Q2 2023 Rocket Lab USA Inc Earnings Call
[music].
Yeah.
Thank you for standing by my name is Adam and I'll be your conference operator today at this time I would like to welcome everyone to the rocket Labs Q2, 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number.
One on your telephone keypad, if you'd like to withdraw your question Press Star one again, thank you.
I'd now like to turn the call over to Colin can see hope Investor Relations manager. Please go ahead. Thank.
Thank you Adam.
Hello, everyone. We're glad to have you join us today for todays conference call to discuss rocket labs second quarter 2023 financial results before we begin the call I'd like to remind you that our remarks may contain forward looking statements that relate to the future performance of the company and these statements are intended to qualify for the Safe Harbor protection from liability established by the private Securities litigation.
Form act any such statements are not guarantees of future performance and factors that could influence. Our results are highlighted in today's press release and others are contained in our filings with the Securities and Exchange Commission such statements are based upon information available to the company as of the date hereof and are subject to change for future developments, except as required by law the company does not.
Not undertake any obligation to update these statements our remarks in press release today may contain may also contain non-GAAP financial measures measures, what the meaning of regulation G enacted by the SEC included in such release and our supplemental materials are reconciliations of these historical non-GAAP financial measures to the comparable financial measures calculated.
In accordance with GAAP. This call is also being webcast, although due to technical difficulties with our conference call provider, we will post a copy of the presentation on our website at a later time.
Our presenters today are rocket lab, founder and Chief Executive Officer, Peter back and Chief Financial Officer, Adam Spice. After our prepared comments, we will take questions and now let me turn the call over to Mr. Beck.
Thanks, very much color then welcome everybody and thank you for joining us.
Today's presentation.
Our key business accomplishments for the second quarter of 2023 as well as further achievements, we made sustained if the quarter.
Adam will then take us through our financial results for the second quarter before covering the financial outlook for Q3 2023.
We will take questions and finishes finish today's call with the nearer term conferences, we'll be attending.
Yeah.
Alright onto what we achieved in the second quarter for the year.
Starting with our lunch business in May we successfully launched by NASA tropics missions and in June we launched <unk> mission for NASA Wallops.
Selected ask Tim launch tropics in November late last year. After the initial once Nevada was unable to meet the mission and schedule requirements within six months of contract Award. We had successfully launched five machines, enabling these critical store monitoring set a lot to get onto orbit in time for the hurricane season.
Incredibly proud to deliver mission success, Vanessa once a guy and further demonstrate the reliability and proven capability that electron delivers to our civil and defense customers.
We also have followed up the two tropics missions with a successful heist mission highest as a hypersonic sub orbital switchblade variant electron.
And those are very real and urgent need for our government customers.
The acceleration of hypersonic system technology development is a significant national priority, but testing opportunities remain limited, particularly in real flight scenarios beyond wind tunnels.
With the Tyson launch completed in June from Elsie tuned Wallops, Virginia.
A new critical national capability, enabling rapid and cost effective cost effective <unk> Houston.
We're incredibly excited about what that brings correct estimates as well as.
As well as additional total addressable market that looks to grow rapidly head of strategic and civil needs. All of this while leveraging Eric just on Elektron architecture, and continued R&D investment and that kicks stage capabilities.
Expanded propulsion manufacturing capability. So we're also excited about our acquisition of <unk> 144000 square foot long Beach facility leased production lease and production equipment.
Which we're already hard at work.
Configuring for Archimedes and Rutherford production overall.
Overall, we estimate that the $16 $1 million price paid for this would have represented around 100 million of value versus having to purchase new.
While approximately 80 million derived from acquired machinery and equipment and the remaining 20 million from the tenant lease hold improvements.
We believe this asset purchase enables significant savings for neutral and support future skyline as we work towards Chris Walsh.
Neutral on testing.
John we want to highlight some of the major development testing and construction milestones, we've reached a neutral and its infrastructure.
You may have noticed we recently.
Some updated renders the neutron which created some online buzz around design changes.
These include adapted landing legs for optimized <unk>.
Thanks to increased launch availability as well as the adaption of neutrons hungry hitbox hearing from four sections to two allowing for simpler mechanism.
This is on changes, we actually made some months ago as part of that is our interim <unk> analysis program.
And some direct customer feedback, but the outward really just hasn't kept up with pace.
But the real vehicles. So we've recently updated days for everybody to see.
We've hit some significant milestones in neutral production and in testing in this quarter, including completion of the second stage qualification tank and to stand in preparation for the cryogenic test campaign in the third quarter.
This work is progressing at pace, thanks to their extensive experience with Cabo.
The Elektron program. So we have a strong head start on structures and.
In parallel Earth works at launch complex, III, and Wallets, Virginia have convinced Tonight Blanc pad construction to commence in Q3.
Once complete neutron should enjoy all the benefits that come with launching from a pad that benefits from clear line of sight to future launches has significantly less congestion relative to the Cape and close proximity to key government customer.
The propulsion team is also on schedule to deliver the first full scale print alvar committees and that can be distress chamber and we've run in running a successful campaign.
Prepaid <unk> fruit Purdue University.
These milestones keeps us on track for delivering the first complete qualification engine by the end of this year in parallel with building avionics hardware and successfully testing.
And hardware in the loop simulation.
All of these achievements puts us in a good position to meet some key milestones by the second half of this year, including completion of the <unk> site qualification Tis campaign. We're also targeting the completion of the first stage qualification tank at <unk> as well as the first Archimedes development engine and Ts campaign at propel.
<unk> complex with the necessitate us.
We're still working towards getting something on the pad by 2024 and will continue to provide updates as we progress through the year and Anthony.
Okay.
Our space systems team also recently delivered a really significant milestone in the second quarter in the form of successfully operating.
The latest rocket we have designed and built space craft.
This is one of our newest spacecraft platforms.
High power high pilot volume spacecraft designed for short to mid duration missions in low Earth orbit.
This was the first of four spice crop that were on contract devote an upright savada size to enable and spice manufacturing highly bespoke and complex spacecraft design for reentry, which is the Ria capability and something we're really proud to bring to market.
The spacecraft house, many pharmaceutical led that successfully grew crystals, commonly used in drug treatments for HIV.
When this when the Spice manufacturing is now.
With the inspire manufacturing now completes the capture was anticipated to return to Earth in the coming weeks.
Well the next two spacecraft, Nevada, Erin thoughts production and ready for the follow up question sorry.
All of these spacecraft feature components and software from across our spy systems businesses, including solar panels Star Trek as radios.
You have to produce affordably at pace. It's also a demonstration of their business model is in into an spice company to buy build and upright satellites on orbit.
And finally development is progressing well for a twin spacecraft mission to Mars Vanessa <unk>.
The escapade mission, we are developing two bespoke spacecraft studying nos has a magnetosphere next year and this quarter. We completed the qualification spacecraft heat of an extensive testing and qualification campaign.
We now want to take the time highlight some of our accomplishments in so far in Q3.
Successful launch Vanessa Telesat and spot we have started the quarter strong with successful Roger mission for from launch complex, one deploying satellites, but NASA spa and tell us that we're on the brink now of our 40th electron launch and on track to complete three more this quarter in 15 overall this year.
Yeah.
Now regarding our capella launch.
We love the Nighthawk, we continued to take an abundance of abundance of caution as we continue to track continue a track record of the most reliable small rocket at present. The team is working through some unusual data from one of the agencies for that but of course these things happen with Wilkes vehicles from time to time, we have a very straightforward path to resolution <unk>.
Scheduled March light at the spot so no big deal there.
One of those missions.
Of course was a recovery mission.
This launch was an important one as we used it to prove out and waterproofing technologies and marine retrieval system for extracting electrons from the ocean.
I'm pleased to report that the new system works exceptionally well and electron splashed out this condition, we've seen it yet.
We continue to operationalize electron reusability with the first reflect of a recovery scheduled for the second half of this year from where we are.
Scheduled the first re flight of our first stage booster.
Signed two new science, sorry signed 10, new Elektron launches. So elektron continues to be the preferred dedicated small lunch option demonstrated by continued and growing demand.
Since we reported earnings in May we signed deals for a total of 10, you did occurred in launches, including block buys from return to government and commercial customers.
Really is a testament to electrons reliability frequent launch cadence and in particular the high degree of control over all but that we can give to a constellation of arthritis, which is something that just cannot get on our large rod sheet machine.
And with that I'd like to turn the call over to our Chief Financial Officer, Adam spot Adam.
Okay.
Thanks Pete.
Second quarter 2023 revenue was $62 million.
Which was above the midpoint of our prior guidance of $60 million to $63 million.
Second quarter 2023 revenue reflects sequential growth of 13% and the result of three successful launches and a return to growth for our space systems business.
Our <unk> services segment delivered revenue of $22 $5 million in the quarter from three launches.
Which was consistent with our prior guidance of $23 million.
The resulting average revenue per launch stepped up nearly $1 million to $7 5 million.
With our target average selling price for 2023.
Our space systems segment delivered $39 6 million in the quarter, which was up 12% sequentially and near the high end of our prior guidance range of 37 million to $40 million.
Driven by healthy growth in our satellite bus solar and separation systems businesses.
Our backlog increased by $40 1 million to $534 3 million in the second quarter.
We continue to see strength in our launch business driven by returning launch customers with multi launch requirements haste.
<unk> related missions.
Re <unk> and re manifesting launches from other failed or struggling launch providers.
Additionally, our space systems backlog increased with the addition of a new satellite design and build program and strong component bookings, particularly for our software and solar businesses.
Now turning to gross margin.
GAAP gross margin for the first quarter was 23, 5% above the high end of our guidance range of 14% to 16%.
non-GAAP gross margin for the second quarter was 31, 8%, which was also well above our guidance range of 22% to 24%.
GAAP and non-GAAP gross margin improvements relative to our Q1 2023 results and Q2 2023 guidance reflect the release of a $4 $1 million loss reserve associated with the exploration of a legacy launch contract.
An increase in average loss selling price and favorable mix within our solar and software businesses.
Adjusting for this non-GAAP gross margin would've been 25, 2% modestly above the high end of our previous guidance range.
We ended Q2 with production related head count of 767 were up 10 from the prior quarter.
Turning to operating expenses.
GAAP operating expenses for the second quarter of 2023 were $59 $8 million above the high end of our guidance range of 55% to $57 million.
non-GAAP operating expenses for the second quarter were $43 4 million, which was modestly above our guidance range of $41 million to $43 million.
The increases in both GAAP and non-GAAP operating expenses versus the first quarter of 2023.
Primarily driven by higher staff costs related to new hires and our annual Merit review and related compensation step ups material purchases supporting neutron and space systems developments and facilities and other ongoing expenses related to the Virgin orbit asset acquisition.
Yeah.
In R&D, specifically GAAP expenses were up $7 $1 million quarter on quarter as we continued to aggressively ramp our neutral development efforts through new hires large materials purchases and outside professional services related to our space systems development programs.
In addition to these areas contributing to the sequential increases we also recognized increases in stock based compensation and were impacted by the absence of ERC tax credits that were recognized in the prior quarter.
non-GAAP expenses were up $4 $9 million quarter on quarter, driven similarly, as GAAP expenses by staff costs outside professional services and materials related purchases.
Q2, ending R&D head count was 518, representing an increase of 62 from 456 heads from the prior quarter.
And SG&A GAAP expenses increased slightly by $200000 quarter on quarter due to changes in contingent consideration related to our PSC acquisition attributable to a higher average stock price in the quarter.
M&A costs associated with the Virgin orbit Act with that asset acquisition.
And nonrecurring ERC tax credits that were recorded in Q1 and.
All of which were partially offset by a reduction in outside service expenses associated with year end audit and compliance work.
non-GAAP SG&A expenses decreased by $1 $7 million, owing primarily to the decrease in audit and compliance related expenses.
Q2, ending SG&A head count was 228, representing an increase of nine from the prior quarter.
In summary, total second quarter, ending head count was 1513 up 81 heads from the prior quarter.
Cash consumed from operations was $6 $1 million in the second quarter of 2023 compared to $25 4 million in the first quarter of 2023.
The sequential improvement of $19 $3 million was driven primarily by strep by strength in cash collections.
Yes.
Purchase of property equipment, and capitalized software licenses decreased from $12 $7 million in Q1 of 2023 to $10 6 million in Q2 of 2023.
The sequential decline was due to the timing of receipts for neutral and photon capital purchases.
Overall, non-GAAP free cash flow defined as GAAP operating cash flow reduced by purchases of property equipment and capitalized software in the second quarter of 2023 was a use of $16 6 million compared to $38 1 million in the first quarter of 2023.
When including our $16 $1 million acquisition of select Virgin orbit assets, which were primarily PP&E.
non-GAAP free cash flow was a use of $37 $8 million.
The ending balance of cash cash equivalents restricted cash and marketable securities was $419 million at the end of the second quarter of 2023.
And with that let's turn our let's turn to our guidance for the third quarter of 2023.
We expect revenue in the third quarter to range between $73 million and $77 million, which.
<unk> $43 million to $47 million of contribution from space systems, and $30 million from launch services, which assumes four launches.
As referenced earlier based on our manifest launch backlog, we continue to expect 15 launches in 2023, and our average selling price to support our current target pricing as we progress through the remainder of 2023.
We expect third quarter GAAP gross margin to range between 21% to 23% and non-GAAP gross margin to range between 28% to 30%.
These forecasted GAAP and non-GAAP gross margin improvements reflect continued efficiency improvements and greater fixed cost absorption and average selling price improvements.
We expect third quarter GAAP operating expenses to range between $51 million and $53 million and non-GAAP operating expenses to range between $38 million and $40 million.
The quarter over quarter decreases are driven primarily by the expected realization of our final 2000 14 million dollar Contra R&D credit related to a neutral upper stage development agreement with a U S base for us.
Partially offset by continued step up staff cost prototyping and material spend supporting neutral and photon development programs.
We expect third quarter, GAAP and non-GAAP net interest expense to be half a million dollars.
We expect third quarter, adjusted EBITDA loss to range between $10 million and $14 million and basic shares outstanding to be approximately 484 million shares.
And with that we'll hand, the call over to the operator for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Our first question comes from the line of Erik Rasmussen with Stifel. Your line is open.
Yes, thanks for taking the questions and nice job on the margins.
I just wanted to.
Dig into the guidance a little bit.
You're guiding to 70 773 to 77 million.
Launch seems to be in line, you've got fewer launches there.
But space systems at 43 to 47 seems a little bit light versus what we were expecting.
And I think.
Yeah.
Sort of what we were expecting the second half.
Could you, maybe just break down where the assortment.
The disconnect is how should we be thinking about the second half overall versus the first half and is this related to the MBA.
Ramping maybe slower than expected.
Yes, I'll take I'll take a shot at that and then PD can weigh in if you want to.
So Eric yes.
You point out launches pretty much on target.
With regards to contribution from space systems, there is a bit of a timing issue with regards to.
Being able to recognize revenue over certain.
Programs on the satellite manufacturer side of the house.
I don't think its all that unusual given the early stage of these contracts that we're executing on so we have a very stringent process for how we are able to recognize revenue over over the period the contracts. So.
Theres nothing thats changed as far as the magnitude of the size of the opportunity or really that much of a time shifted but it's probably about a half quarter light of what we were expecting and as far as contribution from those programs that we're ramping.
But we expect to make up a lot of that ground in the fourth quarter.
Okay. So you feel pretty comfortable.
A steeper ramp even even further in Q4 versus Q3 in terms of the space systems business.
Yes, absolutely.
Great.
And then I saw.
Some of the new some of the announcements after the close of the AC maybe just digging into that.
You signed a new deal to launch mission starts I guess for some time in 24.
Do you have no specific award a contract behind this or are these going to these deals can sort of be.
One offs.
Okay.
Yes, Eric.
So we have we kind of have.
Multiple.
Kind of relationships with multiple customers on this front.
And.
The way the way these contracts are sort of.
Developed it's it's daily.
<unk>.
If I kind of work so.
It's difficult to give too.
Too much kind of inside into and.
Some of those but.
Suffice to say, we see a healthy pipeline of of.
All of these kind of emissions setting.
Sitting there.
And maybe just.
Okay.
Your next question comes from the line of <unk> Desilva with Roth and Ken Your line is open.
Yeah.
Hi, Peter Hi.
So.
Just to understand how the.
The recovery.
Effort.
I know you're going to do some more milestones and I read I think launches 41 to 40, if I can you just describe the next steps and when this can become operational in terms of help.
Helping helping with the cost structure for the launches.
Yes sure.
So what we are balancing here is incrementally condos, adding learnings.
But not interrupting production.
Yeah.
Instead of doing like one big block change as vehicles as you pointed out 41 and 45 come come.
Come down the line.
Each of them have.
The kind of the learnings and changes incorporated into them.
So.
I would say that the last vehicle we bought them.
Whole bunch of waterproofing technologies, the next vehicle because because the next step.
At the <unk>.
Changed changed a whole bunch of.
Thanks, a lot and political hedges and things like that.
And we learned a lot from this last machine I would say, we probably validated more then we learned.
But.
Yes.
It's rolling into two fully operational since I would say right now and if you look on a production line.
<unk> third rocket is the silver one where the rates drop for recovery.
It's it's it's just it's pretty much been operationalized from a production standpoint.
There's still some more to go from the marine recovery, but yes.
Yeah that last mission, we splash it down within 400 metres of of the.
Target so the.
You guys had it within sort of 15 to 20 minutes. They had had a buy the boat so that kind of worked well.
So yes.
But I think I think the last kind of major upgrade is on 45, and then hopefully at that point. It is just business as usual.
And thirdly when it comes to your question with regards to what that's doing for our cost I mean, we've definitely taken an incremental view of let's validators or our assumptions each step of the way with these with these recovery tests. So as we've mentioned before we will do a <unk> engine and then we'll do more of it.
<unk> engines, and we will do look to eventually obviously require an entire booster and when we get to that point then we believe the savings that we can articulate it even if you got to go back to our Investor Day, which is now almost two years ago. We think there is still very valid as far as what we can bring as far as cost reduction and margin improvement for this elektron program.
Okay, Alright, Thanks, guys and then my other question is on a neutral on it sounds like you're making good progress toward 24 here, obviously the Virgin orbit.
The acquisition can you talk about the Opex and the shape of it in support of Neutrolin is there sort of a kind of a peak quarter.
Are we getting close to it or is that going it can be a continued kind of steady spend to bring neutrolin up just curious how that shapes out.
Yes.
Like anything with a with a rock development program, it's very hard to be too precise with when certain expenses are going to hit in certain milestones may be achieved but as you said, we definitely are making steady progress against.
Anticipated launch at the end of 2024, and I would say that.
We.
We will continue to see a kind of a march up in expenses related to neutral with the exception of Q3, which we talked about in our guide where we have this $14 million.
Contra R&D credit, that's certainly helping the P&L, but once you get through Q3 there'll be again, a significant step up that will start to look like more of a sequential kind of increasing trend on spend for neutron and we don't see the spend peaking on neutron till probably either I'd say as we.
Certainly get much much closer to the inaugural launch so think about kind of the Q3 timeframe next year, where you'll probably see spending peak and of course theres going to be a difference between kind of what hits your P&L versus your capex because those are all things that kind of move at different times. So I think youll just see a continued progression of investment in neutral.
That shouldnt it shouldnt be too out of school, but I think it's hard to say that trying to pick which quarter that spend is going to peak at from both the P&L spend and also from a capex perspective.
Okay, Alright, thanks, Adam Thanks, Peter.
Okay.
Your next question comes from the line of Kristine <unk> with Morgan Stanley . Your line is open.
Hey, good afternoon, everyone.
We'll be talking about our pricing.
In the past few years, we've seen so many aspirational based companies.
Try their hand at launch.
A few of them have closed stores already so with the environment is still pretty high regarding.
You talk about like the pricing.
You have for 2024 with a new Blackberry contract that you announced and how that compares to previous launch.
For for what you get uhm.
People always compare us to to a raunchy emission uhm, but really the only accurate comparison is to a small dedicated launch and currently the only other small dedicated launch a that's available is is is probably a minotaur at some 30 or $40 million. So an electronic at 7.5 is is it represents.
Good value and.
Neither needed to erode.
Crossing on that on that product uhm install maintain really good sounds traction.
Hey, Christina when it comes to your questions on on the profitability kind of.
Benchmark for for electron so we've been pretty consistent in when we see two launches per month, that's where we really get to the economies of scale in the fixed cost absorption that we need to just kind of increment our way towards our target of a 50% non-GAAP gross margin for electron.
Requires a few things to happen of course, you need the cadence that I mentioned, so two launches per month.
We need our annual cost reductions on bomb in production efficiency.
We need also the savings from the recovery program that we were talking about earlier and all of those kind of kind of things are still very much in focus nothing has really shifted from that.
The one thing is we we've already turned.
Gap gross margin positive on on the electron launch platform. We don't really we don't report below the gross margin lines. So it's hard to give.
Clarity on for example, what the contribution margin looks like now that we're in positive gross margin territory on electron, but needless to say everything seems to be.
Progressing in a way that is very much consistent with what we thought profitability should look like for this platform and we really are starting to see a lot of efficiencies of the business and I think probably the most encouraging is the way that we've been able to pivot a lot of the previously dedicated production resources over to support neutron in space system. So again I think the the learning curve is definitely one.
We've got well in hand, I think really the next big step for the margin enhancement really remains to be the the recovery program, which is Pete mentioned earlier as well in hand as well so.
Hopefully that answers your question a margin.
Yeah. Thanks to think that P. P. Diana Uhm, Adam maybe I could ask the technology question you know.
Last month <unk> now is an award Lockheed and be definitely X T. Two tests nuclear propulsion in space any Peter you know, maybe it's still very early stage, but I was curious to get your thoughts and how much of a chain changer nuclear propulsion could be in terms of.
Speed efficiency and how viable is that to the rocket labs story, where do you see its raul for the company if any.
Yeah, I'm I'm, a great fan of nuclear propulsion and spices nuclear propulsion, because you know it it's it's.
If you if you think about as historically chemical.
Chemical propulsion, we haven't really improved a whole lot since since the early sixties. So we we reached.
<unk> excuse me.
We reached kind of chemical equilibrium.
Quite some time ago.
Sorry, the needs to be a major.
Major advancement, if we truly want to to to kind of be.
Citizens of the solar system. So I think you can propulsion is is is is one of those things that can can really transform transform that.
Sorry, I'm very bullish on it now it's it's it's deeply complex and of course, the most challenging but it's it's getting getting it to open in the first place.
<unk> significant challenge for that uhm, but once on all that is is it's a it's a really great technique uhm. We were not we don't have any active programs internally developing any of that technology that do you think it's a technology to watch it will certainly be watching it.
Okay.
Okay. Thank you for the color thank God.
The next question comes from the line of cave on rumour with Cohen your.
Your line is open.
Yes, thanks, so much so.
Talk of course cuts to the bombs, but basically.
<unk> area environment.
Folks are seeing supply chain disruptions.
Talk to us a little bit about.
What are you seeing in terms of inflation.
Regarding pricing and it looks like the pricing average price.
Launch in the third quarter is going to be pretty much the same as the second.
Period of stability or is that just a mix.
Yeah, I can take <unk>.
Okay.
No you go ahead.
So I would say.
On the inflation side of things and pricing.
Pricing that you're seeing in 2023 is a function of agreements that were put in place.
A year for the most part of year or even greater than that in the rearview mirror.
We talked about we've been pretty consistent about where we see our pricing in 2023 and kind of we have an annual escalation in our pricing assumptions going forward. So.
Obviously, we weren't able to predict inflation too.
Two years ago, when some of these contracts are being entered into or even a year ago.
But fortunately for us we've been able to get a lot of efficiencies on the production side of things.
On the supply chain side, we're very vertically integrated so we're not as exposed as maybe some other companies where they buy so much of their vehicle and subsystems from from other providers in my vehicle, obviously, it applies to our our space systems business as well, particularly when you look at our photon platforms and you and you look at how much of the content is internally source.
I think we've been pretty Jose.
Well insulated compared to others from supply chain shock and inflation related events.
Not to say we are completely immune from it we certainly see it on the on the labor side of things, we see it on other kind of things that we purchase from third parties with regards to like rent and utilities and everything else that goes on gases and so forth, but for the most part just the nature of our kind of vertically integrated business kind of influences a bit from that.
Going forward on pricing again.
Knowing now where inflation is and we're kind of is expected to be we're certainly taking that in consideration on pricing or launch contracts going forward. So I think we covered the bases there as well, but I'll, let comment as he sees.
No you said exactly what I was gonna say it and.
The way, we've kind of typically done stuff in the past cause.
<unk> will take a product and we'll put it into production and will spin kind of.
The minimum required to put that in production you know we don't we don't go out and build a giant victory and thoughtful of gear and then.
<unk> <unk> product what will genuinely do is better product any kind of iteratively faison automation and and those kind of production gains sorry.
<unk> for example.
Would have been the very first first few are entirely built by hand, and then we'll add a little bit more information. So we get to where we are today, we have a lot of that prices is entirely automated sorry that that that's.
That's the way, we can kind of realize some of these bombs savings even in even in this kind of hideously inflationary environment.
So.
Realized prices basically and once you've priced a year ago, what should we look for for next year, because it looks like you've done a pretty good job in offsetting whatever cost heights.
Yeah, I can take that so.
I'd say that when we obviously at this point, we've got quite a bit of our 2024 significant portions of 25 and in some cases beyond that kind of already in backlog right. So we've done some anticipatory pricing again with what views of inflation. We're at the time that we entered those agreements also where we thought our costs were gonna trend.
Our focus is really on on getting to our long term gross margin targets and we've been we've not been shy about that for either our launch business or our space systems businesses.
Yeah.
I would say that.
That.
We've we what we've seen historically, though is a continual upward march in our price if you go back even.
Say three or four years ago, we were you know.
Got a sticker price of little under $5 million per launch and now you can see what we will be printed for Q2, and where we see the rest of the year fully out. So again I think we see that trend increase and I think also as maybe Christine mentioned earlier on the call. There's been a lot of dropouts from aspirational launch providers and that just kind of really if you also think about the pricing that you're seeing now.
Coming through probably didn't reflect the reality of today, where there are fewer people delivering the service. There was then was kind of anticipated a lot of people were selling on slide, whereas so forth backwards to these contracts are being negotiated so as you get a a more I would say.
A smaller group of people who've actually been able to deliver.
Frequent reliable access to space.
We believe that that supportive of firming up pricing.
And so I think hopefully we will see that trend continues going forward based on execution alone.
And then the last one is what's the split between adjusted gross profit between launch and space systems in the third quarter.
I don't believe we provide that in our in our guide we're not getting down to that level of detail information at this time.
Okay, great. Thanks, so much.
Thank you.
Your next question comes from the line of Jason Gurski with City. Your line is open.
Yeah. Good afternoon every funny.
Start with a question on space systems, and the Globalstar project and.
Some of the Rev. Rack that you talked about their Adam can you talk kind of what the status of that.
Program is from a milestone perspective CD, our preliminary design review it just kind of where you are.
In that process. So we can get a sense of.
What the shape of the curve it looks like a memory forever.
Revenue in space systems over the next few quarters.
Yeah, I'll talk to the status of the the engineering program.
Yeah, sure Hey, Jason It's I look we we remain solidly on track to that program Sir.
Obviously gone.
<unk> <unk> and <unk>.
Program is is matching.
You know on on on track and.
It's.
It is intended.
Mhm, that's like near size your customer is wealthier kind of stay on track.
I mean, it's it's a joint project, so we will kind of rely.
Rely on each other you know obviously there's <unk>.
And <unk> as well as global styles pay sorry uhm.
But by definition for for us to successfully deliver <unk> to be as well.
Uh-huh.
But this this this quarter of revenue that you're not going to get this quarter's it tied to any particular milestones ahead of us.
See some announcements.
In the future.
Yeah, I can jump in there.
So so Jason I think one of the challenges with the Rev wreck under ASC 606, with these programs, there's a lot of different.
A lot of different hurdles that you've gotta get over and satisfied.
As a company. We're we're just as conservative on our accounting as we are and making sure that the launch vehicles ready to go off and we've recognized very little revenue historically under the contract with MDA, even not that a little bit that's embedded in our queue three and it's a function of certain parts of the program.
Basically get allocated to.
R&D and then other elements get allocated to obviously that the cost of producing.
Face craft themselves. So we are still up to this point have been very much in the in the R&D portion and the real heavy kind of phase, where you move into actually assembling spacecraft and pulling inventory and all of those things that are required under that which also tie into your <unk>. Those are really kind of been always back end loaded and so.
Think to to Pizza point, I mean, I think all of the technical things are on track and on schedule and so now it's just a matter of really kind of.
Getting to the point, where we're we're able to recognize the revenue.
Once we get the R&D portion largely behind US, which is kind of where we're at right now we're kind of right on that cusp as we as we start to convert from the kind of hitting the P&L on the on the Opex line versus now transitioning to Rev rack and seeing the cost of sales come through as well.
Mhm, Okay, that's great.
The second question is around capacity for electron and neutron I'm just kinda curious if she got it kind of an update on <unk>.
If the demand was there how many annual launches do you think you were capacity to do on the electron.
And then I think you maybe I heard this wrong, but I thought I heard you mentioned that some of the.
The inventory and equipment that you picked up from.
From Virgin might accelerate.
The capacity position for lack of a better word on neutron should be kind of curious you get that first launched on on new Toronto, So everything goes swimmingly well.
How much <unk> annual capacity would you have on the on the tail end of.
Successfully certifying that that launch vehicle.
Yeah. That's a great question. So on electron look we <unk> victory would you be able to ultimately produce one went to like trying to wake sorry the.
The factories kind of capacity is as is stated at that.
Yeah in order for us to increase the capacity of today Uhm does not manage a piece of capex that we need to do something we had three pets operational.
And it's it's really it's really a he'd count adjustment uhm on that Saint sorry.
There's plenty of plenty of capacity fairly truck Garth eight we we just kind of manage that capacity uhm.
And you know with with the launch as we have scheduled during the year just so that we.
We we.
We do we don't either as a kind of a capacitor myself on it it seems.
And then you know with neutron will be following a pretty pretty consistent pass it that's proven to work well with with each one as we did with electron we we started off with with with one vehicle uhm and it and it's not.
It's it's it's not produced in a full production scenes and then as as we produce more we add we kind of boot strapping add more facilities and add more dimension has just been kind of true.
Sorry.
Obviously being a reusable launch vehicle Uhm is there anything that we have to really produce a volume of just taken stage, which is a much smaller and remarkably simple.
Comparatively speaking to the first <unk> device, sorry, you know that that the cadence to that.
Can can move out pretty quickly.
The the <unk> all but.
Exposition, which is really it's really a scaling and <unk> sorry, knowing that the way we kind of work here at rocket lab, we don't go out and just build giant factories and for them to look here and then stop it.
<unk> one rocket we kind of build one rocket and then iteratively add those those things along the way we found that to be the most capital efficient way of doing it.
The the beauty with the original but just somebody is that we walked in there and it's it's just <unk>.
Capitalized to the roof.
Equipment, sorry, Uhm, we that really really is gonna help us specie from an agent development to speak to a <unk> agent production perspective is that a lot of that a long lead really expensive capital equipment.
Despite seeing seeing machines, and and and uhm measuring systems and whatnot.
We just all picked out for $16.1 million sorry.
We have <unk> for US is really really gonna shine is on the back side of the project, we need to stop producing large volumes of <unk> and even even composite components such.
Right and then thank you and Adam one last one if you don't mind the balance sheet can you talk a little bit about the debt.
And the plan for them.
Yeah, so that out of the balance sheet is from the 100 million dollar Hercules loan that we took out before going through art. These back transaction.
Truly again derisk that transaction itself.
We've been pretty active in looking at ways to access.
I would say more cost effective forms of capital I think the capital that we have in the form of that loan has been incredibly flexible they have been a great partner to us.
That was also taken out of the time when the company was in a very different stage of its development versus where we are now, which we think opens up other options for us now.
Said well became publicly raise the amount of capital that we thought we would need to execute our vision on the space system side of the house plus get get neutron to the pad, we still feel very comfortable that we are in that position.
We we can always choose to to go faster or slower depending on kind of where our capital resources kind of what they look like but.
But right now again like we're we we have a long term roadmap that we can execute with with a capital that we have but we again I think there will be opportunities to put more replace that piece of capital with more efficient capital because now we're much more mature and established.
It has gone current that the loan is.
Is payable within 12 months now I think it becomes due on January sorry June 1st I believe of 2024.
Obviously, we've got some time, but.
We're very comfortable with where we're at from a liquidity perspective, and we have a lot more options now their disposal then we had again too.
Two three years ago and that was taken out.
Okay, great. Thanks, everybody.
Mmm.
The next question comes from the line of Andre Madrid with Bank of America Securities. Your line is open.
Yeah, Hey, guys how are you.
I wanted to follow up on the serious question actual would you guys be able to maybe provide a percent cost reduction that you're targeting <unk> I.
Electron recovery and maybe talk a bit more about how this can drive margins on the platform moving forward.
Yeah. So so.
If you look at the total cost of an electron launch vehicle about two thirds of the costs are in the first stage, which is obviously, where we're focused on a recovery efforts.
And if you look at some yeah, we've made some assumptions about how much rework the required to the stage.
Fortunately you know each one of these recovery mission that we've done have provided a lot of data for us to kind of confirm those those assumptions.
The fact that we are going to be flying.
An engine Refloat engined later this year and a lot of other components of already gone kind of similar analysis and even some that have gone through flight.
Very helpful. So if you look at the the total cost that we've been targeting to get a an electron launch including the reuse the booster.
Certain percentage of our missions, which is also a factor in that goes into calculus.
The second stage, where we looked at bomb reductions because that's not recoverable and then the kick stages well, we've targeted getting the total cost of an electron launch down into the call. It.
Three to $3 million to $5 million per launch.
And again, that's all a lot of it's tied to launch cadence of at least two launches per month.
Getting our normal kind of realized.
Cost reductions realized and then of course the benefits from from recovering the first stage boosters.
So yeah I hope hopefully that provides you a little bit more color.
<unk> is your question.
Yeah, no definitely that is very helpful. And then maybe one more if I may.
Nude sure given that we just talked about electron.
I understand the platforms expected to be reasonable bad back on the pad whatnot, but how should we be thinking about the cost structure there.
Pretty.
Pretty similar too sure sure Yep <unk> pretty similar too.
Two it to electron and a reusable <unk> I think the the.
Economics Uhm.
Pretty much remained <unk>.
<unk> the same it's just that it's.
And extra <unk>, probably but.
But the the actual uhm fundamental economics of overuse pretty much internet uhm assignment and.
The the <unk> the same.
The added advantage of course with with neutron is that the mall reuse as we get out of the first stage.
The the <unk> that is economics, Uhm, obviously look at and until you can play to amortize the cost of that first stage.
Have I ever noticed.
Repeated uses.
Great Great. That's that's Super Super helpful Allah.
I'll leave it at that thanks, guys.
Thank you.
Thanks.
Your final question comes from the line of Edison you with Deutsche Bank. Your line is open.
Hey, Thanks, guys a couple quick ones.
For me I think we talked about 20th launches next year is this is that still the right way.
About the manifest and.
Given all the active.
Activity negative activity for the competition do we think there are some maybe upside to that.
Yeah, I think I think that's certainly what we're planning for an internally for production since Edison and.
We kind of.
You know on on target there uhm.
And.
The thing is with.
The kind of aspirational once you provide is uhm.
No it wasn't always clear how many launches they actually head on the contract sorry. It does very few of them now lift sorry, yeah I mean.
Maybe there is but I think most people have kind of realize too.
Who's going to be successful and who's not by now sorry.
I think the majority of the depiction is probably probably occurred.
I just said.
And then one on space systems I know there were some difficulties I think initially with with Salerno, what's the latest update on that that business is that kind of recovering to the trajectory that hey, guys expecting.
Yeah, I think I think I think we're very happy with we that that that that business is coming so I think I think the team there have done a.
A really great job and I think.
Uhm.
<unk> is it is it is a good example of kind of a very traditional historic Spice company coming under the wing of of I've kind of of rocket lab than.
Kind of.
You know <unk>.
<unk> and.
The the team also very much.
Up for that and enjoying that uhm.
And I think.
The result is Adam you can say more that that person I'm very happy with the way that it's trashy.
Yes, I would say Edison that when.
When we when we.
Close that deal.
It will be two years in in January .
We set a target for 30% gross margin within that timeframe and on a non-GAAP basis, and I would say that we're we're absolutely still tracking towards that I think if you'd asked me that question six months ago, I think I, probably would have said that maybe there's some a little bit of schedule risk it might've taken maybe.
Two and a half years at a two years to get there, but it feels like we're in the right place to kind of achieved that in the original time frame that we contemplated so is pizza. We've been very very excited I mean, it's a great team we love the would that brings to the to the platform as far as the level of vertical integration for a very key and high percentage total cost a bomb.
To our platforms again, just gives us more control over delivering our solutions to our customers at a time frame and a cost and performance that that.
We need to have so it's been a it's been a very big differentiator and unfortunately, the the financials are are are following along with that.
Okay. Thanks.
I will now turn the call back over to calling Canfield for closing remarks.
Hey, thanks, so much.
Just a reminder for everyone on the call today.
Actually we are able to resolve the technical issue from our call provider to get the slides posted onset of today's web site. We also wanted to take the opportunity to flag that we'll be presenting it upcoming conferences for bank of America Jeffries City and Morgan Stanley during the upcoming months. So look forward to seeing you guys on the road and thank you all for coming to today's call.
Ladies and gentlemen that concludes today's call. Thank you for joining you may now disconnect.
Ladies and gentlemen that concludes today's call. Thank you for joining you may now disconnect.