Rocket Lab Corp Q3 FY2024 Earnings Call

Thank you for standing by. My name is Bailey and I will be your conference operator today. At this time, I would like to welcome everyone to the Rocket Lab Third Quarter 2024 Fiscal Results Update and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Mariel Baker, Senior Communications Manager at Rocket Lab. You may begin.

Thank you. Hello and welcome to today's conference call to discuss Rocket Lab’s Third Quarter 2024 Financial Results. Before we begin the call, I would 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 day 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 comparable financial measures calculated in accordance with GAAP. Now 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 speakers today are Rocket Lab’s Founder and Chief Executive Officer, Sir Peter Beck, as well as Chief Financial Officer, Adam Spice. They will be discussing key business highlights, including updates on our launch and space systems programs. And we will discuss the financial highlights and outlook before we finish by taking questions. So with that, let me turn the call over to Sir Peter.

Thanks, Murielle, and thanks to everyone for joining us today. Before we discuss the quarter's achievements, I want to remind everyone what drives every launch, milestone, and spacecraft we create. Rocket Lab is a comprehensive space company. We offer transportation to space with our launch vehicles and manufacture the spacecraft that perform tasks in orbit. This ultimately grants us access to the vast market of space applications. With our rockets and spacecraft now well-established, we are well-positioned to create our own constellations that will provide valuable services in space. In Q3, we solidified this position with significant achievements, including signing a multi-launch agreement for Neutron with a commercial constellation operator. We have been careful in our approach to Neutron's initial commercial contracts, and I look forward to sharing more details later in the call. Regarding small rockets, we successfully launched multiple Electron missions in Q3 and secured $55 million in new Electron launch contracts, highlighting the strong and growing demand for dedicated small launches and recognizing Electron's established position. On the space systems side, I will provide updates on various programs, with a key highlight being the Mars Sample Return Contract Study. Those familiar with Mars Sample Return understand NASA's concern that their current mission architecture is too costly and time-consuming, prompting them to seek innovative proposals to expedite sample return and reduce costs. We are thrilled to have been selected by NASA to propose how Rocket Lab can make this happen, and I am excited to share details about our proposal today. To deliver space systems effectively, we must produce constellations of spacecraft quickly and inexpensively. I’m proud to announce that our spacecraft production line in Long Beach is operating at its highest efficiency yet, with over 40 spacecraft in the backlog. All of these achievements contribute to our ultimate goal: to build, launch, and operate our own constellations. While we are not ready to disclose details about what these constellations will be, it is important to recognize the strong foundation we have established in launch and space systems to enable this in the future. Now, let’s move on to some key financial highlights for Q3. We delivered another strong quarter with positive growth metrics. Our third quarter revenue peaked at $105 million, just $1 million shy of the record we set last quarter. This marks a 55% increase year-on-year, with our backlog growing by 80% year-on-year to reach $1.05 billion at the end of September. I will let Adam elaborate on the numbers, but it's crucial to emphasize that we are consistently delivering on our commitments in both engineering and financial results. On the Electron side, we've reached 12 missions so far this year, setting a new annual launch record for Electron. Only two rockets worldwide, Falcon 9 and the Chinese Long March, have launched more than Electron, making it one of the most significant rockets operating today. While maintaining a launch cadence is one aspect, achieving this sustainably is equally important. We've sold $55 million in new Electron launch contracts in Q3, and it's noteworthy that our average sales price has risen 60% since Electron's initial flights. This reflects the growing need for our service, illustrating how we have provided a marketplace that meets customer needs and proven our ability to scale. To visualize this, we see Electron ranking third in global launch cadence for the year. In Q3, we executed three missions for three distinct commercial constellation operators, all part of multi-launch contracts with repeat customers. Electron delivers a critical service for small satellite operators seeking control over their orbits, schedules, and mission parameters, which is often unfeasible with larger rideshare missions. We achieved a quick turnaround between missions, launching Electrons back-to-back from Launch Complex 1 within just eight days. Following Q3, we completed another launch in record time, executing a mission for a confidential constellation operator just ten weeks after signing the contract— a speed rarely seen in the industry, where contracts typically take a year to reach orbit. This efficiency reduces bottlenecks and expands launch opportunities for satellite operators, allowing them to deploy satellite operations more swiftly, facilitating technology testing, early revenue generation, or urgent data collection. As I have mentioned previously, the launch industry often experiences shifts and delays in customer schedules, leading to frequent manifest changes. With our production capacity and launch sites ready, we can quickly accommodate new customers as opportunities arise. Our revenue model supports flexibility, as we collect up to 90% of contract value before launch, minimizing the overall impact of any schedule delays. Now, turning to updates on Neutron. We have signed a launch agreement with a constellation operator for two early Neutron launches. Our achievements with Electron have established expectations for reliable, high-performance rockets in the industry, allowing us to be selective about our initial customers. This agreement marks an important opportunity for collaboration that could lead to Neutron deploying the entire constellation for this customer. I am confident that these two initial launches will be just the beginning of a long-term partnership. We are intentionally pacing our approach to Neutron 2 bookings, which is common in our industry where providers may sign non-binding agreements that often do not materialize. We believe it's more effective to bring a competitive rocket to market first and command a premium price. As we approach Neutron's launch next year, customer conversations and demand for launch slots are maturing. I am pleased to report that the value of this contract aligns with our expected pricing for Neutron launches. Neutron is also well-suited for the US Space Force's National Security Space Launch Program, which has recently issued Requests for Proposals for the Market Next Lane 1 on-ramp, allowing us to compete for a share of up to $5.6 billion in national security launches. The current bottleneck in the medium launch market poses a risk to national security, and introducing new launch capabilities like Neutron is essential to providing diversity and assured access to space. We are progressing with Neutron's build and test campaigns to keep on track for the first launch next year, meeting the timeline sought by the Space Force. With Electron, we quickly reached 50 launches, the fastest in history for a commercially developed rocket, demonstrating our competence in this area. Interest from government agencies in Neutron's development is also building. This quarter, we received an $8 million study contract with the US Air Force's research lab to showcase our digital engineering capabilities with Archimedes. This contract aligns with the NSSL program and offers potential to further enhance our digital engineering framework for future launch providers. Additionally, USTRANSCOM has extended our research agreement from 2022, enabling us to keep exploring point-to-point cargo delivery with Neutron. The US Space Force has confirmed that Neutron can now compete for missions under OSP-4, a near $1 billion contract we were previously on-ramped to. Moving on to Neutron's development and technical milestones from this quarter, we are well past the design phase and deep into qualification testing for our large-scale flight hardware. We've successfully tested our reusable captive fairing, known as the Hungry Hippo, which will release the payload during flight and return with the first stage. These fairings are set to undergo mechanical testing before their assembly and integration. Another milestone was the successful Wet Dress Rehearsal test of the second stage, conducted in flight configuration, testing the processes and procedures it will undergo in actual flight operations. This has been a significant milestone, confirming both the flight hardware and supporting infrastructure. We are also on track for integrating the necessary internal components for the First Stage tank ahead of testing. On the Archimedes engine front, we've strategically taken our time to develop a flight-ready engine for testing, resulting in a doubled testing cadence in Mississippi this past quarter. Rocket engine programs are not one-off endeavors; Archimedes engines will undergo extensive testing, including short bursts and full-duration hot fires, as we prepare for Neutron’s first flight. Scaling engine production alongside testing is crucial, and we are continuing to build Archimedes engines in parallel with our testing efforts. Our California assembly line is active, getting engines ready for shipment to Mississippi, positioning us well for effective Neutron launches post-debut. Our launch infrastructure is equally vital and has benefitted from our experience with Electron. We are now finalizing the above-ground structure for our launch pad, including a massive launch mount that will support Neutron during liftoff next year. The installation will occur at LC3 in the coming weeks, followed by commissioning efforts. Major components have already arrived at the Wallops Island pad, including two large propellant tanks installed in Q3. We also completed the assembly, integration, and testing building near the launch pad, allowing a seamless logistics process for getting the rocket ready for launch without the delays of long-distance transportation. Switching gears to space systems, one of NASA's flagship projects is the Mars Sample Return Program, which aims to bring back Martian samples. NASA has recognized the current approach as prohibitively costly and slow, prompting calls for innovative proposals. I'm proud to state that we have been chosen to conduct the study, proposing a faster, cost-effective solution to return Mars samples. This mission could significantly impact our understanding of the solar system and the search for life's existence on Mars. Our accumulated experience positions us uniquely for this endeavor, as our technology has previously contributed to various successful Mars missions. We have extensive expertise in handling complex missions, handle re-entry, and manage challenging guidance and control processes. Our track record reveals our ability to operate effectively beyond Earth's orbit while remaining cost-efficient. As for additional updates, our ongoing projects include constructing two ESCAPADE spacecraft for NASA's Mars mission, despite a delay in the launch window. Our contract with the Space Development Agency for their tranche 2 transport layer is also on track, positioning us well for solicitation of 200 satellites under tranche 3 expected in 2025. We have completed our space systems and the next two satellites for Varda Space Industries, ready to assist in their upcoming mission. These satellites will support capsule delivery operations back from space. Before we conclude, I'd like to mention recent personnel changes at the board and executive levels. Mike Griffin finished his time on the Rocket Lab board after four years, and we are thankful for his contributions. Meanwhile, we have welcomed Frank Klein as our new Chief Operations Officer, who brings extensive international manufacturing experience, and Ken Possenriede as a new board member, enhancing our leadership with his deep aerospace and defense background. Now, I’ll hand it over to Adam for more details on our financial highlights and future outlook.

Great. Thanks, Pete. All right. Third quarter 2024 revenue was $105 million, which was at the high end of our prior guidance range and reflects significant year-on-year growth of 55%, driven by strong contributions from both business segments but led by space systems. Our launch services segment delivered revenue of $21 million in line with our prior guidance. Our current backlog continues to support our 2024 target average revenue per launch of $7.5 million, with some quarterly variability tied to volume purchase commitments, launch location, and mission assurance requirements. Our space systems segment delivered $83.9 million in the quarter, near the high end of our prior guidance range of $79 million to $84 million, reflecting sequential growth of over 9%, driven primarily by a strong quarter from our space solar business. Now, turning to gross margin. GAAP gross margin for the third quarter was 26.7%, in line with our prior guidance range of 25% to 27%. Non-GAAP gross margin for the third quarter was 31.3%, which was also in line with our prior guidance range of 30% to 32%. Relatedly, we ended Q3 with a production-related headcount of 964, up 50 from the prior quarter. Now turning to backlog, we ended Q3 2024 with $1.05 billion of total backlog, with launch backlog of $326 million and space systems backlog of $721 million. Year-over-year from Q3 last year, total backlog increased by 80% or $465 million, primarily due to our $515 million contract awards for about 18 spacecraft for the FDA we won last year. Sequentially, there's a slight remixing of our backlog, resulting from particularly strong bookings in our launch segment. We continue to cultivate a healthy pipeline, including multi-launch deals and large satellite manufacturing contracts that can create lumpiness in our backlog growth given the size and complexities of these opportunities. We expect approximately 50% of our current backlog to be recognized as revenue within the next 12 months. Moving to operating expenses, GAAP operating expenses for Q3 2024 were $79.9 million, up $9.5 million sequentially, which was at the low end of our guidance range of $80 million to $82 million. Non-GAAP operating expenses for the third quarter were $68.7 million, increasing by $10.2 million sequentially, also at the low end of our guidance range of $69 million to $71 million. The sequential increases in both GAAP and non-GAAP operating expenses were primarily driven by headcount growth and prototype spending to support our Neutron development program, related infrastructure, and IT support for Neutron and our SDA satellite contract. In R&D specifically, GAAP expenses were up $7.8 million quarter-on-quarter due to Neutron prototyping, materials, and headcount growth. Non-GAAP R&D expenses also increased by $8.1 million quarter-on-quarter, driven similarly to GAAP expenses. Q3 ending R&D headcount was 776, representing an increase of 103 from the prior quarter. In SG&A, GAAP expenses increased by $1.7 million quarter-on-quarter, largely due to an uptick in outside services related to legal and IT, with IT spending primarily related to security and cyber requirements under our SDA contract, and legal spending driven by a range of corporate initiatives, including corporate development as we continue to look to scale the business both organically and inorganically. These legal and IT increases are paired with an increase in staff costs. Non-GAAP SG&A expenses increased $2.1 million, driven similarly to the GAAP SG&A expenses. Q3 ending SG&A headcount was 300, reflecting an increase of 27 from the prior quarter. In summary, total Q3 headcount was 2,040, up 180 from the prior quarter. Now, concerning non-GAAP free cash flow and adjusted EBITDA, regarding cash, purchases of property, equipment, and capitalized software licenses totaled $11 million in Q3 2024, a decrease of $4.3 million from $15.3 million in the prior quarter. We continue to invest in Neutron research, testing, and production infrastructure projects along with expanding our satellite production and space solar solutions capacity. We expect capital expenditures to increase over the upcoming quarters. Cash consumed from operations was $30.9 million in Q3 2024, compared to $13 million in Q2 2024. The sequential increase of $17.9 million was primarily driven by increased Neutron and Space Systems program spending along with lumpiness in Space Systems program milestone receipts, partially offset by improved launch contract cash collections. Overall, non-GAAP free cash flow, defined as GAAP operating cash flow less purchases of property, equipment, and capitalized software in Q3 2024 amounted to a use of $41.9 million compared to $28.3 million in Q2 2024. While we are doing better compared to our targeted cash consumption run rate, we expect to pick up cash consumption in the next few quarters, owing to an expected increase in Neutron spending ahead of our mid-2025 launch and lumpiness in large space systems milestone payment collections. The ending balance of cash, cash equivalents, restricted cash, and marketable securities was $508 million, as of the end of Q3 2024. We exit Q3 in a strong position to execute on our organic expansion initiatives, as well as inorganic options to further vertically integrate our supply chain with critical capabilities and expand our addressable market consistent with our past successes. Adjusted EBITDA loss was $30.9 million in Q3 2024 compared to a loss of $21.2 million in Q2 2024. The sequential increase of $9.7 million was primarily driven by amplified spending related to Neutron development. Moving on to our guidance for Q4 2024, we expect revenue to range between $125 million and $135 million. This range reflects a step up in space systems and an increase in launch cadence consistent with our prior outlook. While we've previously broken down guidance by launch and space system segments, we’ve found it challenging to predict launch customer readiness within a quarter. Therefore, we believe that providing a single top-line guidance number is more appropriate at this time, given the resilience we've witnessed due to the expanded diversification of our business. That said, we’ll continue to report actual revenues and related gross margins of launching space systems as distinct segments. We expect Q4 GAAP gross margin to range between 26% and 28%, and non-GAAP gross margin between 32% and 34%. These projected GAAP and non-GAAP gross margins reflect improved mix within our space system segment, primarily within satellite manufacturing, as well as better overhead cost absorption in our launch business. We anticipate Q4 GAAP operating expenses to be between $84 million and $86 million and non-GAAP operating expenses to range between $75 million and $77 million. The quarter-on-quarter increases are driven primarily by continued Neutron investment in staff costs, prototyping, and materials. We expect Q4 GAAP and non-GAAP net interest expense to be $1.5 million. Adjusted EBITDA loss for Q4 is expected to range between $27 million and $29 million, with basic shares outstanding at approximately 501 million shares. With that, let’s turn the call over to the operator for questions.

Your first question comes from the line of Andres Sheppard with Cantor Fitzgerald. Your line is open.

Hey, everyone. Good afternoon and congratulations on the quarter. Certainly a lot of developments, so well done. I guess first question, just on the Neutron, I just wanted to clarify. It sounds like the target for the first launch is unchanged for mid-2025, but the multi-launch agreement that you disclosed today is targeted for, I believe, to start in mid-2026. So I just wanted to confirm that, and if that's the case, why announce this contract today, just given where you still are on the Neutron development? Any color there would be helpful. Thank you.

Yeah, hey, Andres. Happy to take that question. I think we've been pretty clear about what we expect for Neutron's launch cadence to be. One test flight in the following year, three, and then five, and then continue to seven and beyond. That follows the scaling rate we achieved with Electron and history illustrates that it's pretty difficult to see any examples of a scaling rate faster than that. So that backs into real available slots. As we talk to customers, they want to know when their launch slot will be available due to their mission objectives. We also want to know that their spacecraft will be ready. We've discussed this in the past. So it’s really a careful alignment of various customer requirements and our available launch slots. As we stated on the call, we are very selective about those early slots. We need to ensure we are there on time, as well as our partners. Announcing it now is significant as, once we start signing a Neutron contract, it’s been anticipated and would need to be disclosed.

Yeah, and I would add to that, too, Andres, that we've been clear, as you approach Neutron readiness, think of a timeframe of 12 to 18 months where you want to line up your customers. You have to coordinate payload integration and launch readiness. I think it's also important to note that we won't be selling heavily discounted Neutron launches just because it's a new vehicle. Our history with Electron gives us credibility to command a premium price. This milestone is very important for the company, and we’re pleased to announce it today.

Thanks, guys. That's super helpful. I appreciate all that context. Maybe just a quick follow-up, if I may. Can you remind us what the outstanding catalysts or milestones for Neutron development should we be aware of? Additionally, could you give us more details on the hot fire test and the additional engines’ production?

Sure, the best way I like to explain it is that we have three pillars. One is launch infrastructure, which is where most of the capital flows. The things to watch here are visible construction efforts—steel being built, concrete poured, creating a launch site. We'll provide updates since it's relatively easy to follow. If you see construction progress, it indicates we’re on track. Second, structures like full stage tanks and flight configurations going through tests are critical. Finally, with Archimedes, we’re undertaking a test and qualification campaign. We find all the operational conditions of the engine, defining what they are. Our goal is to establish how it performs under various intake pressures and operating conditions. We reached a significant milestone last quarter when we fired a production engine with full production components that surpassed the 100% throttle level. Moving forward, it’s all about accumulating test time and increasing performance. Engine programs require long-term efforts for improvement. We’re currently in a good space, with those three components to track.

Wonderful. I really appreciate all that color. Congrats again on the quarter. I’ll pass it on.

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

Thank you for taking our questions, and congratulations. I know you aren't sharing too much about the Neutron award, but I would like to ask from a different perspective. Can you provide any context regarding whether the customer had already engaged another launch provider before switching to you? Or do they have any existing soft contracts with other launch companies? I'm just looking for some clarity on what your current involvement is in this situation.

Yes, we can't disclose too much, but it is a customer we know well. We have been strategic in choosing early launches, so it's not about getting into their business, but we are happy with that customer; it's a good fit for this stage in the program.

To add some context, as we've shared in the past, there are not many companies in our space executing ready to launch with confidence. We see a range of customers who have satellites competing with other launch providers. We feel comfortable launching with those offering payloads that don’t necessarily compete with others. The market remains strong, with demand. Many customers already have their capacity spoken for, meaning Neutron is timed well to fill a new need for additional capacity without being competitive and threatening those customers.

Understood. Then a follow-up question that’s a bit longer-term. You've got Frank on board now; he comes from the automotive industry. I'm curious if you could maybe dimension the kind of scale you’re looking for. Obviously, automotive is orders of magnitude higher than aerospace, coming on board to take you to a higher level or just get the existing backlog up to speed?

It’s a bit of both, Edison. We have components at low scale like Mars spacecraft that we’re looking to produce at a higher scale. Other components, like reaction wheels, we produce thousands per year. The fundamentals of production remain consistent across vehicles, whether cars or rockets. Our team has successfully scaled, so the timing of bringing someone with manufacturing and operations experience was right for us.

Fantastic, thank you.

Your next question comes from the line of Matt Akers with Wells Fargo. Your line is open.

Yeah, hey guys. Good afternoon. Thanks for the question. I wanted to ask about space services. You guys kind of teed that on Slide 4. Just curious. I know you don't want to reveal what that could look like yet but just curious what kind of timeframe you had in mind. It seems like you know kind of the Phase 1 and 2 are in pretty good shape so I guess – if you move to phase 3, I mean do we need to get Neutron sort of at a higher production cadence? Are there maybe more parts of the portfolio to fill in? Just curious how you think of kind of the timing there.

Everything revolves around a reusable high cadence launch. Neutron is crucial to unlocking that. If you look at Starlink, the spacecraft is excellent, but the enabling factor is high cadence, low-cost launch, made possible by a reusable launch vehicle. Until Neutron is flying at a certain level of cadence, we cannot even discuss deploying constellations.

Got it. Okay. And just curious on this Neutron deal or maybe just Neutron in general, thoughts on progress payments and how we should think about cash flow lumpiness as that program ramps up.

We have a standard launch services agreement, which we've used with Electron and is being applied to Neutron. You’re right; building Neutron will challenge the working capital cycle. Initial launches won’t be fully reusable. So the early rockets will consume cash. Each LSA typically includes a deposit and milestone payments. Historically, we've collected about 60% of the contract value before constructing the rocket. Neutron may differ early on due to transitioning from R&D to production, but it should resemble Electron's insights in terms of payments and efficiency as we progress.

That's very helpful. Thank you.

Your next question comes from the line of Erik Rasmussen with Stiefel. Your line is open.

Yeah, thanks for taking the questions. And congrats on the progress with Neutron. Maybe just on that subject, Neutron, I know it's not a lot you want to really share at this time, but are you replacing anyone or are you being brought on to serve as another alternative because of, like Adam mentioned, the market for medium rockets is evolving?

With respect to commercial contracts, some cases are replacements while others bring on new providers. The recent NSSL Lane 1 Phase 3 award went entirely to one launch provider, indicating a lack of competition. Thus, sometimes we replace others, and sometimes we introduce new options.

Okay, and you stated the ASPs for Neutron are fairly steadfast. Is this in the $50 million to $55 million range and is this where things have settled? Would both of those potentially happen in 2026, or how should we think about timing, assuming you meet the mid-2025 for your first test launch?

Yes, the launch pricing is consistent with our previously discussed ASP for Neutron. We're selling real slots with actual launch windows, dictated by customer requests while potentially staying within the 2026 timeframe.

Got it. I want to clarify the recent RFPs opened for the NSSL. Does this mean you'll be available for this particular one or is it for the next cycle due to the Neutron timeframe, which is projected to be early to mid-2025?

You must demonstrate launch capability in 2025 to be on-ramped, then you’ll bid for various task orders. The task orders are released at the times NSSL or the Space Force decides.

Even though we’re on ramping in 2025, we likely wouldn’t win contracts for launch until 2026. We’re planning one test launch in 2025, mentioning three launches in 2026, and five in 2027. This initial Neutron customer will occupy some capacity in 2026, but not the most likely scenario.

Right. Okay, great. Just one last thing on backlog clarification. The $326 million for launch, does that include this latest award win for the two for Neutron?

No, it does not since that was a Q3 ending, and this contract was signed post the end of Q3.

Great. Okay. I’ll get back in the queue.

Your next question comes from the line of Suji Desilva with ROTH Capital. Your line is open.

Hi, Pete. Hi, Adam. Congrats on the progress and the Neutron success here. The gross margin improvement, Adam, is that the contribution between launch and space systems sequentially in Q3 and Q4 relatively even? And could you give an update on the solar gross margin status? Are there still tailwinds there?

The gross margin percentages are relatively consistent across both segments. Our mix is roughly 70% space systems and 30% launch. Hence we apply the same margin calculations proportionally. We are progressing on solar but at a slower pace. We expect to arrive at target margins within two years of acquisition. We’re slightly behind schedule but seeing progress. Our backlog indicates we haven’t booked any business falling below target margins.

Okay, great. My other question on the launch business: I understand that Neutron will impact the backlog this quarter, but Electron is growing $55 million. Could you explain how that compares to the previous quarters? Is this accelerating? What's driving that?

Launch is lumpy just like actually launching rockets. Contracts can be varied. We've certainly had a good quarter for Electron, but it's typically varied throughout the year.

We are indeed booking more launches. Although it’s lumpy, we target bigger multi-launch agreements. The ASP has also improved, with the estimated average selling price for Electron at around $7.5 million. Our total backlog pricing is about $8.2 million. So we’re booking at higher prices and moving steadily toward our target margins for the Electron business.

Okay. Very helpful. Thanks, guys.

Your next question comes from the line of Andre Madrid with BTIG. Your line is open.

Adam, Peter, thanks for the time. I know we kind of danced around it, but I wanted to just ask more specifically, how much was total Neutron development cost in Q3? I know previously you said around $160 million for the year, or about $40 million a quarter. Is that still the target?

In Q3, the total net spend for Neutron across OpEx and CapEx was just under $44 million. That number is expected to increase as we work toward the first launch. That moment is crucial as it will greatly impact our P&L, moving from cash-heavy R&D to cost of sales for launched rockets.

Got it. If I could squeeze in one more, could you highlight backlog at some of the non-photon space systems businesses like PSC, Sinclair? How has expansion and acquiring more business progressed?

Those businesses continue to grow at a healthy rate. Our target for components growth in space systems is around 20%. We're exceeding that considerably. Sinclair, in particular, has experienced notable growth due to a mega constellation reaction wheel contract we've discussed in the past. Overall, we're seeing strength across even the merchant space systems market. Each business has distinct growth factors feeding the company's performance.

Thanks so much for the call. I appreciate it.

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

Hey, good afternoon everybody. Pete, I'd like to have you walk us through why we have to do one, three, and five. If there isn’t an opportunity to go faster, can we throw some capital at it and speed things up?

There's a limit to how fast you can go. We're building customers’ payloads, and with the planned cadence, each rocket's first flight needs to be reliable. You can’t just pack up everything and rush in this industry. Productions require methodical approaches, testing, and safe operations. We’re attempting to strategize the phased process to achieve a successful operation.

Yes, I’ll continue to ask Pete that daily as well.

Thanks, Adam. You mentioned earlier; we had anticipated 22 launches, and are likely ending at 15-18. Can you discuss commercial demand excluding National Security and how that aligns with relative supply?

We aren’t concerned about demand. Our main focus is how fast we can effectively develop Neutron. Demand isn’t our worry; we have confidence in the need for our service.

Alright, last question. With a new administration, what policy statements have you heard that either encourage or give you pause? What should we look out for?

There's unprecedented focus on space, akin to the Apollo era. The current administration places strong importance on national security, which is essential to our business. We see noteworthy efforts to streamline government contracting while focusing on commercialization. Opportunities will arise, and companies like Rocket Lab position themselves well in all of this.

Okay, great. I'll pass it on. Thanks.

And your next question comes from the line of Michael Leshock with KeyBanc Capital Markets. Your line is open.

Hey, thank you. I wanted to ask on space systems. You've spoken of organic and inorganic avenues to scale the business. Could you update us on the M&A pipeline, any new opportunities? And on organic initiatives like additional clean room capacity, how far do you have to go with those?

For organic efforts, we continually develop new products, some stemming from ongoing programs. We don't discuss new products until ready, which strengthens our reputation. On the inorganic side, we continue to examine various assets. We've been selective and seek teams and assets that fit our vision, timing, and price. Several interesting assets could establish ourselves further in applications.

We are analyzing various assets. Historically, teams have driven our success. We continuously identify opportunities, focusing on the right team for the right project. We might aim for payload capabilities in the future and build a consolidated platform, which remains on our radar.

Okay, great. I appreciate that detail. I'll leave it there. Thanks, guys.

Your next question comes from the line of Anthony Valentini with Goldman Sachs. Your line is open.

Hey, guys, thanks for taking my question. You got Anthony on for NOAA tonight. Sorry to beat this point to death, but it's been publicized that Amazon’s Kuiper must deploy over a thousand satellites by mid-2026. They ordered from some competitors that haven’t launched extensively. Do you stand to benefit here potentially between now and 2026 for a piece of that pie?

Demand does not concern us. That fits the nature of our service, and we maintain our growth strategy around that market.

The systems segment is not yet profitable today; we can’t specify isolated segment profitability at this level. However, the majority of cash outlay originates from Neutron expenses. Once we reach minimum viable product with Neutron, we can gain clarity.

Okay. That makes sense. Just one last confirmation on the Neutron test flight in 2025—there's no revenue tied to that, right?

Correct, no revenue will be associated with that launch, but we're working towards some creative solutions to mitigate the cost of that test launch.

Awesome. Thank you guys so much. Appreciate the time.

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

Super, thanks so much. Adam, your ASPs for Electron have decreased sequentially for three consecutive quarters, yet your gross margin has improved. I know costs are specific to each mission, but what does this suggest about the underlying core profitability of Electron?

The ASP reflects varied customer timelines; customers ordering multiple launches receive lower prices, improving margins significantly as we reduce redo work. The underlying gross margin reflects our continued progress for Electron with improved production efficiency and processes.

Got it. And Peter, you targeted 22 launches initially at the start of the year; will you likely end within the 15-18 launch range? Have you considered pricing adjustments for delayed customer timelines?

There are instances where contracts have penalty provisions, but no relationship benefits from imposing penalties on customers if they suffer setbacks. The failure of a satellite could hinder their mission long-term.

Terrific. Thank you so much.

There are no further questions at this time. I will turn the call back over to Peter Beck for closing remarks.

Great, and thanks very much for everyone sticking around for the questions as well. Much appreciated. Before we close out today, I wanted to draw your attention to some upcoming conferences we'll be attending. We look forward to sharing more exciting news and updates with you there. But that wraps up today's call, and thanks for your time. The team is certainly very proud of this quarter and what we've achieved this year. So thanks very much.

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