Q3 2020 Virgin Galactic Holdings Inc Earnings Call
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Excuse me, ladies and gentlemen, this is the operator your conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
From time to time with the Securities and Exchange Commission, including those risks and uncertainties included in the risk factors section of our form 10-Q for the third quarter of 2020.
Forward looking statements speak only as of the date. They are made <unk> are cautioned not to put undue reliance on forward looking statements.
With that let's get started with a summary of our Q3 accomplishments beginning on slide four.
Despite the challenges brought on by the pandemic, we accomplished many milestones this quarter across the company.
We made good progress.
Building spaceships during a pandemic is materially less efficient than normal.
Our team members, though have been simply incredible and everyone has stepped up to continue progress on our key initiatives, while working under stringent covid protocols.
Many task involved in building spaceships require close quarters work, including inspection and maintenance task on our first space shifted mothership and installation of systems in our second shift.
This type of close and work is still progressing, albeit slower than expected.
Our team members have moved to staggered shifts to lower density and we've reworked communications processes with engineers were primarily working from home.
While it continues to be difficult to quantify the full impact to our overall flight test program, we are still experiencing schedule and cost inefficiencies and we expect these to continue into 2021.
Asked of achieving technological feasibility and this marks an inflection point in the company's journey.
Turning to slide seven the.
One example is Tom heel, our senior VP of programs and engineering.
Tom came to US following a 32 year career at Lockheed Martin Advanced development programs.
Tom started his career Skunk work supporting the Saar 71, Blackbird and he played a part in many programs, including the F 117, and the F 22, along with other initiatives.
Tom and the other great team members on this page are only a small slice of the extraordinary people we have across all levels of the company.
Once analysis on that slide is completed we will follow with a third rocket powered test flight that would include our founder so Richard Branson.
Richest flight will be a momentous occasion and will provide us with important feedback on the cabin design and the astronaut experience.
At this stage we are on track for each of these flights.
As always our progress towards next flight depends on the results of detailed reviews of our prior flights and our engineers may recommend conducting additional test flights.
For our fall flight I'm pleased to announce that we have entered our final flight preparation phase and we expect to launch from Spaceport America between November 19th and November 20 Threerd.
For the full testing of the customer experience in our upcoming quarter one flights.
To get into the reentry attitude as soon as possible.
Winners based flight specialist will test to verify cabin interior hardware the.
The waitlist experience in space.
And our lives stream camera systems.
Lever the vehicle and a more streamlined and efficient manner.
And this space ship differs from VSS unity in that it has been designed for higher rate service with reduced turnaround time between flights.
Higher flight rates with minimize downtime improve our efficiency as we scale and the learnings incorporated into this shifts design will help form the basis for how we design our spacious at increased rate and efficiency in the future.
In terms of our third space ship, we expect commenced final assembly in 2021.
Moving to an update around our commercial plans on slide 12.
I believed Virgin Galactic is at the Vanguard of the experience economy.
As we will be providing our customers with a transformative journey journeys.
Let's reflect the progress we have made completing the final steps in preparation for VSS communities first powered flight from stage toward America, and our ongoing work ahead of commercial launch.
We remain in a strong cash position and ended the quarter with cash and cash equivalents of 742 million as of September 30th 2020.
In the period, we completed a public offering of 23 6 million shares of common stock at a public offering price of $19 50 per share generating over $440 million in net proceeds.
Net loss for the quarter was 77 million compared to 63 million net fast in the second quarter of 2020.
The increase in net loss, primarily reflects certain non-cash expenses, which I will cover shortly.
Non-GAAP SG&A expenses and non-GAAP R&D expenses have been adjusted to exclude stock based compensation.
And non capitalized transaction costs if applicable.
Gap SG&A expenses for the quarter for 31 million compared to $26 million in the second quarter of 2022.
Due primarily to additional cash charges and non-cash stock based compensation costs, including those incurred.
In connection with the hiring of our new CEO and the appointment of our Chief Space Officer, as well as increased cost incurred to ensure proper covid related safety standards.
Non-GAAP SG&A expenses for the quarter or $26 million compared to $23 million in the second quarter of 2020.
Looking forward for queue for later, we expect non-cash stock based compensation expenses to increase due to the scheduled grant of additional equity awards, which relate back to the closing of our transaction for social capital <unk>.
Gap R&D expenses for the quarter were $46 million compared to $37 million in the second quarter of 2020.
The increase R&D expenses, primarily reflects a onetime $5 million non-cash charge related to the identification of certain inventory items determined not meet our policy for capitalization before achieving technological feasibility.
As a result similar to other vehicle build costs. These items were expense to R&D during the quarter.
In addition, incremental cash and non-cash personnel costs as well as travel costs incurred as a result of more frequent employee travel between locations contributed to the increase.
Non-GAAP R&D expenses for the quarter or $43 million compared to $35 million in the second quarter of 2020.
Adjusted EBITDA, which excludes stock based compensation total negative $66 million for the court.
This is compared to adjusted EBITDA of negative $54 million for the second quarter of 2020.
Cash paid for capital expenditures was $4 million in the third quarter of 2020 compared to $6 million in the second quarter.
Capital expenditures in the third quarter consisted primarily of vehicle tooling and other equipment costs.
Turning to slide 15.
I would like to run through some of the line items in our income statement to provide more context on the drivers behind some of these numbers and our income statement.
As expected we did not generate revenue during the quarter given our continued focus on flight test.
We anticipate modest revenue related to the payloads, which will be flown in the fourth quarter as Michael outlined earlier.
Turning to R&D as a reminder, our vehicle costs currently sit within R&D and we will continue to be expense there until we achieve technological feasibility.
What we mean here is that once we have completed a powered test flight to space with four passengers in the cabin, we will begin capitalizing our vehicle costs.
Our R&D expenses for the quarter totaled $46 million compared to $37 million in the second quarter of 2020.
As I outlined previously this reflects a $5 million non-cash charge related to the expensing of certain inventory items to R&D and an increase in personnel and other costs.
Our SG&A expenses for the quarter totaled 31 million, an increase of $5 million compared to the second quarter of 2020, primarily due to the granting of equity awards.
Including those granted to our CEO and Chief Space Officer as previously mentioned.
Turning to slide 16, and looking at the cash flow statement.
Free cash flow was negative $59 million for the quarter, which was generally in line with our queue to free cash flow of negative $58 million.
Although we are not providing specific guidance, we expect our negative free cash flow to increase in the fourth quarter of 2020, due primarily to the typical timing of annual premium payments for certain insurance coverages, which are concentrated in queue for.
I would now like to turn the call back over to Michael.
Thanks, John.
I will now hand over to the operator for Q&A.
At this time, if you would like track a question. Please press star.
Followed by the number one on your telephone keypad, if you would like to withdraw your question press the pound key faux pas for just a moment to compile the Q&A last year.
Her first question is from the line of Adam John Asquith Morgan Stanley. Please go ahead.
Thanks, everybody just a couple of questions first on the Covid issues that you highlighted you expect them to persistent it in the first quarter yet the brand. Some slight is on track for Q1 is this because the Q1 brand some slight already factors any delays or is it that the delays just aren't as <unk>.
Significant for that part of your operation due to differences in working conditions in closed quarters.
Thanks, Adam first question. Thanks.
Thanks, Michael.
We are seeing impacts from Covid as I said, there's a lot of close quarters work that is just the latest we spread out and follow our protocols. What we've been doing now is really focusing our talent and the resources that we can get into the shifts on our flight the upcoming flight.
That's one of the reasons why you see a bit of a delay coming in our second spaceship coming off. So today, we do believe we have in the schedule the ability to successfully do this flight I said November 19th 23rd.
The second one to go off in Q1, I would probably be the end of Q1, but we do expect.
Our third rocket powered flight to go to within that quarter of course, we're going to assess the date. After each one of these flights and there's always things that we may learn.
That is our expectation.
Thanks, Michael.
The question on the on a modest revenue that you highlighted for the payloads, how should we be thinking about that test payload revenue for the quarter of order Mag.
Yeah sure.
This is Joan.
Think this way to look at that it's probably in the sort of $400000 range for the the pillows and there is three mass pillows that will be on that slides.
That we have planned as Michael mentioned earlier on for later this.
Okay, that's great and just finally, if I can slip one more in your.
Your price per shift can you remind us of the.
Telemetry of cost reductions, obviously your space ship.
Ship manufacturing capabilities are proprietary and something that gives you that edge at at mode. If you could tell us kind of from first to second now that you're getting really really close to.
Final testing for the second Chevron getting getting to that phase what the prices and then as you start Santa line of sight of a third space I've, just give us an order of magnitude.
Magnitude of how how much those the cost per shepard declining thanks very much.
Yes.
Thanks, Rob.
One thing I am really really bullish on it is the nature and truly transformative experience that we're going to be providing I spent time talking to those in our company that have made this journey and it will be incredible.
Im also looking forward to expanding.
What we will do I think we focus so far on the space flight itself, which of course is going to be the peak emotional part.
But this transformative journey really starts for the moment people signed on with us.
And when they come to new Mexico, we will build and experienced kind of booking around the flight itself. That's one where I believe there'll be a lot of opportunity for friends and family to join in and participate in parts of that and then we take of course experienced will carry on how we're going to be adding into what that the value that that experience will deliver ana.
I think when we add value in there we will not have so much of a demand problem. It's more about supply. So I do think that will help support pricing over over the experience as we go and we will continue to look to ways to expand and widen the revenue footprint beyond the ticket I'll call. It on the space flight itself.
And we're we're looking forward to that so I think that billion dollars does reflect those things.
Is it too soon for me to ask you.
To quantify that in terms of.
Ancillaries relative to ticket price it sounds like it could be as much as 50%.
Yes, I think.
Our pricing strategy is going to evolve off the experiences, but one of the things that I am excited about is when you have a truly incredible product and one that will be supply.
Constraint as opposed to demand constrained because a lot of flexibility into our pricing models. So I am looking forward to being able to share in future calls, what our experienced looks to be and will bring pricing strategies around that experience.
That time.
Okay, and then just to finish just on the timeline I wanted to clarify is the plants in flight a third test flight third power test flight or is it build is a first commercial flight.
How should we think about that.
Sure we as you know our continuing our flight test program. The first one coming up in November 19th to 20 Threerd.
The second flight Test program, we think will be in Q1, and Thats, where we will bring for the first time, a full cabin pull for passengers to go those while the employees.
Complicated than that I think that's basically our program has been really helpful. In letting people sign up and register a degree of interest but.
But we're looking forward to now fully reopening sales following Richard site.
Okay, and maybe one other question in terms of after the branch in flight.
Is that when you will go into significant uptake and pace of flights or should we think of that is something that happens much later.
21.
I think is when you've probably heard from us before.
As we close out play to keep technological feasibility and then pushed into commercial service, we do plan to take that and a slow and measured way, we're going to focus on safety first as we always do but we also really wanted to focus and ensure we get the experience.
Just right.
The objective of all the people that we have signed up and who will come in the future is to truly have this transformative life experience, we want to make sure that is really dialed in so you'll see us do a slow and measured start and then we will be increasing that also is.
Fleet side.
Your next question is from the line of Brian Epstein with Bank of America. Please go ahead.
Okay.
Okay.
Okay.
So Michael.
Fix your question for you.
You've been with the company and artwork, maybe 100 is a little longer.
What's been the surprises what's been the challenges.
Give us or your hundred day perspective.
Sure a.
A couple of surprises.
I was really pleasantly surprised with the depth of talent that we have a really going up and down across all levels of the company and for a company doing what we're doing it is grounded in talent. So that was really excellent to see as I mentioned earlier in the call the quality of the assets that we have.
<unk>.
Really incredible between the spaceflight system itself, but also what we've developed in our learnings having gone through 15 years of flying in designing these things is really important.
What I am also excited about is the ability now to monetize and scaled his business and I think this is let's come to date has really been an incredible first chapter.
We're on the cusp of technological feasibility this and now as we move into the second chapter it is going to be about growing the business and that will require a shift in putting for us as we move away from prototyping R&D focus and into manufacturing for scale and I'm really excited surprised that we have such great talent.
That we can already put into some of those key roles.
We now look to build the business.
And maybe a little bit of a different question.
Seems like maybe we're on the cusp of a change in presidential administration.
The top administration was very very firmly on commercial space.
If nothing else New administration was a big believer in space.
Secretary Ross Department Commerce was pushing commercial space.
Very positive ways, if we were to see a change in administration.
Did you think we will see a change in how they feel about commercial space and.
And not just the investments in commercial state space, but.
Department of Commerce with real children cheerleader for for commercials business, what do you expect to see happen if we see the change.
Well like I'm sure everybody on the call I have been following the elections closely and I. Appreciate your time breaking away from that to join us today.
One thing I will say is really regardless of where the next administration plays out.
Over our 15 years, we've had a really great history of working with administrators and leaders in government on both sides of the aisle and I fully expect that will continue we have excellent relationships with government.
<unk>.
And I think we're going to have a good path forward, regardless, where the election plays out.
Your next question is from the line of Oliver channels with Kevin. Please go ahead.
Hi, Thank you Michael in your remarks, you mentioned customer lifetime value. How are you thinking about that opportunity and also scaling creative an experience like what will be more challenging or the bigger opportunities as you seek to scale that part of the equation.
Surveys indicate a lot of.
Pricing leverage on both the up.
Raising as well as Lola.
And would also just from a modeling perspective, as we think about space port.
The 400 bytes per year, what does that it's been for a ship.
And as we look longer.
The number of course and the opportunity ahead. Thank you.
Thanks Oliver.
On the first part of that well, let me take the second part first if you don't mind, so when I think about 400 flights per year.
We obviously you're going to need.
Several motherships to accomplish that in the space Port.
Many spaceships, and obviously lots and lots of rocket motors.
And our current footing, we've been focused on flight test and in order to know.
To be able to supply the demand that we expect here, we are going to have to ramp up manufacturing in that regard, but I think it will beyond the order of a few motherships, many spaceships and like I said, a rocket motor for every flight as we go.
When we reached that and I think 400 is a good approximation something that we are now going to see is that target for fully utilized space Court.
That will be an incredible economic engine it will drive economics for our company, but as well as the communities in which we operate.
Her first focus of course is new Mexico, and I think is that comes together this will be a really powerful product. If you will that will be of interest in other parts of the world how.
How many parts I think we'll see in the future but.
Very excited about that and I'm, sorry, I'll have or would you mind just restating. The first part of your your first question for me one more time.
Just thinking about customer lifetime value and maximization there.
And that likely intersect with.
Tailing creative and experiential.
As well as plans for what pricing.
Right Phoebe and.
And what you see.
Right and they have offices.
Thank you, obviously I'm coming from a background where.
Relationship with a customer is not a one and done experience and while we believe this is truly going to be a transformative experience I don't think it's a once in a lifetime experience I think the.
Opportunity to fly and get this perspective from space is going to be so compelling.
That people will want to bring others with them as they come back and do that and I think as we look over time scaled to different markets it'll be a different experience from different spaceports. So the fact that right now as I talk to are 600 future astronauts here.
Commitment to the community that they are joined in kind of shared journey that they're on has been really powerful.
I think there's a lot of opportunity and that that will focus on delivering value for our customers and.
I think a lot of ways that will play out over time.
Okay, not a sports.
The number of sales post globally, and how will you approach.
Expansion thinking about the capital required they're indoor partnerships to to make it more capital light, possibly globally. Thanks.
Thanks, I think at this stage as you would imagine we're really focused in the near term.
On completing our flight test.
Hitting our technological feasibility proven starting to get a commercial operations going in and growing into.
Fully utilized spaceport. So I think it's probably a little premature for me to put forth thoughts on how and how will fund future spaceports, but I do believe the economic engine that will be generated here will provide a lot of opportunity and I think he'll be good partnerships with.
As we expand around the world with that.
Your next question is from the line at <unk> with Goldman Sachs. Please go ahead.
Hi, documenting everything.
Hey, How's it going.
Just want to make sure I have it clear that the move.
October to November four.
Unity first powered flight is 100% completely covid restriction related as opposed to anything technical or otherwise and then.
How aggressive or not do you feel about the.
Space in.
Between powerful like one two and three with.
On the first part of your question.
Actually covid it all on that we.
Have always said, we will be flying our first powered flight from new Mexico and the fall.
What I think you may be referring to is as part of an FCC license.
Request for spectrum that will use as for transmitting are downlinks, we had to open up a flight window in that flight window was put out is October 22nd that was never planned to be part.
Line unity here so.
Okay, we're feeling good on our flight window, there as to spacing.
Well.
I will say this.
At this stage today, we feel good about the second flight in Q1, we feel good about our third rocket powered flight it'll be at the end of the queue, one but with that said as we always do we take each of these slide by flight and that's very purposeful, we're going to go forward prudently with safety absolutely is the first thing in mind and so what we do after each.
These flights.
As we analyze all the data that comes from it we look at the ships as they come back down and we make our decision there. So it's always possible that our engineers will.
Find something that they want us to retest.
Or additional tests, they would like but as we said with our knowledge today I feel good about the upcoming play dates.
Okay.
With regard to the second vehicle can you tell us more about the milestones.
Will be will be and we'll schedule after you.
Will that out and we will that how much of it.
Full test program will that have what kind of timing will we be looking at with that vehicle.
Sure. So our second spaceship, we will have come off and four roll out in Q1, and when we bring this out into rollout in that <unk> accurate and might learn to <unk>.
What will start with his ground testing as we finished ground testing then we will move into flight testing and we will carry through the same type of data analysis that we adhere. So right now we won't be giving guidance on the timing of all of those pieces.
But we are excited because this ship I do think will give us.
On a ship that provides higher rate higher service shorter turnaround time and that will be a model for our ships going forward.
And your final question is from the line at Pizza Kubicki Olympic Global. Please go ahead.
Yeah, Good evening guys.
Just a couple quick ones.
Getting back to the discussion on the matter of getting to 400 flights.
And one of your slides mentioned the second ship is designed for higher rates.
I think I have in mind model, each ship being able to do it.
Five flights per month can you talk about at this point in the second ship can do six seven hour you guys thinking about the these follow on ships and the rates that they can do.
Well I think for today, we're going to focus more about the tired of where we're going to hit 400 flights a year as we build our manufacturing into that.
Obviously will need ships that move at a reasonably high return rate and.
And the overall model I think the.
The ships themselves. The main factors how quickly we can turn them.
Less about probably the specific cost of the ships and so that's part of the learning that we will have going forward I think it's probably a little early to give guidance in that regard, but we do know the second ship is designed to have.
Ah better turnaround time, it's designed in a modular fashion that lets us.
Tina and a more quick and easy fashion.
It is one thing we will be committing to us as we do.
Get the clarity learnings here, we will be committing two.
And formal view about those things so that you can be closer with your own modeling.
Okay. That's good I appreciate it and just lasting for me a little technical but I'm curious on the upgrades to be off by control system, particularly the horizontal stabilizer that you guys mentioned, maybe Mike mentioned.
What what does that do for the ship <unk> allow you to reach a higher altitude.
Or just maybe for the safety or smoothness of the ride concern anybody's speak to that maybe.
Yes. This is my comes with I can I can answer that one so the horizontal stabilizers are actually one of our primary flight controls that we use so when we dropped the vehicle we're flying kind of street level and then the horizontal stabilizers turn and allow us to bite in and turn the the ship on its tail and boost straight up.
So there are there are very critical system for us. So anything we can do to kind of improve their their reliability. The control that they have the fine tuning really does help us with performance because it allows us to to net curve. If you want to so to speak of that boost profile. So it really gives us a little more robust system.
And maybe more importantly talking to what Michael just talked about it allows us some room to improvement in the future even more with an electronic system that has software upgrade capability and again, we were developing this for future shifts and we decided to go ahead and put it in unity now to get some runtime on it but it's got some great expansion capability for us in the future as we look to Ah.
Hire flight rates.
Thank you and at this time I will turn the call back to Michael for closing remarks.
I'll be brief here first I just want to thank everybody for joining this call. There's a lot going on as the election news and I. Appreciate you taking the time I do want to take a moment to think our entire team at Virgin Galactic people have been working so hard preparing for this first powered flight for new Mexico.
But people in new Mexico people in Mohave and the support it's been incredible.
I know I speak for all of Us when I say, we cannot wait for this upcoming space flight and to all of you on the call. We appreciate your continued interest in support of our company. We look forward to updating each of you on our progress after the space flight in a few weeks and during next quarter's earnings call as well. Thanks, everybody have a good day.
And that concludes today's conference call. We thank you for your participation you may now disconnect.