Rocket Lab Corp Q1 FY2023 Earnings Call

Hello and thank you for being here. My name is Jessica and I will be your conference operator today. I would like to welcome everyone to the Rocket Lab First Quarter 2023 Financial Results Update and Conference Call. All lines are muted to avoid background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to hand the conference over to Colin Canfield, Manager of Investor Relations. Please proceed, sir.

Hey thank you. Hello, everyone. We're glad to have you join us today for today's conference call to discuss Rocket Lab's first 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 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 also contain non-GAAP financial measures within the meaning of Regulation G enacted by the SEC. Included in such release and our supplemental materials, a reconciliation of these historical non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP. This call is also being webcast with a supporting presentation and 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, Colin, and welcome everyone. I appreciate you joining us today. In our presentation, we will review our significant business achievements for the first quarter of 2023, along with additional accomplishments since the quarter's end. Adam will then provide details on our financial results for the first quarter and share the financial outlook for Q2 2023. Afterward, we will have a question-and-answer session, followed by an overview of the upcoming conferences we will be attending. Let's discuss what we achieved in the first quarter. We kicked off the year strongly with three successful Electron launches, which met our expectations for the quarter. Each mission represented an important milestone for the company. In January, we executed our first mission from US soil, quickly followed by a second launch from NASA Wallops in March. Just a week later, we successfully launched from our LC-1 worksite in New Zealand. This was our quickest turnaround for a launch to date, and launching from two different countries showcased our flexibility and responsiveness to customer needs. Achieving this high launch rate early in the year positions us well to meet our goal of 15 Electron missions for 2023 as planned. While many small launch companies are struggling, we continue to successfully complete missions for our customers. We're witnessing a notable increase in launch bookings for Electron in 2023 and beyond from both new and returning customers in both government and commercial sectors. Our progress with Neutron is also promising. We started the year with a payment from the US Space Force as part of a formal program milestone we achieved, which was recognized revenue in the first quarter. Later in the presentation, I will provide key updates on our launch vehicle and program development for Neutron. Our Space Systems business also made significant strides this quarter, with Rocket Lab satellite components or software featured on 18 spacecraft across eight missions. We continue to see strong bookings in our solar power division, along with major milestones in two significant satellite builds that I will also discuss. As highlighted, we had a strong first quarter for Electron launches with two missions from Launch Complex 2 in Virginia and another from Launch Complex 1 in New Zealand, including that rapid seven-day turnaround between launch sites. All missions were for commercial constellation operators with signed bulk dedicated launch contracts. With over 36 Electron launches, the vehicle has proven its reliability for both commercial and government providers. Satellite operators require the ability to reach unique orbits, and Electron remains the only small launch vehicle consistently delivering this capability. In fact, Electron is the sole US small launch vehicle to successfully deliver satellites into orbit throughout 2023. In February, we signed a multi-launch deal with Capella Space for four more dedicated Electron missions from Launch Complex 1. With Launch Complex 2 now operational, we have the flexibility to reposition any of those missions to the US as needed to meet customer requirements. The development of Neutron is progressing well, and the team reached key milestones in Q1. We are steadily working towards our first full-scale Neutron booster at our U.S. facilities, while also nearing completion of a full-scale Neutron second stage, readying composite parts for the flight hardware tank test in Q2. Recent factory photos highlight the size of these tanks. In Q1, we reached a payment milestone from the US Space Force for completing successful development phases of Neutron, as part of a $24 million contract awarded to us to develop Neutron’s upper stage, which enhances orbit capability, insertion accuracy, and responsive dedicated launch. These capabilities position Neutron well for high-priority national defense missions under Lane 1 of the National Security Space Launch Phase 3 program. Simultaneously, we are making good progress on Neutron reusable engines. The full-scale Archimedes engine components are being produced using 3D printing, which demonstrates our advanced manufacturing techniques. However, Rocket Lab is only part of the equation in developing a scalable orbital launch capability. Advanced test and manufacturing facilities are also crucial. While the vehicle team advances Neutron’s development, our ground systems and manufacturing teams are progressing test infrastructure and constructing Launch Complex 3 for Neutron, as well as commissioning new large-scale 3D printing machines and vehicle assembly facilities for rapid production. Lastly, we’ve initiated flight simulations now that the vehicle design is advanced and production is underway. Software remains a key differentiator for Rocket Lab, whether for Electron or a Photon spacecraft. We develop tailored software to maximize vehicle performance, and I'm pleased to report that we are successfully conducting orbital mission simulations across a range of profiles with our guidance and navigation control software. We conduct thousands of these simulations for every Electron mission, which has been pivotal in delivering reliable and successful missions over the years. It’s essential to achieve this early for Neutron. Now turning to air space systems, this segment of our business continues to thrive. 2022 solidified Rocket Lab’s position as the leading manufacturer of spacecraft and spacecraft components, and we have progressed into large-scale manufacturing and execution. There are numerous milestones and achievements we won't have time to detail today, so I’ll highlight a few key points. Eight launches in Q1 deployed more than 18 spacecraft featuring Rocket Lab software or hardware for clients like BlackSky, Capella, and OneWeb. We have over 25 spacecraft in development for various customers, encompassing missions to Mars, a global communications constellation, in-space manufacturing satellites, and an on-orbit fueling depot. To support this, we have expanded our Space Systems teams, manufacturing and development facilities, and integrated our four Space Systems acquisitions into our Photon spacecraft manufacturing programs. As part of this growth, we are seeing ongoing strength in bookings within our Solar Solutions division and achieving multiple production milestones for upcoming missions. Production is now underway for twin spacecraft for NASA’s Escape mission to Mars, with a 2024 launch date set, allowing us to advance assembly, integration, and testing at our Long Beach facility. Moving on to our key achievements since the end of Q1, just two days ago, we successfully launched the first of two dedicated missions for NASA to deploy the Tropic Constellation. This critical constellation monitors tropical storms with faster revisit times than standard weather satellites, providing forecasters with more accurate storm data and essential warnings to save lives. With this first mission complete, we'll proceed with the second in about 12 days to finalize the constellation ahead of North American hurricane season. Additionally, we have been awarded another mission by NASA. Electron will launch NASA’s Styles mission to test and demonstrate autonomous swarm technologies with four satellites set to be deployed within three months of contract signing. These satellites were previously slated for a different launch vehicle, but due to delays, they were remanifested on Electron for Q3 this year. We have also signed multiple dedicated and rideshare launch contracts on Electron, including with many new customers who switched from other small launch vehicles that faced delays. This trend reflects Electron's proven reliability as the dependable choice for launching small payloads. Hypersonic and suborbital facilities remain national priorities despite the critical need for these capabilities, as the supply of sustainable vehicles and wind tunnels is severely limited. This is a challenge we are ready to address right now. This quarter, we introduced HASTE, the Hypersonic Accelerator Suborbital Test Electron, a suborbital test launch vehicle derived from Electron. HASTE offers reliable flight test opportunities to advance hypersonic systems. The first rocket is currently at LC-2 Virginia, undergoing final launch preparations. HASTE has been selected for various government programs, including the Navy's Cranes Mark IV project, DARPA's high-CAT program, and the Defense Agency’s targets and countermeasures study. More information on HASTE is available in our press release from April 17 on our website. We also completed final testing and qualification on the first Rutherford engine set to fly into space for the second time. Having launched it last year as part of our reusability initiative, we've tested it at the factory and reintegrated it into production for a Rocket launch in Q3 later this year. This marks significant progress in our reusability program and is a critical milestone toward full-stage reuse. Last week, we shipped our first of four Photon spacecraft for Varda Space Industries, an in-space manufacturing firm planning to produce high-value products and pharmaceuticals in space. This milestone represents a significant achievement for our Space Systems team as we embark on a busy year of satellite production, including work on NASA’s Lunar Gateway, development of Photon spacecraft for Mars, and 17 satellite buses for global staff. Lastly, we launched a new star tracker specifically designed for constellations. This updated version of our existing high-performance star tracker is optimized for mass manufacturing and serves as a responsive small satellite solution. It is part of a growing array of spacecraft components we’ve recently developed, including reaction wheels and satellite radios to supply best-in-class space systems hardware at scale. With that, I'll hand it over to Adam for the financial highlights and outlook.

Thanks, Pete. First quarter 2023 revenue was $54.9 million, which was above the high end of our prior guidance of $51 million to $54 million. First quarter 2023 revenue reflects sequential growth of 6% and the result of three successful launches and continued strong contribution from our Space Systems business. Our launch services business delivered revenue of $19.6 million in the quarter, off of three launches, which was modestly above our prior guidance of $19 million. The resulting average revenue per launch came in below our standard pricing due to a partially filled rideshare mission where we prioritized getting our first LC-2 launch off versus opting to delay the launch to fill up the remaining rideshare capacity. As we progress through the year, including what is embedded in the current Q2 guide to be discussed later, our manifest indicates the trend towards higher priced missions. Our Space Systems business delivered $35.3 million in the quarter, which exceeded the high end of our prior guidance range of $32 million to $35 million, with strength in key programs across defense, civil, and commercial customers, and despite delayed revenue recognition impacts from vertically integrated supply of components for Photon satellite build programs. Now turning to gross margin. GAAP gross margin for the first quarter was 11.6%, well above the high end of our guidance range of negative 5% to negative 3%. Non-GAAP gross margin for the first quarter was 17.9%, which was also well above our guidance range of 7% to 9%. GAAP and non-GAAP gross margin improvements relative to our Q4 2022 results reflect a combination of increased launch cadence, an increase in average launch price, and a favorable mix within our SolAero and PSD businesses, as well as improved mix between components and services at the segment level. Additionally, gross margins benefited from greater Electron production efficiency, which has allowed us to shift or redirect production resources to support Neutron and Photon R&D programs, thereby moderating incremental R&D headcount hiring. Relatedly, we ended Q1 with production-related headcount of 757, down 61 from the prior quarter. Turning to operating expenses. GAAP operating expenses for the first quarter of 2023 were $52.4 million, above the high end of our guidance range of $44 million to $46 million. Non-GAAP operating expenses for the first quarter were $40.2 million, which was also above our guidance range of $33 million to $35 million. The increase in both GAAP and non-GAAP total operating expenses versus the fourth quarter of 2022 was primarily driven by a step-up in staff cost and material purchases supporting Neutron and Photon development, partially offset by a $1.7 million employee retention credit recorded in Q1. In R&D specifically, GAAP and non-GAAP expenses were up $8.9 million quarter-on-quarter as we continue to aggressively ramp up our Neutron development efforts through both new hires and redeployment of existing production resources. Q1 ending R&D headcount was 456, representing an increase of 90% from 348 in the prior quarter. In SG&A, GAAP expenses increased $4.4 million quarter-on-quarter, driven primarily by staff costs, including stock-based compensation, and outside services, in particular, our year-end audit and stock-related costs. Non-GAAP SG&A expenses increased by $3.9 million, driven by the same items excluding stock-based compensation. Q1 ending SG&A headcount was 219, representing an increase of 22% from the prior quarter. In summary, total headcount was 1,432 as of March 31, 2023, up 51 heads from the prior quarter. Cash consumed from operations was $25.4 million in the first quarter of 2023 compared to $18.9 million in the fourth quarter of 2022. The sequential increase of $6.4 million was driven primarily by an increase in GAAP loss as working capital was flattish during Q1. Purchases of property, equipment, and capitalized software licenses decreased from $15 million in Q4 of 2022 to $12.7 million in Q1 of 2023. This sequential decline is largely related to the timing of goods received and payment terms as we continue our investments in Neutron and Photon production equipment and facilities enhancements. Overall, non-GAAP free cash flow, defined as GAAP operating cash flow reduced by purchases of property, equipment, and capitalized software in the first quarter of 2023, was $38.1 million compared to $33.9 million in the fourth quarter of 2022. The ending balance of cash, cash equivalents, restricted cash, and market securities was $450 million as of the first quarter of 2023. And with that, we expect revenue in the second quarter to range between $60 million and $63 million, which reflects $37 million to $40 million of contribution from Space Systems and $23 million from launch services, which assumes three launches for two quarters. One of the three launches forecasted in Q2 was Sunday's successful mass-atopics mission out of LC1 in New Zealand. As referenced earlier, based on our manifested launch backlog, we continue to expect 15 launches in 2023 and our average selling price to trend toward our standard pricing as we progress through the remainder of 2023. We expect second quarter GAAP gross margin to range between 14% to 16%, and non-GAAP gross margin to range between 22% to 24%. These forecasted GAAP and non-GAAP gross margin improvements reflect continued efficiency improvements, launch average selling price improvement, and a modest improvement in mix within our Space Systems segment. We expect second quarter GAAP operating expenses to range between $55 million and $57 million and non-GAAP operating expenses to range between $41 million and $43 million. The quarter-on-quarter increases are driven primarily by continued step-up in staff costs and prototyping and material spend supporting Neutron and Photon development programs. We expect second quarter GAAP and non-GAAP net interest expense to be $1 million. We expect second quarter adjusted EBITDA loss to range between $22 million and $24 million and basic shares outstanding to be approximately 480 million shares. And with that, we'll hand over the call to the operator for questions.

Yes. Thanks. Congratulations on a good quarter. I wanted to talk about launch. It looks like there's a lot of positives in the quarter. And obviously, there is some wash out, if you will, with some of the other smaller players that are obviously having challenges. You mentioned an increase in the launch bookings, given strong demand. What would be the limiting factor to maybe not achieving a higher launch cadence in the 15 that you're currently targeting?

Yes, Erik, it will be customer readiness as usual. We continue to see customers moving around and we're fully booked for the year, and that will be the determining factor, the factory continues to produce rockets at the rate required. Like I said, that's the usual factor.

Great. Can you provide any updates on the progress of the NSSL opportunity and the RFP process? How significant could this opportunity be for Rocket Lab?

Yes. We're naturally very happy with the approach that CNS folks have taken. The two-lane approach ensures a good balance of ensuring the nation has assured access to space through the incumbent, but the additional lane one gives us the opportunity to onboard and provide extra services. We're really happy with the overall constraints of the program; we're advocating to keep the bar high, which is what's happened, and the mass class is clearly suited for Neutron. So we think Neutron is very well positioned to play in that lane amongst a very small group of vehicles that will be ready in time to do so.

Great. And then maybe for my last question, you mentioned the HASTE rocket. How should we consider its role in the overall context of launches and what you have projected for 2023 with a total of 15 launches?

Yes. So the hypersonic flights will be included in that 15 number.

Hi, Peter, Adam. It's Suji Desilva, so congrats on the progress. So the 7-day turnaround you just had was pretty impressive. Just curious, generally, what were some of the proprietary elements that allow you to turn around that quickly? I know your competitors are having trouble just launching at all, but what allows you to kind of be able to turn around that quickly will use further improve that?

Yes, that's a good question, Suji. The rocket is only one part of the overall equation. It's important to have the facilities to support this and to have teams that are cross-trained. This allows us to conduct launches from various sites, and we also need the rockets to be produced at a rate that supports that launch frequency. It’s not a simple task; it requires significant coordination and planning. However, we have developed a factory capable of achieving a very high production rate, and that is delivering results. Our launch teams are finely tuned, and the launch vehicles are well-prepared. These factors will enable us to reach our goals.

Yes. Suji, I would add to that, too, that really Pete talked about the infrastructure. I mean, it really is a key piece. The fact that we have two operational launch locations and one of those is in private control, right? We control the manifest entirely. So it gives us a trend of kind of flexibility. I think it would probably be impossible to do this if you didn't own one of the two ranges, right? So I think that level of flexibility really allows us to do things that very few others could do.

Okay. Great. My other question is about the MDA Globalstar program within Space Systems, which I expect will start ramping up more significantly in the second half of 2024. Is that timing still unchanged? And can we anticipate the initial revenue contribution from this? Thanks.

Yes. So we'll start to see meaningful revenue contribution from that in Q3. So it will be a fairly significant step-up in Q3 from Q2. And then continue on from that into Q4 and obviously into the first half of 2024. So yes, everything is on schedule. Everything looks good, consistent with everything that we've articulated in the past.

Good afternoon, everyone. Regarding HASTE, previously you indicated that Electron would achieve 15 launches for the year, with each launch supporting about 300 kilograms. Now that HASTE is involved and some launches can handle 700 kilograms, could you explain the economics? Are the total prices the same, or is there a difference in price per kilogram? How should we view the overall economics of Electron compared to HASTE in terms of revenue and margins?

Yes, sure. So I mean when someone comes to us, they buy the entire launch vehicle when you buy a dedicated rocket, you buy the whole rocket. So it's not priced out as a cost per kilogram. In fact, the whole cost per kilogram metric is really only applicable to kind of rideshare missions where you may actually pay cost per kilogram. So whether it's an orbital mission or a suborbital mission, someone's coming to us and buying the complete launch vehicle. And missions like HASTE that have an element of mission assurance, extra mission assurance, and obviously, more fixed trajectories typically will demand a higher average selling price than a very standard Electron orbital mission.

Yes. Kristy, there is a launch premium for launches from LC-2 in Virginia because that range is operated by NASA, unlike our range in New Zealand. Various factors influence this, and currently, all hypersonics opportunities are set to launch from LC-2. Therefore, considering the reasons Pete mentioned regarding mission assurance, along with the location premium, there is an upward bias to the average selling price.

I see. In terms of margin economics between an Electron launch versus a HASTE launch, how do we differentiate between the two?

Well, I mean, I would say probably the biggest difference would again be launching out of LC-2. We pay range fees to NASA. But again, largely, those are factored in. So from a margin contribution perspective, they should be equal to your ordinary Rocket Lab launch.

I see. And then following up on the reuse of the Rutherford engine in the third quarter. Do you have an idea of how quickly you can turn around these engines for re-flight down the line? And also, how many times can a single engine be used?

Yeah, it's a great question. So answering your question backwards. The qualification test we did on the recovered engines, we've put a number of them through a total of 16 full-duration hot fires, that's like going to orbit 16 times and no degradation in the performance or in the engine at all. So the Rutherford engine is the mighty nugget engine, with very good margins. So the limit to reuse would be in excess of probably 10 times. But the caveat to that is we need to slowly step our way through this. And we're being very conservative here. You noticed that we've taken the most difficult and critical element, and we're flying that kind of independently of a whole new stage first because we believe once we have built confidence in the reflying engines, then that's the hardest piece of the whole puzzle completed.

Great. Thank you for the color. Hello?

We can hear you.

Hey, how are you? Sorry about that. Could you just provide a little bit of color? So it looks like production headcount is down; could you give a little reasoning as to why that happened?

Yeah. So again, I was trying to convey earlier that we've been fortunate that we've been able to repurpose our production resources to support the Neutron and Photon R&D initiatives. So it's really a case where we've gotten to be much more efficient building Electrons that we have these resources. So rather than hiring incremental R&D heads to support those programs, we can now just basically move or reclass those resources from production to support R&D. So that kind of just speaks to the fungibility and flexibility of the types of resources that we have, where, again, our production folks are equally capable of performing very complex R&D tasks, and those are super helpful for us to be able to have a really fungible workforce that we can move around as needed. So that's really what's driving it. As mentioned earlier, total headcount increased; it's just kind of the mix within changed quite a bit as we hit that new stride in production efficiency on Electron.

I understand. That makes sense. I would like to discuss the order momentum at Space Systems and get an update on the low-margin SolAero backlog and how you are progressing in addressing it.

On the Space Systems side, we are seeing a significant increase in high-value opportunities not just for components but also for full spacecraft. Our approach to the Space Systems business focuses on securing large, impactful programs rather than smaller projects. While we are experiencing momentum and progress, these larger deals have taken longer to finalize compared to smaller ones, which is expected. Regarding the margin profile of the SolAero Business, Pete and I have been very impressed with the gross margins of the new business we have been closing and adding to our backlog, which are considerably higher than those from the previous acquisition. This supports our goal of achieving a gross margin above 30%. We previously mentioned that it may take about a year longer than we initially thought to work through the lower margin backlog and replace it with new business. Additionally, we are also fulfilling demand for internal programs, and we plan to sell Solar Solutions to the merchant market at higher margins. Our vertical integration into our building processes also adds to our advantages.

Just as Peter mentioned, we've been very selective on which orders we take on to Adam's point, we're not looking to do little things here and there; we're looking for pretty serious needle-moving things. And naturally, they take longer to close than smaller things. And then I would say that we've been harping on for a while now that solar, as a constrained environment, had a constrained supply. And if you only need to look across all the spacecraft that are in development or manufacture right now, and it's fairly clear that a solar crunch has started to occur. And we're investing in more capacity, but obviously, solar constraint is helping to drive some of those margins.

Hello, everyone. Peter, I would like to give you the chance to discuss the current competitive landscape and its evolution. Could you also share your perspective on how you see competition developing over the next four to five years? Additionally, Adam, I would like your thoughts on the pricing environment for new orders and whether we are beginning to observe any increase in the backlog you are building compared to what you are currently working through.

Yeah. Thanks, Jason. I'll get out my crystal ball here for you. But I would say on small launch, I think my personal view is it’s pretty tough to enter that market at this point. I mean, Electron has demonstrated just such great reliability and good service that that becomes harder and harder to break into that, not being arrogant to think that, nobody can't do that, but certainly, it will be difficult. So we've seen a failure of a lot of small launch vehicles or failure to deliver over the years and even more recently, in more dramatic ways. So, I think on the small launch side, it's a great market. It's a nice little niche market, and Electron will probably continue to do well there. And I'm not sure if I really see too many small launch vehicles coming online in the future. Now, on the medium to large, I think that's a very different environment. And the fact that there's a launch crunch coming in that sort of 2025 to 2030 time frame. You don't need to be a rocket scientist to figure that out; if you look at all of the spacecraft that are in development, and I look at the manifest, I look at the likes of Kuiper who bought up most of the launch available globally, kind of Ariane 6 delayed and other launch vehicles delayed as well. That's going to be a really, really interesting time. And of course, our whole approach here and philosophy is to bring Neutron online right at the peak of that crunch. So, we think that vehicle will do well. If you look at things like the NSSLP Phase 3 program, Neutron is ideally situated to provide a good role in there. So, I think in a new capital-constrained environment, we're real kind of products and real businesses have to survive. I think there's going to be somewhat of a whittling of the wood and really strong executors are going to be the ones that are left over to supply. And then on the really heavy stuff, I think that's an interesting market. That's more of the creation of a market rather than the servicing of the market. I think that will be super interesting over the next four to five years.

Yes. Jason, regarding pricing dynamics, I would say that the shift of missions from other providers to us has been very encouraging and surprising. I believe this trend will continue. As Pete mentioned, there has been a lack of execution from others in delivering payloads, leading people to understand that this is a very challenging task. Program delays are extremely costly for customers. The confidence in delivering their satellite into orbit on time is something that customers are increasingly willing to pay a premium for, which is favorable for launch pricing. On the Space Systems side, we are beginning to see significant advantages from our end-to-end strategy. Unlike some other satellite manufacturers facing margin stacking issues, we control many of the key subsystems within our platforms, allowing us to adjust various aspects to achieve attractive margin profiles for our programs. I don't think we could achieve this without our high level of vertical integration. Currently, I feel optimistic about pricing for both launch and Space Systems as we see all the factors aligning positively, and I don't foresee any changes in this trend.

Okay, great. Okay. If I speak one more?

Yes.

Yes. Okay. Great. So just going back to Globalstar, it sounds like the revenue ramp begins in the second half of the year. Can you maybe just talk a little bit about technical milestones and the risk retirement that you'll be working on either now or as you get going here that we should be kind of aware of and kind of appreciate as you retire that risk? And are there any risks to your expectations on margins for that program to the extent that the risk retirement doesn't go as planned?

I can talk briefly to the technical milestones. And I have to say that I'm just incredibly impressed with the team. It's a very difficult spacecraft. It operates in a very difficult environment. And of course, it needs incredible uptime. But the team continues to knock down major milestones like PDRs, and the supply chain team continue to work their magic to make sure everything that's not Rocket Lab produced is arriving on time. So I think we're very happy with the way that project is coming together. We've got a big team working super hard to make sure it does. But certainly, on my horizon, there's nothing that I can foresee that's likely to cause issues. But I can let Adam talk to more of the less technical issues.

Yes. Regarding the margin profile, we were proactive in securing long lead items early in this program. These long lead purchase contracts were established about a year ago, giving us clear visibility on input costs from third-party sources. Additionally, we have significant vertical integration for this platform, allowing us to have a strong understanding of our costs since we've been selling similar solutions in the merchant market for many years. Therefore, the margin risk for the program appears to be quite low. Challenges can arise in any program, whether involving a rocket or a satellite, but as we progress and approach the delivery of these platforms, we are seeing many risks diminish and move into the past. Overall, we feel optimistic about our position in terms of derisking the program from a margin perspective, and there have been no major technical challenges that could lead to program delays. We are confident about our timeline and margin.

Hey, it's Edison Yu from Deutsche Bank. First question, wanted to come back to the gross margin. I don't think you broke it out yet, but where do you see more upside relative to the expectations in the quarter? Was it more on launch or Space Systems?

There were several factors at play. We clearly surpassed our previous gross margin guidance. As we entered the quarter, I felt optimistic about reallocating resources from production to R&D. This became more apparent as we progressed through the quarter. Regarding margin improvements, I believe the largest potential for enhancement lies in our launch activities. Currently, we face challenges with overhead absorption as we support two launch ranges. One is our own, specifically LC-1 in New Zealand, which has high fixed costs and is very dependent on the launch cadence. The NASA range in Virginia has variable costs accompanied by some fixed costs. Our business in the launch segment is highly sensitive to the number of launches each quarter and increasingly to their locations. For instance, in Q1, two of our three launches came from Virginia, leading to a significant amount of unallocated costs for the single mission from LC-1. In Q2, the launch distribution will change slightly, with two launches from LC-1, one from New Zealand, and one from LC-2. This will allow us to better absorb fixed costs across the launches from New Zealand while having one variable-cost-intensive mission from Wallops. I believe that as we aim for 15 launches this year and target 20 next year, including six in Q4, we will establish a solid exit rate for 2024 to meet our margin goals. Launch cadence is crucial in achieving these targets, and there is substantial room for growth from our current position. Additionally, the recovery of the first stage booster will contribute to this as we improve our processes, especially with the upcoming engine test later this year. Within Space Systems, there are segments showing strong gross margins, while others, which have been lower historically, are improving as we work through a reduced backlog. Ultimately, the most significant potential for margin growth will come from scaling Electron through the launch cadence and recovery efforts.

Appreciate the color. And just one follow-up on, I guess, Space Systems more specifically. I know it outperformed in the quarter. Any specific product lines you would call out? And I think also you announced a new win on SolAero. So just curious kind of the trajectory going forward is there some products that sort of outperforming?

The significant growth has come from the Photon business, particularly in satellite manufacturing. As Pete mentioned earlier, we successfully shipped the first Varda spacecraft, and in the third quarter, we anticipate a substantial increase in revenue from the MDA Globalstar satellites. This will indeed be the most notable percentage growth contributor in the latter half of the year, building on programs we have previously identified.

Yes. Yes. Okay. Yes, just one more to follow up. Given that you guys are pretty certain of the manifest going through 2023. I mean, when can we start to see some more long-term targets being outlined?

I believe we've been clear about our plans this year with a goal of 15 launches. For next year, we're aiming for 20, but we expect to finish the year at a rate of 24. This aligns with our long-term strategy, and we see enough market potential to support over 30 launches annually, which remains consistent. This is separate from Neutron's prospects. We have not identified any factors that would lead us to change our expectations for Electron's launch volume. The small dedicated launch market is strong, and we are outperforming our competitors. We won’t provide a long-term launch outlook beyond what we've shared, which outlines our expectations for the next year. Looking into 2025 is uncertain. We do have some bookings and visibility for 2025 and beyond, but we’ve noticed that while we have good visibility within the next 12 months, it becomes less clear afterwards. We track all potential opportunities, and it becomes a matter of our market share capture. Currently, we hold a very high market share and expect to maintain that. So, to reiterate, we are on course for 15 launches this year, 20 next year, exiting at a rate of 24, and we’ll see where it goes from there.

Got you. Thanks.

This does conclude today's conference call. You may now disconnect.