Rocket Lab Corp Q4 FY2022 Earnings Call

Good afternoon, and thank you for attending today's Rocket Lab Fourth Quarter 2022 Financial Results Update and Conference Call. My name is Daniel, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. It is now my pleasure to hand the conference over to our host, Colin Canfield and Head of Investor Relations. Colin, please proceed.

Hello, everyone. We're glad to have you join us for today's conference call to discuss Rocket Lab's Fourth Quarter and Full Year 2022 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 Reform 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 undertake any obligation to update these statements. Our remarks and press release today may also contain non-GAAP financial measures within the meaning of Regulation G enacted by the SEC. Included in such release is a reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP. This call is also being webcast with a supported presentation. A replay and copy of the presentation will be available on our website. Our presenters today are Rocket Lab's Founder and Chief Executive Officer, Peter Beck, 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, Colin. So welcome everybody and thank you for joining us today. Today's presentation will go over our key business accomplishments for the year 2022, as well as specific highlights from the fourth quarter. We'll also discuss further achievements we've made since the end of the quarter. Adam will then talk you through our financial results for the fourth quarter and full year and also cover the financial outlook for 2023. After that, we'll take questions and finish today's call with the upcoming conference we'll be attending. On to what the company achieved in 2022. Starting with a quick recap of our launch activity for 2022. It was our busiest year of launches yet. We retained our position as the leading small launch vehicle globally. And once again, Electron held the title of the second most frequently launched US Rocket annually. Across nine Electron launches, we deployed more than 40 satellites to precise orbits for our customers, including commercial constellation operators and NASA. Across these launches, we had a 100% mission success rate for the year, providing our customers with a reliable path to orbit. 2022 was also the year we successfully delivered the CAPSTONE mission to the moon for NASA with a launch plus spacecraft solution using Electron and Photon. We completed two successful ocean recoveries of Electron's first stage as part of our rocket reusability program. We conducted five successful missions for constellation operators. We put all three Electron pads to use, including our first launch out of LC-2 in Virginia in Q4, which was initially scheduled for Q1 2021. And we caught Electron with a helicopter for the first time. More on each of these achievements later in the presentation. As mentioned in 2022, we reached our highest annual launch cadence with nine missions, assuring that Electron remains the global market leader in small launch. With a 100% mission success in 2022, Electron is the most reliable dedicated small launch vehicle globally. As of December 31, 2022, we've completed 32 Electron missions and deployed 152 satellites. I'm pleased to say that both those numbers have already increased thanks to another successful mission in Q1 2023. 2022 was also the year that Electron mission beyond Earth orbit and for the first time successfully deploying the CAPSTONE mission to the moon for NASA. This mission was far from just the standard Electron launch. It was a highly complex mission that showcased our strength as an end-to-end space company, not just a launch provider. In addition to providing the launch for Electron, our team developed, built and operated the Luna Photon, a highly capable interplanetary spacecraft that set CAPSTONE on a course to the moon. The team developed a highly efficient lunar trajectory to enable such a small rocket to transport a payload into orbit. Rocket Lab is the only small provider to have designed, built, launched and operated its own satellites in orbit, further expanding our total addressable market. The CAPSTONE mission is the first to launch NASA's Artemis program to return humans to the moon, and we're immensely proud to have enabled this crucial first step. Just 15 days after launching CAPSTONE, our most complex mission to date, the team turned around for the next launch, which was a dedicated national security mission for the NRO. This rapid launch turnaround not only set a Rocket Lab record, but is by far the fastest turnaround between successful launches for any other small launch provider. Overall in 2022, we averaged a launch approximately every 40 days compared with a launch nearly every 60 days in 2021. And from April to November last year, we successfully had a launch every month. So far I've touched on some of the key launch achievements for 2022, but it was also a significant year of growth for our space systems under the business. More than 200 spacecraft were launched in 2022, featuring Rocket Lab Space Systems products including reaction wheels, star trackers, solar power, light software, separation systems and more. Rocket Lab technology was featured in one form or another on 30% of globally addressable launches in 2022, demonstrating the success of our strategy to extract value from the full space chain, not just from our own launches. We delivered space systems products to more than 60 customers globally, spanning commercial and government sectors. In 2022, we built a new space system production lines including one to support high-volume reaction wheel production to serve mega constellation customers and a new satellite manufacturing facility at our Long Beach headquarters. 2022 was the year that really solidified Rocket Lab's position as a leading spacecraft manufacturer. We have more than 25 spacecraft in development for various customers, including NASA – our NASA mission to Mars communications constellation for Globalstar and space manufacturing satellites and home orbit depots. To achieve this, we've scaled our space systems team, expanded our manufacturing and development facilities, and of course integrated our four space system acquisitions into our spacecraft programs. Finally, before we wrap up the full year highlights and dive into the fourth quarter in more detail, in 2022, we saw backlog more than doubled from $241 million at the end of 2021 to more than $500 million at the end of Q4 2022, with growth driven by a healthy mix of launch and Space Systems bookings. So with that, let's move on to the key accomplishments of 2022's fourth quarter in more detail. The final quarter of 2022 saw our successful launch of two Electron missions delivering satellites to orbit for the Swedish National Space Agency and General Atomics. We were also honored to be selected by NASA to launch two dedicated Electron missions to deliver the TROPICS mission to orbit to monitor hurricanes and tropical storms. In Q4, we also received the required licenses and approvals for our first mission from Launch Complex 2 in Virginia. There was a long road to bring LC-2 into operations, but with those approvals in place at the end of the year, we're able to launch the first Electron mission from US soil early 2023. To top that off, we also introduced Rocket Lab National Security, a new subsidiary to deliver reliable launch services and space systems capabilities to the US government and Apollo. We signed our largest order of satellite separation systems in the company's history totaling $14 million in hardware to serve the Space Development Agency's Tranche 1 Transport Layer. It was also the quarter that CAPSTONE reached lunar orbit, signaling final mission success for the NASA mission more than five months after the successful launch on Electron. We also began testing at the NASA Space Center for Archimedes engine hardware and completed construction of the new satellite production line and clean room at our Long Beach headquarters. We rounded out 2022 with two successful Electron launches in Q4. Both missions were from Launch Complex 1 and saw our total launch tally for the year reaching nine successful missions as mentioned. This is a significant increase in launch cadence from six missions in 2021, and we look forward to continuing to increase our cadence in 2023. Electron is already a trusted launch provider to NASA, having successfully delivered missions to lower orbit and to the moon for the agency previously. Once again, we're honored that NASA entrusted Electrons to deploy the remaining spacecraft in the TROPICS constellation across two dedicated missions. This is a constellation close to our hearts because it aims to enable scientists to study hurricanes, tropical storms and ultimately improve modeling and prediction to help save lives and livelihoods in the path of storms. These missions are scheduled to launch no earlier than May this year, and we look forward to sharing more about them in the lead-up to launch. In November, during our final mission for 2022, we conducted another successful splashdown in the ocean recovery of Electron's first stage as part of our Rocket reusability program. We had initially planned to attempt a helicopter catch for this mission, but not all the requirements were met to ensure a successful capture due to a brief telemetry loss with Electron's first stage during atmospheric reentry. This turned out to be quite a happy turn of events as it gave us another chance to bring back a stage that had been postponed. We never want to lose an opportunity. Our team analyzed the return stage and components through analysis and testing. We're starting to see a bit of a pattern here that we had initially expected. Electron survived an ocean recovery in remarkably good condition. In many cases, its components actually passed requalification for flight. In one of our upcoming flights, we're going to attempt another ocean recovery. This time we have a few additional waterproofing modifications to the stage to protect some of the key areas and the components we want to keep dry. The outcome of this testing and analysis may lead us towards sticking with marine recovery altogether and introducing significant savings to the whole operation. In 2022, we proved that it was possible to run over with a returning stage mid-air and get it on the helicopter hook. But if we can save the extra step by just plucking it out of the water, we will. Without the helicopter, if we're able to determine that ocean recovery is the most viable and effective path to recovery, this opens up even more flexibility with our launch windows and takes us from around 30% of Electron missions being suitable for recovery to anywhere between 60% and 70%. We look forward to sharing the development of this following our next recovery mission in the coming months. Moving on to Neutron achievements for the fourth quarter of 2022. In Q4, we officially opened the Archimedes Test Complex at NASA Stennis Space Center in Mississippi. The site will be home to engine testing for Neutron's Archimedes engines, and the team made fire at the site for the first time before the end of the year with the commencement of our figuring those hardware testing. Q4 also sourced the major movements at NASA Wallops Flight Facility for Neutron, including the completion of our first Neutron development building, which will be home to some stage assembly and integration activity. The team also started moving dirt at the site of the Neutron launch pad with construction moving into full swing now that we're in the New Year. We also started to see some really exciting hardware development in Q4 with carbon composite structures for Neutron’s first stage and different stages in production. As you can see here, we're working on a much bigger scale in Neutron but we've been able to take that deep composite experience we've developed with Electron and use knowledge to rapidly streamline Neutron's development. We're designing Neutron to be the world's first carbon composite large launch vehicle with the lightest and highest-performing components in history. And when we say light, we mean really light. The vehicle, when fully tanked, weighs about the same as a Harley-Davidson motorbike, around 380 kgs, so incredibly high performance. In the final quarter of 2022, we had some great milestones with space systems including Rocket Lab hardware on 30% of all globally addressable launches. In the quarter alone, more than 90 spacecraft launched to orbit featuring Rocket Lab’s Space Systems technology. One of the most exciting of those was the Artemis 1 launch of NASA's SLS rocket in November. That mission featured Rocket Lab solar arrays, satellite dispensers and software, helping support NASA's goal of returning humans to the moon. The SOCC will provide 24/7 monitoring and management of the Globalstar constellation, including continuous satellite control and monitoring using Rocket Labs ground data systems, satellite orbit determination, maneuver planning, collision avoidance, orbit maintenance and current management. By designing and building Globalstar’s spacecraft buses, delivering the flight and ground software solutions, and developing and supporting the spacecraft operation center, we're once again executing on our strategy of going beyond launch to deliver complete space mission solutions. And finally, in Q4, our solar team in Albuquerque, New Mexico, delivered the final solar panels for the NASA gateway power and propulsion elements. These solar panels will enable NASA's gateway lunar space station to be the most powerful electric propulsion spacecraft ever flown, and they're a critical part of returning humanity to the moon. That wraps up our Q4 2022, but we've been busy since then. So let's take a quick look at some of the company's key accomplishments so far in Q1 2023. Electron took to the Virginia skies for the very first time in January 2023, marking the beginning of Rocket Lab launches from the US. It was a successful mission that delivered three satellites for Commercial Constellation operator, HawkEye 360. This was a significant moment for us and for the small satellite industry as the new US launch pad represents even more flexibility and responsible launch capabilities for small satellite operators. All three Rocket Lab launch pads across two hemispheres are now operational, and we look forward to many launches from them all. With that, first LC-2 mission successfully launched, we're on to the next. In fact, right now at Rocket Lab both Launch Complex 1 and Launch Complex 2, we're preparing for launches within a mere few days of each other. From Launch Complex 1 in New Zealand, we are preparing to launch two satellites for BlackSky Global, which will be our sixth mission for that constellation company. Meanwhile, at Launch Complex 2 in Virginia, the team is preparing to launch a mission for Capella Space, a SAR constellation operator that we previously launched in 2020. Both missions are currently scheduled to launch with launch windows to be finalized in the coming days based on customer requirements and range status. And while we have one rocket on the pad for Capella Space, we've just signed a multiple contract with them to launch another four dedicated Electron missions through 2023. These missions are on top of our second launch for them coming up in March. So, five launches to look forward to this year altogether. We're honored that they've entrusted us with five missions in 2023 to help build their growing satellite constellation. The latest multi-launch deal with Capella Space further solidifies our leadership position as the trusted small launch provider of choice for constellation operators. We've now launched and signed deals with some of the most prominent constellations and operators globally, demonstrating the value that Electron provides to these customers by offering reliable and flexible launch to tailored orbits. Onto our Space Systems and we started the quarter strong by releasing two new space systems products, a new satellite radio and reaction wheels, specifically designed for constellation bus spacecraft. These products bolster our existing heritage and space system components and provide an entry point to new programs and mission profiles. This quarter we also formally established a new subsidiary, Rocket Lab Australia, to explore opportunities to support the expansion of Australia's national space capabilities. The Australian government has set a goal to triple the size of the Australian space sector from an estimated AUD 4 billion in 2016 to AUD 12 billion by 2030. To help facilitate this growth, the Australian government has committed more than 2 billion to the civil space sector since 2018, spending on earth observation, satellite infrastructure, and high-tech manufacturing in support of NASA's Artemis program. The Australian government has also committed 17 billion above and beyond the civil space investment for the development of defense-based capabilities. Rocket Lab has already played a key role in supporting Australia's rapid growth in space through supplying launch and space system products to Australian organizations. By building on our deep expertise and proven heritage in the space sector, we're well positioned to advance Australia's capabilities in space. We have people on the ground already and we look forward to exploring opportunities where they make strategic sense for us as a business and where we can genuinely strengthen Australia's position in the global space sector. On the Neutron front, this quarter we've made investments and progress in establishing manufacturing infrastructure that will support scale production of Neutron. This includes composite tank molds for Stage 1 and Stage 2, as well as the installation of large 3D printers and modeling machines to enable rapid production of the Archimedes engine. Q1 2023 brought welcome news in the form of a new acquisition strategy for the National Space Security Launch. This is the Space Force's program to launch the nation's most critical and valuable government assets. Under NSSL Phase 3 RFP, which was released earlier this month, new entrant launch vehicles qualified a bit for launches. Neutron is designed with NSSL launches in mind and we look forward to making Neutron available to meet national security needs. This wasn't merely due to good luck for us. We actively engaged NSSL on this to introduce this change on the back of our strong relationship with them. The first vote of confidence in Neutron came back in September 2021, when we won a $24 million development contract for the Neutron transfer stage through the Space Force's Systems Command of Launch Enterprise, which falls under the NSSL program. This contract recognizes Neutron's design to maximize NASA orbit capability or the launch session accuracy and response of dedicated launches for the US government, all key requirements to the highest priority missions awarded through the NSSL. I'm pleased to see this further strengthening of our relationship with this new path opened up. Finally, before I hand over to Adam for the financial highlights, I'd like to share that David Cowan is wrapping up his time on Rocket Lab's Board of Directors. David is a partner at Bessemer Venture, one of our earliest investors and he joined Rocket Lab's Board in 2014. Since then, we've been grateful for his leadership and guidance as we grew Rocket Lab from a small start-up to a publicly listed company and the leading small launch provider, and now a global space systems firm. I'd like to personally thank David for his support and efforts at Rocket Lab over the past nine years and wish him the very best for his continued work in deep tech. With that, I'll hand it over to Adam to discuss the financial highlights.

Great. Thanks, Pete. I will first review our fourth quarter 2022 results and then discuss our outlook for the first quarter of 2023. Fourth quarter 2022 revenue was $51.8 million, which was within our initial guidance range of $51 million to $54 million and well above our revised guidance range of $46 million to $47 million provided in December. Fourth quarter 2022 revenue reflects growth of 88% over the year-ago fourth quarter of 2021 and the result of successful launches and continued strong contribution from our Space Systems business. The overage to our revised guidance range was a result of higher-than-anticipated revenue recognition from a SolAero contract to a major prime contractor program. This closes out a very successful year with full year 2022 revenue of $211 million, up 239% from 2021, with launch in Space Systems finishing the year with revenue growth of 56 and 546%, respectively. Now turning to gross margins. GAAP gross margin for the fourth quarter was 3.5%, below the low end of our original guidance range of 5% to 7%. Non-GAAP gross margin for the fourth quarter was 15%, which was also below our original guidance range of 16% to 18%. GAAP and non-GAAP gross margin results relative to both our revised guidance and our Q3 2022 results reflect a combination of reduced launch cadence and related lack of fixed cost absorption, below-average revenue contribution from the Catch Me If You Can R&D recovery mission, and an unfavorable mix within our Space Systems components revenue. More specifically, launch cadence was impacted by the pushout of the HawkEye 360 launch from the December quarter due to weather and other factors. The below-average revenue contribution from the successful Q4 2022 Catch Me If You Can recovery mission was a conscious decision to trade off acceleration of the Electron recovery margin improvement initiatives versus maximizing revenue from additional payloads that were taken longer to secure and integrate. Our current launch manifest and proven execution capabilities give us confidence that we'll see a return to growth and gross margin expansion in the launch segment of our business as we progress through 2023. Lastly, the unfavorable mix within Space Systems was a result of the timing of revenue recognition under a legacy low-margin pre-acquisition SolAero contract with a major prime contractor. We anticipate significant top-line growth to resume for our Space Systems segment in the second half of the year. As we forecast to begin benefiting from more meaningful revenue contribution under the MDA Globalstar contract, which brings with it gross margin uplift in addition to forecasting a beneficial mix and change in our Space Systems component revenues as our higher-margin component solutions contribute at a greater rate versus the lower-margin component solutions. We ended Q4 with 818 production-related headcount, up 21 from the prior quarter, which positions us well to not only scale production but also the resources to exploit margin expanding production efficiencies. Turning to operating expenses, GAAP operating expenses for the fourth quarter were $39.1 million at the low end of our guidance range of $39 million to $41 million. Non-GAAP operating expenses for the fourth quarter were $27.3 million, which was below our guidance range of $28 million to $30 million. The decline in both GAAP and non-GAAP total operating expenses versus the third quarter was primarily driven by an R&D grant benefit and lower stock-based compensation, partially offset by increases in headcount and prototyping expenses supporting Neutron and Space Systems. In R&D specifically, GAAP expenses decreased by $2.5 million or 14% in the fourth quarter, driven again by R&D grant benefits and lower stock-based compensation. Non-GAAP R&D expenses were down $1.6 million or 13% quarter-on-quarter. We anticipate a return to sequential growth in R&D as we ramp investment in our Neutron launch vehicle. Quarter-ending R&D headcount was 348, representing an increase of 18 heads from September 30, 2022. In SG&A, GAAP expenses increased $1.1 million quarter-on-quarter or 5%, driven primarily by outside services, primarily owing to the first year SOX compliance-related expenses. Non-GAAP SG&A expenses increased by $1.6 million or 10% quarter-on-quarter, mostly driven by outside services as previously mentioned. Quarter-ending SG&A headcount was 197, which represents an increase of one head from September 30, 2022. On a year-on-year basis, GAAP operating expenses for the fourth quarter of $39.1 million were up $8 million or 26% year-on-year, while non-GAAP operating expenses of $27.4 million were up $7 million or 34% year-on-year. The growth in both GAAP and non-GAAP operating expenses were primarily driven by the acquisitions of ASI, PSC, and SolAero, which occurred in Q4 2021 and Q1 of 2022, as well as an increase in staffing costs related to Neutron vehicle development, the Electron booster recovery initiatives, and Photon development projects. In R&D specifically, GAAP expenses decreased by $3.1 million or 25% in the fourth quarter, while non-GAAP expenses were up $2.6 million or 33% year-on-year. In SG&A, GAAP expenses increased $5 million or 26% year-on-year. Cash consumed from operations was $19 million in the fourth quarter, compared to $23 million in the third quarter. The sequential improvement of $4 million was driven primarily by improved cash collections during Q4. Purchases of property, equipment, and capitalized software licenses increased from $8 million in Q3 to $15 million in Q4. These investments are primarily aimed at new equipment facilities underpinning our Neutron development initiative and expansion of our Photon production capabilities. Overall, non-GAAP free cash flow consumption in the fourth quarter was $33.9 million compared to $31.3 million in the third quarter. The ending balance of cash, cash equivalents, restricted cash, and marketable securities was $484.3 million at the end of the fourth quarter. With that, let's turn to our guidance for the first quarter of 2023. We expect revenue in the first quarter to range between $51 million and $54 million, which reflects $32 million to $35 million of contribution from Space Systems and $19 million of contribution from Launch Services, which assumes three launches or two remaining launches in the quarter. One of the three launches forecasted in Q1 was a successful January HawkEye 360 mission out of LC-2 in Virginia, which was a partially filled rideshare mission where, similar to an R&D mission, we made a conscious choice to focus on expediting our first-ever LC-2 launch versus maximizing revenue by filling the rest of the mass capacity on the launch vehicle. Based on our manifested launch backlog, we expect our average selling price to increase back to our standard pricing as we progress through the remainder of 2023. We expect first quarter GAAP gross margins to range between negative 5% and negative 3%, and non-GAAP gross margins to range between positive 7% and 9%. These forecasted GAAP and non-GAAP gross margins reflect greater contributions from our Launch Services segment, as well as a lower-margin product mix within our Space Systems segment. We expect first quarter GAAP operating expenses to range between $44 million and $46 million and non-GAAP operating expenses to range between $33 million and $35 million. This quarter-on-quarter increase was driven primarily by increased R&D staff costs and prototype expenses related to accelerated investments in the Neutron launch vehicle development and scaling up our Photon product family. We expect first quarter GAAP and non-GAAP net interest expense to be $1 million. We expect first quarter adjusted EBITDA loss to range between $28 million and $30 million and basic shares outstanding to be approximately 476 million shares. And with that, I'll turn it back to the operator for questions.

Certainly. Also, on behalf of the management team, we would ask that you limit yourself to one question and one follow-up. The first question comes from the line of Kristy Liwag of Morgan Stanley. Please proceed.

Yes. First question for me, on Globalstar, we've seen the difficulty in raising financing. It's great to see that they finally have a resolution with Apple now prepaying to help fund the satellite build. So in this environment where capital is more expensive, how prevalent are financing challenges amongst your commercial customers? Is this a one-time thing or are you seeing this continue into the supply chain?

Yes, I can take a pass at that and Pete you can also provide your thoughts to Kristine. So, I would say that, certainly, with the capital market's conditions, the way they are, it's difficult for a lot of people to continue to finance their businesses. We've been relatively immune from that, largely given the mix that we have of either direct government contracts or also with customers who have deep ties and rely on a great amount of their revenue to come from government programs. So, I think we’ve probably been impacted a lot less than maybe some other folks you come across. But we're not completely immune to it. We've certainly seen some of our smaller customers struggle from time to time, requiring a little bit longer to pay, or in some cases, having to take relatively small amounts of bad debt reserves for amounts owed to us. But for the most part, it really hasn't been a tremendous factor on us. Today, hopefully, it continues to be that way, but there's how to determine how this is going to roll out going forward given the environment that we're in. Peter, I don't know if you have any different thoughts on that?

I think, one of the advantages that we have relative to some of our other new space peers is that we obviously have a very healthy balance sheet. And we're also really particular about who we take on as customers. So when we look into our backlog, we don't see a lot of financing risk in there, again, because of the mix of customers that we have. And again, I think that we've been able to be a little bit more creative and flexible in some cases, working with customers to support their business and also making sure that we're in a good position from maintaining and growing market share in many cases.

Thanks for the addition on that, Adam. So maybe, Peter, as a follow-up on government contracts. You touched on the Space Force RFP for the national security space launch Phase 3. It looks like Lane 1 is geared more towards medium-sized launch vehicles where Neutron would play in. So can you talk about the timing, milestones to watch, and size the opportunity for Neutron?

Yes, of course, Kristy. We appreciate the interest. Our expectation is that we will be able to provide updates and have a presence in those bidding scenarios as they start to become relevant. And of course, we'll keep the marketplace updated as that is something very closely tracked by our sales teams on the ground, as well as with our business development efforts.

Thank you for the questions. To start with the launch, you mentioned three in Q1 and two more coming up, with timing looking like it's in March. Adam, you previously mentioned possibly 14 launches for the year, but since one slipped from Q3 to Q4, I'm assuming that makes the number 15. Is that still a solid figure for us to model and consider as we look at the launch?

Yes. Erik, I think so. I mean we typically have seen – I mean, it's a relatively young business, so we don't have a great amount of track record as far as seasonality is concerned, but it does seem like Q1 gets off to a slower start, probably a function of a little bit of a hangover from indications launch ranges being kind of closed at the end of the year. So it takes a while for programs to get respun up. But with the targeted three launches in the first quarter, I think we're in great shape to get to that 15 number of launches for the year. Demand actually is higher than what would indicate a higher number of launches than 15 this year, but we've also learned through the school of hard knocks that we can get burned when we rely too much on what just our customers are telling us about their demands because customer spacecraft oftentimes seem to slip and push out to the right at the last moment just because of the nature of how these programs develop and when things come through their final qualification and testing. So we think that we've risk-adjusted the numbers, and we think 15 is the right number for the year, given where we're at and given the likelihood that some programs could push to the right. But yeah, time will tell. But right now, it feels like the right number.

Okay. And maybe just adding to that, you've mentioned we're seeing it with the Q1 outlook for launch at $19 million for three launches, but you mentioned that you probably would get back to more of a normalized ASP throughout the year. That's fair to say, right?

Absolutely. Yes. Again, we made a conscious choice to get that launch off earlier in the year versus taking more time to backfill all the volume capacity on the vehicle. And right now, I mean, we have very, very strong visibility and conviction in where the manifest is and we know what the launch prices are for those. So yeah, we're confident where the ASP is migrating back to where it has been and more towards our advertised sticker price.

Okay. And maybe just my follow-up. On the MDA contract, any milestones that maybe you can call out, where are you in terms of building out the manufacturing line, and what volumes can you achieve? And then maybe just on the opportunity for launch, any updates there? Thank you.

Yeah. I'll let Pete do you want to take a first pass on that?

Yeah, sure. Absolutely. Hi, Erik. Things are looking good, so you can see a fully stacked integration facility at the headquarters. So that was completed last year. And that facility is more than capable of processing the 17 million that are on contract and any further that may be options. So no, I think we're in good shape there and we continue discussions for the launch of those particular spacecraft.

And Erik, I think I’d just add on a little bit there. We continue to knock down the gates towards these milestones in the program, so we've cleared quite a few of the scheduled milestones. We're on schedule. Everything looks to be in good shape. So we will go into all the details of all the milestones and sub-milestones. But we've been very fortunate to be hitting all of our milestone dates and getting through successful reviews. So yeah, all that looks very, very good. So far, we've also been pretty fortunate that we haven't been burned by any supply chain issues during this point.

Hey, good afternoon. Adam, it looks like the Q1 EBITDA loss you're guiding to is about double the loss in Q4 and pretty close to what the Street was expecting for the full year in 2023. So just given the market's focus on profitability, I was wondering if you could give some further context on what's driving that increase and then how we should think about the trend from Q1?

Sure. I don’t think there has been significant resolution in some of the models currently available. When we communicated with investors about the required investment for the Neutron program, we indicated it would be roughly a $250 million program to get the first Neutron ready by the end of 2024. We believe we are still on track for that. If you look at the breakdown we provided regarding CapEx versus prototyping and operating expenses through headcount, we can model what that should look like, especially as we are in Q1 of 2023 with the launch anticipated in Q4 of next year. This aligns with our adjusted EBITDA expectations. For internal purposes, it feels consistent with our initial projections given the lifecycle of the program. Moving forward, we expect to see continued increases in spending related to Neutron. We have navigated much of the R&D work associated with our Photon Space Systems, though there is still more ahead. We anticipate that we will reach a peak in Neutron spending around the middle of next year as we near the Q4 launch date. While we don’t offer guidance beyond the next quarter, we don’t view the current forecasted Q1 adjusted EBITDA loss as the lowest point, as spending continues to rise. However, we also don’t expect it to increase dramatically from its current level. We believe we are entering a new phase of expenditure for the program, and we also see revenue growth over the same timeframe. Therefore, while spending will increase significantly, we anticipate revenue will grow in tandem with the rise in R&D expenditures, helping to mitigate the adjusted EBITDA loss on a quarterly basis.

Okay. So, if Q1 is not the low watermark, could full-year EBITDA losses be $120 million or more? I'm just trying to put some sort of finer point on it, because to your point there's not a lot of resolution to the Street models?

A lot depends on various factors, as we are still figuring out the timing for invoicing on major prototyping items. Therefore, it's difficult to accurately predict the trajectory of R&D spending related to Neutron. We are also anticipating significant revenue growth in the second half of the year from some of our space systems programs. Depending on how those perform and the associated margins, we expect that to help manage the increase in spending. At this moment, I can only comment on what the next quarter looks like. As we gain more clarity and insight, we will certainly share that with you and others.

Okay. I mean that's super helpful. And then just as a follow-up, does the $143 million contract with the MDA, does that include any inflation protection mechanisms on it just given that it's kind of a multi-year contract in you're in an inflationary environment? Just curious on inflation protection on that contract specifically. Thank you.

Yes, Scott. No, it's a good question. No, that's a firm fixed price contract. So, we were able to secure some incremental scope under that agreement with the SOCC to operate the satellites on orbit for the customer. So, we got some uplift to total revenue from that. We didn't disclose the exact amount. But I think we feel pretty good because when we were modeling out the BOM and other factors building satellites, we took into consideration a certain amount of inflation. Now, is inflation running hotter than we thought it was going to be a year and a half ago when we were doing that modeling? Certainly, but we also put in some cushioning factors to make sure that we come out on the right side of that. So, we feel very good and we don't see anything right now that would impact the margin expectations for that program versus where we originally modeled it.

Hi, Peter, hi Adam. For my first question regarding the launches, could you provide your expected numbers for Virginia? Additionally, what new launch opportunities do you foresee from the US that were not available to New Zealand? It would be helpful to hear your thoughts on this.

Yes, hi Suji. Yes, so of the 14, 15, it kind of depends a little bit on readiness with customers, but it could end up being up to six launches out of that site this year like I said depending on readiness of customers.

Okay. And the incremental opportunity, Peter? US government or another specific division?

Yes, an incremental opportunity the one thing that we built that pad for was kind of a rapid response for our US government customers. And we are seeing that capability really being valued. And more on that shortly, I would say. But it certainly opens up, I would say, much greater access to doing defense or national security, which is frankly why we intended to build that pad.

Yes Suji. Real quick on the impact of having the Virginia launch site now operational, there are some variable incremental costs that come along with launching from that range because we don't own it like we do in New Zealand. But at the same time, we are seeing a strong degree of acceptance or willingness for customers to pay a premium to launch out of that range for obvious reasons; it's three, three and a half hours outside of D.C., and there are a lot of benefits that come from a logistics perspective of having that in the backyard of some of our largest customers. So, I think it's for us it's hugely enabling and it's something that our customers are – seem to be very, very grateful that it's come online now. I think it's going to be long-term to be a very busy range for us. And I think we're well set up to leverage that into more and more US government business.

Okay, great. Thanks for that, Adam. And then as my follow-up, with the backlog growing here to $500 million should we expect additional direct sell-related opportunities like GlobalSat MDA, or maybe was that a one-off just to set the expectations for what could be coming now that you successfully won that?

Yes, the pace at which our backlog grows indicates that we are currently focusing on fewer but larger deals. The quality of our backlog is extremely important to us, and we are constantly working on significant projects. Therefore, I hope we will continue to see larger chunks of backlog decline as we complete those deals.

Yes, I think Suji, I mean maybe a little bit more on that as well. So, obviously, we're very happy with what we've been able to secure for this type of application, and certainly, we think that we're at the earlier stages of what this ultimate application could look like for us. But we're also very selective in who we work with, and we're not looking to basically go work with every kind of random opportunity out there looking to take advantage of the direct-to-mobile type of opportunity. So, we're pretty focused on staying engaged with the absolute Tier 1 of customers on this type of opportunity. So, yes, we see more opportunities, but it's probably going to be a very concentrated customer area if you will.

Hi, this is Eric Yan on for Matt. Just quickly wanted to ask about the margins at SolAero, if there's any progress being made so far for getting to 30% by early 2024?

Yes, I'll take first half of this because there's a bunch of different initiatives ongoing. Certainly, we believe that that 30% gross margin is the right target for that business. I will say that we're still going through the process of burning through the legacy backlog that was there, which came at pretty compromised gross margins. But if you look at the new business that we're booking, and we've been booking quite a bit of new business, all of that is at or above our target margin. So, we feel very good about how we're replenishing the backlog with new business as we burn off the old business. But there are also some longer-term opportunities for that legacy backlog to become better gross margin over time, but that's just the traditional blocking and tackling; getting the efficiencies out of the operation, investing more in systems and processes and people and equipment. So, I think that we've got the right things in focus and we're actually in the right things to get the margin up. But I would say that it's definitely a longer initiative to get the margins to where we thought we would. I think it's aggressive at this point to think that we are going to be at that 30-point target in the early part of 2024. I think it's going to take us a little bit longer. And again, that's just a function of how quickly we kind of burn through that backlog and get some other efficiencies in the business. But longer term, we absolutely feel like that's the right number to be had. And when we say longer term, we're not talking like three, four, five years. It's a shorter time horizon than that, but it's probably not the next 12 months.

Yes. So, I think it's a good point. I mean one of the reasons why we're attracted to that acquisition was the new IMM beta cell technology, which is the highest-performing cell technology in the world. So, as we take that from relatively small production volumes and almost R&D into volume production that really changes some of those margin opportunities as well. And as Adam pointed out, we will just need to burn off some of those long legacy deals, but even the team has been booking and is looking exactly where we need it to be. It's just that we're going to have to drive a little bit.

Hi, guys. How are you? Kind of wanted to touch base on the comment you made regarding ocean recovery versus mid-air recovery. I mean is there a big difference between how much you might be able to recover for it to be received in mid-air versus ocean? Is there an amount of the Electron that you might not be able to recover in the event that it splashes down?

Yes. Hi, Andre. No, not really at all. The reason why we didn't want to get it wet is there are some remedial work that's required when you get it wet, purging and slightly more intense kind of recertification activities rather than having it be dry. But as kind of with placed whole bunch down now and retrieved our vehicles, that's become really well understood for us. So when you trade the extra work that you need to do to replenish them and recertify the vehicle for launch against the cost of operating the helicopter, it's pretty much neutral. So at that point what the water landing does enable us to do is recover more vehicles because we don't have the constraints of the operations of the helicopter. So it's kind of financially it's neutral, but we get to actually use more vehicles. And as we refresh more and more down, we learn more and more. And as I mentioned in the deck, we're making modifications to the vehicle that make it far more seaworthy. So it's going to get better.

All right. Understood. Is there any read-through to Neutron development then? I mean it seems like it's not how much of an issue if it splashes down. Is it worth the incremental development cost to develop the landing system if you could also do recovery from the ocean for Neutron platform? I mean is that something you guys are considering as well?

Yes. So I mean, they're just such a different scale of vehicles. One of the advantages of Electron being so small is that these kinds of sea recoveries make it simple and viable. A vehicle of that scale, an ocean-based landing is not something we want to do; it's a very, very large and floating motion. So the big difference between Electron and Neutron is that Neutron is designed from day one to be re-usable, whereas Electron, I thought it wasn't possible for the longest period. So it was never conceived. And the mass margins you have on a small launch vehicle versus a larger launch vehicle just make small launch vehicle recovery infinitely more difficult. So when you've got a fresh piece of paper and you can design it from scratch, then landing a Neutron dry is by far the most sensible thing.

Hey guys, thanks for taking the question. First one, I'm sure you've seen there's been quite a few high-profile failures since the last earnings call by some of your peers. Have you seen any increased activity from maybe customers that were considering us before that are now coming to you?

Yeah. I'm not aware of any specific customer that has switched providers. However, there is a general feeling that as more emerging providers face challenges, it serves as a reminder that this process is much more complex than it often appears. As more examples of difficulties and failures arise, it definitely shifts the perspective. I would also note that customers we have been in discussions with for a longer time have quickly strengthened their decision to choose us.

Understood. As you ramp up the spend on Neutron, how should we think about the next couple of big milestones? And I asked that in the context of maybe a couple in the second half. And also, when would you consider announcing when exactly that first launch is for Neutron? Is that like a 4Q 2023 thing? Is that a 1Q 2024? Just how to think about the sequencing leading up to the first launch?

I'll deal with the announcement and I'll hand it over to Adam to talk about the spin profile. But a launch vehicle, you think you're golden until you do a particular test. In fact, this is across the whole space industry. This is why there are so many satellite delays. You do a final tee-up just to confirm that you've got thermal issues in the containment launch vehicle development. You think you're golden until you go and do a test and realize something's not right. So you have to operate in the mindset of kind of like a green light schedule until something proves otherwise. So I wouldn't expect us to make any formal announcements of a launch date until it's pretty obvious that we're ready to launch this. And we've got stuff on the pad and things are moving along because as you've seen from some of the other emerging players, some of them have had a rocket on the pad for a year, working through previously the launch vehicle issues. So it's pretty hard to just put a stake in the sand, but we’ll keep you really updated on their progress. And if anything crops up that we think is going to impact timing, we'll see.

Yeah. I would say that, our baseline plan of record that's built into our financial plan assumes a launch in Q4 of 2024.

Hi. Good afternoon. Just my question about Peter's comment around the ocean recovery of the Electron, if we go from recovering 50% of the Electrons to potentially recovering 60% to 70% of Electrons by doing water recovery what does that do to your projections for gross margins for the launch business relative to your prior expectations?

Yeah, Austin. It's a good question. I mean I think it really doesn't change it because we – this basically just buys down the risk of getting to that margin target, right? So I would say the margin targets in a business like this are never slam dunks. There's a lot of hard work that goes into it. Recovery is part of it. There are other elements that we're driving to get to our target margins, including a launch cadence of launching twice monthly, also some kind of, I would say, more traditional savings from BOM elements and labor efficiencies and so forth. So all that factors into our longer-term target of getting into the low 50% gross margin range on a non-GAAP basis. So again, I wouldn't build in any increase to that based on recovery. I think it just maybe it de-risks our ability to get there or what time frame we get there.

Yeah, I'd agree 100% to that. The recovery is one element of the program here.

Okay. And then also, considering your current position within the launch market given the shortage of available launch vehicles, you see Amazon and a Moon Lander company all scrambling to get onto a ULA launch, even though it's a first launch for that vehicle. Do you expect to increase pricing for the Electron just given the launch shortage and inflation pressures, or do you plan to keep prices where they're at?

I mean, Electron pricing has never gone down. It's only ever gone up. Yes. Maybe you want to take that, Adam.

Yes. I believe that over time, we expect prices to increase. The main factor contributing to higher pricing is the increasing failures of aspirational launch companies, many of which may lack the capital to succeed. It's only a matter of time before the natural selection process narrows the field, leading to higher costs for launching Electron rather than lower ones. This may explain why we're seeing more bulk purchases from constellation customers; they understand this reality. Committing to one platform is challenging, especially with the possibility of cheaper and more available launch options emerging, yet they recognize that having a reliable launch platform is crucial because time is money for constellation operators. Therefore, I predict that prices will stabilize as we continue to see difficulties faced by these aspirational launch companies. Still, there is enough activity from new entrants in the market that we don't yet have significant pricing power, but that situation is evolving. People are beginning to understand the challenges, and it's clear that there won't be a large number of successful launch companies—perhaps just a few long-term players. Typically, we would expect pricing to firm up in response to this consolidation, which I anticipate will occur over the next several years.

Thank you. There are currently no additional questions registered at this time. So I will pass the conference back over to the management team for closing remarks.

Thanks very much. That wraps today's presentation. Thank you everyone for joining us on the 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 with you. Thanks again and we look forward to speaking with you again soon about the exciting progress being made here at Rocket Lab.

And with that, we will conclude today's conference call. Thank you for participating. You may now disconnect your lines.