Q2 2022 Rocket Lab USA Inc Earnings Call
Long Beach headquarters on the satellite constellation production line to support the manufacturing of 17 half-ton spacecraft buses for Global Stars constellation under a $143 million contract.
So we had a great quarter for launches, successfully launching three missions. The missions included a mission to the moon for NASA, a dedicated launch for Earth, Image and Constellation Black Sky and a ride share mission for a range of US and UK companies.
Across the quarter Electron delivered 37 satellites to precise orbit. The quarter once again submitted Rocket Lab's position as a launch provider of choice for constellation operators. The satellites deployed for four commercial constellation companies.
Three out of the four of these were return customers for Electron.
One of the missions in the second quarter was particularly significant however. This was the Capstone mission to the Moon for NASA. It was a monumental and historic mission for Rocket Lab and for NASA. So I'm going to spend a little bit more time going into greater detail on this one.
For those of you not familiar with Capstone, it's a satellite designed to test the near-rectilinear payload around the moon.
This orbit has never been flown before and is the same orbit NASA hopes to use for Gateway, a moon orbiting space station that astronauts will live and work in as part of the Artemis program. As an aside, through our acquisition of Solero, Rocket Lab is also providing the solar module for the Gateway power and propulsion element.
So back to Capstone. In a nutshell Rocket Lab launched the first mission of NASA's Artemis program to return humans to the moon for the first time since 1970.
So this mission was significant and monumental for all humankind, not just for Rocket Lab, but a real testament to NASA's trust in Rocket Lab as a mission partner.
Importantly, the mission was much more than just the launch for us.
We provided a complete solution. Capstone was launched to an initial lowest orbit on Electron and from there our in-house designed and built lunar photon spacecraft powered by a hyper-curry engine provided six days of in-space propulsion, maneuvering and communications to Capstone. After a flawless launch on June 28th and after six days of 24-7 spacecraft operations and multiple complex orbit raises
We ignited lunar photons' hyper-carry engines for the final time on the 4th of July to set Capstone on a ballistic lunar trajectory. I'm immensely proud of the team for delivering flawlessly on this complex mission, initiating a new era of lunar exploration.
NASA awarded the Capstone contract to Rocket Lab in February 2020. So in a little over two years we developed a new in-space propulsion system capable of reaching deep space destinations.
We designed and built the highly capable lunar photon spacecraft and we increased electron performance enabling it to lift over 300kg.
It's generally to be considered an unreasonably short development time, but we do like to take on a challenge and deliver and I'm happy to say we have done just that once again.
Beyond developing and operating the launch vehicle and the spacecraft for this mission, we work with Space Exploration Engineering to develop a unique energy efficient trajectory to the Moon.
Unlike the Apollo missions in the 60s and 70s, which basically used an enormous rocket sealed with a massive amount of fuel to go direct to the Moon, we took a different path. After lunar photon and capstone, the capstone integrated on the top, was launched to an initial low Earth orbit, we used the lunar photon spacecraft and its hypercarry engine to carry several days of orbit-raising manoeuvres, essentially igniting the engine periodically to raise the highest point in the orbit until we got far enough away from Earth to escape its gravity.
spacecraft on a ballistic lunar trajectory, Lunar Photon is continuing to tour the solar system and is currently around about 1.3 million kilometers or 800,000 miles for the area people from Earth. We've used this extended mission time to push the spacecraft to its limits, learning what we can about communications and propulsion systems to inform our up and coming missions to Mars and Venus using similar high energy photons.
As I mentioned, the Capstone mission was far more complete than just a standard electron launch. It was our first deep space mission. While we have successfully launched and operated two Rocket Lab designed and built photon spacecraft previously, this mission was the first flight of our high-energy deep space variant of the photon spacecraft.
It required the development of new in-space propulsion systems in under two years. It was the first time we integrated MAKS Flight Software into a rocket-load built spacecraft. As you'll remember, MAKS Flight Software is an off-the-shelf flight software solution developed by Advanced Space, a Colorado-based company we acquired late last year.
The Capstone mission was also our first mission
planning and executing lunar trajectories. This is a complex precision work that often takes years in planning. And in addition to developing Capstone to a perfect trajectory for this mission, which was of course the primary goal, we have developed the team and the skills now to be able to deliver on other up-and-coming interplanetary missions, including Mars and Venus.
We're very conscious of space sustainability, I think as everybody knows, and not leaving large rocket stages in orbit with every launch is important to us, which is why we developed the launch system in such a way that electrons second stage de-orbits within a matter of days.
With this mission we broke our own record. The second stage actually de-orbited the same day as launch.
We had the first time using the FR Light Radio, which Rocket Labs had an exclusive license with John Hopkins University Applied Physics Laboratory to manufacture. And last but not least, the Catstone mission was a heaviest lift to date, with electrons carrying a whopping 320 kgs or 705 pounds. This is almost triple the lift capacity demonstrated by any other small launch provider.
So Rocket Lab satellites are now deep space proven. More than just delivering mission success to NASA, the mission means we have successfully flight proven our lunar proton interspace spacecraft platform. This positions us extremely well for future complex missions beyond LEO and already we've received a significant amount of interest from new customers in terms of having developed their mission concepts, design and build their spacecraft, launch it and operate.
including those with suspected, canis and black sky.
Supporting our vertical integration strategy, Rocket Lab will also supply a 4K 360 with separation systems produced by Planetary Systems Corporation, the Maryland-based hardware company we acquired in December 2021.
Excitingly, the first of the three Hawkeye 360 missions has been scheduled to lift off from Launch Complex 2 in Virginia later this year.
Scheduled to liftoff in December , it will be the inaugural flight from LC2 and the third pad Rocket Lab will have launched from.
The key reason we haven't launched from LC2 yet has been delays with NASA certifying the agency's Autonomous Flight Determination Unit software. The NASA officials have advised that they are on track to certify it in time for the pre-launch.
In the second quarter we also hit a significant milestone in our program to make Electron reusable. We successfully caught a returning first stage with a helicopter concerning the concept of operations for future aerial capture.
This was a key moment in the program that brought us a step closer to recovering stages of dry and refueling them.
The next step from here is to not only catch a stage but fly it all the way back to land under the helicopter. We expect to attempt this later this year, but in the meantime you'll start to see more and more red striped electrons coming down the production line as we build recovery ready rockets into the standard production flow and process.
While the Electron launch program continues to go from strength to strength, we're also in solid progress on the development of our new large launch vehicle, Electron.
In the second quarter we broke ground on the Neutron production complex near Launch Complex 2 in Virginia. The 250,000 square foot complex will be home to Neutron's production and assembly and is located at just a few miles from where Neutron's pad will be located on the eastern shore. We won't go into too much detail on Neutron today as we'll be sharing a more full some program updates during our VISTA Day on September 21st.
Onto the space systems side of business now. I'm pleased to confirm that Rocket Lab has been selected to manufacture the solar array panels for the NASA GLIDE spacecraft. GLIDE is the first mission dedicated to surveying the changes in the exo-atmosphere, the outermost layer of the Earth's atmosphere, which is super important for all of us. The array will be manufactured at a production complex in Albuquerque, New Mexico, which is home to the world's largest production line for space solar cells.
On to our space software. As of Q2 this year Rocket Lab's next flight software has successfully flown on more than 50 missions.
developed by ASI which was acquired by Rocket Lab in October 2021. NACS is an off-the-shelf spacecraft flight software used by leading aerospace current contractors, the US Air Force, US DoD organisations, NASA and commercial spacecraft developers and constellation operators.
Further supporting Rocket Lab's Vertical Integration Strategy, Max software has now been used in 12 spacecraft launched by Electron.
In the first quarter of this year Rocket Lab was awarded $143 million subcontract by NDA to build 17 half-tonne spacecraft batteries for the Global South constellation.
Rocker Lab is also manufacturing spacecraft for Varda Space Industries, E to Space and the University of California, Berkeley for NASA Mars missions.
In the second quarter we quickly got construction work underway on the production facility for the spacecraft at our Long Beach headquarters. Construction is now substantially complete and the facilities include a state of the art 10,000 square foot class 100K clean room. This is a significant investment by Rocket Lab's future workload.
This is a significant investment in Rocket Lab's future satellite manufacturing capability.
Leveraging our vertical integration, the satellites will feature components and subsystems produced by Rocker Labs' recently acquired companies, including solar panels and structures from Solero, Technology Software from ASI, Reaction Wheels from Sinclair into Palmsdale and so on.
So with that quick recap of some of our major accomplishments in the second quarter, let's delve into some of the additional achievements between the end of the quarter and now.
So since the close of the quarter we've launched another two successful missions, this time back-to-back launches for the National Reconnaissance Office. These missions took place just over three weeks apart, so we had prepared the launch vehicles and the pad to be able to support a turnaround in just 10 days. Ultimately the NRO required some additional time to complete a software update on their payload.
It was a change in the launch schedule that we could easily support since Launch Complex 1 is a private launch range, so we didn't have to go around and work around any other launch provider schedule.
The missions were a flawless demonstration of responsive space and action, and I'll talk more about responsive space in some upcoming slides.
With these two missions Rocket Lab has now successfully launched four NRO missions on Electron.
reliably serving the national security, intelligence, and intelligence community.
Between the capstone launch at the end of Q2 and the first NRO mission at the start of Q3, we actually achieved a new record in launch turnaround time. After a successful mission to the moon for NASA, our team delivered a flawless national security launch in just 15 days later.
As you can see, that's the fastest turnaround ever achieved by a small launch provider.
Continuing the national security and defence team, I'm pleased to confirm that since Q2, Rocket Lab was also selected by Lockheed Martin to supply solar power for the Space Force's new missile warning satellite.
The deal continues to layer as long term partnership with Lockheed Martin by powering the next generation of OPI GEO satellite missile warning system.
and it further demonstrates a successful vertical integration strategy.
Since the close of the last quarter, we also officially introduced our Responsive Space program. From day one, everything we've done has been designed to support Responsive Space, from manufacturing processes that use 3D printers to print an engine in 24 hours, to operating the first orbital launch sites, to developing our own modular spacecraft that can be quickly customized and integrated with custom instruments.
When we talk about responsive space we're talking about the ability to rapidly replace or replenish new assets on orbit. This is a critical and growing need for government and commercial operators alike, because the unavoidable truth is that satellites do fail. Whether they age out, experience technical failure or are disabled through deliberate actions, all satellites are vulnerable.
Through responsive launch on Electron we can replace these assets in a matter of hours or days, not months or years. But we also know that launch is just one piece of that puzzle, which is why we can also have Rocket Lab designed and built satellites on the ground 24-7, awaiting the call to be integrated with the customer's payload and launch rapidly.
This is a capability that is increasingly attractive to constellation operators and we've already seen some customers look at building out their constellations with Rocket Lab spacecraft specifically to have this capability at the ready.
While there's a lot of talk about responsive space, Rocket Lab is in the unique position of having the infrastructure, experience team and proven technology in place to enable it today. This includes three launch pads across two hemispheres. Launch Complex 2 in Virginia was purpose built with this capability in mind.
proven rockets, payload processing facilities, personnel, launch sites and ground stations capable of supporting 24 hour rapid call up launch.
The ability to receive, integrate, encapsulate and launch spacecraft within 24 hours.
proven spacecraft technology already operating in more than 1,700 satellites in orbit.
streamlined and integrated manufacturing capability to build rockets and spacecraft quickly, the ability to reach a wide range of orbits and meet a broader range of customer requirements.
All of this is not necessarily new or a new Rocket Lab capability, but as I've discussed in this presentation and in recent media interviews, increasingly our launch cadence is driven by and in fact slowed down by customers readiness.
This program is about working closely with customers to understand their mission requirements early and get them in a state of readiness.
so that when the day comes they can call us up and we'll have them on a little bit in a matter of hours.
And with that, I'll hand over to Adam to provide a review of the second quarter financial results.
Great. Thanks, Pete. I'll first review our second quarter 2022 results and then discuss our outlook for the third quarter.
Second quarter 2022 revenue was $55.5 million, exceeding the high end of our guidance range of $51 million to $54 million.
representing 36% sequential growth of the prior quarter.
Our record revenue performance in the quarter was the result of three successful launches, as we had guided, and outperformance in our space system segment, led by our Solaro product line.
Launch services contributed $19.1 million, or 191% quarter-on-quarter growth, representing 34% of total revenue in the quarter.
Space Systems contributed $36.4 million, yielding 70% quarter-on-quarter growth, representing 66% of total revenue.
Now turning to gross margin.
GAAP and non-GAAP gross margin for the second quarter of 2022 were 9% and 22% respectively.
This was outside the low end of our guidance on a gap and non-gap basis.
of 11% and 26%, respectively.
The lower gross margin versus guidance was a result of two primary factors.
an unfavorable product mix within the space system segment, and lower overhead absorption in the launch services segment.
Compared to the first quarter 2022, where GAAP and non-GAAP gross margin were 9% and 24% respectively,
Second quarter gross margin trended slightly lower based on a mixed shift to lower margin launch services revenue.
In the launch services segment, specifically, gap gross margin was negative 12% in the second quarter, flat with the prior quarter.
In the space system segment, gap gross margin was 20% in the second quarter versus 13% in the prior quarter.
The expansion of gross margin quarter on quarter was driven by a favorable mix of higher margin products delivered in the quarter versus the prior quarter, despite the second quarter being negatively impacted by the introduction of stock-based compensation into Solero production costs resulting from post-acquisition equity award vesting.
Total production headcount ended Q2 2022 at 781, up 11 heads from June 30, 2022.
In the face of increased production unit volumes, we continue to focus on constraining production headcount and identifying production efficiencies in pursuit of expanding gross margins across the business.
Backlog declined $14.5 million during the second quarter to $531.4 million as the recognition of record revenue outpaced new bookings in the quarter.
Significant portions of our business involve projects that are many months or years in formation and as a result converting opportunities into new bookings is lumpy.
A recent example of this was the MDA Constellation bill contract that resulted in a significant backlog uplift of $143 million, but with a long time in the making.
Our pipeline of opportunities remains robust and we look forward to growing our backlog as we progress through the remainder of the year.
When we compare the second quarter 2022 revenue on a year on year basis, the strength, evolution, and diversity of our business is evident.
Total revenue was up 392% or more than $44 million when compared to the second quarter of 2021.
Acquisitions have played a major role this year on your growth.
Revenue contribution from the recently acquired ASI, TSC, and Solaro businesses added approximately $28 million of revenue in the second quarter of 2022.
The organic Rocket Lab product lines have experienced significant growth as well, having grown more than $16 million, representing 144% growth year on year, and contributed nearly $28 million in the second quarter of 2022.
As a quick aside, the growth and execution in our Space Systems segment is a good example of how our business has evolved and diversified.
In total, the Space System segment revenue was $36.4 million, reflecting an increase of 893% or more than $32.7 billion over the prior year.
As Pete covered in the previous slides, in our space systems business, we now have revenue contribution for almost every US government defence and civil agency.
the majority of large US Primes and a diverse mix of global customers.
This is allowing us richer and deeper customer engagement, which can be seen in our financial results, backlog, and forward guidance, which I'll get to shortly.
Now turning to gross margin.
GAAP and non-GAAP gross margin in the second quarter of 9% and 22% respectively, compared to GAAP and non-GAAP gross margin of 22% and 25% respectively in the second quarter of 2021.
The decline in gross margin year-on-year for both GAAP and non-GAAP was driven largely by the mixed impact of the addition of lower margin revenue from the Solaro acquisition.
In the large services segment, gap gross margin of negative 12 percent in the quarter compares to negative 3 percent in the second quarter of 2021.
The decline in gross margin year on year was driven by less absorption of overhead, exacerbated by revised overhead rates that were impacted by a range of inflationary and other factors, including staff costs, but specifically stock-based compensation for production staff that factored in much less in the Q2 2021 period prior to Rocket Lab coming public.
In the space system segment, gap gross margin of 20% in the quarter compares to 73% in the second quarter of 2021.
These declines in gross margin year on year were driven largely by the mixed impact of the addition of lower margin revenue from the Solero acquisition, as well as previously referenced stock-based compensation for production staff, stepped up relative to periods prior to Rockville's upcoming public in August of 2021.
Turning to operating expenses.
GAAP operating expenses for the second quarter of 2022 were $38.1 million, which was approximately $900,000 lower than the low-ended guidance.
non-GAAP operating expenses for the second quarter of 2022 were $25.2 million, in line with a high end of guidance.
The quarter on quarter step up in both GAAP and non-GAAP operating expenses was primarily driven by an increase in staffing and related stock based compensation expense.
Prototyping related to neutron vehicle development.
the Electron Booster Recovery Initiatives, and Photon Development Projects, which were partially offset by the change of fair market of considered consideration related to the PFC acquisition.
In R&D specifically, GAAP expenses were up $5.7 million or 42% quarter on quarter.
non-GAAP expenses were up $4.3 million or 63% quarter-on-quarter.
We anticipate the trend of sequential growth in R&D to continue as we ramp investment in neutron launch vehicle development in particular.
Quarter ending R&D headcount was 308, representing an increase of 29 heads from June 30, 2022.
In SG&A, GAAP expenses declined quarter-on-quarter $4.1 million, or 18 percent, driven primarily by, as mentioned earlier, the change in fair market of contingent consideration related to the PSC acquisition.
non-GAAP SG&A expenses remained relatively flat between the quarters.
Quarter-ending SG&A headcount was 182, representing an increase of 14 heads from June 30, 2022.
On a year-on-year perspective, both GAAP and non-GAAP operating expenses were up as the company continues to invest heavily in broadening our space systems portfolio of products and services.
electron recovery initiatives, and neutron development.
The company is executing and achieving milestones on numerous ambitious projects, and we look forward to these investments generating shareholder value for years to come.
Year-on-year gap R&D was up by $10.6 million, driven by a one-time $3.1 million increased stock-based compensation incentive related to the capstone mission.
staffing, and prototyping expenses directed to Photon and Neutron platform developments.
non-GAAP R&D was up $3.5 million, driven by a combination of higher prototyping and staff costs.
Year-on-year GAAP SG&A was up $11.9 million year-on-year, driven by an increase in various public company costs, including initial DNO insurance, legal and audit and professional services, as well as stock-based compensation and acquisition-related performance incentives and amortization of purchased intangibles.
non-GAAP SG&A was up by $7.4 million, driven by similar GAAP items referenced earlier.
Net cash used in operating activities totaled $38.3 million, driven sequentially higher by $10.7 million in greater net loss in Q2 versus Q1, resulting from higher R&D costs related to investments in neutron, photon, and electron booster recovery activities.
Cash consumed from investing activities totaled $12.3 million in Q2, compared to $71.8 million in Q1.
The sequential reduction in cash consumed from investing activities was mostly driven by a lack of acquisition outflows in Q2 versus Q1, offset partially by a near 2X increase in capex investments related to neutron development, photon manufacturing infrastructure build-out, and electron booster recovery initiatives.
Cash consumed from financing totaled $15 million.
driven primarily by the timing of a tax withholding payment made in Q2 of 2022 for employee performance share units that vested and cash taxes was withheld in Q1 of 2022 and the payment of contingent consideration related to the ASI acquisition.
Overall, cash consumed in Q2 was $61.1 million compared to $84.3 million in Q1, with Q2 ending cash, cash equivalents, and restricted cash balances of $546.6 million.
With that, let's turn to our guidance for the third quarter of 2022.
We expect revenue in the third quarter to range between $60 and $63 million, which reflects $37 to $40 million of contribution from Space Systems and $23 million of contribution from Launch Services, which assumes three launches or one remaining launch in the quarter.
We expect third quarter gap gross margin to range between 12% and 15%.
and non-gap gross margin to range between 22 and 25 percent.
These expected gap and non-gap gross margin improvements are driven by expected sequential beneficial changes in product mix within our space system segment and a higher average selling price per launch in our launch services segment.
We expect third quarter GAAP operating expenses to range between $41 million and $43 million.
and non-GAAP operating expenses to range between $27 million and $29 million.
This quarter on quarter step up is driven primarily by increased R&D staff cost and prototype expenses related to the scaling of our photon product family and continued growth in our investments in the new Trump launch vehicle development program.
We expect third quarter GAAP and non-GAAP net interest expense to be two million dollars.
And lastly, we expect third quarter adjusted EBITDA loss to range between $8 million and $12 million and basic shares outstanding to be approximately 471 million shares.
And with that, I'd like to open up the call for questions. Operator.
Absolutely.
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The first question is from the line of Suji DeSello with Roth Capital. You may proceed. You may proceed.
Hi Peter, hi Adam, congratulations on all the progress here. Can you talk about maybe the Responsive Space Program? It sounds like with the lead times there you may be able to kind of exceed your launch guidance in a given quarter. Just trying to understand if that's the case, kind of, you know, Adam's the turns kind of concept of CEMIS or whether, you know, if that's unrealistic and you're able to kind of guide and these will be, you'll be, these will be visible kind of quarter upon quarter. When you get absolutelyManually to investigate if I'm the wife, you can review that in the next couple of weeks and all the things there will be available questions, that we've RachelLayout talking with the
Yeah, I'll take a stab at that and then Adam might want to pile on. I mean, it's kind of mentioned, you know, the thing that drives that launch cadence is customer readiness. So, you know, that's a single biggest influencer. And the Responsive Space Program kind of does two things for us. It enables us to work with our customer even more closely to better judge.
their customer, their in fact readiness. And then the second part of it is, there's a growing focus on responsive space. And although we've had all these capabilities, we've never really advertised them as such. So that was kind of the rationale here. And within a quarter, it's completely feasible that there can be a pop-up launch.
Really, we know that there's budget that's being added for programs to support this, so that's helpful as far as a tailwind. I think also, as we get a little bit more experience with these types of programs, we'll be able to model what that looks like going forward. Obviously, the more frequently launched, the better it is across our business, and I think that these programs do nothing but help that. But we just don't have a tremendous amount of visibility as to when they're gonna start to pop up in a meaningful way. But as Pete said, we're doing everything that we can to be ready to support those. I think with these most.
broader economic and macro concerns right now if perhaps some of the newer companies trying to put constellations up are maybe being a little more cautious or pushing out plans or if you think your pipeline is more, you know, really kind of not as exposed to that phenomenon. Here's what you're seeing there. Thanks.
I would say that the quality of our pipeline is extremely high. So far, we haven't seen any impacts from a broader economic standpoint. The typical Rocket Lab customer is a mix, but like I say, the backlog and customer quality is more than 2000, G
you know, is really, really high.
and it's really, really high. Yeah, I would jump I would I would basically add to that.
Sujithi, if you look at the types of customers that we have too, even though we have roughly a 50-50 split between government and commercial, even within our commercial customers, a vast majority of those have government support contracts, right? So, you know, we have very little in our backlog to say that's pure commercial for where there's a government that's not ultimately kind of standing behind providing demand for that content.
So I think for the most part, the government spending is much more predictable, once it's been kind of provided or allocated in a budget. So I think we feel in this environment, yeah, I can understand how there's going to be some companies that are going to get a little nervous about the ability of some of their customers to continue to finance themselves, where I don't think we necessarily have that same risk. But a few of our customers actually went through a growing public process last year, which, again, not the greatest conditions compared to where we were a year ago, but still much better than being in the private markets. And I think the ones that are private actually do have a lot of strategic engagement with
lumpy.
So, you know, it takes a significant amount of work. But what we really didn't show is the pipeline of opportunities, which we think is very, very strong. We're not concerned about that.
Thanks guys.
Thank you.
The next question is from the line of Eric Rosamond with Stifel. You may proceed.
Thanks for taking the questions. One of the sort of stay on launch, you know, looks like the pace has obviously picked up, but I appreciate the commentary around the customer readiness. It seems to be a limiting factor. You know, you'll have one more launch for this quarter. How should we be thinking about the sort of the year and maybe, you know, the target, a number of launches and is there anything that can be done or what?
what we have done slightly differently is be a little bit more aggressive with the booking of the launch slot. So historically if someone books a launch slot then we just carve that slot out and say well nothing happened in that slot. So we are a little bit more aggressive now with the slot there.
to people within that same slot. And we're getting to know which kind of programs or customers seem to move around so we can manage the manifest more accurately and just communicating with their customers that to make sure that they don't wait for the last minute to tell us that their spacecraft is gonna be delayed, which is kind of typical within the industry.
Yeah, and Eric, I would add then.
Sorry, Eric, I guess just to put a little more color on that one, too. I think that as far as...
you know, adding more launches to the manifest, whether it's a little bit later this year or as we head into 2023, I think some of the pretty clear failures and pretty significant delays from our aspirational launch competitors on the small home site are really creating opportunities for payloads to come our way, right? So I think that, you know, we've had, we've witnessed a bit of a, you know, we've seen scenarios where the customers are trying to play almost a game of chicken where they're
They're wanting to take advantage of some lower launch prices being off to them based on some either desperation or people who are just really early in the game and trying to build commitment to their platform, but when they don't execute either because the rockets fail or their programs continue to have push outs and the customer only gets nervous about keeping their payloads manifest on those rockets, those will start coming our way, I believe. So I think that as time, we've always said that at the end of the day, you actually have to deliver a working product.
you know, we've been able to do that while many others have faltered. And so as that faltering becomes more evident, I think it just pushes these kind of payloads that we're kind of hoping to take advantage of bargain basement kind of introductory pricing to a more reliable platform such as ours. So I think it's kind of hard to when we'll see a more meaningful kind of effect from that, but I think it's likely.
Great, that's helpful. So it sounds like maybe there could be some upward pressure in pricing that you could expect from this sort of dynamic that's playing out given that we sort of see some separation between yourselves and others who have not been successful.
Well, I think we've been pretty steadfast in holding what we think is attractive pricing, but certainly we're not immune to people putting sticker prices out there that are just unrealistic because they don't really understand what it takes or what it costs to run a rocket business. We understand what those costs are, so we haven't just kind of thrown in the towel and chased kind of ridiculous pricing down the rabbit hole, but I do think that as options winnow in.
and demand continues to build, I think those that are positioned to supply the market with a quality product are going to benefit from higher prices. So I think you're exactly right, I would expect that trend to become evident in the future.
Great. And then maybe just the last one, this would be for you, Adam. On the margins, obviously, some pressure in Q2. We're seeing a little bit of lift in Q3, but how should we be thinking about margins as we sort of exit the year, and what's a good trend that we should be sort of modeling?
Yeah, you know, I think we're going to stick to our quarter by quarter guidance. I think it's, you know, we look at margin, there's a few factors that obviously heavily influence that. And, you know, it's becoming a diverse set of factors because of the diversity of our business. But on the launch side, it's really all about, it's about launch cadence. So you know, we've definitely picked up our build rate. So we've pretty much hit our marks on how many vehicles we wanted to build in 2022, which is great. That's an important requirement.
But also, as Pete mentioned earlier, it's customer readiness, making sure we get those launches off. And really, we talked before about we hit our target model for Electron from a margin perspective when we get to two or more launches per month. So we're about halfway there. And again, it's where we see demand in the marketplace. We're confident we're going to get there. And we think it's roughly on the same timelines that we've been communicating all along. So we feel very good about it. And also, what Pete mentioned earlier, he gave an update on the booster recovery for!
that's going to be a meaningful enabler of seeing some of those rapid improvements in the margin profile of business. Because you go from building, every vehicle building being expendable to having a fleet of vehicles that you refurbish and reuse. So I think that from that perspective, that's always been part of our plan. And again, the success that we saw in actually rendezvousing and capturing that rocket was an important step forward in proving that that could become a reality. So again, I think we feel very confident in the margin profiles that we previously communicated.
themselves, which are just really getting underway. The component businesses that we've developed internally and also the ones that we've acquired actually kind of come out of the chute with attractive gross margins to begin with. So it's not really, there's not really a scaling challenge with those businesses. I think the real important focus item for us to achieving and maintaining healthy gross margins in space systems is really around implementing some of the things that we know that we need to do on the Solero side of the business, because that brought with it meaningful revenue run rate.
that we stated when we acquired the company was the high single digit gross margins. And we have a path and a target to get to 30 points of gross margin for that business. And when we achieve that, balancing that with the other existing higher gross margin, it will land us exactly where we want to be. So I think we know what we need to do. It's just a matter of time. And when we did the Solara acquisition, we said it was about a 24-month path to get from kind of where they were to where we want to go. And again, nothing is really pushing off of that view. We remain encouraged by the fact that...
The new business that we sign up continues to come in at higher gross margins than what existed in the existing backlog when we closed the deal in January . So all the indicators are pointing in the right direction that we can achieve the margin targets that we were hoping for in space systems and in the launch side.
Great, thanks so much.
Thank you. The next question comes from the line of Ronald Espin with Bank of America. Please go ahead.
Hey, good afternoon.
wherever you might be in the world. Just maybe a couple quick ones. This week we saw an announcement.
Northrop has cut a deal with Firefly to get some engines.
When we think about neutron and some of the launch needs that we might be seeing out of the defense community with some of the big primes there, are there opportunities for you all with the bigger rocket, with bigger payloads, with the big defense primes?
Yes, for sure, Ron. If you look at Neutron already, we already won an ETSS-LP contract. If you look at who's won an ETSS-LP contract, it's basically QLA larger than us. We already have very, very strong customer engagement. There's no more bit of elevation than your customer investing in the development of the vehicle.
partner with the Prime to be able to develop that vehicle and bring it to market.
Got it, got it, got it. And then maybe on the M&A front, are you all looking at more potential M&A in the systems business?
Yeah, I mean, we like to keep kind of half a dozen to a dozen companies in the chute. What I will say is that we haven't seen the valuations of those private companies come in line with probably the public market. There seems to be a bit of hysteresis there. So we're not saying that we're going to pay over the odds for anything there. But we continue a very active M&A strategy. There's a few things that...
that you would like to add to the quiver, but we've been very disciplined about it in the current market.
Got it, got it. And then maybe just one last quick question. Get the Russians out of the market seemingly permanently now.
If we look out, say, three, four years from now, and I know, if you can, I'm sure you don't.
obviously, but...
Where could the launch cadence go now that that big provider is effective?
out.
Well, I mean, for you know, it's only got one way, you know, there was enough launch demand as it was for, you know, I think we've talked about this in that in that sort of 2024 to 2027 timeframe, we have a tremendous number of mega constellations coming to market all requiring launch and there's a massive launch deficit in that period of time and remove, remove, you know,
I think Russia was either the second or the third largest launch provided by volume from the market. And all that launch has got to go somewhere. We also see launch becoming, you know, acquired fairly rapidly. Programs like the Amazon private program that have consumed basically all the remaining launch capacity on a number of vehicles. It really presents a tremendous opportunity for us and Neutron.
and we're being very, very selective with respect to who we partner with on that one because a number of customers aren't looking for...
one or two launches, they're looking to acquire years of Neutron's launch abilities. And we're just being very conservative about who we provide that to, who's going to be at the pad in the right time and who's going to be real. Those are the considerations that we're making as we work with those customers.
Thank you very much.
Thank you.
Thank you.
The next question is from the line of Matt Acres with Wells Fargo. You may proceed.
Hi, thanks. Good afternoon. Thanks for the question. Can you talk about margins of profitability on the responsive launches? I know you talked about how that will benefit your overhead absorption, but I hear the only provider who has demonstrated that capability, is that something you're going to be able to charge a premium for launch for? And then on the other side, are there additional costs that need to come with that?
premium because you know if you have a nice production cadence of flow and launch flow.
and then if something jumps in the middle of it, then there's certainly additional value that you've created. And with respect to costs, I mean, Adam will provide you a more wholesome financial answer, but my point here is you're not flexing with a whole bunch of staff to meet these. So your staff cost is relatively fixed. We like to carry inventory.
Anyway, it's just kind of reprioritisation of staff and projects to allow the flux. And there will be some additional staff carried in a small number to enable certain things, but generally it's reprioritisation.
Yeah, yeah, and Matt, I think following on the point there, on the revenue side, what we've seen is every year we seem to have customers that come with short-term launch needs. And it's a little bit different with this US government responsive launch because that's much more planned and coordinated. But if you kind of take the range of kind of a mix of kind of commercial and government customers who are either have planned responsive launch requirements or commercial customers...
that show up with a very defined short-term launch window that they need to hit. Prices have been on average probably 15 to 30 percent higher than our sticker price.
So that kind of gives you a bit of an example of what the premium kind of looks like for this kind of responsive type of capability.
And our sticker price again being, call it, you know, seven and a half million dollars is kind of what we advertise a baseline Electrum launch to be.
On the cost side of things, as Pete mentioned, one of the
You know, one of the valuable characteristics of being so vertically integrated, in fact, owning our launch facility in New Zealand, the fact that most of what we do is fixed, right? Fixed costs. So the incremental cost of doing a responsive launch is really nothing different than a well-planned out manifested launch that's out, you know, six, 12 months from now. So I think it's really all beneficial to margin because you're seeing a significant uptick in average selling price and your cost of goods sold, including your kind of your near-term kind of launch period costs are not.
I mean, you know, it's telling there's always, you know, there's always a challenge. I would say that we made some pretty significant changes to the way that we were doing recruiting in the last, the last sort of six months. And those visits have formed really great results. Also, you know, we are kind of seeing that...
Engineers want to work on projects that actually launch and within successful companies. So as other folks fail to execute or have very, very long-term ambitious plans that also fail to execute on, we don't get in a pixie cup with the price.
successful in the last quarter or so and feeding the machine than we ever have before.
Got it. That's helpful. Thank you.
Got it. That's helpful. Thank you. Thank you.
The next question is from the line of Edison Yu at Deutsche Bank. You may proceed.
Thanks and congrats on Capstone. That's quite extraordinary. I wanted to come back to the topic on Neutron and sort of the environment for megaconciliation. In the context of everything that's sort of going on, obviously you have OneWeb merging. There's some rumors about some other constellations out there. How are you thinking about the timing of when to decide?
who the first customers are for launch. And I guess what could possibly influence that?
What I'd say to Edison is like, typically we don't sign contracts that are kind of fluffy. So if someone wants, for example, to secure an electron launch, it's a 10% non-refundable deposit down before we'll engage. So you know.
there's kind of two sides to this question is that, we need to determine who is gonna be the best partner, especially when they're looking to consume the tremendous amount of launch from us. And the customer also has to be willing to make that investment into launch. And the more real the customer is, the more real.
they expect a launch vehicle to look. And, you know, the less real a launch vehicle is, the less real a contract is and looks.
There's no formal commitment, there's no cash paid. So our focus is really on working with all of those customers, determining which one is going to actually be at the pad, and those customers in turn are looking at us and looking to see development milestones. And they're asking us the same question, was this vehicle going to be at the pad when you say it's going to be? And all the rubber hits the road when money exchanges hands at that point.
Yeah, and Addison, I would add a little bit more to that too, the fact that now that we've become a much more diversified company and everyone views us as a launch company, which certainly that's the core, but we're really looking to put more deals together that are multifasted. So, it may not be the first customer that we announce for Neutron is probably going to involve more than just launch. We have a lot of things that we bring to market and we're looking for much broader end-to-end customer relationships.
So, I think that that's one of the values of having kind of the breadth that we have now is that it's rarely becoming just a launch contract. It's usually launch contract plus other things kind of in partnership with that, whether it's components for people's satellites, whether it involves design services, on orbit management and so forth. So again, we're looking to create much more holistic relationships and package deals. So it's a little more complex and it also kind of winnows down the field of who...
kind of you want to partner with as well. It becomes that much more important that who you're partnering with is going to ultimately deliver their constellation and you're not going to be kind of left with a kind of vaporware type of contract.
I just want to follow up. Kind of related, there's certainly a lot of competing or new competition coming to the market and particularly in sort of the 1 to 1.5 ton payload. I think we discussed this before, but just curious if you can refresh. Just sort of view on that kind of sizing versus.
You're kind of at the small end with Electron and then you have Neutron coming. How do you view that segment of size for the market?
Yeah, so, you know, there's been emerging competition coming for as long as, you know, we've been flying Electron. And as of yet, you know, it just hasn't materialised. I think, you know, it's easy to kind of talk about disruptive technologies, it's actually super hard to do it and even harder to, you know, to do it reliably.
consistently. What's not been as arrogant to say is that there's not going to be competition at some point arrive. It's just you know it's been arriving for in the last decade but it's not finally got there yet. And with respect to the one tongue class I mean we were very very very
deliberate in the size of launch vehicles for a small dedicated launch vehicle that we developed. And we really think we've hit the sweet spot. Now with respect to the kind of the one-ton class launch vehicles, our view has always been and the fundamental reason why we didn't develop one is you're in a complete no-man's land with a one-ton vehicle.
So if you've got a dedicated small satellite that you need launched, you know Electron and electrons price point is absolutely ideal Nobody charges you lift the half pulling up a rocket like if you want to buy a dedicated rocket Then you know you buy a dedicated Rocket, and if you've only got a 100 or 200 or 300 kg payload then Then you've just bought a very much more expensive rocket than you needed and then on the flip side from a ride shape perspective
you're competing directly with a Falcon 9 transport emissions. So it's just the worst of all worlds. It's too small to be an effective ride share vehicle and too big to be a cost competitive dedicated launch vehicle. And I think, as Adam mentioned previously, there's a lot of new entrance pricing out there. A lot of folks really don't have the experience to know what it actually costs to build and operate.
a launch vehicle and a lot of capture pricing going on that will be completely unsustainable in the future. If we felt that one ton was a sweet spot then we would have built a vehicle for that and we could certainly pivot to building one very very quickly but we'd honestly think that is the rest of the world.
All right, thanks for the insight.
Thank you.
The next question is from the line of Austin Moller with Ken Accord. You may proceed.
Hi, good afternoon Peter and Adam.
So, my first question here, earlier this –
Hi earlier this week max are announced that they're moving sort of up or They're moving into a the small set market if you will with a proliferated Leo bus It's sort of scalable to 150 kilograms to 500 kilograms So are you sort of seeing the same kind of trends right now within the manufacturing market where? A lot of companies are sort of moving their constellations from what had been cube sets up to
to slightly more capable systems in that sort of 150 to 600 kilogram range that are not quite an exquisite 5,000 kilogram satellite but do have the capacity for bigger batteries, bigger solar panels and more capability.
Yeah, absolutely. This has been a trend that we've witnessed and seen over many years. We would, if you roll back a couple of years, we would fly a tube set customer and they would do a mission demonstration that would enable them to raise capital or prove a sensor and then they would move into a more capable platform. We see this across the board. This is why we think going back to the edited questions, why the classes.
electron launch vehicle, you know, suits this market very, very well. But yep, that is what we continue to see as you kind of cut your teeth on a tube that graduate into a more important platform. And then ultimately, typically how it rolls is you, you know, you'll even on your larger platform as you look for a rideshare cheek launch, you'll get it on orbit.
prove out the capability of the spacecraft, and then when you actually need to put the spacecraft into the desired orbits to be commercial, that's when we often see those customers coming back again and buying bulk files of electrons to deploy their constellation to the exact orbit. And I think you can look across a number of those bulk files that we've signed and see that evolution consistently across all of them.
Great, that's very interesting. I just wanted to comment, congratulations on the achievement with the Capstone mission. And now that you've sort of demonstrated, you know, more interplanetary mission capability, I know the company's talked about doing a Venus mission soon. Is the intent there to monetize some of that data collected from the Venus mission and be able to sell that?
Yeah, I mean, the Venus mission is a nights and weekends using old coal hardware kind of a mission. And the science team working on that is, they're funded themselves. And anybody who wants to be part of that program has to bring their own funding. But undoubtedly, the data will be a huge sign to the value and, you know, there could be, you know, opportunities to monetize that. But what I would say is we're the real focus.
is now that we've proven that we can build and operate a spacecraft that's capable of interplanetary flight is actually taking that investment we've made in that lunar photon platform and the proof points that we now have and developing missions with our end customers, which is the most exciting thing about that whole mission really. I mean, you sit down with a planetary scientist from NASA and.
You know, in their entire career they've expected to do maybe two missions to a planet in their entire professional career and generally these missions are measured in decades and billions or hundreds of millions and just sitting down with a planetary scientist now saying well for some tens of millions of dollars in a few months time we can go to Mars or we can go to this asteroid. It's really really changed the game and changed the way that everybody's thinking about actually having how you do in the planetary.
science and what is the art of it possible now. So we see that platform as being really, really disruptive and we're looking forward to doing some really exciting missions in the future with it.
That sounds super exciting. Just one more if I may. This might be a question for Adam. If you haven't already, can you sort of delineate what specifically in the quarter caused the within the mix of space system caused the lower gross margin there?
Yeah, so if you look in the mix, it's really, everything that we're doing in Space Systems right now is influenced by Solero because it came with so much revenue relative to everything else. So it's really more than anticipated Solero contributions in the quarter was the primary one. Everything else is kind of on the margin. I think the other parts of our Space Systems business have reasonably good margins. They were good when we acquired the assets. I think the stuff that we've developed internally has generated.
opportunities and bringing not only kind of our broad manufacturing capabilities to bear on it, but also capital. I think it was a business that wasn't fed particularly well by the prior owners, and I think we're looking for ways to put more capital in that business and do things a little bit differently. Yeah, it's really that that was the skewing of the margins in the quarter.
Okay, and so I guess after we sort of get through that 24-month timeline for transformation in that business and you can get it above the objective 30 percent gross margin, then we can think about space systems being back in the 50 to 60 percent range?
Yeah, I think we've always been consistent in talking about kind of the low to mid 50s. So there are certainly elements of that business that are 60 points plus, but really when you're looking at it on a consolidated space systems basis, low to mid 50s is where we kind of set the bar.
Okay, great. Thanks for all the insights there.
Okay.
Thank you.
The next question is from the line of Karzahun Remor with Cowan. You may proceed.
Yes, thank you very much. I know it's been a long call. Maybe you could comment on supply chain inflation and FX basically, you know, what impact they're having on your business. I know it's a complex question. So maybe just hit the high points.
Yeah, hi Kavan. So from a supply chain perspective, because we're so vertically integrated, unless raw materials start flowing, then we don't see typically a huge impact. Now, not saying we haven't had a supply chain challenge, but I think we've got a great supply chain team that manages things very well. We keep quite a lot of inventory and width and long lead items. But we've been able to manage our way through that. So as of date, we haven't delayed.
boring stuff is just not available as available as it used to be. And then from inflation and foreign exchange perspective, I'll let him comment on some of those more false to lead up, you know, we're all about to feel the impacts of inflation, your costs are going up and you saw that in some of the commentary here and these earnings with more additional costs and staff and, you know, the foreign exchange exposures we have between New Zealand and New Zealand.
were less exposed, I think, in general than most other companies. Again, the exception being wage inflation, which we're all seeing, right? So I think it, for the most part, it doesn't keep me up at night right now, kind of inflation impacting every part of our business, but a significant portion of our costs are related to human capital and those costs continue to go up.
And the last one, strategically, when you think about taking orders for neutron, obviously, the longer you wait, the better your visibility of the costs, the visibility of the quality of the clients, but maybe you want to lock up some early on. So how do you think about that? At what point are you going to be more aggressive about trying to actually sign those orders? Yeah, it's a great question.
you see with Rocket Lab, like it's a real contract and there's money down. So, you know, we could press release some fluffy contracts, but that's not really our style or being real. And, you know, part of it comes down to is when is the customer willing to, you know, commit capital to secure it? And also, you know, as I mentioned before, is like, who's going to actually be on the pad? And I look.
I'm not too worried at the moment, you know, Kavon about that. I mean, we've got work ahead of us to deliver the vehicle and our customers have got work ahead of them to keep their constellations on track and on schedule. And the one thing as an absolute fact is that launch is an actual, you know, especially around the time that Neutron comes to market as an absolute rarity.
So we can afford to be fussy and others have lots of aspirations and not so much execution history. We're very much of the opinion that we will execute and we'll watch our customers execute and then the people that execute will come together and that will be that.
Terrific. Thank you very much.
Thank you.
The next question is from the line of Justin Lang with Morgan Stanley . You may proceed.
Hi, thanks. Maybe just one quick one on the booster you covered, the helicopter back in May. Have there been any surprises at this point now that you've had some time to assess the extent of refurbishment required? Thanks.
Yeah, Justin. I wouldn't say any surprises. I mean, we're very happy with the condition that it was, even though we dunked it in the water. All of the areas that typically see the most amount of load and work and the areas that we've been iterating on look really successful. And we have a battery program which is just about wrapped up, which will enable 10 recharges of the batteries, which is the largest single element.
the ocean with something that's been traveling at seven times the speed of sound on a ballistic trajectory and, and Rondo doing and doing all that, it was very gratifying to see that all that analysis work and, and, and if it paid off and, and this is going to be really a viable system for us. So that, that was a great, a great point to reach.
been traveling at seven times the speed of sound on a ballistic trajectory and in Rondo and doing all that, it was very gratifying to see that all that analysis work and if it paid off and this is going to be really a viable system for us so that was a great point to reach. Great, thanks.
It.
Thank you.
Again, to ask a question, please press star 1.
There are no additional questions at this time. I will pass it back to the management team for closer remarks.
Thanks very much and with that, thank you everyone for your interest in Rocket Lab and for those who participated in today's call. Adam and I will be speaking at these up and coming conferences and look forward to the opportunity to share more exciting news and updates at the RBC Global Industrials Conference in Vegas on the 13th of September , the Morgan Stanley Laguna Conference on September 14th, 2018.
the ACG Aerospace and Defence Mid-Mater Conference in Los Angeles, September 15th, and the B of A Global Industrial Innovation Summit in Washington DC on September 23rd.
And last but not least, we look forward to welcoming you all to our invitation only investor day and neutron development update to be held on the 21st of September at the Intrepid Museum in New York City. At this event, I'll be joined by Adam and other members of our senior leadership team to host a series of presentations really focused on our company's progress since our DSPAC in August 2021.
as well as a full-time update on the development of the Neutron launch vehicle. Thanks again and we look forward to speaking with you again about the exciting progress that we've made in our business. Thank you.
That concludes today's conference call. Thank you. You may now disconnect your line. You may disconnect your line.