Rocket Lab Corporation (RKLB) Earnings Call Transcript & Summary

Hello, and welcome to the Rocket Lab Discussion of Government Constellation Award [Operator Instructions] I will now turn the conference over to Colin Canfield Head of Investor Relations. Please go ahead.

Thank you. Hello, everyone. We're glad to have you join us for today's conference call. 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 at the date hereof and are subject to change or future developments. Except as required by law, the company does not undertake any obligations to update these statements. I'd also like to note that due to quiet period dynamics, we ask that analysts and members of the media limit their questions to today's announcement as we will not be able to provide any views or updates related to our Q4 2023 results or Q1 2024 financial guidance at this time. This call is also being webcast with a supporting presentation and a replay and copy the presentation available on our website. I'll now turn the call over to our Chief Executive Officer, Peter Beck.

Thanks very much, Colin. So I'm very pleased to confirm that we're being selected by the Space Development Agency to be the prime contractor to develop and operate 18 spacecraft and support of SDA is Tranche 2 Transport Layer. At over $0.5 billion in contract value, the award is our largest contract in the company's history. It affirms our vertical integration strategy across space systems and establishes Rocket Labs position as a leading satellite prime contractor, providing supply chain diversity to the Department of Defense and Commercial Constellation alike. Turning to the award specifics. The contract comprises a $489 million base plus $26 million of incentives and options. The bulk of the work is expected to be carried out through the next 3 years with the satellites due to launch in 2027. Rocket Lab will then handle operations of the constellation on orbit through to 2030, but the potential operations were carrying us through to 2033. As a prime contractor, Rocket Lab will lead the design, development, production, test and operations of the satellite, including procurement and integration of the payload subsystem. And the demonstration of a vertical integration strategy at work, all 18 spacecraft will feature subsystems and components built in-house by Rocket Lab, including solar panels structures, Star Trackers, Reaction Wheels, Radios, Flight Software, Avionics and are Launch Dispensers. The constellation will be built at our advanced spacecraft development and manufacturing complex in Long Beach, California. With the addition of the T2 Beta contract, we now have more than 40 spacecraft in backlog. We review the T2 Beta as a foundational win for Rocket Lab for several reasons. One, it confirms Rocket Lab's ability to capture high-quality, high-value work, thanks to our previous investments in the Space Systems business, both organic and inorganic. 2, it significantly derisks the growth and earnings outlook of our Space Systems businesses as well as the [ overall ] company; and 3, the work scope confirms Rocket Lab's role as a disruptive commercially developed new government prime. We will look forward to cement our position as a prime with this win and ongoing new opportunities. The Rocket Lab solves hard problems and shedding a little bit more color on the mission itself, SDA's Beta constellation will serve as the backbone for the Joint All Domain Command and Control infrastructure, providing low latency data transport, encryption and connectivity for a range of government missions [ there ], including the online of site targeting missile warning and missile tracking and advanced missile threats. This is the type of mission that Rocket Lab is extremely good at developing reliable technology that customers know they can rely on to deliver missions with tests for the nation. From leading humanities push back to the Moon with the Capstone Mission of the NASA to [indiscernible] James Webb telescope to design and delivering fast and affordable hypersonic launch capability. We're right through to building Globalstar's communication constellation, Rocket Labs launch and spacecraft solutions are key enablers for the global space market. We are honored that SDA has posed the trust enough to deliver a highly capable space graph for such a critically important constellation, and we look forward to working with the SDA team in the coming weeks, months and years as we bring this spacecraft to life. With that, I'd like to turn over the call to Adam Spice, who can discuss our Space Systems strategy and some of the dynamics to consider with respect to the budget outlook.

Thanks, Peter. This contract is the culmination of our thoughtful and deliberate investment in our Space Systems business where [ why ] we either acquired key space technologies or invested in them organically as a means to deliver industry-leading quality, performance and schedule. In terms of these 18 satellites specifically, our Constellation award includes all of the subcomponents we've previously acquired or developed internally, including solar, Star Trackers, Reaction Wheels, Radios, Launch Dispensers and other critical technologies. We view this as a fundamental proof point of our investment strategy as well as the government's pivot to commercially develop space programs that are able to deliver best value for the customer and for taxpayers. Now turning to some of the related budget dynamics to consider. We [ view ] not just this award, but SDA's program portfolio as a whole as a generational growth opportunity for Rocket Lab. As you can see, from U.S. budget -- U.S. government budget forecast that can be found in the Space Force's program acquisition materials, it's clear that government budgets cannot just grow quickly with billions of dollars of opportunities, but that the outlook is increasing year-on-year as U.S. government continues to pivot to commercially develop satellite architectures. In addition to Beta, we view Rocket Lab is uniquely positioned to compete for and support other key programs beyond transport. While we prefer to take on the role of prime contractor as a means to have more control of the cost and schedule certainty, we'll also continue to be a critical partner to the broader space ecosystem as we alleviate key supply chain constraints, such as currently the case for space-grade solar capacity. And with that, I'd like to turn the call over to the operator for Q&A.

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

Congrats on the award. You may have -- Adam, you may have sort of alluded to this, but how should we think about this award and the business with SDA in the context of your Space Systems business. I mean, you are planning on targeting all the other remaining SDA tranches? Or how selective are you planning on being for that?

Yes, Erik, we're always selective in the programs that we pursue. I think it's no different in the case of SDA. I think we believe that we've got some unique capabilities that can execute on specific elements of their overall program. And we do see there are other opportunities where we can add value to SDA. So we're certainly not stopping at Beta. We'll be continuing to make proposals and other elements of their initiatives. And we also think there are similar opportunities outside of SDA within U.S. government programs that we can bring similar kind of innovation and performance too. So yes, we're definitely not stopping at Beta, but I think this is a huge validation of the fact that these opportunities are real for Rocket Lab [ where ] we can do meaningful capture against those.

Got you. And so this gamma portion just went out for solicitation and I think responses are due in a couple of weeks. Can you confirm that you had put in a bid for that as well?

It's not our practice to comment on things that we've kind of not proactively announced. So we're not going to respond to gamma at this point, but just there'll be more to come on that in the future.

And can you comment on how big the satellites are. You're obviously providing the buses and there's a lot of integration of all the components and subsystems that you've built and acquired. But are you also then supplying any of the payload?

Yes, I'll let Pete take that one.

Yes, yes. So as prime contractor, we are getting a number of suppliers and - to support the mission. So as a connected but is aware that Rocket Lab currently doesn't provide necessarily payload. So we have a good supplier for those as a prime contractor. And the spacecraft in kind of scale, it's not [ dissimilar ] in size to the SDA Globalstar platform. So sort of a few 100 kgs multimeter [ wing spend ] for solar, right?

Got you. And maybe my last one, Adam, just for you. What sort of gross margins are you targeting for this program? And then maybe as it relates to future business with SDA, what are the thresholds you need to preserve for your internal targets?

Yes. So we've set out what our longer-term non-GAAP gross margin targets are for launch and for Space Systems. And I would say that this contract kind of fits within the overall modeling that we've done. I mean there are -- if you look at the -- across our portfolio of Space Systems offerings, we've got some materially, I would say, higher gross margin parts of our business, which are more, I would say, related to the merchant components that we sell into the market. Again, those usually come at pretty attractive gross margins. And then when we go to these larger total platform solution sales, we typically kind of model a lower gross margin profile than the merchant component sales. But overall, they come to a kind of that blended gross margin target that we long talked about, which is north of 40 points. But again, I think the overall model for Space Systems doesn't get changed by this is actually supportive of this. Again, I think -- but the overall gross margin is going to be highly dependent upon the mix of merchant component sales versus these more strategic large platform opportunities, which do come at a lower gross margin.

Great. Your next question comes from the line of Suji Desilva with ROTH MKM.

Adam, congratulations on the win here. Maybe first on the revenue, the [ 49 ] for the deal size. How is that going to flow through Adam? Is that leaning toward when the satellites to delivered? Or is it relatively even throughout the 3-year life span of the work?

I wouldn't say it's even, but it will be recognized over the life of the work. So it's basically going to be modeled on and recognized on a kind of cost of completion. So yes, there are milestones, milestones for the most part, drive kind of cash collection and invoicing. Revenue recognition is driven by the amount of effort expended towards completing the program. So it will be more linear, we suspect than what we've experienced to date on the Globalstar MDA contract, but not entirely dissimilar. And this contract, like almost any other program like it is more back-end loaded. So again, more linear than the Globalstar MDA, but still back-end loaded. We do expect some revenue recognition from the program in 2024, but we'll speak more to that likely on our upcoming Q4 results call in February.

Okay. And then the other question I have is on the capacity for satellite manufacturing. I'm just thinking you have 2 programs now more in the pipeline potentially. How should we think about the kind of capacity you have for building X number of satellites per year? Or is that not the right way think about it, it's more program-specific? How should we think about your capacity build out?

I can take that one Adam.

Yes, okay.

So we've made pretty significant investments in the manufacturing capabilities. So we recently moved all the engine manufacturing over to the new engine development center, [indiscernible] building and free that whole facility up facility upfront satellite manufacturing. So there's some small CapEx investments required, but largely that's all in place. And we have 2 [indiscernible] and of course, all of the Globalstar MDA. So we've really been scaling that over the last couple of years as [ evident ].

Your next question comes from the line of Edison Yu with Deutsche Bank.

Congrats on the win. Just a follow-up on the last question. Are we expecting the, I guess, the investment or expenses to have to ramp up a little bit before the rev rec picks up? Or how do we think about that aspect?

Yes, Edison, I think they're largely going to be in concert with each other. So we're not expecting like a large upfront preloaded R&D element of this contract. It's pretty much going to go pretty much in tandem with the rev rec. So yes, it's -- from that perspective, it should be pretty coupled and linear.

Got you. And then maybe can you provide a little color on the bidding process. What kind of key factors do you think may be the win? I know you highlighted vertical integration? And maybe were there any learnings that you took away from a Globalstar that sort of applied to this that gave you a better position, better edge?

Yes, I can take that, of course that one, Adam. So I think there's a couple of key kind of things there. One is supply chain diversity, SDA and the US government in general is looking for more and more supply chain diversification in nontraditional commercial providers. Our execution history, of course, the type of spacecraft that we build are not trivial, simple spacecraft. We -- all of it if you look across all of the spacecraft we build, whether it's going to [ Mars ] or the Globalstar MDA, but they're all very, very difficult spacecraft. But that's where we kind of excel. And then our ability to partner with really discriminating payload and bring payload partners along that provide solutions that at the end of the day, that's where the rubber hits road.

Your next question comes from the line of Jason Gursky with Citi.

[ Can you bit ] really quickly. Can you talk a little bit about the scope of development that will need to be done on this relative to the overall program. And then maybe comment a little bit about where that development work has to happen? Is it software, hardware, kind of just describe the scope of the problem that you're all going to be solving as you go through this work?