Rocket Lab Corporation (RKLB) Earnings Call Transcript & Summary

Great. Thanks, everybody, for joining us on the last day of the UBS Industrials Conference. Happy to have Adam Spice, CFO of Rocket Lab, with us. Thanks, Adam.

Thanks for having me.

Would love if you just maybe give a couple of remarks and let us know the Rocket Lab story.

Yes, you bet. So yes, I'm the CFO at Rocket Lab. I've been with the company for going on 7 years now. Prior to that, I spent about 25 years in the semiconductor industry. But yes, Rocket Lab is interesting. A lot of people are familiar. When you think about Rocket Lab, as its name would imply, it's a rocket company, and that's where we got our start. But today, Rocket Lab generates actually 70% of its revenue from the space systems side of the business versus the launch side of the business. So launch will always be the thing that gets headlines. People love to watch the fiery stick go up in the air, and I think it's very cool. It's a very strategic capability that we'll talk a little bit later, I'm sure. But we are a much more diversified business. So again, 30% of our revenue from launch. It's off -- today, it's off of our Electron launch vehicle, which is the second most frequently launched vehicle in the U.S. behind the Falcon 9. We've had 55 launches of that vehicle, 14 of those year-to-date. And we're bringing a new launch vehicle called Neutron to market in the middle of next year, which is a medium launch carrier, so -- or launcher. So the Electron can deliver 1,300 kilograms payload to low earth orbit. Neutron is capable of delivering 13 tonne to orbit. So it's a much bigger vehicle, much more kind of a direct head-to-head competitor to Falcon 9. And then in our space systems business, we generate about half of our space systems business from merchant subsystems line of business where we sell things like solar solutions, reaction wheels, star trackers, all kinds of other subsystems that other people use to build their satellites. So customers include people like Lockheed and Northrop and Airbus and so forth. And then we also sell full satellite turnkey solutions. Most recently, our biggest contract award to date was from the U.S. government through its SDA program for a $515 million contract to deliver 18 satellites into the tranche 2 part of that ecosystem. So it's a rapidly growing, pretty diversified business that's come a long way in a very, very short period of time.

Great. And you'd mentioned that's a picks-and-shovels business. Who are the biggest customers? You mentioned some of the defense primes there. You mentioned the government. What's kind of the longer-term opportunity aside from launch?

Well, I think on the -- so on the picks-and-shovels piece of the business, on the subsystems, it's really -- that's the most diversified piece of our business. But really, when you kind of peel the onion back a few layers with any one of our businesses, whether it's on the Electron launch side, whether it's on the subsystems business, it really ends up being U.S. government is a huge, huge end kind of consumer of ultimately what we produce. And I think that's going to be consistent. I think that's -- and we really like that exposure because as much as we all like the hockey stick that commercial opportunities present, the government is kind of that tried, true big spender, and we're in kind of a nice position of coming into a large existing market but in a disruptive way. So we have a small share in a large market that fortunately for us, in the subsector that we're dealing with, is growing very rapidly. So the kind of new space, small satellite LEO market or low earth orbit proliferated architecture is not only taking hold on the commercial side, but it's very much taking hold on the government side. So when you think about in the last few decades that precede us, the typical architecture was a large exquisite satellite that would go up in geosynchronous orbit, and there'd be a handful of those, and they'd last for decades. Now you're going to this LEO architecture where you're putting up dozens, hundreds or even thousands of satellites, they last for a much shorter period of time. And so this replenishment cycle, which is really helpful on both selling the picks and shovels because you're selling those more frequently and at a higher volume. And also on the launch side, you're just feeding your launch business as well. So this whole LEO proliferation is really what is underpinning our business, and it's happening not only on the commercial side, but it's happening on the government side. And when you think about the driver on the government side, it's really because this proliferation really provides resiliency. So you don't have that kind of one-off exposure that can be taken -- you can't have assets taken out in war time that then kind of cripple your capability. There's no way that your adversaries can take down dozens or hundreds or thousands of your satellites at one time. So it's a much more resilient architecture, and that's why you're seeing kind of the architecture move in that direction. On the commercial side, the reason for that is when you put satellites up in LEO, you've got lower latency because the satellites are much closer to the Earth for communications. They're much closer to the Earth, so you get much better resolution for imaging for intelligence purposes. So all of those things are really beneficial in kind of just underpinning everything. But at the end of the day, I'd say government -- U.S. government, particularly, probably represents north of 70% of all of our kind of real kind of consumption because even our commercial customers, for example, their largest customer in almost every case is the U.S. government or some other sovereign, for example, when we launch for European companies or Asian companies.

So the long-term opportunity, 70-30? Or is government more of the pipeline?

I think 70-30 is where we -- we like that. I think that's kind of where Pete and I are kind of trying to architect the business to several years ago. I think the mix, though, of that 70% is going to change. So ultimately, the goal for us is very much like you've seen with SpaceX, where it's all about getting that recurring revenue off of assets that you own and orbit and operate. So for us, that's really kind of the third leg of the stool in our space systems business. So first 2 being, again, the subsystems kind of merchant market, kind of picks-and-shovels business. Then you got the full turnkey satellites that we sell to people like the U.S. government and NASA and so forth. And then the third is really kind of that constellation business where you're -- either you're selling information, right? You're selling bits to customers, and you're getting that on a recurring basis like Starlink is doing. So I think Starlink is a great example of that.

How much does Neutron unlock that for you?

Yes. Neutron is the unlocker. I mean we really can't do that in a real meaningful way without Neutron because Electron is a phenomenal vehicle. It serves a very important role in the ecosystem for launch -- for small dedicated launch. But in order to really kind of participate in the largest parts of the space ecosystem, you have to be -- you have to really -- it's a volume game. You have to put up a large number of satellites. In order to do that, you got to do it in a very cost-effective and timely way. And really, if you look at the -- a huge differentiator when you look at what SpaceX is accomplishing with Starlink, it's really enabled by having a reasonable launch vehicle in the form of the Falcon 9 and so having that -- I mean Neutron is that same thing. So we'll be able to put up much greater amounts of asset on orbit once we have Neutron because again, it's a 40x-the-volume-capable rocket versus Electron.

Any way you can put numbers around, I guess, the addressable market, what you have for Electron? And then Neutron obviously opens up a broader launch market, but also everything else you just articulated. Is there a way to kind of quantify how big of an unlock that is?

Yes. So if you think about the launch TAM is around -- if you think about $10 billion to $20 billion TAM per year across small, medium and heavy launch, that's a global number. If you look at the space systems manufacturing business, so all the subsystems and including payloads and so forth, that's about a, call it, a $30 billion a year TAM. But the actual -- other part of the -- like the application side of the market is about $300 billion. So that's where the -- and if you look in the past, it was comprised of you've got secure comms in the enterprise market, you've got -- you always have kind of the sat phones, and you've had Earth imaging that you would -- that you'd be able to monetize. But at the end of the day, it's -- lot of that volume is coming from like the DIRECTV, like pay-TV services, for example. That is now being replaced by things like Starlink who are doing broadband services from orbit. But that $300 billion TAM, that's the brass ring that we're shooting for. And -- but really, we've taken the strategy of in order to really exploit that opportunity, you got to have all the pieces. You have to be an end-to-end player where you can design satellites, manufacture them at scale efficiently with your own vertically integrated supply of key subsystems, so you don't become supply chain kind of blocked. You have to be able to launch them at a pace and at a cost that is -- that's necessary. And then you have to be able to operate those constellations on orbit. We can do essentially all of those things now. We just are kind of missing that last customer -- but having Neutron, we're going to enable -- unlock that last piece and then also kind of gain the capability on the payload side to be able to tap those applications because each application is very unique with its payload requirements. So the payload that you'd have for a communications satellite is very different than from an Earth imaging one. And even within Earth imaging or, call it, remote sensing, there's various ways to do that. You can use RF sensors, you can use electro-optical like cameras, essentially telescopes. So there's -- the thing about space is there's lots of different kind of verticals that you can go after. And so it's a target-rich opportunity for sure, especially for a new player like us that's bringing new capabilities to the market.

More near term, I'm sure you can answer the SpaceX competition question on autopilot. But on the Department of Government Efficiency, like NASA and maybe some others could be in the crosshairs. How do you think about the threat or maybe even the opportunity there given your low cost?

Yes. Look, I think for us, I think, we're a bit more of a concern for other people than they are for us. I think specifically, the older, more traditional government primes are really, really struggling with the firm fixed price model that the government customer really wants to move to. They like their 6% cost-plus models with -- so for us, we actually -- we love firm fixed price. We don't want a cost-plus model. We don't want to get pinned into a single-digit, low double-digit margin structure. And so if you look on our satellite systems part of our business, historically, margins for that have been in, call it, the high single-digit, low double-digit range on a gross margin basis. Our gross margins in that business are more like 30 points. And the reason for that is because, again, we're so vertically integrated. We're not buying reaction wheels from Honeywell. We're not buying all these other subsystems from other -- we're not buying solar solutions from Boeing. We actually have pretty much all in-house. And so we eliminate all of that margin stack and essentially keep that margin to ourselves at a program level. And I think that the margin enhancement is super important to the business model, but I think even more importantly, and what's allowing us to win some of these contracts is the fact that oddly enough, a new supplier like Rocket Lab is, in many ways, lower risk because we control our own destiny. We don't have as much dependency on these critical subsystems. And the one thing that we've learned since entering this market is that delays -- old space is done in ways where there's always delays. It's an industry that's comprised of lots of different mom-and-pop shops, none of them at scale. And so you get bit by the various pieces of the supply chain and which cause overall program delays. When you have it all under one roof, you can really control that, and the customer really likes that. We say, look -- when they're evaluating our proposal versus somebody else, they go, "Oh, well, Rocket Lab doesn't have to go procure this. They don't have to procure that. It's all under one roof. We can feel more comfortable that they're going to meet cost and schedule." I mean there's been pretty good examples actually in the last -- I would say, good examples, but there's been examples in the not-too-distant past where things like electric propulsion, for example, for the SDA program has been a real visible problem where suppliers weren't delivering, and that was causing overall program delays. There are very public issues now with things like optical terminals where optical terminal providers are not delivering to their commitments. So to the extent that you can kind of eliminate those points of failure by having them under your control, you're a much more viable supplier. And I think that's where we see -- and we see the future really. If you're not an end-to-end player, we think you're going to be increasingly squeezed out of opportunities. And when we say end to end, again, it goes all the way from designing your spacecraft to launching the spacecraft and operating on an orbit. And we've just kind of methodically been putting all the pieces together to be able to do that. And all of those pieces, again, it comes back to how we started the conversation: launch is the most difficult piece of all of that. Building satellites and satellite subsystems, it's difficult because it's space, but there is nothing that can kind of equate to the technical challenge of launching a rocket. It's basically a series of controlled explosions with 66,000 parts. And at the end of the day, it all depends on your quality systems and your testing, and it's a very, very challenging part of the business, but it's a hugely differentiated one. And again, it all comes back to if you look at why SpaceX has been as successful they have with Starlink, it's because they've got the world's best launch platform.

And NASA suggested some pretty big cost reductions possible on the Mars Sample Return. It's kind of how you articulated it. Is that an example of what you articulated?

Yes, I think so. I think that when the initial proposal was put out there, I believe it was like $11 billion, it was the proposed cost to bring those samples back, and it wouldn't be done until 2040. And so our proposal is done on a significantly -- would be done on a significantly reduced budget and a much more compressed time line. And I think that's, again, a function of having so much capabilities under one roof. Like we actually have the launch capability. We have the satellite kind of design and manufacturing capabilities. We've actually already sent payloads to the moon, right? So we've got interplanetary experience. So all of those come together to allow you to do things where if you're -- the more traditional prime that would go after this, you're more of an integrator. You're taking other people's technology elements and stitching them together to try to put a whole solution together, again, versus one person owning all of that and being a much more kind of, I'd say, orchestrated approach. So I mean, the Mars Sample Return is a great example of how if you rewound the clock 10 years ago, you would never have seen a company like Rocket Lab in serious consideration for an opportunity like that. It would just never be the case. And nor would have been the case where you would have thought that the first piece of the Artemis program were to put a -- you had to put a lunar payload in place. That wouldn't have been done by Rocket Lab, but it did. We actually built the spacecraft, and we actually launched the spacecraft on our own Electron launch vehicle. Like the market is changing so quickly that it creates opportunities for people that can move quickly. And you also have to have access to capital, which is, again, one of the reasons why we kind of took the company public in the way that we did back in 2021, and it's definitely proved that capital is a -- is much of a weapon as engineering capabilities.

Well, the cost reduction point is a really interesting one as you've been able to also increase your Electron launch pricing. So it seems you can offer a lower price, yet also you've been able to increase your own price. What's enabled that? What's kind of the relative order of magnitude that you think you can increase Electron to and where Neutron could settle out?

Yes. The small dedicated launch market is kind of the unique one because when you're talking about average selling prices of less than $10 million per launch, that's kind of an unheard of zone, right, that's been created through Electron. And other people have tried. We saw the very public failures literally of Virgin Orbit, Astra. You've seen less public failures of ABL and relativities of the world that have not been able to get there. And I think that when you look at -- what small dedicated launch has brought to the market is if you'd previously need to put a refrigerator-sized payload on orbit, before Electron, you'd have to basically put it in a big rocket. And so you have a very small payload and a big expensive rocket. And so now we've been able to put a small payload and a small fairing at a very low price. The engineering required to get Electron to work, and so I almost think about like the complexities of a small rocket or like building a Formula 1 car versus like a Chevy, Chevy Nova -- I don't want to talk about it. I don't know what the Chevy models are these days. But it's a very, very tough environment to build this high-performance vehicle in a small form factor with the narrow margins you have for like fuel margins and so forth. So what we've been able to do, though, is we've been able to offer that sub-$10 million price, high frequency now because we can launch -- having launched 14 times this year, which has kind of created more opportunities for customers because it's allowed programs to be deployed on much tighter budgets. And a good example of that as well as what we're doing with the U.S. government on hypersonics, where if you look at the cost of a hypersonics launch program, a single launch was probably measured more than about $100 million per launch per test campaign. And of that, probably $40 million to $50 million of that was launch cost. And we've been able to take like 80% of that launch element cost out by providing Electron into that market. And so that's a great example of how when you kind of keep -- you bring a new cost point into a market, you can hopefully drive greater volume and just allow more innovation to take place. So part of what allows you to do that, though, if you look about the cost structure of Rocket, less than half of the cost of goods sold is actually in bill of materials and direct labor. More than half of it, at least in our cost structure, is really around overheads. So running a rocket company is a very high fixed cost environment because you have -- you've got all the production overhead, you've got range overhead, you've got health and safety and regulatory and all these different things, and you've got a standing army of engineers to do cost reductions and performance improvements and risk reductions and so forth. So it's a very high cost business. So it's all about cadence. So when like, for example, today, we're launching roughly a rocket per month. And our gross -- our non-GAAP gross margins on that are about 30%. As we scale from 1 rocket per month to 2 rockets per month, that gets us to our target margins in the mid-40s on a non-GAAP gross margin basis. And it's all about overhead absorption. You're now leveraging that infrastructure over a greater number of launches, and it has a significant impact on the profitability of the business. And I think when you look at Neutron, Neutron is coming into the market with an average selling price of $50 million to $55 million, right? And if you kind of compare that to a Falcon 9 at around $67 million, it kind of gives you an idea kind of where we're entering the market. And our long-term margin model for Neutron is very similar, if not a little bit better than where Electron is or where the -- kind of where we are today and where we're going with that model. So kind of think about it in the roughly 50% gross margin range. And again, that is a function of not only again, ultimately getting to rate but also the reusability of that vehicle because that vehicle is designed, from day 1, to be ultimately kind of reusable, where call it, 70% to 80% of the overall cost of the rocket is in that reasonable first kind of stage booster. And so getting to reusability is a huge, I would say, enabler of our business model coming into focus.

I mean you've laid out the milestones pretty clearly on Neutron. But is there a single long pole in the tent?

The long pole in the tent is -- the Rocket program is historically propulsion. And so I think that we got a lot of encouraging kind of validation when we got our hot-fire test from that engine in August. And so that was an important milestone for us to get through. And that engine program continues to progress now that we know that the [indiscernible] testing the engine in its every configuration to make sure that we understand every condition. So that's really scaling. It's going -- it's in production now. So we've gone to R&D, now into production mode, and we're always going to be continuing to test and improve and iterate the engine, but that's the long pole. And that's -- we pretty much got that behind us. Now the rest of it is infrastructure. And if you kind of spend enough time kind of looking at all the online forums, you'll see people are kind of publishing new pictures of our infrastructure almost on a daily basis, like how the steel is coming together from -- at Wallops Island, Virginia and so forth and how our factory outside of Baltimore is kind of -- is spooling up to produce all the larger-scale composites and so forth. So -- and we were very fortunate that we were able to take advantage of Virgin Orbit's bankruptcy and pick up their rocket factory in Long Beach, which is 2 blocks down the road from our headquarters, and we were able to pick that up for $0.16 on the dollar due to their bankruptcy. But -- so I think all things have come into focus. I don't think there's any one long pole right now that would say that's really kind of a big risk factor for hitting that mid-next year kind of initial launch. So that's super important for us. So if you think about -- the way I think about that program is get that first test launch off middle of next year. And that does -- one thing for me as the CFO is you get that heavy R&D spend behind you because at that point, you've got minimum viable product and minimum viable infrastructure. And at that point, everything else becomes more discretionary as you kind of target rate. And then the next big milestone will really be how quickly can we put that -- put a Neutron back on the pad that's flown. Reusability unlocks a tremendous amount of things. Number one, it allows you to uncap your kind of -- your rate increase because then you don't have to build a booster for every mission. Now you have a fleet model where you get to refly just like the Falcon 9 is doing because at one point, I think, SpaceX was building like 20 boosters a year, and then they had got down to the point where they were only building like 4 boosters a year because they were reflying them at least once a quarter. And now they've got to the point where, I think, they're flying each booster every 30 days, right? So that -- landing that first -- landing -- the first landing where we stick the landing of the booster on the barge is going to be a massive kind of unlocker again for us. So there's a series of things. Getting the engine hot-fire test behind us was huge. Getting the first test launch off middle next year is huge. And then sticking the landing for usability is kind of that, I would say, almost like the last major achievement that you need to unlock that huge Neutron potential.

Is that also a '25 target?

No. So the first launch of Neutron will be a test launch. And right now, the plan is to do just a soft controlled splash down of that booster. And then we'll bring it back to the shore, and we'll kind of -- and we'll bring it back and figure out -- get a lot of learnings from that. But the question would be, is it tail #2 that we try to land on the barge? Is it tail #3? It will really depend on how well that first test goes because if we come back and it's a very nice controlled splash down and we think, oh, we actually could have probably landed that on a barge if we wanted to or want to take that risk, then we're -- we'll feel confident about #2. If it's a little messy, then we've got some more calls to make.

How is the pipeline building up? I think you already have a couple of orders. Are you qualified for a National Security Space Launch competition right now?

Well, that's -- so we're -- right now, we're working towards getting on ramp into the NSSL program in 2025. If we're successful in doing that, that starts to basically -- it makes us eligible for awards beyond 2025. Typically, you would expect that, that would take at least kind of a couple of years once you've kind of gotten kind of onboarded to be qualified for your first NSSL missions. But I think we're also in a -- hopefully, we could truncate that because the market -- there is such a dearth of capacity right now. If you really look at -- today, you've got SpaceX who is obviously the dominant really. And you got SpaceX and ULA, right? And then you got a Blue Origin that's been on-ramped but has not yet flown. So there's a tremendous opportunity within NSSL. It's just a matter of we got to get onboarded and get on-ramped and then just get that flight cadence up so we can fully exploit that opportunity. But that's going to be -- that's a big one.

And I guess, another potential big one that you mentioned earlier is transport layer. Do you guys have the opportunity to do more than 18 on tranche 2? Or is the more opportunity after tranche 2?

Right now, we're focused -- there might be on tranche 2. There's definitely a tranche 3. So there are multiple platforms that we're going to be bidding on for tranche 3 awards. And those are coming into focus as far as being awarded, think of that sometime in the middle of 2025. And so one of the nice things about our business is we do have very good visibility, right? So you talk about pipeline like on the rocket side, we've got -- exiting Q3, we had 39 Electrons in backlog. ASP was like $8.3 million. So we know very well where that business is going and kind of how that's looking. On the Neutron side, as you mentioned, we've signed our first 2 launches up with the customer, and I think that pipeline is going to start to build quite nicely as well now that we've got that first kind of customer domino to fall. On the space systems side, we benefit on that picks-and-shovels merchant subsystem business from the fact that we're selling into a growing ecosystem in the small satellite market with a variety of different solutions. We just kind of wait as that kind of rising tide raises all ships in that market. On the full solutions business, like into SDA, we also are very comfortable. We know where our revenue is coming from for that. It's very programmatic over '24, '25, '26, '27. So now in order to avoid an air pocket in 2028, '29, we've got to get that next major piece of the puzzle put into the backlog. And that's really where our focus is right now, is securing that incremental backlog in the first half of 2025 to derisk the out-years. So sitting in my seat, I think there's a lot of -- I take a lot of comfort in the fact that I don't have to rely on every -- like in the semi business, every quarter is a crapshoot, right? And this is -- I have the benefit of looking out 2 or 3 years and saying, "Okay, I know where I'm going to -- where I'm getting -- how I'm going to pay the bills." The challenge is it's been like an ocean liner, right? Like you can't -- you have to anticipate where you need to be, and you have to constantly be building that pipeline and nurturing it and making sure that you don't ever get caught in a situation where you go, "Oh, we missed that turn, and now we're going to have a problem 3 years from now that we really can't recover from." So it's kind of a bit of a blessing and a curse.

Yes. To have the backlog visibility. And what's the importance then of -- you recently had a 10-week turnaround contract to launch. If you have a good amount of visibility, presumably there's not a ton of short-term turnaround opportunity, but what's the significance of that?

So in the launch business, one of the things is that we've never had a customer waiting on a rocket, but we have often had rockets waiting on customers because the nature of their products, so if you're a satellite operator, you'll contract for a launch 12, 18, 24 months from now. And that assumes that everything in your program goes well. And let's say, for example, you've got an issue with a subsystem vendor where somebody doesn't show up with an electric propulsion thruster, for example, or you put your satellite 3 months before launch, your satellite is in final TVAC and vibe, and if something doesn't go well, they basically -- then you have to basically remediate that issue, put it back through test. And so that can throw you off by 3, 6 months, maybe more in some cases. So you've got the ability -- you know what you have on your manifest, but your customer basically has to show up in order for you to fulfill that manifest. But for us, at least, fortunately, we're collecting the cash along the way, so we don't actually have to wait to launch them before we collect the money. We're doing that along the way. We recognize revenue when we actually press the ignition button on the rocket, but we're collecting cash all along the way, leading up to that. But it does create opportunities when new customers come in and need a quick turn launch and they actually have a satellite that works that you can basically take advantage of a rocket you have sitting there for a customer that's slipped, right? So does it necessarily mean that turns orders represent upside to your forecast? Not so much. It just means it just provides you some cushion that you may not miss your forecast that you had because your customer doesn't show up when they were supposed to. A new customer can kind of slide in and kind of be the backstop.

It's impressive turnaround time.

Yes, that 10 weeks is a record, but you also saw like 2 weekends ago, we did 2 launches within 24 hours in 2 different hemispheres. So that's the benefit also of having multiple launch pads in New Zealand and a pad in Virginia. And it kind of just shows the resiliency of kind of having that kind of scale of operations. But it's taken a long time to build out. I mean we've been at this for a while now. And we've got -- we certainly have aspirational kind of people driving us. We look at what SpaceX is doing, launching up to 150 Falcon 9 this year. It's pretty impressive. And we have similar ambitions longer term, obviously, for Neutron. But it's a good rabbit to chase.

I'll come back to margins that you were talking about earlier. I mean pretty steadily improving your gross margin. Did I hear you correctly that Neutron comes in at an accretive margin?

So no, Neutron initially will be negative margin, like if you think about it, because until you get to the reusability of the booster, you're basically -- it's still kind of a quasi R&D kind of mode. And just like Electron came out negative margin and then eventually -- because a lot of it too is just about cadence, right? You have to get that overhead absorption. So it's a combination of getting your efficiencies up and your rate up to absorb your standing cost. So initially, Neutron will be negative, will be dilutive to margins, but then once it gets to kind of the rate and the cost targets that we've modeled, relatively early in its life, it should become accretive overall to the launch business and overall accretive to the business. It should be the higher, if not highest, margin part of our business in the kind of medium to longer term.

Okay. That was a target.

Yes.

And then I guess in terms of the 2 segments, like similar margins today, how do those trend over time? And how do those mix?

So the margins are very similar today, call it, in the low 30s on a non-GAAP gross margin basis. But those are going to start to spread because if you look at the merchant subsystem part of our business, that's already got, call it, low 40s gross margins. And what is lower than that, which is bringing the overall margin down, is the full systems business, which is more in the -- call it, in the high 20s, kind of 30% range. And so over time, the -- that business, we think that mix will shift to probably more of that lower margin but larger magnitude systems business. And then you have the launch piece. So if you look at the overall space systems business, it's probably a 35-point gross margin business at -- you might -- maybe you could stretch to -- squint to see that go maybe towards 40%. But the launch business is the one which we think has the bias towards 45 to 50 points of margin. So launch will be the highest part of the gross margin story of the business. Space systems will be larger in absolute terms but lower gross margin. So overall, we think, on a blended basis, we should be able to get the business to close to 40 points of non-GAAP gross margin, and we model kind of a mid-20s kind of operating margins.

And then in terms of conversion to cash flow, I guess some of that may depend on how strong the growth opportunity is. But when do you think about cash flow positive?

You're right. I mean I think -- it's going to depend on how much more fuel we need to kind of put on the fire for enabling the scaling of Neutron. So Neutron is -- right now, it's consuming all of the cash burn of the company, right? So if you look at the -- Electron is not consuming cash. Space systems is -- actually, if you look at Electron and our space systems business, they're providing cash to fund that Neutron burn. So once Neutron kind of -- once that burn gets extinguished, which, again, happens once we get into revenue on that, which is in 2026, that's when the model really kind of flips, if you will, and has the potential to turn more sustainably cash flow positive. Now you're right. We can get to 2020 -- sometime in 2025 or 2026, and a large customer could come to us and say, "Hey, look, we understand you've talked about a launch cadence for Neutron of a test launch in '25, 3 launches in '26, 5 launches in '27. What would it take for those 5 launches in '27 to be a much bigger number or in order to go for a, say, 5 in '27 to, again, a much, much bigger number in '28, how much incremental capital will be required to do that?" That could be some -- does that require building out another launch pad? Does it require building more tails, which consume more working capital? That's really -- that's a good problem to have, right? That'd be a great problem to have. And oftentimes, with those larger strategic customers, they can also be providers of that growth capital. Sometimes they pay for that, for that scaling capital. So I think there's a lot of things yet to come. It's really -- so all eyes are on that first test launch. How well does that go? If it goes really well, then, yes, we could be -- we could have some really good tough decisions to make about how much more capital we want [indiscernible] the business to scale faster.

[indiscernible] that you get installment or [indiscernible] at launch?

Yes. I mean typically, by the time we start actually bolting a rocket together, we've collected 60% of the mission value. So from that perspective, it's a good cash flow cycle.

Let me see if we have any questions in the room in the last few minutes here. Well, maybe one last one for me then. You mentioned access to capital earlier. I think you've got maybe $500 million of cash on the balance sheet. You mentioned some customers may also help prefund growth if you were to accelerate that. Do you anticipate needing to go back for capital at any point?

Well, the one thing that Peter and I are very focused on is you never want to run a rocket company too low on cash because you can have bad days. And a bad day in the rocket business basically means that you could have something happen on the pad that could take out some of your infrastructure that would have to be rebuilt. Our model will be sensitive to how quickly or how long it takes for us to get to reusability on Neutron, sticking that first landing because each booster that's kind of, if you think about it, an expendable mode. As I mentioned, it's kind of negative margin prospect initially. So it's very important to get that. So I think for us, we've kind of set some internal comfort levels around $300 million of cash. So if we were able to get it kind of close to that line, we'd probably think about kind of topping up the coffers a bit. We did a convert earlier this year. We raised $355 million back in February. And that was really to fund inorganic growth stuff, which we haven't actually got any deals across the line to consume any of that capital yet. But if we were to do -- we were successful in doing that, then that might make us think about, again, making sure that we had sufficient dry powder. But I think right now, we feel very comfortable where we're at. We don't have any immediate clear kind of need for -- to put more cash on the balance sheet.

Great. Maybe any final remarks you wanted to leave us with?

No, I think that -- I think the one thing that really kind of -- that I think has been resonating with investors is the fact that like we are really the pure-play space publicly traded option right now, right? So there's been a lot of speculation. Will SpaceX come public in the next few years, TBD, right? I mean obviously, they set a very attractive valuation comp out there, right? I mean the most recent number I saw this morning, and they're talking about a $355 billion valuation for an employee tender. I've seen some analysts talk about IPO target prices of $750 billion or greater, right? So I think there's clearly appetite for investors to have exposure to the space. And I think we are the only scaled, pure-play space option, particularly with launch, out there. And we think launch is the most difficult piece. And I think once you have launch, it really very rarely -- and we would not expect at this point to see other people outside of launch kind of work their way into launch. Launch is kind of the foundational cornerstone. And so if you come in with that, the rest of it looks relatively easy to pick off, right? And we've kind of seen Elon do that, right? He's incrementally taking whatever he wants because the launch piece is what has proven to be the most difficult barrier to entry in the space market because there's just very few providers because it's so difficult to do. So if you can do that, kind of the world starts to become very, very -- your aperture becomes very large as far as things you can go exercise. So stick the launch piece, and we think that our opportunity set becomes larger and larger. I think we're very -- we're close to Neutron. I mean we came public 3 years ago. We said, look, Neutron is the reason why we're coming public. And here's what we say we're going to do, and we've systematically just done what we said we were going to do, and we're super close to ultimately kind of checking that last box and getting Neutron off the pad. So very exciting.

Stick the launch and stick the landing.

Stick the launch and stick the landing, absolutely, yes.

Thanks, Adam. Appreciate it.

Yes. Thank you very much.