Space Exploration Technologies Corp. (SPCX) Earnings Call Transcript & Summary

I think it's an interesting world for us right now. I mean we have done these compute deals, right? And almost all of them, if not all of them, have been, in essence, 90-day with a 90-day out, so roughly 6 months commits. In fact, the one I just talked about that we just did earlier this month is also the same structure and time line. And I think largely, that's because we have so much internal conviction about our own products. In fact, if you look at our own product cycles, it's pretty great that we closed the deal with Cursor just a few weeks ago. That brings a huge, very capable team to us officially now and you're already seeing improved product cycles, announcing Grokbot and getting that out there, that's a viral product. It is really amazing. If you haven't tried it, you should. And it's just getting started down that path, right? And certainly, it takes a little longer on the enterprise side than it does the consumer side related to security and other things you need to work through, but as people start using it and seeing all of the benefits of it and starting to talk to their friends, like anecdotally, that's what I'm seeing constantly around this. We're starting to see that. We saw Grok 4.6 come out and be a notable improvement from 4.5. We're talking about 4.7 here shortly. And so the product cycle is improving, the size of the models, the capability and so we're in this interesting dynamic where we have so much conviction about these products and more coming that you don't want to get in a situation where you constrain your own products in the years to come because you were giving away the compute forever. And so it is -- for me and for my finance team, it's an interesting one because you're actually basically building this model of I'm going to have this much compute from a wattage perspective, and this is my assumption of how I'm going to monetize it. And we know for a certain period of time what the range is. I think on the earnings call, we talked about $30 to $50 is where we expect next year to be from a range of monetization and that we were at the high end of that range is probably the right. I think the wording we use, if not we're on the high end of the range. And so really now it sets the bar for our internal team, right? Because you don't want to be pivoting over to your internal solutions and have any degradation related to the monetization, you want to have improvement. But I mean, I don't have the financials of some of these big guys like Anthropic or OpenAI related to visibility of their financials, I should say. I think our financials may be better, but whatever. But visibility to their financials to know exactly what they're getting from a monetization of dollars per watt, but based upon what we're seeing, it's higher than the range, right? And that's why it makes sense for them to be coming to someone like us to get the compute. And it's been a great virtuous relationship, right? We have a very strong relationship with Anthropic and Google, for example. And so you see that and you say to your team, look, if you just forecast that range for monetization, when our tools start ramping, it will actually be an improvement to that range, right? When they're using -- when we are using our compute and our software models. So it's pretty great because you could take a situation where you guys want to model something in that range and say, okay, well, I see certainty to that. I actually don't even have to have any conviction on their products and see that but all of the upside of the products starting to kick in, in the rock world will all be upside to what I have in my model. And certainly, we're at the very, very early days of something incredibly compelling on the AI evolution revolution. And really, we're still only in the digital AI side, right? When you start talking about physical AI in the years to come, I'd even expand the market another fold.

Yes. Understood. Okay. There's maybe 2 themes in there. I just want to pull on the string a little bit. So obviously, you're talking about this third deal for compute. How do you think about the array of potential partners for those types of deals because you're standing up compute in a very constrained environment and delivering a solution to the industry that there's a high degree of demand for how long do we think that narrative could sort of play out? Or how do you even think about who the people are that will call and ask you about that, sort of, availability?

I mean it feels like almost everybody. I mean they might be one company that hasn't called us, and we haven't called them. But other than everybody else in the industry, we have, first of all, very strong relationships with in many ways and are talking to. And so I think that just speaks to the environment that we're all seeing, right? This hyper, hyper growth dynamic that from everything we're seeing, it's not slowing down by any stretch, and we don't predict anything other than up into the right in a meaningful way into next year as well from everything we're seeing. And so when you see that, first of all, you want to continue to invest with great software solutions and do deals like Cursor to make sure anything you can do to get your product right up there is important. But you also then have a lot of conviction about making investments for the future. The other side of this is the risk related to these investments for us is dramatically less when we're in less than a 1-year payback mode, right, because you can see a situation even when you're doing 6 months at a time that likely continues beyond that. Now you're sitting with compute that will likely last for -- I mean, many, many years. In fact, you're seeing the monetization of many generations old now compute from NVIDIA, still holding its own from a pricing perspective. And so that tells you related to the residual value on these GPUs that it's going to be a great product cycle for a long time. It also opens up markets from a financing perspective, right? Because now you're taking -- in essence, creating a whole asset class related to GPU financing because everyone is seeing the value of this. And in fact, in the earnings call, I talked about the fact and one of my buddies made fun and said, I'm going to use that line, that not all capital is the same, right? CapEx is not the same when you're talking about assets that you can buy that others could use as well that have less than a 1-year payback. That is very different from what the rocket guy would say is like a hanger or a launch tower that -- let me talk about the next couple of decades for that asset. So it is an interesting time, and it has, kind of, a ripple effect to a lot of other pieces of the business.

Okay. So one more piece, I just want to click on that you mentioned, just to give you the opportunity. If I think about what's changed over the last couple of months, the closing of Cursor, the success you've had on the model side, that was not where the conversation was 4 months ago, and now it is where it is now, at least based on my experience. So talk a little bit about how that's evolving the strategy. You talked a little bit before about striking a balance in the business. There's compute deals, but you don't want to starve your internal operations that want to go in external for the long term. Talk about what you're learning about the opportunity set as a foundational model company as a solution like Cursor into the enterprise space and how that could build in momentum?

Yes. I mean we have certainly up till this year -- and I've been the CFO for 15 years. So we have certainly been all about organic growth, right? And I think really proud of our track record related to capital allocation and value creation. And this year, we certainly get some M&A. [ I mean ] Cursor so far this year. But it's because when you're faced with a product cycle as amazing as the AI product cycle. And again, time to market becomes so critical. You then look at how do I get there? And how do I get to the very -- not just the frontier, but how am I winning at the frontier. And we feel like we have a very logical strategic advantage because we're an infrastructure company because of the fact that we have reusable rockets [ fleet ] that nobody really else has, I think the Chinese are trying to get there, right? And to their credit, they've got an amazing space program. And I do think in the years to come, right, we will see things. But not on a Starship level anytime soon, let's put it that way. And so when you have that asset and you believe that, that should be the solution for infrastructure for AI and it will drive our cost of compute dramatically lower than others in the industry, then you do want to play it forward even maybe as soon as next year and say, well, if there's multiple solutions out there and our model is even close to -- at the Tier 1, if not better, hopefully. And our token cost is less, I think that puts us in the best position related to our customers. And I think in the end, that's the key, is you want to be able to say that you're delivering a better service. And we can absolutely say that with rockets, most reliable rocket ever flown let alone lower cost per kilogram. We can absolutely say that with Starlink. If you look at our Starlink product offering, no one's ever had that before. If you go on an airplane now and it has Starlink, you'll know what I mean. You're on a cruise ship or at your house for that matter. And now we want to be able to do the same thing with AI. And honestly, like this is a company that's only used to being in #1 and winning. And so what I would tell you is since the IPO, I have a couple of friends that are like, "Oh, at least, you got through that. Now you can you can relax a bit." I'm like, "are you kidding me?" Probably more intense now than it was because it's such an exciting time. And all we want to do is get out there and deliver the best product. And I think there's an opportunity for us, and you're seeing Grokbot start to be part of that and Grok continuing to evolve to that. We're not going to settle, not going to settle for anything other than going after being the best product for our customers. And I think that's really compelling, and I think people are starting to see that, and that's probably change to your point of maybe the talking points from a couple of months ago is people said, "Yes, I get it. I understand why you guys could be the best infrastructure solution for AI." But they were a little hesitant related to the products and already like 90 days later, not even I think people are seeing, "Oh, they were very serious about this side of the business as well." It's exciting.

Yes, definitely. I do want to touch upon connectivity. Let's go with Starlink Broadband first. You brought up the example of if you experience the product and then experience the product, I can personally attest there is a difference for what it's worth. But talk a little bit about what you've learned about the addressable market for Starling broadband especially some of the key verticals that you're attacking globally and how you think about building our scale and competitive advantages around that business?

Yes. What's interesting is we started out -- and actually the first year we called it better than nothing service, right, in 2020 or 2021. And we were learning and we were getting satellites up there. And then a couple of years later, it was clear that we had a very strong service and consumer was still a big focus because we hadn't gotten to the point of being able to go to a CTO, CIO and show that we were 3 or 4, 9s uptime and that we could give commitment levels and SLAs. But in the last couple of years, we're there and enterprise has been a big push and everybody wants to talk to us because when you're now in a world where resiliency is so important, not having Starlink part of your networking solution just doesn't make any sense, right? And there isn't really another solution that's anything close to Starlink at all. And so you're seeing that, and we're seeing that in almost every industry, this makes sense. Whether you want to use Starlink as your backup or your primary, like why wouldn't you do that? Because certainly, any Board member could look up in any of those companies go, why were you down? Like why wasn't there Starlink in the solution? So I think we're seeing that on the fixed wireless side. And then we have a huge opportunity in anything related to mobility, right? We were talking about aircraft. We have a huge backlog actually on the aircraft side that we're actually ramping up our production for right now and addressing pretty exciting on that front. Almost every major airline, 3 of the 4 largest, we can't even talk about the one that's not in the fold because it's just, kind of, embarrassing. But we'll make sure, right, that we're embarrassed, but cruise ships, yachts, trains, like anytime where the connectivity wasn't there, it now can be there. And what's great, if you just say cruises or airlines for a minute, is now it's exposure to millions and millions of folks that are getting connectivity from Starlink that otherwise wouldn't and now thinking, geez, I could have this at my home or office. And what we're -- kind of what we were facing in the past is actually most of our issue if we didn't have an issue because we're selling every terminal what we're making. But issue overall on the demand side was just awareness. People weren't aware that we were there. We still face a lot of that outside the U.S., especially where you go places and you say, well, you could have Starlink, and they ask you what Starlink is and you're like. It just means we have some work to do, but it certainly is a huge opportunity. And I'm very excited actually about what the next step is. And what I mean by that is even on the broadband let alone when we can talk about mobile in a minute, but the fact that AI and physical AI will probably be a large conversation when we start into next year and beyond of devices everywhere. These devices are going to want to have AI embed from a knowledge perspective and capabilities will be there, but they also need to be connected basically at all times, and they can't be down. And so connectivity to a humanoid, robot or autonomous car or other any type of flying vehicle like that is not something that you're going to do with terrestrial solutions. And so I think it's going to open up the connectivity market dramatically when you see these solutions coming out because they need so much more data for that connectivity. So it's really exciting on that front.

Understood. Let's turn to the longer -- the medium to longer-term mobile ambitions of the company. You've been very upfront about these ambitions. You've invested in assets that can build out a portfolio of solutions to deliver globally and to consumers. How are you thinking about investing, building and scaling against the broader mobile telephony opportunity that could present in front of the company in the years ahead.

Yes, someone asked me just recently, "was it a distraction at this point?" I said, "not at all." What's beautiful about this model is we're going to take largely the same V3 bus that you're about to see fly in production for our V3 satellites for broadband, and we're going to change the payload out and be able to deliver starting next year flying satellites for building out our network for direct to device, right, for the mobile. And so that's probably all through next year. And then the first half of '28, we'll be able to turn on to service, it's completely differentiated from anything out there. And I think that's pretty magical because then you can put that team onto the AI sat as well next year, right? And so you basically have, all because of Starship, which is why I want to start the conversation always when we talk about SpaceX with Starship, this capability that nobody else has and won't for years and years, delivers to all 3 of those businesses, the broadband business, that mobile direct-to-device business and the AI sat business. And so flying those satellites in those constellations will be really, really terrific related to get our cadence up on our own rocket business as well. But circling back to direct to device, we're planning to fly the satellites next year and have the capability to turn on service first half of '28 and so now what that means is we've got some time to figure out exactly if there are other assets we need related to it, we can look at that. But what we went out and did is we saw that this is where the business was going, and it just looked like a missed opportunity to not be also in mobile when you have this capability to deliver from space that no one's ever had before. And so we turned on our version one of this and flew 600 satellites very quickly within a year, right, and turned on the service that, for example, in the United States, you look at T-Mobile, and they call it TSAT, I think, and that's the Starlink version 1, right? But that's more like a text-only service and maybe light voice, and it's awesome for disaster recovery. It's awesome from an emergency perspective. If you get into a dead zone somewhere, you can still connect but it's not what you and I are used to with full 5G. The next version of this, what we're going to start flying next year with the satellites is full 5G quality service. And so now it's a matter of -- when we go to market, we bought the spectrum, the mid-band spectrum from EchoStar for U.S. And so we feel like we've got the spectrum where we can go turn on service. We've got that and it has direct from space and terrestrial capability already FCC approved. So if we need to, we can stand up terrestrial solutions to put the terrestrial piece in place, too, or we could work with the existing carriers. We're open to, I think, a lot of different ways to do it, but we're marching down that path in the U.S. Overseas, we're probably going to have to go through the same process that we did with broadband, right? We started out with the service that was approved in the U.S. And then over the next couple of years, went to now we're in over 170 countries around the world with Starlink on the broadband side, and we worked with each regulator in each country to really just to demonstrate that we are bringing a product offering that's better for the consumer. Again, I think it circles back to is this a product that's better than what's out there. And for sure, it is on the broadband side. And for sure, it will be in an industry that just hasn't innovated for decades if you think about the wireless industry, right? In essence, the service you have is largely the same. And I don't remember when 5G was talked about. It was a long time ago. I was at Qualcomm way back in the day, myself. And so now you're talking about being able to come to market with a product that shouldn't have dead zones, you can have global roaming, you can go anywhere you need to with it. And that's pretty magical, especially if you're charging same or slightly less than a service that doesn't have any of those things. And I think that's why the big 3 operators were a little concerned about us and wanted to create a cartel maybe. I don't know what term is. But I'm not a lawyer, and I'll let them figure that out. But the point being, I think that the whole industry is seeing that we have the ability to deliver a service that would be really compelling for people.

Yes. Let me try to tie together with one final question. You face all these decisions about what to invest in, all these different durations and return profiles. Talk a little bit about allocating capital to all of these opportunities and then bring it home with the theme of like, what are you the most excited about to continue to demonstrate to the market in the years ahead.

Yes. I think our track record on capital allocation kind of speaks for itself. But what -- what it looks like there's a lot of different things we're investing in. I think really, right now, you just think we're investing in Starship specifically because it enables our other businesses, and we're investing in terrestrial compute because the better we get at that, I think, will help us on the orbital compute side and will also be an incredible funding mechanism for some of the other pieces of the business. I think in the longer term, I think right now, the piece that's still a little misunderstood is Orbital compute simply because I think the time frame that others have related to when is this going to be bringing gigawatts or tens of gigawatts to the table is different than what we're actually going to be able to deliver. I really appreciate the opportunity.

Bret, thanks for coming. We really appreciate you being part of the conference. Please join me in thanking SpaceX to be a part of this.