Rocket Lab Corp Q3 FY2023 Earnings Call

Thank you for waiting. I’m Eric, and I will be your conference operator today. I would like to welcome everyone to the Rocket Lab Q3 2023 Earnings Call. I will now hand the call over to Colin Canfield, Head of Investor Relations. Please proceed.

Thank you, Eric. Hello, everyone. We are glad to have you join us for today’s conference call to discuss Rocket Lab’s third 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 the liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and factors that can 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 are reconciliations of these historical non-GAAP financial measures to the company’s comparable financial measures calculated in accordance with GAAP. This call is also being webcast with the 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 everybody for joining us. Today’s presentation will go over our key business accomplishments for the third quarter of 2023, as well as further achievements we have made since the end of the quarter. Adam will then talk through our financial results for the third quarter before covering the financial outlook for Q4 2023. After that, we will take questions and finish today’s call with the near-term conferences we will be attending. Alright, on to what we achieved in the third quarter for the year. Starting with Electron, in July, we launched a mission with several satellites for NASA and others, which was the first of the two back-to-back reusability focused missions. After successfully deploying the first Mission 7 spacecraft, Electron’s first stage was brought back to Earth and recovered from the ocean. Then we followed that up with our 40th Electron launch and even more recovery milestones, including a return for stage and the first launch, reflying the Rutherford engine previously flown on our 26 Mission, There and Back Again. The engine performed flawlessly like a new one, completely validating our pursuit of reusability for Electron and setting us up well to refly an entire engine set as our next major reusability goal. Next, I will provide a bit of an update for Electron. Following those two successful flights, as you know, we unfortunately experienced an anomaly on our 41st Mission. It’s important to remember that up until this launch, we have had 37 successful orbital missions to place 171 satellites in orbit. And the past two years have been flawless, with a record of 20 successful missions one after the other. For Flight 41, as soon as the issue occurred, a team jumped into action. In the week since, the team has been scouring through thousands of channels of flight data and manufacturing data to determine what was the probable root cause. I will take you through their investigation in detail over the next couple of slides. Working in parallel with the FAA, the FAA has conducted its own review of the mission safety processes, plans, and procedures, which concluded that they all worked as they should to keep the public safe and I am pleased to confirm that the FAA has since given us approval to resume launching from Launch Complex One. With their investigation in its final stages and our launch license remaining active, we are fully anticipating to return to flight within the next few weeks. Following updates and changes to our testing and manufacturing processes, we will be returning to the pad with an even more reliable vehicle to meet our busy launch manifest for the remainder of 2023 and into 2024. Now, let me take you through what happened and what we have learned. The anomaly that ended the mission happened incredibly quickly. From the first action in the chain of events when Electron cut off its data relay, the team only had 1.6 seconds of anomaly flight data to work with. This was always going to be a highly complex issue to figure out, but with deep diligence and analysis, here is what we have been able to determine. On its 41st Mission launched September 19, from LC-1, it completed all the usual launch milestones through lift-off, Max-Q, and stage separations. At 151 seconds, the second stage engine tried to ignite, which is confirmed by flight telemetry that showed the ignited pressure building and the locks and kerosene pump speed rising to pump propellants into the combustion chamber. The voltage levels from the battery packs that power the engine and the motor controllers were nominal at this point and normal at that point of ignition, but within milliseconds, at 151.7 seconds, we got our first indication of the anomaly. The system’s high-level voltage levels took a sudden dip and rise of about 100 volts within 30 milliseconds, indicating an energy escape from a system that then led to a full loss of power to the second stage lower avionics, cutting off telemetry and communication with the second stage. And with that, it was all over. So move on to the issues. You have to bear with me on this was a little bit to talk about here. But with good visual evidence from the onboard cameras and over 12,000 channels of data and this high-level timeline to draw from, the investigation narrowed in on the issue. More than 200 sub-investigations were launched to rule out hypothetical causes of the anomaly. After more than 7 weeks of extensive analysis of the mission’s manufacturing, test, and flight data, the findings of the Rocket Lab investigation team overwhelmingly indicate an unexpected electrical arc occurred within the power system. From that, they are able to pinpoint and retriangulate the failure’s point of origin to an area where the two battery packs connect, known as the fix-packed to supply the high voltage power. So now, we are all going to take a little lesson on Paschen's Law and Paschen curves. Paschen law describes how, in partial pressure environments, the likelihood of an arc to occur changes in high voltage systems depending on the environmental composition. The easiest way to think about this is if you have a positive and a negative terminal of a battery at 500 volts down here on Earth, you could place those two terminals of the battery about 0.03 millimeters or one-third of the thickness of a human hair beside each other and they would not create an arc or jump a spark between them. Now, take the same 500-volt battery terminals and put them in the worst part of the Paschen curve, which just happens to be just after stage separation and Stage 2 ignition of Electron. In that case, the same 500-volt battery terminals will now arc to each other when they are nearly 1 meter apart. So different gases and different pressures affect this distance. And there are other factors like AC ripple that can have a huge negative effect. But for now, let’s just keep it simple. For Electron, with its high voltage 500-volt power supply, we have to ensure that every connection is hermetically sealed. A tiny pinprick or installation failure will result in arcs given that they can travel over large distances in the Paschen curve. One of this is influx and very transient, because as we ascend higher during the second stage burn and go into the high vacuum of space, the arcing distance goes back the other way and it becomes hard to arc again. It’s really just at stage separation where things are the worst. As you can imagine, this is extremely difficult to test for on Earth. We currently put the whole rear engine assembly in a vacuum chamber, pull it down and inject gases like argon to try and aggravate the phenomenon. But even the smallest installation compromise cannot always be detected, especially when you compile that with other factors like AC ripple and trace gases. So, now that everybody understands Paschen curves during the second stage ignition, we are at the worst part of the curve and we had a small concentration of helium in the vicinity of the upper stage, which is normal, and a high voltage AC ripple that lowers the spark threshold even lower and a tiny undetectable fault in the HV loom installation. All of which combined allowed for an arc to briefly occur. If any of those elements were not present, then the failure would not have occurred. All four had to be there. To be honest, with all the testing we do before flight, you would also have to be incredibly unlucky to have the installation failure point also line up with an electrical path to be able to arc a chassis. And look, I don’t generally believe in luck as an engineer, but in this instance, I would say that so many things had to line up that most people would say that the probability of this occurring would be largely improbable. So with that, now that we kind of understand how we have explained the failure, what are we going to do to get back to flight? The failure is obviously a highly complex set of conditions that are extremely difficult to predict. The team’s top priority through the investigation has been to find a way to make sure that this never happens again. As a result, there are a couple of key corrective measures. The first is to increase the fidelity of stage-level vacuum testing. We now have much more sensitive instruments implemented in the pre-flight test both at the component level and the stage level that can sense partial discharge all the way down to a picocoulomb now. This gives us much more confidence in the testing. However, I was not happy to stop there. We have implemented a rather brute force solution. What we have done is seal up the battery frame, which contains all the high voltage connections and equipment, and then pressurize it to about 0.5 PSI. Surprise, surprise, it’s another Paschen curve that shows that by pressurizing the high voltage area, we shift the Paschen curve to the left out of the red zone and into the green zone, meaning, basically, we are back to what it’s like on Earth, where it’s not really possible for big arcing distances to occur. Now, this has been a lot of work to implement by the team and it’s a fairly extreme solution. In my opinion, the best way to solve a problem is always to eliminate the problem. And that’s what we have done. Getting to the bottom of the issue and back to the pad for our customers has been the team’s number one priority. It’s been incredible to witness their perseverance and dedication over these past few weeks, not only on the anomaly investigation, but in the work that they have completed in parallel to make sure we are good to go as soon as we get back to the pad. The launch window for our return to flight mission will open on November 28 and extend into December. This dedicated mission will be for iQPS, a Japanese-based Earth imaging company, with the rocket for that mission going through pre-launch testing on the pad at launch complex right now. Moving on to Electron's launch manifest. In 2024, we have a really big year ahead of us. Even with air pours in operations, Electron remains the world’s most frequently launched small orbital rocket. Dedicated missions for small satellites continue to experience strong demand, which we have seen in multiple buys by returning customers and constellation operators. In fact, we have booked out Electron launches for next year completely. We see the market for the Electron product being very strong and this manifest validates that. Frequent launch opportunities, flexibility over schedule, and control over orbiter deployment are what our customers are looking for, and that’s what Electron has been providing and will continue to provide in the new year. And all we have to do is execute. With our 2024 manifest, as with anything in the space industry. By ramping up Electron production and keeping on top of demand with recent acquisitions, as well as continuous improvement in automation across our manufacturing processes, we look to continue improving on our already impressive performance in manufacturing. We also note that the scaling is coming with improved gross margins. In Q3 2023, we achieved a 27% GAAP launch gross margin, which should enable us to progress our profitability targets for Electron as we drive scale and efficiency into the business. I now want to take you through and highlight some of our accomplishments in Q4. So, Neutron Structures, we will start with a Neutron update. Earlier this quarter, we reached a major milestone and had the first second-stage tank up on the stand for structural and cryogenic testing, which is a key milestone for our Neutron program development. The team’s job was to push the tank to its absolute limits by loading it up with cryogenic fluids and testing to destruction. Something like 96,000 liters of liquid nitrogen was used for this test campaign and an exploded tank in this instance is very much a good thing and what we wanted to achieve. The team took the tank past its maximum expected operational pressure at more than 7x atmospheric pressure. What they have learned in the campaign has been applied to the next Stage 2 tank currently under production, really to confirm structural reliability early as we get closer to our date with the launch pad. Speaking of baking, this is quite literally what the carbon composites team has been up to with their next full scale Neutron structures and components. The images on this slide show you the scale of some of the in-tank devices being produced, more than 7 feet in diameter for those circular propellant management devices and the Stage 2 dome being eliminated in the bottom section. Most of Neutron’s fixed fairing sections are coming together nicely. And of course, we have another second-stage Neutron Tank being built for our next test stint to go on our next test in the first half of 2024. Over to Neutron’s Archimedes engine, another test we are celebrating was a critical combustion test that the team achieved with Neutron’s Archimedes engine. There are plenty of benefits to pursuing methane LOX propellants, but it does come with its own challenges. The critical piece really, and one of the challenges was in using methane and liquid oxygen for Archimedes, is getting the pre-burner dialed in. We want a fuel mixture ratio in a chamber of roughly 3:1 oxygen fuel, but we are running an oxygen-rich pre-burner cycle on Archimedes that forces us to flow all of our oxygen through the combustion device. Therefore, our ideal mix is between 60 to 100 to 1, which is a challenging achievement without all the excess oxygen extinguishing combustion. Archimedes also has an extremely benign operating point, which makes it great for reliability and reusability, but it does mean that the pressures are low and ironically, harder for the pre-burner. But I am happy to say that we met all the operating points that we wanted to on those tests. That was a great accomplishment by the team. At the same time, the Archimedes team has been producing and testing full-scale hardware like valves, chambers, injectors, controllers, and assemblies in preparation for development and propulsion tests, which makes for a really impressive sight when all the pieces come together, as you see in the photo on the side. Over to Neutron infrastructure, so supporting infrastructure for Neutron has also scaled quickly over the past few months. Ground works are being completed in Virginia, where our Neutron pad will be. Test facilities and support services will be based there as well, and we are ready for construction to begin at our launch site located close to our key government customers, which will enjoy the benefits of a less congested launch site than, obviously, the case. In Q4, we opened our new engine development center in Long Beach that will support the development and production of the Archimedes engine. Once the engines are completed at EDC, they will go to testing at our standard NASA Stennis Space Center, where the Neutron team has been busy with site improvements to accept the engine for hot fires. Finally, Neutron timeline, all of these achievements across Q3 and Q4 that I have mentioned and several others are shown here have been great to tick off along the Neutron timeline. We’ve completed second stage tank testing, printed key Archimedes engine parts and components, had success with our combustion testing devices, completed qualification testing of our composite over our pressure vessel, run through separation lock deployment testing and stage pusher system testing, completed our actuator microcontroller testing, finished tests on our power management module, confirmed Neutron’s engine and stage controller functions, completed avionics controller testing, successfully tested the vehicle’s thermal protection system, and set up a test rig for incoming Neutron and system testing. The team is obviously working hard to keep our ambitious schedule for the rest of the year and into '24, with some of the next year milestones to look out for, including first stage qualification tank test completed, Archimedes engine testing campaign, and the first simulated flight orbit with our hardware connected to our flight computers. We will continue to provide updates on how Neutron is tracking outside our quarterly reviews. Beyond Electron and Neutron, our hypersonic test vehicle, HASTE, has seen significant amounts of interest from new and returning government customers looking to further develop the nation’s hypersonic testing capability. We have actually booked 7 launch contracts in the 6 months since the HASTE program was introduced, including our latest mission announced today. HASTE launched from Virginia for the U.S. Department of Defense Innovation Unit. This mission will demonstrate HASTE direct inject capability by deploying its payload during ascent while still within the Earth's atmosphere, a long sought-after capability for the nation’s strategic defense and civil needs at a fraction of the cost of the current full-scale tests. On to space systems now, we have a new spacecraft order on the books for our confidential constellation customer that builds on a strong demand for our satellite products. This particular spacecraft will include a full suite of our satellite components and subsystems, including star trackers, reaction wheels, solar panels, radios, flight software, and more. This contract speaks to the popularity and configurability of our spacecraft bus, as well as our ability to grow as an end-to-end mission partner for the space industry. Importantly, we will also be managing the mission’s operations and further demonstrating our end-to-end business model of building and operating satellites for our customers.Continuing with space systems updates, we are proud to have directly supported the success of NASA’s groundbreaking Psyche mission launched in October, with their solar panels powering the spacecraft on its 6-year journey into deep space. These solar panels we provided to the mission hold the record for being the largest solar panels ever installed on a NASA JPL satellite, which we are immensely proud of. Finally, I am thrilled to welcome retired U.S. Space Force Lieutenant General, Nina Armagno, to Rocket Lab’s Board of Directors. Lieutenant General Armagno served more than 35 years in leadership positions across the U.S. Space Force and U.S. Air Force, including being the first Lieutenant General Officer appointed to and Director of Staff for the Space Force, where she established America’s first new military branch in 72 years. She has had an accomplished and distinguished career in the military and will be an invaluable asset to the board.

Thanks, Pete. Third quarter 2023 revenue was $67.7 million, which is near the high-end of our prior revised guidance of $66 million to $68 million. This reflects sequential growth of 9%, the result of three launches and continued growth in our space systems business. Our Launch Services segment delivered revenue of $21.3 million in the quarter from three launches and is in line with post-anomaly revised guidance of $22 million, with the slight underage due to timing of revenue under our launch study contracting. The resulting average revenue per launch came in at $7.1 million, below our target average selling price of $7.5 million for 2023 and the result of a less favorable mix in the quarter. Our current backlog continues to reflect our target average revenue per launch with variability tied to LSA volume commitments, launch location, and unique mission assurance requirements. Our Space System segment delivered $46.3 million in the quarter, which was up 17% sequentially and modestly above the high end of our prior revised guidance range of $44 million to $46 million. This was driven by a step-up in our MDA contract revenue, offset somewhat by a reduction in our components business, which is poised to rebound in the fourth quarter guide that we will discuss later. Now turning to gross margin. GAAP gross margin for the third quarter was 22.1%, above the high-end of our prior revised guidance range of 18% to 20%. Non-GAAP gross margin was 29.5%, which was also above our prior revised guidance range of 26% to 28%. GAAP and non-GAAP gross margin improvements relative to our revised Q3 2023 guidance reflect continued efficiencies in both our launch and satellite manufacturing businesses. We ended Q3 with production-weighted headcount of 816, up 49 from the prior quarter. If we look at a sequential basis, non-GAAP gross margins reflect a 430 basis point improvement versus Q2 2023 when adjusted for Q2’s one-time $1.1 million release of a loss reserve related to a legacy launch contract. We are encouraged by the trend in gross margin improvement and expect this trend to continue into 2024 as we return to launch and resume growth in Electron’s launch cadence against our strong and growing launch backlog. Turning to backlog, we ended Q3 2023 with $582.4 million of total backlog, with launch backlog of $260.7 million, and Space Systems backlog of $331.7 million. Relative to Q2 2023, total backlog was up 9% sequentially or $48.1 million thanks to healthy bookings at our launch business, partially offset by declines in Space Systems. For launch specifically, backlog was up 55% sequentially or $88.8 million as Electron continues to benefit from return orders of both commercial and HASTE customers. For Space Systems, backlog was down 11% sequentially or $40.7 million as we continue to work through our larger satellite manufacturing contracts. Timing of additions to the Space Systems backlog are lumpy due to the increasingly complex and magnitude of these contract opportunities. We expect approximately 57% of current backlog to be recognized as revenues within 12 months and expect continued meaningful growth in our backlog as we exit 2023 and progress through 2024. We continue to pursue increasingly complex and financially needle-moving space system opportunities and are encouraged by progress being made in this part of our business. We believe that these pursuits position us to continue scaling as an end-to-end space solutions leader. Lastly, regarding operating expenses. GAAP operating expenses for the third quarter of 2023 were $53.8 million, modestly above the high-end of our original and unrevised guidance range of $51 million to $53 million. Non-GAAP operating expenses for the third quarter were $39.8 million, which is at the high end of our original and unrevised guidance range of $38 million to $40 million. The decreases in both GAAP and non-GAAP operating expenses versus the second quarter of 2023 were primarily driven by R&D credits related to Neutron upper stage development from our U.S. government partners, partially offset by higher Neutron development spending, increases in headcount, and higher depreciation and amortization expenses. Q3 ending SG&A headcount was 236, representing an increase of 8 from the prior quarter. In R&D specifically, GAAP expenses were down $4.4 million quarter-on-quarter due to increased contract R&D credits related to Neutron upper stage development, partially offset by a step-up in Neutron development spending. Q3 ending R&D headcount was 520, representing an increase of 2 from the prior quarter. Total third quarter headcount was 1,572, up 59 from the prior quarter. Purchases of property, equipment, and capitalized software licenses were $21 million in the third quarter of 2023, an increase from $10.6 million in the second quarter of 2023. The sequential increase was due to our continued investment in Neutron research, testing and production infrastructure projects, along with its expansion of our satellite production and space solar solutions capacity. Cash consumed from operations was $25.2 million in the third quarter of 2023 compared to $6.1 million in the second quarter of 2023. The sequential increase of $19.1 million was driven primarily by timing of receipts and payments associated with our satellite production programs. Q2 was a quarter that benefited from a working capital dynamic where we collected on material milestone invoices that were raised in the prior quarter. Cash consumed by asset acquisition and business combinations was $800,000 in the third quarter of 2023, a decrease from $16.1 million in the second quarter of 2023. Overall, non-GAAP free cash flow defined as GAAP operating cash flow reduced by purchases of property equipment and capitalized software in the third quarter of 2023 was a use of $47 million compared to $16.7 million in the second quarter of 2023. We expect a reversal of this negative working capital cycle in early 2024. The ending balance of cash, cash equivalents, restricted cash, and marketable securities was $374 million at the end of the third quarter of 2023. We have made progress towards our long-term financial model. We have delivered consistent revenue growth and, when adjusting for the one-time release of a loss reserve in Q2, gross margin expansion and shrinking adjusted EBITDA losses each quarter. With our strong launch manifest and greater contribution from Space Systems contract execution in 2024, we expect this trend to continue. Overall, we expect gross margin trends will continue to improve over time.

In terms of guidance for the fourth quarter of 2023, we expect revenue in the fourth quarter to range between $65 million and $69 million, which reflects $48.5 million to $52.5 million of contribution from Space Systems and $16.5 million from launch services, which assumes two launches. Based on our manifested launch backlog, we now expect 11 launches in 2023 and 22 launches in 2024, with an expectation that our average selling price continues to trend towards our current target of $7.5 million through the remainder of 2023 and into 2024. We expect fourth quarter GAAP gross margin to range between 24% to 26% and non-GAAP gross margin to range between 30% to 32%. These forecasts of GAAP and non-GAAP gross margin improvements reflect a favorable mix between launch and space systems, along with a favorable mix within space systems. We expect fourth quarter GAAP operating expenses to range between $61 million and $63 million, and non-GAAP operating expenses to range between $50 million and $52 million. The quarter-on-quarter increases are driven primarily by having recognized a substantial amount of contra R&D credit related to our Neutron upper stage development agreement with the U.S. Space Force in the prior quarter, along with increases in staff costs, prototyping, and material spend as we continue ramping our Neutron development program. We expect fourth quarter GAAP and non-GAAP net interest expense to be $2 million. We expect fourth quarter adjusted EBITDA loss to range between $23 million and $27 million and basic shares outstanding to be approximately 487 million shares. The unique situation created by the anomaly and related pent-up impacts to the launch manifest as we prepare to return to flight, along with better visibility on Space Systems program execution and revenue recognition as we prepare to ship the first spacecraft against the MDA Globalstar program in the middle of the first half of 2024, provides us with the visibility and confidence to estimate Q1 2024 revenue to range between $95 million and $105 million, putting in sight our first $100 million revenue quarter. This forecast would be the result of 4 to 5 launches in the quarter yielding between $30 million and $37 million of launch revenue and $65 million to $68 million of contribution from Space Systems. This would represent a significant milestone for the company and we believe a strong endorsement of the end-to-end space solutions business model we are delivering on.

Thank you. Your first question comes from Edison Yu with Deutsche Bank. Please go ahead.

Thanks for taking our questions, and appreciate the level of detail provided on the investigation. First question on the manifest for next year, can you give us a sense of your confidence level on the 22? Is that sort of your base case? Or in other words, the ranges are 20 to 24? And the midpoint would be 22? Or do you need kind of everything to go right to hit that 22 target?

Well, listen, it is with any launch contract, right. We are always somewhat susceptible to factors that we can’t control. Like customer readiness is always a big one; the customers need to turn up with the satellites on time. We’re there. And of course, as I mentioned in my commentary, we have to execute from a manufacturing standpoint. But I think the key takeaway there is we have a completely sold-out manifest for next year at a solid number. So I would say that we have to execute, and there’s always some uncertainty from some things that we don’t control. But that’s certainly what we’re targeting.

Understood. And then just a follow-up to that, can you give us a sense or maybe a bridge on the margin in launch? You got a very good quarter actually in 3Q? How does that margin look if you can get to that 22 launch cadence?

I’ll take it, Pete. So yes, I mean, we’ve long stated that we get to our target model for non-GAAP gross margins of around 50%; that requires launching 24 times a year. We’re going to make significant progress towards that as we launch and strive to hit that 22 number next year. If we have, again, six launches in the quarter, that should be at or very close to our long-term 50% non-GAAP gross margin target.

Got it. And if I can just sneak one more in on Neutron kind of the milestones, do we feel comfortable with the timeline? Should we interpret that as you guys feeling comfortable with the timeline on next year?

Well, there’s still a lot of work to do and the year is not finished yet. So we’re pushing hard, but at this stage, we’re not making any adjustments to our predicted timeline. I just want to highlight there are still some significant tests to be completed. But right now, we’re not making any major changes.

Yes. Hey, guys. Good afternoon. Thanks for the question. I wanted to ask on Neutron. After that first launch, what sort of rate do you envision doing Neutron launches? And what rate are you kind of getting capacity to support now? At what point would you need to sort of have capacity there?

Yes. Hi, Matt. It’s a good question. We’re not attempting anything Herculean on Neutron. We’ve lived through the pain of creating a launch vehicle and bringing it into production. It follows a pretty similar cadence profile to what we were able to achieve with Electron. We will do a test flight or a couple of test flights and then move into sort of 3 or 4 a year and then continue to bootstrap and grow that. We have always bootstrapped our way along and increased flight rate and cadence along with that and the facilities.

Got it. Thanks that’s helpful. And then if I could ask one, I guess free cash flow. How much additional expense was there around kind of the investigation in Q3 and maybe into Q4 and how are you thinking about free cash flow into 2024?

Yes, Matt, we didn’t see a tremendous amount of – I would say, resource diversion. A lot of these anomaly investigations take a select group of very capable people to dive in and do the analysis. There’s not a lot of capital spend associated with it. We continue to keep our foot on the gas and production of Electron. The anomaly investigation itself really won’t have a noticeable material effect on cash flow in the fourth quarter. I think the biggest thing for us for cash flow is really around timing for the big space systems contracts. If you look at our launch business, people typically pay a 10% deposit at contract signing, and there’s milestone payments along the way, with nearly 10% left to collect at the time that we actually launch the mission. That’s always been a good cash flow model. With space systems, large contracts, as I mentioned, are lumpy due to achievement, delays of critical design milestones, before you can turn that over into the AIT phase of the program. It leads to near-term pain on that side. We’ve experienced that in 2023 and expect that dynamic to turn around and be much stronger from a cash flow perspective in 2024.

Yes. Thanks so much. So first quarter, it looks like you have a target price of $7.5 million. Is that the price likely to be for the entire year or given the vigor and demand? Are you guys increasing prices as we move forward and if so, by how much?

Yes, it’s a good question, Cai. The manifest that we showed in the deck, that is confirmed backlog pricing is not in question, right. That drives our long-term pricing model in 2024. We expect that longer-term, we will see upward movement to the ASP for Electron launches. But I would say there’s really no volatility in the manifest because they’re firm price contracts.

Yes, we have a standard escalation for inflation year-on-year, and certain missions, not all missions have the same consideration. When we do complicated government and hypersonic missions, they command a much higher price than missions where we are flying the same satellite again and again. There’s kind of variability. We test the market fairly on that pricing range and it tries to provide the right price for the product and services that they’re expecting from us.

I believe right now, there are least two or maybe three launches currently manifested for Virginia.

Hi, Peter. Hi, Adam. My questions are on the space systems. The increase in 1Q versus 4Q, is that primarily the GSAT MDA program ramping up?

Yes, there’s a few things contributing to that. The biggest element is really as the MDA Globalstar vehicles start coming off the production line, we have a clearer line of sight to the revenue recognition as bill materials are pulled to the production floor. Once you progress through key program reviews like PDRs and CDRs, the assembly integration test phase of the program, it’s a much more predictable formulaic schedule as you have labor and the materials scheduled to arrive.

I wouldn’t necessarily just think about capacity because the spacecraft projects we take on are deeply complicated missions. We tend to be very successful in those missions and create a lot of value. So, I wouldn’t just use a volume metric to measure us.

Hi there. Good afternoon, everybody, and really quickly on the balance sheet, what are the current expectations around the refinancing that’s gone current here?

Yes, we are actively looking to refinance that. We are pretty far down the path with a few providers. They range from doing equipment lines to structures similar to term loans.

Okay, great. And I want to make sure that I fully understand the comments on Electron for next year. Are you at this point fully sold out, or if you had a couple of customers that wanted a quick turn mission, would you have the launch vehicles available?

We will always look for opportunistic opportunities. It’s fair to say that production will be at near full capacity next year. But we always keep that in our discretion.

Hi, good evening there guys. It sounds like you guys are prioritizing better pricing in the long term at the expense of building a backlog now and providing significant discounts.

Yes, and there’s no argument that there’s huge demand, so the smart thing to do is arrive with a flight proven product and not have to do crazy things with pricing.

Hi guys. Good afternoon. I mean, a lot of the space startup companies have been having difficulty and you guys were able to pick up some interesting assets from Virgin Orbit. Is there talent you can pick up in the satellite world in terms of engineers?

Absolutely that is true and great talent attracts great talent as well. The bar to get into Rocket Lab is extraordinarily high, but there are certainly opportunities for new folks as some of those other businesses fail.

Hey. Good afternoon everyone. Thanks for taking our question. Would you mind just reminding us what is the expected run rate there? And can you give us any sort of ideas or directions on how we should think about that backlog being recognized?

We have got sufficient liquidity to continue broadening out our space systems business. We expect to consume significant capital in getting Neutron to the pad by the end of next year. The timing of that is a little difficult to predict because there are different ways to get there that can affect how much cash goes out the door. Our Q3 cash consumption number was a high point that we have seen thus far that could hover around for a quarter or so.

If we start pouring concrete for the ground infrastructure, I would feel good about that.

That’s great. Thanks Peter. Appreciate it.

Alright.

Thank you. Ladies and gentlemen, there are no further questions at this time. I will now turn the call back over to Peter Beck for closing remarks. Please go ahead.

That wraps up today’s presentation. Thank you everyone for joining us for the call. Rocket Lab will be participating in some upcoming conferences displayed on the sheet and look forward to the opportunity to share more exciting news and updates with you then. Thanks and we look forward to speaking to you soon.

Ladies and gentlemen, that concludes today’s call. Thank you all for joining and you may now disconnect your lines.