we think that at the end of the day, that transaction will be a really good strategic accelerant. But we're still working to define what that means for a Neutron production wallet.

Great. We want to make sure we leave some time for questions from the audience. So if you have a question, please raise your hand, and we'll give you a mic. Oli?

Just a quick question. I know there's a lot of noise around the budget environment. Any concerns there? I know space is obviously a big focal point, but any sort of chatter? Or you think it's still full steam ahead?

Yes. So a couple of considerations to think about there. From a top-down perspective, defense budget's typically more protected versus total budgets, although total budgets are still subject to what I'd say is both the interest rate versus the deficit funding as well as kind of the political appetite to cut. I think that net space given the national security environment and given the kind of the civil environment has proven time and again that it's an incredible multiplier of force structure. And so if you think about where those budgets go from here, we feel relatively good about the defense space side of those budgets being protected as well as the programs within the civil space budgets being relatively protected. Where that goes from here and how -- what happens if we get to a point where budget considerations become more important versus the kind of national security environment, I think the key thing to focus on is who are the commercially developed players and who can provide the best price and schedule effects. And we think that agnostic of whether the budget's up or the budget's flat or the budget's down, Rocket Lab should be in a really good spot to continue to service customer needs by virtue of our commercially developed portfolio.

Colin, I asked you a lot of questions. But was there one that you wish I asked you?

Yes. I think it's key to kind of think about the balance of risks and opportunities within the business. So as you kind of underwrite the visibility of this business, a lot of the kind of space force and NASA fit-ups can give you a lot of confidence on what a 2030 time frame looks like. I think that if you think about what Neutron entails, we've been incredibly transparent about what are the key milestones and design issues that we think we can solve by virtue of just kind of the culture that Rocket Lab is. And one thing that I focus on is, really think about what does the next kind of 7 years look like from a relative growth perspective versus a structural growth dynamic like space, as well as the buckets of folks that will be there in the 2030 time frame. So if you think about the constellations that are announced today, broadband being Kuiper and StarLink, a couple of government constellations like SDA, Europe's Iris as well as Japan's government constellation that they've announced at the end of '22. Within that framework, Rocket Lab's going to do a really great job of supplying those folks because we can guarantee the pricing schedule that folks deserve.

Great. And if there's anything in the next 12 to 24 months, what are you most concerned about?

Yes. I think the importance of getting a budget passed and kind of a shutdown is really something that I think government contractors have become used to in terms of being able to mitigate the environment and focus on not just the government side of the house, but maybe filling fab with commercial. But it's absolutely critical to make sure that we get the right programs funded that are able to kind of not just deliver what I'd say is the necessary effects, but the necessary effects at the right price. And it all goes back to kind of that commercially developed story where we've seen other commercially developed portfolios do incredibly well. Things like defense electronics, things like UAVs. Items that -- where -- when companies are able to kind of formulate a strategic plan, put the dollars upfront and take an incredible amount of price out, the National Security Space Launch also being a great example, we think Rocket Lab will be able to participate and succeed in that kind of environment.

Well, great. Well, with that, are there any more questions from the audience?

Colin, you mentioned about this migration from sort of low LEO to high LEO and presumably, that could be meaningful to you if ride share can't service that well. So just if you can unpack that a little bit, what's sort of driving that trend? And maybe you can point to a few recent constellations and progress that are targeting sort of the higher LEO?

Yes. No, that's a great question. I think it's arguable whether or not rates have had a factor and inflation have had a factor in that. There's an argument to be made about what does asset utilization and kind of what the capital plans look like in a high rate versus low rate environment. If you think about satellite design today versus satellites that are being launched, typically satellites that are being launched are a function of design multiple years ago. And so within that construct, it's been easy to understand low rates, cheap capital allows you to scale single-use items very quickly and at a kind of affordable rate. But as you think about inflationary pressures, higher interest rates and kind of the desire to essentially not throw away a multimillion dollar asset, we think that Rocket Lab's bus design will be a really great feature within that. And so if you think about the trade-off is that over a 10-year period, we've migrated what I'd say is kind of geo back to, I'd say, the last few years of low LEO. But if you think about asset utilization trends and the ability to mitigate things like radiation burn electronics through redundancy and the like, that's something that Rocket Lab will be really keen to service. If you kind of walk at the last, I'd say, week of commentary, there's been some constructive commentary around people planning for that high LEO architecture. And then if you look at things like space force's fit-ups, right, and you go out and look at the FDA dollars, there's a fair bit of desire to do things like SDA tracking in that, we'll call it, high LEO. It's termed mid-earth orbit. But if you think about kind of the operating altitude, operating at the kind of 1,000 to 1,200 kilometer range can help drive things like a 10- to 15-year useful life of an asset, which I think if the last week's sell-side notes, too, there's been concerns about recurring CapEx of low LEO. We think that our design and our architecture as well as the assurance that we can provide around are really high [Technical Difficulty] space grade solar were all combined in kind of a winning satellite manufacturing strategy going forward.

Well, great.

Yes, appreciate it.

Well, thank you, Colin. And this concludes our presentation on Rocket Lab.

Thanks.