Thank you for joining us. My name is Adam and I will be your operator for this conference. I want to welcome everyone to the Rocket Lab Q2 2023 Earnings Call. All lines are muted to avoid background noise. Following the speakers' comments, we will have a question-and-answer session. Thank you. I will now hand the call over to Colin Canfield, Investor Relations Manager. Please proceed.

Thank you, Adam. Hello, everyone. We're glad to have you join us today for today's conference call to discuss Rocket Lab's Second Quarter 2023 Financial Results. Before we begin the call, I'd like to remind you that our remarks may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the safe harbor protection from liability established by the Private Securities Litigation 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 and our supplemental materials are reconciliations of these historical non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP. This call is also being webcast. Although due to technical difficulties with our conference call provider, we will post a copy of the presentation on our website at a later time. Our presenters today are Rocket Lab'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. And welcome, everybody, and thank you for joining us. Today's presentation will cover our key business accomplishments for the second quarter of 2023, as well as further achievements we've made since the end of the quarter. Adam will then take us through our financial results for the second quarter before covering the financial outlook for Q3 2023. After that, we'll take questions and finish today's call with the nearer-term conferences we'll be attending. All right, on to what we achieved in the second quarter for the year, starting with our launch business. In May, we successfully launched both NASA TROPICS mission, and in June, we launched our inaugural Hypersonics mission from NASA Wallops. NASA selected us to launch TROPICS in November, late last year, after the initial launch provider was unable to meet the mission and schedule requirements. Within six months of contract award, we had successfully launched both missions, enabling these critical storm monitoring satellites to get into orbit in time for hurricane season. We're incredibly proud to deliver mission success for NASA once again and further demonstrate the reliability and proven capability that Electron delivers to our civil and defense customers. We also followed up the two TROPICS missions with a successful HASTE mission. HASTE is a Hypersonic Suborbital Test Bed variant of Electron, and it fills a very real and urgent need for our government customers. The acceleration of Hypersonic system technology development is a significant national priority, but testing opportunities remain limited, particularly in real flight scenarios beyond wind tunnels. With the test launch completed in June from LC-2 in Wallops, Virginia, we unlocked a new critical national capability, enabling rapid and cost-effective hypersonic testing. We're incredibly excited about what that brings for our customers as well as the additional total addressable market that looks to grow rapidly ahead of strategic and civil needs. All this while leveraging our existing Electron architecture and continued R&D investment in our kickstage capabilities. Expanded propulsion manufacturing capabilities, so we're also excited about our acquisition of Virgin Orbit's 144,000 square foot Long Beach facility, production lease, and production equipment, which we are already hard at work configuring for our Archimedes and Rutherford production. Overall, we estimate that the $16.1 million price paid for this would have represented around $100 million of value versus having to purchase new, while approximately $80 million derived from acquired machinery and equipment, and the remaining $20 million from the tenant leasehold improvements. We believe this asset purchase enables significant savings for Neutron and supports future scaling as we work towards first launch. Neutron testing, speaking of Neutron, we want to highlight some of the major development, testing, and construction milestones we've reached for Neutron and its infrastructure. You may have noticed we recently released some updated renders for Neutron, which created some online buzz around design changes. These include adapted landing legs optimized for barge landings to increase launch availability, as well as the adaptation of Neutron's Hungry Hippo fairing from four sections to two, allowing for a simpler mechanism. These design changes were actually made some months ago as part of our iterative testing analysis program and some direct customer feedback, but the artwork really just hadn't kept pace with the real vehicle. So we've recently updated these for everybody to see. We've hit some significant milestones in Neutron production and testing in this quarter, including completion of the second stage qualification tank and test stand in preparation for the Cryogenic test campaign in the third quarter. This work is progressing at pace, thanks to our extensive experience with carbon composites throughout the Electron program, so we have a strong head start on structures. In parallel, Earthworks at Launch Complex 3 in Wallace, Virginia, have commenced enabling Pad construction to begin in Q3. Once complete, Neutron should enjoy all the benefits that come with launching from a Pad that benefits from clear line of sight to future launches, significantly less congestion relative to the Cape, and close proximity to key government customers. The propulsion team is also on schedule to deliver the first full-scale print of Archimedes Thrust Chamber, and we're running a successful campaign of pre-burn tests at Purdue University. All of these achievements put us in a good position to meet some key milestones by the second half of this year, including completion of the second stage qualification test campaign. We're also targeting the completion of the first stage qualification tank and test stand, as well as the first Archimedes development engine and test campaign at a propulsion complex within NASA Stennis. We're still working towards getting something on the pad by 2024, and we'll continue to provide updates as we progress through the year and next. Our Space Systems team also recently delivered a significant milestone in the second quarter in the form of successfully operating the latest Rocket Lab design and built spacecraft on orbit. This is one of our newest spacecraft platforms, high payload volume spacecraft designed for short to mid-duration missions in low Earth orbit. This was the first of four spacecraft that we are on contract to build and operate for Varda Space to enable in-space manufacturing, a highly bespoke and complex spacecraft designed for reentry, which is a rare capability and something we're really proud to bring to market. The spacecraft hosts a mini-pharmaceutical lab that successfully grew crystals commonly used in drug treatments for HIV. With the in-space manufacturing now complete, the capsule is anticipated to return to Earth in the coming weeks. Meanwhile, the next two spacecraft of Varda are in advanced production and test ready for the follow-up mission soon. All of these spacecraft feature components and software from across our space systems businesses including solar panels, star trackers, and radios, enabling us to produce them affordably at pace. It's also a demonstration of our business model as an end-to-end space company to both build and operate satellites on orbit. And finally, development is progressing well for our Twin spacecraft mission to Mars for NASA, for the Escapade mission we're developing two bespoke spacecraft to study Mars's magnetosphere next year, and this quarter we completed the qualification spacecraft ahead of an extensive test and qualification campaign. We now want to take the time to highlight some of our accomplishments so far in Q3. The successful launch for NASA, Telesat, and Spire. We've started the quarter strong with a successful rideshare mission from Launch Complex 1 deploying satellites for NASA, Spire, and Telesat. We're on the brink now of our 40th Electron launch and on track to complete three more this quarter and 15 overall this year. Now, regarding a Capella launch, we love the nightlife. We continue to take an abundance of caution as we continue our track record of being the most reliable small rocket. At present, the team is working through some unusual data from one of the engine sensors for that mission. But of course, these things happen with launch vehicles from time to time. We have a very straightforward path to resolution and we'll reschedule the launch later this month. So no big deal there. One of those missions, of course, was a recovery mission. This launch was an important one, as we used it to prove out new waterproofing technologies and a new marine retrieval system for extracting Electron from the ocean. I'm pleased to report that the new system works exceptionally well, and Electrons splashed down in the best condition we've seen it yet. We continue to operationalize Electron reusability with the first reflight of a recovered engine scheduled for the second half of this year, from where we will schedule the first reflight of a full stage booster. We signed 10 new Electron launches, so, Electron continues to be the preferred dedicated small launch option, demonstrated by continued and growing demand for launches. Since we reported earnings in May, we've signed deals for a total of 10 new dedicated launches, including block buys from returning government and commercial customers. This really is a testament to Electron's reliability, frequent launch cadence, and, in particular, the high degree of control over orbit that we can give to constellation operators, which is something they cannot get on a large rideshare mission. And with that, I'd like to turn the call over to our Chief Financial Officer, Adam Spice. Adam?

Thanks, Pete. Second Quarter 2023 revenue was $62 million, which was above the midpoint of our prior guidance of $60 million to $63 million. Second quarter 2023 revenue reflects sequential growth of 13% and the result of three successful launches and a return to growth for our Space Systems business. Our Launch Services segment delivered revenue of $22.5 million in the quarter from three launches, which was consistent with our prior guidance of $23 million. The resulting average revenue per launch stepped up nearly $1 million to $7.5 million, consistent with our target average selling price for 2023. Our Space Systems segment delivered $39.6 million in the quarter, which was up 12% sequentially and near the high end of our prior guidance range of $37 million to $40 million. Driven by healthy growth in our satellite bus, solar, and separation systems businesses, our backlog increased by $40.1 million to $534.3 million in the second quarter. We continue to see strength in our launch business driven by returning launch customers with multilaunch requirements, HASTE-related missions, and remanifesting launches from other failed or struggling launch providers. Additionally, our Space Systems backlog increased with the addition of a new satellite design and build program and strong component bookings, particularly for our software and solar businesses. Now turning to gross margin, GAAP gross margin for the first quarter was 23.5%, above the high end of our guidance range of 14% to 16%. Non-GAAP gross margin for the second quarter was 31.8%, which was also well above our guidance range of 22% to 24%. GAAP and non-GAAP gross margin improvements relative to our Q1 2023 results and Q2 2023 guidance reflect the release of a $4.1 million loss reserve associated with the exploration of a legacy launch contract, an increase in average launch selling price and favorable mix within our solar and software businesses. Adjusting for this, non-GAAP gross margin would have been 25.2%, modestly above the high end of our previous guidance range. We ended Q2 with production-related headcount of 767, or up 10 from the prior quarter. Turning to operating expenses. GAAP operating expenses for the second quarter of 2023 were $59.8 million, above the high end of our guidance range of $55 million to $57 million. Non-GAAP operating expenses for the second quarter were $43.4 million, which was modestly above our guidance range of $41 million to $43 million. The increases in both GAAP and non-GAAP operating expenses versus the first quarter of 2023 were primarily driven by higher staff costs related to new hires and our annual merit review and related compensation step-ups, material purchases supporting Neutron and Space Systems developments and facilities, and other ongoing expenses related to the Virgin Orbit asset acquisition. In R&D specifically, GAAP expenses were up $7.1 million quarter-on-quarter as we continue to aggressively ramp our Neutron development efforts through new hires, large material purchases, and outside professional services related to our Space Systems development programs. In addition to these areas contributing to the sequential increases, we also recognized increases in stock-based compensation and were impacted by the absence of ERC tax credits that were recognized in the prior quarter. Non-GAAP expenses were up $4.9 million quarter-on-quarter, driven similarly as GAAP expenses by staff costs, outside professional services, and materials-related purchases. Q2 ending R&D headcount was 518, representing an increase of 62 from 456 heads from the prior quarter. In SG&A, GAAP expenses increased slightly by $200,000 quarter-on-quarter due to changes in contingent consideration related to our PSC acquisition attributable to a higher average stock price in the quarter, higher M&A costs associated with the Virgin Orbit asset acquisition and nonrecurring ERC tax credits that were recorded in Q1, all of which were partially offset by a reduction in outside service expenses associated with year-end audit and compliance work. Non-GAAP SG&A expenses decreased by $1.7 million, owing primarily to the decrease in audit and compliance related expenses. Q2 ending SG&A headcount was 228, representing an increase of nine from the prior quarter. In summary, total second quarter ending headcount was 1,513, up 81 heads from the prior quarter. Cash consumed from operations was $6.1 million in the second quarter of 2023, compared to $25.4 million in the first quarter of 2023. The sequential improvement of $19.3 million was driven primarily by strength in cash collections. Purchases of property, equipment, and capitalized software licenses decreased from $12.7 million in Q1 of 2023 to $10.6 million in Q2 of 2023. The sequential decline was due to the timing of receipts for Neutron and Photon capital purchases. Overall, non-GAAP free cash flow, defined as GAAP operating cash flow reduced by purchases of property, equipment, and capitalized software in the second quarter of 2023 was a use of $16.6 million compared to $38.1 million in the first quarter of 2023. When including our $16.1 million acquisition of select Virgin Orbit assets, which were primarily PP&E, non-GAAP free cash flow was a use of $37.8 million. The ending balance of cash, cash equivalents, restricted cash, and marketable securities was $419 million at the end of the second quarter of 2023. And with that, let's turn to our guidance for the third quarter of 2023. We expect revenue in the third quarter to range between $73 million and $77 million, which reflects $43 million to $47 million of contribution from Space Systems and $30 million from Launch Services, which assumes four launches. As referenced earlier, based on our manifested launch backlog, we continue to expect 15 launches in 2023 and our average selling price to support our current target pricing as we progress through the remainder of 2023. We expect third quarter GAAP gross margin to range between 21% to 23% and non-GAAP gross margin to range between 28% to 30%. These forecasted GAAP and non-GAAP gross margin improvements reflect continued efficiency improvements and greater fixed cost absorption and average launch selling price improvements. We expect third quarter GAAP operating expenses to range between $51 million and $53 million and non-GAAP operating expenses to range between $38 million and $40 million. The quarter-on-quarter decreases are driven primarily by the expected realization of a final $14 million Contra R&D credit related to our Neutron upper stage development agreement with the U.S. Space Force, partially offset by continued step up in staff costs, prototyping, and material spend supporting Neutron and Photon development programs. We expect third quarter GAAP and non-GAAP net interest expense to be $0.5 million. We expect third quarter adjusted EBITDA loss to range between $10 million and $14 million and basic shares outstanding to be approximately 484 million shares. And with that, we'll hand the call over to the operator for questions.

Your first question comes from the line of Erik Rasmussen with Stifel. Your line is open.

Yes, thanks for taking the questions, and nice job on the margins. I just wanted to dig into the guidance a little bit. You're guiding to $73 million to $77 million. Launch seems to be in line. You got four launches there, but Space Systems at $43 to $47 seems a little bit light versus what we were expecting. And I think sort of what we were expecting out of the second half. Could you maybe just break down where the sort of disconnect is? How should we be thinking about the second half overall versus the first half? And is this related to the MDA ramping maybe slower than expected?

Yes, I'll take a shot at that, and then, Pete, you can weigh in if you want to. So, Erik, yes. Like you pointed out, launch is pretty much on target with regards to contribution from Space Systems. There is a bit of a timing issue with regards to being able to recognize revenue over certain programs on the satellite manufacturing side of the house. I don't think it's all that unusual given the early stage of these contracts that we're executing on. So we have a very stringent process for how we are able to recognize revenue over the period of the contracts. So there's nothing that's changed as far as the magnitude of the size of the opportunity or really that much of a time shift, but it's probably about kind of a half quarter light of what we were expecting and as far as contribution from those programs that we're ramping. But we expect to make up a lot of that ground in the fourth quarter.

Okay, so you feel sort of pretty comfortable, a little bit of a steeper ramp even further in Q4 versus Q3 in terms of the Space Systems business?

Yes, absolutely.

Great. And then I saw some of the announcements after the close, the HASTE, maybe just digging into that. You signed a new deal to launch a mission that starts, I guess, for sometime in '24. Do you have though a specific award or contract behind this or are these deals going to sort of be one-offs?

Yes, Erik, so we kind of have multiple relationships with multiple customers on this front. And the way these contracts are sort of developed, it's fairly classified work. So it's difficult to give too much insight into some of those. But suffice it to say, we see a healthy pipeline of these kinds of missions sitting there.

Your next question comes from Suji Desilva with ROTH MKM. Your line is open.

Hi, Peter. Hi, Adam. So just to understand how the recovery effort gets going, I know you're going to do some more milestones. And I read, I think launches 41 to 45. Can you just describe the next steps and when this can become operational in terms of helping with the cost structure for the launches?

Yes, sure. Hi, Suji. So what we're balancing here is incrementally kind of adding learnings, but not interrupting production. So instead of doing like one big block change as vehicles, as you point out 41 and 45 come down the line. Each of them have the learnings and changes incorporated into them. So I would say that the last vehicle we bought down, we added a whole bunch of waterproofing technologies. The next vehicle goes the next step down at the power pack, we've changed a whole bunch of things like umbilical hatches and things like that. And we learned a lot from this last mission. I would say we probably validated more than we learned, but it's rolling into a fairly operational sense, I would say right now. And if you look on our production line, about every third rocket is a silver one with a red stripe for recovery. So it's pretty much been operationalized from a production standpoint. I'd say there's still some more to go from the marine recovery. But that last mission, we flashed it down within 400 meters of the target. So the guys had it within sort of 15 to 20 minutes. They had it by the boat, so that kind of worked well. But I think the last kind of major upgrade is on 45. And then hopefully at that point, it is just business as usual.

Suji, regarding your question about the impact on our costs, we have taken a careful approach to validate our assumptions at every step of the recovery tests. As we previously mentioned, we will initially conduct a re-flown engine, followed by additional re-flown engines, and eventually aim to refly an entire booster. At that stage, we believe the savings we can demonstrate are still valid, particularly in terms of cost reduction and margin improvement for the Electron program, as discussed at our Investor Day nearly two years ago.

All right. Thanks, guys. And then my other question is on a Neutron. It sounds like you're making good progress toward '24 here. Obviously the Virgin Orbit acquisition. Can you talk about the OpEx and the shape of it in support of Neutron? Is there sort of a kind of a peak quarter? Are we getting close to it, or is that going to be a continued kind of steady spend to bring Neutron up? Just curious how that shapes out? Thanks.

Yes, like anything with a rock development program, it's very hard to be too precise with when certain expenses are going to hit and certain milestones are going to be achieved. But as you said, we definitely are making steady progress against an anticipated launch at the end of 2024. And I would say that we will continue to see a kind of a march up in expenses related to Neutron, with the exception of Q3, which we talked about in our guide, where we have this $14 million Contra R&D credit that's certainly helping the P&L. But once you get through Q3, there'll be again a significant step up that will start to look like more of a sequential kind of increasing trend on spend for Neutron. And we don't see the spend peaking on Neutron till probably either, I'd say as we certainly get much, much closer to the inaugural launch. So think about kind of the Q3 timeframe next year. Well, you'll probably see spending peak, and of course there's going to be a difference between kind of what hits your P&L versus your CapEx, because those are all things that kind of move at different times. So I think you'll just see a continued progression of investment in Neutron that shouldn't be too out of school, but I think it's hard to say, try to pick which quarter that spend is going to peak at from both the P&L spend and also from a CapEx perspective.

Okay. All right. Thanks, Adam. Thanks, Peter.

Your next question comes from the line of Kristine Liwag with Morgan Stanley. Your line is open.

Hey, good afternoon everyone. Maybe talking about pricing, in the past few years we've seen so many aspirational space companies try their hand at launch and a few of them have closed doors already. So with the environment still pretty tight regarding capacity, can you talk about the pricing difference for these bookings that you have for 2024 with the new Black Sky contract that you announced and how that compares to previous launch costs? And then also when you put that together and as launch costs are coming down, as you get economies of scale, when should we expect to see gross margin break even at launch? It seems like that should be coming up pretty soon?

Thank you, Kristine. You're correct in your assessment. Many launch companies struggle to meet their aspirations, which has led to a tightening in the market. We've maintained consistent pricing throughout and haven't resorted to drastically lowering our prices to gain a competitive edge. While some competitors may have attempted this strategy, it’s not a sustainable way to build a successful business. Our pricing has remained stable, reflecting great value for our services. People often liken us to a rideshare service, but a more fitting comparison is to a small, dedicated launch service. Currently, the only other small, dedicated launcher available is likely a Minotaur, which costs around $30 million to $40 million. In contrast, our Electron is priced at $7.5 million, offering good value, and we haven't needed to lower our pricing on that product while still enjoying solid sales traction.

Hey, Kristine. And when it comes to your questions on the profitability kind of benchmark for Electron, so we've been pretty consistent in when we see two launches per month. That's where we really get to the economies of scale and the fixed cost absorption that we need to kind of increment our way towards our target of a 50% non-GAAP gross margin for Electron. It requires a few things to happen. Of course, you need the cadence that I mentioned, so two launches per month. We need our annual cost reductions on bomb and production efficiency. We need also the savings from the recovery program that we were talking about earlier, and all of those things are still very much in focus. Nothing has really shifted from that. I would say the one thing is we've already turned GAAP gross margin positive on the Electron launch platform. We don't report below the gross margin line, so it's hard to give a lot of clarity on, for example, what the contribution margin looks like now that we're in positive gross margin territory on Electron. But needless to say, everything seems to be progressing in a way that is very much consistent with what we thought profitability should look like for this platform. And we really are starting to see a lot of efficiencies in the business. And I think probably the most encouraging is the way that we've been able to pivot a lot of the previously dedicated production resources over to support Neutron and Space Systems. So, again, I think the learning curve is definitely one that we've got well in hand. I think really the next big step for the margin enhancement really remains to be the recovery program, which, as Pete mentioned earlier, is well in hand as well. So hopefully that answers your question on margin.

Thanks, Peter. And thanks, Adam. Maybe I could ask the technology question, late last month, NASA and DARPA announced an award to Lockheed and BWXT to test nuclear propulsion in space. I mean, Peter, maybe it's still very early stage, but I was curious to get your thoughts on how much of a game changer nuclear propulsion could be in terms of increased speed, efficiency and how viable is that to the Rocket Lab story? Where do you see its role for the company, if any?

I'm a strong supporter of in-space nuclear propulsion because, when you think about it, there hasn't been significant improvement in chemical propulsion since the early 1960s. We've essentially reached a point of chemical equilibrium a long time ago. Therefore, we need a major breakthrough if we truly aim to be active participants in the solar system. I believe nuclear propulsion has the potential to make that transformation. However, it is quite complex, and the biggest challenge is getting it into orbit initially. Once it's in orbit, though, it can be highly effective. Currently, we do not have any active internal programs to develop that technology, but I think it's something to keep an eye on, and we will certainly be monitoring it.

Great. Thank you for the color. Thanks, guys.

Your next question comes from the line of Cai von Rumohr with Cowen. Your line is open.

Yes, thanks so much. So you talk of cost cuts to the bomb, but basically we're in an inflationary environment. Folks are seeing supply chain disruptions. Talk to us a little bit about what are you seeing in terms of inflation regarding pricing. I mean, it looks like the pricing average price of your launch in the third quarter is going to be pretty much the same as the second. So, are you in a period of stability or is that just a mix-related issue?

Yes, I can take that. Okay, go ahead, Pete.

No, you go, Adam.

So, regarding inflation and pricing, the pricing observed in 2023 largely stems from agreements established over the past year or even longer. We have consistently communicated our pricing expectations for 2023 and anticipate an annual increase in our pricing assumptions going forward. We couldn't foresee inflation two years ago when these contracts were made, nor even a year ago. Fortunately, we've achieved significant efficiencies in production. Our supply chain is highly vertically integrated, making us less vulnerable compared to other companies that rely heavily on external suppliers for vehicles and subsystems. This applies to our space systems business as well, especially regarding our photon platforms, where a significant portion of content is sourced internally. Consequently, we are relatively insulated from supply chain shocks and inflation-related challenges. That said, we are not entirely immune; we do experience impacts on labor costs and other expenditures such as rent, utilities, and fuel. However, the nature of our vertically integrated business offers us some protection. Looking ahead, we are definitely considering current inflation trends as we price our launch contracts. I believe we have addressed all relevant factors here. I'll let Pete add his thoughts.

No, you said exactly what I was going to say, Adam. The way we've typically done stuff in the past, Cai, is we'll take a product and we'll put it into production and we'll spend kind of the minimum required to put that in production. We don't go out and build a giant factory and fill it full of gear, and then go and build a product. What we'll generally do is build a product and then kind of iteratively phase in automation and those kind of production gains. So a locks valve, for example, would have been the very first few are entirely built by hand. And then we'll add a little bit more automation until we get to where we are today, where a lot of that process is entirely automated. So that's where we can kind of realize some of these bomb savings, even in this kind of hideously inflationary environment.

So if your realized prices are basically what you priced a year ago, what should we look for next year? Because it looks like you've done a pretty good job in offsetting whatever cost hikes there have been?

Yes. I could take that. So Cai, I would say that obviously at this point, we've got quite a bit of our 2024 significant portions of '25 and in some cases beyond that kind of already in backlog, right? So, we've done some anticipatory pricing again, with what views of inflation were at the time that we entered those agreements, also where we thought our costs were going to trend. Our focus is really on getting to our long-term gross margin targets and we've not been shy about that for either our launch business or our space systems businesses. I would say that what we've seen historically though is a continual upward march in our price. If you go back, even say, three or four years ago, we were at a sticker price of a little under $5 million per launch. And now, you can see what we've printed for Q2 and where we see the rest of the year folding out. So again, I think we see that trend increase. And I think also, as Kristine mentioned earlier on the call, there's been a lot of dropouts from aspirational launch providers. And that just kind of really if you also think about the pricing that you're seeing now coming through, probably didn't reflect the reality of today, where there are fewer people delivering the service than was kind of anticipated. A lot of people were selling on slideware and so forth back when some of these contracts were being negotiated. So, as you get, I would say, a smaller group of people, who've actually been able to deliver frequent, reliable access to space. We believe that's supportive of firming up pricing. I think hopefully, we see that trend continue going forward based on execution alone.

And then the last one is what's the split between adjusted gross profit between launch and space systems in the third quarter?

I don't believe we provide that in our guide. We're not getting down to that level of detailed information at this time, Cai.

Okay, great. Thanks so much.

Thank you. Your next question comes from the line of Jason Gursky with Citi. Your line is open.

Hey. good afternoon, everybody. I wanted to start with a question on space systems and the Globalstar project and some of the rev-rec that you talked about there. Adam, can you talk kind of what the status of that program is from a milestone perspective, CDR or preliminary design review? Just kind of where you are in that process, so we can get a sense of what the shape of the curve looks like in the ramp for revenue and space systems over the next few quarters.

Yes. I'll let Pete talk to the status of the engineering program.

Yes, sure. Hey, Jason. So look, we remain solidly on track to that program. So, we've obviously gone through PDR and CDR. So that program is marching on track. And yes, it's as intended.

That's right. Your side is your customer as well they're kind of staying on track. I mean, it's a joint project. So, we all kind of rely on each other. And obviously, there's the NDA piece and our piece as well as Globalstar's piece. So, by kind of definition for us to successfully deliver our milestones, the other partners have to be as well. But this quarter of revenue that you're not going to get this quarter, is it tied to any particular milestones ahead of us that we might see some announcements on in the future?

Yes. I can jump in there. So, Jason, I think one of the challenges with the rev-rec under ASC 606 with these programs, there's a lot of different hurdles that you've got to get over and satisfy. And as a company, we're just as conservative on our accounting as we are in making sure that the launch vehicle is ready to go off. And we've recognized very little revenue historically under the contract with MDA, even not the little bit that's embedded in our Q3. And it's a function of certain parts of the program basically get allocated to R&D and then other elements get allocated to obviously the cost of producing the spacecraft themselves. So, we are still up to this point, have been very much in the R&D portion and the real heavy kind of phase, where you move into actually assembling spacecraft and pulling inventory and all those things that are required under that which also tie into your rev-rec. Those have really kind of been always back-end loaded. And so I think, to Pete's point, I mean, I think all of the technical things are on track and on schedule. And so now, it's just a matter of really kind of getting to the point, where we're able to recognize the revenue once we get the R&D portion largely behind us, which is kind of where we're at right now. We're kind of right on that cusp as we start to convert from it kind of hitting the P&L on the OpEx line versus now transitioning to rev-rec and seeing the cost of sales come through as well.

Okay. that's great. The second question is around capacity for Electron and Neutron. Just kind of curious if you got kind of an update on if the demand was there, how many annual launches do you think you were capacitized to do on the Electron? And then Pete, I think maybe I heard this wrong. but I thought I heard you mention that some of the inventory and equipment that you picked up from Virgin might accelerate the capacitization for a lack of a better word on Neutron. So, be kind of curious. You get that first launch done on Neutron, let's say everything goes swimmingly. Well, how much annual capacity would you have on the tail end of successfully certifying that launch vehicle?

Yes. And it's a great question. So on Electron, look, we facilitate a factory to be able to ultimately produce one Electron a week. So, the factory's capacity is stated at that. Now, in order for us to increase the capacity over today, there's no major piece of CapEx that we need to produce, I mean, we have three pads operational. and it's really a headcount adjustment on that sense. So, there's plenty of capacity there for Electron growth, and we just kind of manage that capacity with the launches we have scheduled during the year just so that we don't over capacitized ourselves. On Neutron, we'll be following a pretty consistent path that's proven to work well with Neutron as we did with Electron, where we start off with one vehicle and it's not produced in a full production sense. And then as we produce more, we kind of bootstrap and add more facilities and more automation as we go through. Obviously, being a reusable launch vehicle, the only thing that we have to really produce at volume is the second stage, which is a much smaller and remarkably simple, comparatively speaking, to the first stage device. So, the cadence for that can move up pretty quickly. The Virgin Orbit acquisition is really a scaling enabler. So, knowing that the way we work here at Rocket Lab is, we don't go out and just build giant factories and fill them with a lot of gear and then start building one rocket. We kind of build one rocket and then iteratively add those things along the way. We found that to be the most capital-efficient way of doing it. The beauty with the Virgin Orbit facility is that we walked in there, and it's just capitalized to the roof with equipment. So, where that really is going to help us, especially from an engine development perspective or engine production perspective, is that a lot of the long lead, really expensive capital equipment like very bespoke CNC machines and measuring systems, and whatnot we just all picked up for $16.1 million. So, where Virgin Orbit for us is really going to shine is on the backside of the project, where we need to start producing larger volumes of engines and even composite components and such.

Thank you, Adam. One last question, if you don't mind, can you discuss the debt and the plan for the balance sheet?

Yes. So, the debt on the balance sheet is from the $100 million of Hercules loan that we took out before going through our de-SPAC transaction to really, again, de-risk that transaction itself. We've been pretty active in looking at ways to access, I would say, more cost-effective forms of capital. I think the capital that we have in form of that loan has been incredibly flexible. They've been a great partner to us. But that was also taken out at a time when the company was in a very different stage of its development versus where we are now, which we think opens up other options for us. Now, that said, when we came public, we raised the amount of capital that we thought we would need to execute our vision on the space system side of the house, plus get Neutron to the pad. We still feel very comfortable that we're in that position. We can always choose to go faster or go slower, depending on kind of where our capital resources look and what they look like. But right now, again, we have a long-term roadmap that we can execute with the capital that we have. But again, I think there will be opportunities to replace that piece of capital with more efficient capital, because now we're much more mature and established. It has gone current. The loan is payable within 12 months now. I think it comes due on June 1st, I believe, of 2024. So obviously, we've got some time. but we're very comfortable with where we're at from a liquidity perspective and we have a lot more options now at our disposal than we had again, two, three years ago when that was taken out.

Okay, great. Thanks, everybody.

Your next question comes from the line of Andre Madrid with Bank of America Securities. Your line is open.

Yes. Hey, guys. how are you? I wanted to follow up on Suji's question, actually. Would you guys be able to maybe provide the percent cost reduction that you're targeting through electron recovery and maybe, talk a bit more about how this could drive margins on the platform moving forward?

Yes. if you look at the total cost of Electron launch vehicle, about two-thirds of the cost are in the first stage, which is obviously where we're focused on our recovery efforts. And if you look at some, we've made some assumptions about how much rework we require to the stage. Fortunately, each one of these recovery missions that we've done have provided a lot of data for us to kind of confirm those assumptions. The fact that we're going to be flying a re-flown engine later this year and a lot of other components have already gone through similar analysis and even some of them have gone through flight is very helpful. So, if you look at the total cost that we've been targeting to get an Electron launch, including a reused booster on certain percentage of our missions, which is also a factor that goes into the calculus. The second stage, where we look at bomb reductions, because that's not recoverable, and then the kick stage as well, we've targeted getting the total cost of an Electron launch down into the $3 million to $3.5 million per launch. And again, that's all a lot of it's tied to launch cadence of at least two launches per month, getting our normal kind of realized bomb cost reductions, and then of course, the benefits from recovering the first stage boosters. So again, hopefully, that provides you a little bit more color and addresses your question.

Yes. Definitely, that is very helpful. And then maybe, one more if I may, on Neutron. Given that we just talked about Electron, I understand the platform is expected to be reusable and land back on the pad and whatnot. But how should we be thinking about the cost structure there?

Sure, sure. Yes, Andre. It's pretty similar to Electron in a reusable sense. Really, I think the economics pretty much remain the same. It's just an extra zero, probably. But the actual fundamental economics of reuse pretty much pencil out the same. The target margins are the same. The added advantage of course, with Neutron is that the more reuses we get out of the first stage, the better. A bit of those economics obviously looked until you completely amortized the cost of that first stage over and over from the repeated uses.

Great, great. That's super helpful. I'll leave it at that. Thanks, guys.

Thank you.

Thanks.

Your final question comes from the line of Edison Yu with Deutsche Bank. Your line is open.

Hey. thanks, guys. A couple quick ones from me. I think we talked about 20 launches next year. Is that still the right way to think about the manifest? And given all the activity, negative activity for the competition, do we think there's some maybe upside to that?

Yes. I think that's certainly what we're planning for internally for production sense, Edison. And we're kind of on target there. And the thing is with a lot of the kind of aspirational launch providers, it wasn't always clear how many launches they actually had under contract. and there are very few of them now left. So I mean, maybe there is. but I think most people have kind of realized who's going to be successful and who's not by now. So, I think the majority of the defection has probably occurred.

Understood. And the one on space systems, I know there were some difficulties, I think, initially with SolAero, what's the latest update on that business? Is that kind of recovering to the trajectory that you guys are expecting?

Yes. I think we're very happy with where that business is going. So, I think the team there have done a really great job. And I think that is a good example of kind of a very traditional historic space company coming under the wing of Rocket Lab and us kind of re-culturalizing them and the team also very much being up for that and enjoying that. And I think the result is Adam, you can say more, but personally, I'm very happy with the way that's tracking.

Yes. I would say, Edison, that when we closed that deal, it'll be two years in January. We set a target for 30% gross margin within that timeframe on a non-GAAP basis. And I would say that we're absolutely still tracking towards that. I think if you'd asked me that question six months ago, I think I probably would have said that maybe there's some risk. It might have taken maybe 2.5 years to 2 years to get there. But it feels like we're in the right place to kind of achieve that in the original timeframe that we contemplated. So as Pete said, we've been very excited. I mean, it's a great team. We love what that brings to the platform as far as the level of vertical integration for a very key and high percentage total cost of bomb to our platforms. Again, it just gives us more control over delivering our solutions to our customers in a timeframe, in a cost and performance that we need to have. So, it's been a very big differentiator this year and unfortunately, the financials are following along with that.

Great. thanks.

I will now turn the call back over to Colin Canfield for closing remarks.

Thanks so much. Just a reminder for everyone on the call today, we actually were able to resolve the technical issue from our call provider to get the slides posted onto today's website. We also want to take the opportunity to flag that we'll be presenting at upcoming conferences for Bank of America, Jefferies, Citi, and Morgan Stanley during the upcoming months. So, look forward to seeing you guys on the road and thank you all for coming to today's call.

Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.