Rocket Lab Corp Q1 FY2025 Earnings Call

Thank you for standing by. My name is Jessica and I will be your conference operator today. At this time, I would like to welcome everyone to Rocket Lab’s First Quarter 2025 Financial 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. At this time, I would like to turn the call over to Murielle Baker, Senior Communications Manager. Murielle, you may begin.

Thank you. Hello and welcome to today's conference call to discuss Rocket Lab's first quarter 2025 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 Security 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 comparable financial measures calculated in accordance with GAAP. This call is also being webcast with a supporting presentation and a replay and copy of the presentation will be available on our website. Our 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 developments and highlights including updates on our launch and space systems programs. We will discuss 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 everybody for joining us today. While we had a very strong start for 2025 across the business, I want to provide a bit of an update as we build towards our future as a Constellation owner and operator. As we take you through our achievements for the quarter, keep this in mind how every milestone and every mission brings us closer to that lucrative piece of the space value chain. We continue to launch and book more and more electron missions proving we hold the keys to space with regular launch access. As Neutron rises closer to the pad, we also get closer to having a 13-ton reusable launch vehicle that can deploy our own satellites with speed and cost efficiency. We are also generating revenue through the missions we will fly for our national security and commercial customers. Having gone after the full space ecosystem with satellites, launch vehicles and everything in between, our deep vertical integration is one of our distinct competitive advantages. And while it's bringing us closer to our strategic end goal this quarter, it's also served us well against a backdrop of dynamic international trade environments, ensuring that we have the supply chain lock with secure and predominantly U.S.-based manufacturing. So with that, let me move on to some more specifics for the quarter. We've posted a near-record quarterly revenue of 122.6 million, nudging to the top end of our prior guidance and 32% up compared to last year. We have another strong looking quarter on the horizon. With the midpoint of our guidance range for Q2 pointed to another record sending quarter for the business, and I'll let Adam go into those details a little bit later. On the launch side, demand is soaring. We booked eight new Electron and HASTE missions for Q1 and at the same time launched five missions with 100% mission success. Three of those took flight within just 13 days of each other and there is demand from our customers for more than 20 launches this year. For Neutron, our selection to the DOD's High Value Launch contract NSSL program is really the headline for the quarter. I'll go into more detail about what this means and how we plan to deliver against it in the later slides. And in space systems, it only took 15 days to bring back the seconds in space manufacturing mission for Varda before our third spacecraft was launched to space and began its operation. A real demonstration of the speed and capability we have developed to deliver consistently reliable spacecraft for our customers. So there's lots to get excited about this past quarter. So without further ado, let's dig in. First up, turning to small launch. So Electron continues to prove why it's the global leader with five missions in the quarter all across only six and a half weeks. Proving that even when our customers are ready to go with their payloads, so are we. Looking ahead? Next weekend's mission for the multi launch customer IQPs will be the first of six in a row that are flying back-to-back out of Launch Complex 1. Electron makes frequent and reliable launch look easy, but if we take a look back over a past decade, it really shows that Electron has really cemented itself as the preeminent small launch provider. Electron really has scaled to provide the majority of American commercial small launch. A focus on execution, smart use of capital to scale launch cadence and production, and a solid and reliable product is what it takes to succeed. A few others have been able to achieve that in the same way we have with Electron. That really goes to show what an impact Electron has had and continues to have on the industry in delivering trusted and reliable access to space for small satellite operators. And Neutron is set to do exactly the same, obviously. Moving on to HASTE and a hypersonic test vehicle continues to be a sought after capability both domestically and internationally. Both the U.S. and the United Kingdom have picked HASTE to develop sovereign hypersonic technology for their multi-billion dollar defense programs. We've been selected to participate within the U.S. Air Force's EWAAC program, a $46 billion indefinite delivery, indefinite quantity program. The second program we have been on ramp to is a $1.3 billion framework by the United Kingdom's Ministry of Defense as it works to shore up its hypersonics capabilities. This is HASTE's first international call up and a proud moment for the team to be able to contribute to the collective security of the United States and its allies. We've also landed another HASTE launch contract through Kratos for the Department of Defense MACH-TB program. So that's seven missions now with HASTE for MACH-TB making us one of the most prolific commercial launch providers on that flagship DOD program. Regular hypersonic flight tests are critical to developing the technology and infrastructure needed to keep countries safe and HASTE is right at the center of that effort. Now onto Neutron. Momentum is building for Neutron on the back of really significant progress we made in 2024. The big news item in this quarter has been on ramp to the Pentagon's high value launch contract National Security Space Launch Program. This is the most competitive launch program in the industry to fly the DOD's highest priority and most critical missions. Our selection to it is a huge vote of confidence by the Pentagon and Neutron and affirms us as one of the most capable American launch providers. We are also the only publicly traded company to ever onboard NSSL. Once we are clear of Neutron's first launch, we'll be bidding for task orders under the Phase 3 Lane 1 program which has a total value of $5.6 billion and an ordering period through to June 2029. We've already completed a kickoff meeting with the full contingent of future mission partners including the U.S. Space Force, Assured Access to Space, NRO, Office of Space Launch and other stakeholders from across the government. This was part of a $5 million task order for a mission assurance showcase that came with Neutron selection. Entry into NSSL is the type of disruptive competition the U.S. government and the industry has been asking for. Missions for defense and intelligence satellites used to be dominated by legacy launch providers and the DOD has been upfront about wanting new partners with innovative approaches that bring increased competition. That's exactly what we set out to achieve with Neutron and I'm excited to deliver it once we start flying later this year. I'm also pleased to announce our latest contract for Neutron. We've been selected to fly a U.S. Air Force research Lab mission that supports point to point cargo transportation in a multi-manifest mission. It's all part of a program by the AFRL to create rapid delivery systems for defense cargo using commercial launch vehicles and a multi-year effort. Since the mission is all about bringing things back to earth, AFRL will fly on a return to Earth Neutron no earlier than 2026. We know re-entry and rocket usability is a critical advancement in space tech that the DOD is highly supportive of, which is why Neutron has been designed from the get-go for reuse and frequency and the latest contract is a show of confidence from the DOD in our ability to deliver that. Moving on to some technical updates. It's a big green tick for Neutron second stage qualification campaign proving out the stage's design, operations and readiness for launch later this year. We ran launch-like operations across its full combination of flight software, hardware, avionics, guidance, navigation, control systems, and we also proof tested it to more than 125% of its design point. Some of that including applying more than 1.3 million pounds of force in tension across the carbon composite structure. Now, the second stage is one of the more novel pieces of Neutron, so it was important that we retired that risk first. The added benefit of that, of course, is that the structure of stage two is largely similar to stage one. So by completing this qualification campaign first, we brought down a lot of the same risks that we may have seen in stage one. Having passed with flying colors, Neutron Stage 2 is now going through final assembly and will be shipped to the launch site in the next few months in preparation for stage testing with the engine. Now Neutron's pointy end, the stage 1 upper module is also close to completion as well. This is obviously more than what you saw last quarter with just the hungry hippo fairings. This is the full module and it includes all the major stage one elements, like canards, interstage, along with all of its mechanical systems like actuators, locks, avionics systems, and running all the flight software. The full assembly represents some of the most complex mechanical systems that exist on the vehicle, and they all perform seamlessly during testing. We are just a few small finishing touches away from another big tick on the road to launch for Neutron for that whole section. All of the rocket puzzle pieces are really starting to come together now and look, if we can ship them around the country, we can also fly them. And I think everybody knows how much I like helicopters. But even at their size, Neutron's carbon composite material makes them light enough to move large pieces around by helicopter, which is what we did earlier this quarter to help bring Neutron Stage 1 hardware together and place it all at our facility in Baltimore. While the majority of the rocket is assembled here, given the size of the rocket and the rotor has to travel on to Launch Complex 3, Neutron is shipped in stages before it's fully integrated as an entire rocket. Over at Launch Complex 3 in Virginia, we are on schedule and close to finishing Neutron's launch pad. With everything in its place, the team is working around the clock to complete all the integration and activate the pad. One of those more recent campaigns was the water deluge test. Turns out there is water on Wallops Island because we pumped thousands of gallons of it through our pipes. The flow rate was the equivalent to an Olympic sized swimming pool every 40 seconds. And event planning is underway for the ribbon cutting there soon as well. So because Launch Complex 3 really is an important new addition, not just for the state but for the whole nation with Neutron's on ramp to NSSL, our rocket will be the first to fly for the program out of Virginia. And that really highlights the importance of the pad as a critical national security asset. As the engine test site in Mississippi, the propulsion team is doubling down on Archimedes. We're hop firing flat out, as you would expect, with flight avionics and full software stacks, and the team is busy tuning the engine through a barrage of tests. We've also just completed the build of a second engine test cell that's now up and running to enable testing two engines at the same time. So as you can see, we're steadily making our way along the path to the pad. We've ticked off some big wins recently and every element of the vehicle has been worked simultaneously. Yes, it's an aggressive schedule that we have ahead of us, but that's how we've delivered new rockets to the pad before, and a reminder that the schedule that you see here is not sequential. Actually, everything is happening at once and in parallel. A good example of this is the launch license to fly. There's a strong possibility that the paperwork will only come in days before launch, just like it did for our first electron flight from Virginia, but that doesn't mean we stop everything else from taking place that needs to be done before we get that. And with no major issues, we're really still targeting the first launch by the second half of this year. Now let's turn to updates across space systems. Just before the quarter closed, we announced our intent to acquire Mynaric, a German company specializing in laser-based satellite communications. This intended acquisition still has to make its way through all the approvals, but otherwise is progressing well. I want to take this opportunity to get into the details behind why we decided to pursue this acquisition and its strategic importance to the growth of our business. A key piece of any large constellation is the ability to communicate between spacecraft with high speed and secure connections. Often that's laser-based and the technology that Mynaric has developed is some of the best in the world. Beyond the technology, this deal also sees us set down our first European footprint in Munich. With extensive production assets, intellectual property, product inventory and a committed backlog for future constellations, there's a clear line of sight to European growth opportunities in this deal. And we'd be looking to expand the existing team of talented engineers and staff to meet international demand. Now by bringing them in-house, the terminals in-house we will add a new element to our spacecraft supply chain that improves our product line and strengthens our position in commercial, national security and defense contracts. Mynaric terminals are already being supplied for a half a billion dollar contract with the Space Development Agency along with many other companies, making this even more of a logical integration. We've proven across all of our acquisitions to date that we can take a highly sought after product, scale it and make it available in high volume. It's our full intention to do the same here again by expanding into Europe and to bring Mynaric terminals to the world and potentially for our own Constellation too. So I'm excited about the potential of this deal and we'll be sure to keep you updated on its progress. Turning to our Varda missions, and very soon we'll be bringing the third in-space manufacturing capsule back to Earth with our Pioneer spacecraft. This mission launched in Q1 just two weeks after the return of the second capsule, and since then our spacecraft has been providing power, communications, propulsion, attitude control and to keep Varda's capsule in orbit. The process has now begun to position Pioneer and Varda for Earth re-entry over Australia. So keep an eye out for updates on the mission in the coming weeks. Meanwhile, the team is working hard at wrapping up the integration and testing for our fourth and final Pioneer spacecraft in the Varda contract in Long Beach. Our suite of space systems components and mission software is constantly under development, allowing us to consistently produce.

No, this is Adam. I think we've had a comms issue with Pete. Let's give him a minute to work that out. Okay, operator, until we can get Pete back on the line, I'll just pick up where he left off. Great. Thanks everybody. Yes, this is Adam Spice, CFO at Rocket Lab. So I'll pick up where Pete was discussing our product expansion. And, our suite of space systems components and mission software is constantly under development, allowing us to consistently produce and release new products that really move the needle for the industry and for us. I'll quickly take you through a couple of our latest releases. With STARRAY we've introduced a line of modular solar arrays for satellites that are customizable to meet all their power needs. With multiple different panel dimensions that small satellite operators can choose from it's a plug and play solution at a low cost that helps to speed up small satellite development for our customers. And we've got contracts all ready to supply these customizable wings to constellations under development right now. We have also expanded our suite of Frontier Satellite Radios that are compatible with the industry's most important global ground stations. And on the software side, we've introduced the next-gen versions of our highly popular Max software packages for satellite guidance and control. The software behind Intermission for ground data and space operations, and Max Constellation for software control of satellite constellations is the same that helped land a commercial lunar lander on the moon earlier this year, supported NASA's CAPSTONE mission, DARPA's Blackjack program, and which commands our Pioneer spacecraft for our Varda missions. Next, we've also had an extremely active quarter pursuing new opportunities for space systems that further scale our vertical integration. We are pursuing several large government and commercial contracts that would see us building entire constellations of satellites, not just individual spacecraft. These are industry scaling and shaping constellation that would tap our full space systems value chain and realize significant value that reshapes our business. And on the M&A side, with a half dozen deals in the pipeline as we continue to expand our vertical integration. There's high potential in all of this and we've expanded a lot as a company with our eyes set on Europe and international expansion as well as the deepening national security work that we're taking on through Space Systems and Launch, the time is right for a new company structure that makes it simpler and more efficient to manage the business and our growth, particularly when it comes to U.S. Government classified programs. Our new parent company, Rocket Lab Corporation will replace Rocket Lab USA Inc. as the public company listed on the NASDAQ. Existing shares of Rocket Lab will automatically convert on a one-for-one basis into shares of common stock of Rocket Lab Corporation, which will keep the RKLB ticker symbol. Trading is expected to continue uninterrupted on the NASDAQ and there will be no impact to shareholders' ownership or rights. We should have the new company structure wrapped up by the end of the month. And with that I'll transition over to the review of the financial highlights for the quarter. The first quarter 2025 revenue was $122.6 million, which was at the high end of our prior guidance range and reflects significant year-over-year growth of 32.1%, driven by strong contribution from both business segments but led by Space Systems. First quarter revenue declined 7.4% sequentially primarily due to the mix of lower priced electron missions in the quarter paired with an aggregate reduction in our components businesses, with both of these headwinds expected to reverse and convert into tailwinds in Q2. Our Launch Services segment delivered revenue of $35.6 million, reflecting a slight step down in average selling price. However, our current backlog for Electron and HASTE backlog continues to support an increasing ASP with some variability quarterly tied to volume purchase commitments, launch location and mission assurance requirements. Although variable quarter-to-quarter, we expect ASP for the calendar year 2025 to materially expand when compared to 2024 and with that continued gross margin expansion. Our Space System segment delivered $87 million in the quarter reflecting a sequential decline of 3.4% driven by your attitude determination and control systems and separation systems businesses. Now turning to gross margin. GAAP gross margin for the first quarter was 28.8% above our prior guidance range of 25% to 27%. Non-GAAP gross margin for the first quarter was 33.4%, which was also above our prior guidance range of 30% to 32%. GAAP gross margin improved sequentially owing to an improved mix in satellite manufacturing, partially offset by a decline in launch margin segment related primarily to lower average selling price. Non-GAAP gross margin was down slightly sequentially due to a lower stock based compensation adjustment under our EAC program accounting. Relatedly, we ended Q1 with production related headcount 1088, up 84 from the prior quarter. Turning to backlog, we ended Q1 2025 with $1.067 billion of total backlog with launch backlog of $422.2 million and space systems backlog of $644.8 million. While overall backlog growth has been modest, launch backlog nearly doubled year-over-year with strong underlying trends as we convert a very strong pipeline of Neutron, Electron and HASTE opportunities. Space systems bookings remain lumpy given the timing of increasingly larger needle moving customer program opportunities but remain at a healthy level despite a step up in revenue run rate over the last few quarters. We continue to cultivate a healthy pipeline including multi launch deals and large satellite manufacturing contracts that as mentioned earlier can create lumpiness in backlog growth given the size and complexity of the opportunities. Relatedly, in Pete's earlier comments he referenced being on ramp recently to some very large and strategic procurement programs including the very large and exciting NSSL program in addition to a few multi-billion dollar Hypersonics programs domestically and abroad which now set the stage for exciting backlog expanding task order bidding. Getting on ramp was the required milestone to unlock this potential, so we're very excited about what's to come. We expect approximately 56% of current backlog to be recognized as revenues within 12 months and we continue to get relatively quick turns business that drive top line growth beyond current 12-month backlog conversion. Turning to operating expenses, GAAP operating expenses for the first quarter of 2025 were $94.4 million within our guidance range of $93 million to $95 million. Non-GAAP operating expenses for the first quarter were $76.8 million, up $2.3 million sequentially which was just below our guidance range of $77 million to $79 million. The sequential increases in both GAAP and non-GAAP operating expenses were primarily driven by continued growth in prototype and headcount related spending to support our Neutron development program. Specifically, investment has increased to support Neutron propulsion as we continue to qualify Archimedes and mechanical and composite structures supporting the fairing and tank fabrication ahead of the first flight this year. In R&D specifically, GAAP expenses increased $6.9 million quarter-on-quarter due to the ramping up of the Archimedes production paired with increased expenses related to mechanical systems and composites as just mentioned. Non-GAAP R&D expenses were up $4 million quarter-on-quarter driven similarly to the GAAP expenses. Q1 ending R&D headcount was 923 representing an increase of 95 from the prior quarter. In SG&A, GAAP expenses decreased $800,000 quarter-on-quarter due to a decrease in outside services. Within that GAAP spend, we reported non-recurring transaction costs of $1.4 million in Q1 due to continued corporate development activities including advancing a robust pipeline of M&A opportunities. Non-GAAP SG&A expenses decreased modestly by $1.7 million due primarily to a decrease in software licenses. Q1 ending SG&A headcount was 332 representing an increase of 3 from the prior quarter. In summary, total first quarter headcount was 2,343 up 182 heads from the prior quarter. Turning to cash, purchases of property, equipment and capitalized software licenses were $28.7 million in the first quarter of 2025, an increase of $7.2 million from the $21.5 million in the fourth quarter of 2024 as we accelerated our LC3 construction activities and expanded our additive manufacturing capacity to support Archimedes scaling. As we continue to invest in Neutron R&D testing and scaling production, we expect increased capital expenditures to continue leading up to Neutron's first flight. GAAP operating cash flow was a negative $54.2 million in the first quarter of 2025 compared to a negative $2.4 million in the fourth quarter of 2024. The sequential growth in negative GAAP operating cash flow of $51.8 million was driven primarily by materially lumpy cash receipts from our largest satellite programs paired with continued Neutron investment and long lead procurement supporting SDA as well as subsequent Neutron vehicle bill of materials and related infrastructure including the recovery landing barge to scale Neutron's cadence beyond its initial test flight. Overall non-GAAP free cash flow defined as GAAP operating cash flow less purchases of property equipment software in the first quarter of 2025 was a use of $82.9 million compared to a use of $23.9 million in the fourth quarter 2024, again driven by lumpy cash receipts and disbursements. The ending balance of cash, cash equivalents, restricted cash and marketable securities was $517 million at the end of the first quarter of 2025. The sequential increase in liquidity is due to the at-the-market equity offering that we announced earlier in the quarter which generated $92.8 million in gross proceeds through quarter end, which is intended to fund growth including future acquisitions such as the Mynaric acquisition along with general corporate purposes. As such, we exited Q1 in a strong position to execute on our organic expansion initiatives as well as inorganic options to further vertically integrate our supply chain with strategic capabilities and expand our addressable market consistent with what we have done successfully in the past. Adjusted EBITDA loss was $30 million in the first quarter of 2025, better than our guidance range of $33 million to $35 million loss. Sequential increase of $6.8 million of adjusted EBITDA loss was driven by a slight decline in revenue growth paired with an increase in Neutron R&D during the quarter. And with that, let's turn to our guidance for the second quarter of 2025. We expect revenue in the second quarter to range between $130 million and $140 million, representing slightly greater than 10% quarter-over-quarter revenue growth at the midpoint. We expect meaningful expansion in both GAAP and non-GAAP gross margins in the second quarter, with GAAP gross margins to range between 30% to 32% and non-GAAP gross margins to range between 34% to 36%. These forecasted GAAP and non-GAAP gross margins reflect improvement in launch ASP and overhead absorption. We expect second quarter GAAP operating expenses to range between $96 million and $98 million and non-GAAP operating expenses to range between $82 million and $84 million. The quarter-on-quarter increase is to be driven primarily by continued Neutron investment across staff costs, prototyping and materials. We expect second quarter GAAP and non-GAAP net interest expense to be $3.1 million. We expect second quarter adjusted EBITDA loss to range between $28 million and $30 million and basic weighted average common shares outstanding to be approximately 514 million shares, which includes convertible preferred shares of approximately 51 million. Lastly, consistent with last quarter, we believe negative non-GAAP free cash flow in the second quarter remains at an elevated level in the range of $40 million to $80 million, excluding any potential offsetting effects of financing under our existing equipment lending facility. And with that we'll hand the call over to the operator for questions.

Great. Thank you so much again. Are we ready to take questions now?

No problem. While we're getting Pete back on the line again. Okay, operator, until we can get Pete back on the line, I'll just pick up where he left off.

Hey, good afternoon team. Thank you for taking our questions. First one, want to ask about Mynaric. It's a public company, so we've obviously seen some of the struggles that they've had. After doing your analysis or due diligence on it, what do you think is the biggest issue they have had and the plan to kind of address that so you can scale it up?

I can take that one if you want, Adam. At this point, I think it's appropriate to make the statement that we can go to the moon but can't secure a telephone line. So my apologies for that. But the biggest issue there, Edison, is just production. And that's an area that obviously we're very, very strong in. So as we look at them as a company, they've got a great product, there's been a tremendous amount of capital invested in the business to scale, but there are just a few fundamentals there that we really feel we can jump in and fix.

And would you expect that ultimately to be quite a high margin product or at least similar to some of the merchant business that you do now?

I think when we look at how it folds into our overall portfolio of subsystems, we think it's going to be very consistent. Probably, again, I would say that, scale is important to that business too. The number of terminals that get made. So as we ramp up into these programs, the ability to absorb the overhead will improve. So I think it probably starts kind of more towards the average of our program and get to be hopefully one of our better margin programs in the product lines in the portfolio. But I don't see it being vastly different kind of in totality. It's going to be pretty consistent with our overall kind of blended margin for our components business.

Got you. And then in relation to that, you mentioned in the slide deck, in the remarks that you still have several, I think half a dozen, potentially quite large opportunities in the pipeline. I'm wondering if you could maybe comment, are you considering looking at actual operator assets so not just kind of tuck-ins for components, but other operators out there, given there are some fairly distressed assets? And would you kind of consider working with them or acquiring them in some way?

Yes, Edison. I mean, we look at everything right, and some things like Mynaric, nice little tuck-ins to kind of bolster our vision. Then, we'll look across, a range of things including much more needle moving opportunities. Then I would say that, to your point, the opportunities right now to do interesting things are quite high. There's quite a lot of opportunity out there. Hence the reason why we've made sure we're in a strong position to act on some of those opportunities.

Understood. And just quick housekeeping. The space system margin was quite good in the first quarter. Is that a good run rate going forward?

Sorry, you broke up a little bit there. As on, it was... Sorry. As on, it was quite... What? Sorry…

It was quite high. It was quite good. It was very strong performance in space systems margin in the quarter gross margin. Is that a good rate?

I believe we are reaching a stage in our business where we can start achieving better gross margins. We expect our overall gross margins to continue improving as we move through 2025, and this improvement will likely be more significant on the launch side than on the space systems side. The launch segment is set up well for considerable margin expansion due to a healthier average selling price mix and an increased cadence in the latter half of the year. We are on track to reach our margin goals that we've aimed for over the past few years by the end of 2025. Overall, it’s positive news for margins in both space systems and launch.

Fantastic. Thank you.

Yes, thanks. Good afternoon, guys. I was wondering, could you just elaborate on the launch margins in the quarter, what may have driven that variability down a little bit, and if you could give us an update on your free cash expectations, the cadence through the year, that'd be very helpful. Thank you.

Yes, the launch margins have consistently shown that ramping up this launch business involves significant fixed overhead and expenses. For instance, the standing costs of a launch range in New Zealand are strategic, but when underutilized, they add a considerable burden in fixed costs. Cadence is essential; even though it's relatively consistent, for example from Q1 to Q2, we anticipate an uptick in the latter half of the year. The primary driving factor is cadence, followed by the average selling price (ASP). ASP can vary widely; we have volume launch deals priced aggressively due to long-term commitments. There are efficiencies in reusing elements like adapter plates due to prior work done, which adds to both scale and cadence benefits. However, missions requiring higher assurance and data delivery lead to higher ASPs. We expect the second half of the year to benefit from both increased cadence and better ASPs due to higher mission deliverables. Regarding cash flow, our primary focus is on successfully executing the first launch of Neutron in the second half of the year. This is crucial, and the entire team is dedicated to reaching this objective. While meeting this goal is pivotal, we are also preparing the business to scale effectively afterward by investing in items like the return on investment barge and purchasing long-lead inventory for future Neutron vehicles. Some components need to be ordered 12 months or more in advance, so we are proactively securing these items to ensure rapid scaling post-launch. You can expect the elevated levels of negative free cash flow seen in Q1 to persist in Q2 and likely throughout the second half of the year until we achieve that first launch, after which we anticipate improvement. We will provide more details as we approach that significant milestone.

I appreciate it. And one last one on tariffs. Can you size your exposure where you have the exposure, if at all? How it impacts the business? Thank you.

Yes, we can. I want to emphasize that we are in a very dynamic situation. It’s hard to predict what the tariff landscape will look like tomorrow, in two weeks, or in two months. However, based on our current viewpoint, we are fortunate that most of our Electron launch business is based in New Zealand, where the product is both manufactured and launched. Very few of our launches occur outside of New Zealand. Regarding our Space Systems business, we are again fortunate that we have a strong domestic sourcing focus. A significant portion of our manufacturing for Space Systems occurs in the United States, and for parts produced elsewhere, they typically contain a high level of U.S. content. For example, our reaction wheels, which are produced in Toronto, contain a substantial amount of U.S. components in their electronics and other parts. Overall, we are in a good position since our manufacturing setup minimizes our exposure. That said, circumstances could change, and while we can't predict the future, we believe we are better positioned than many in the current environment.

I appreciate it, guys. Thanks and good luck.

Hey, thanks. I want to ask a little bit about the new products and kind of the pipeline of opportunities for that? Maybe starting with your new solar array products. Sounds like they're modular, and maybe you can expand on kind of target applications for those products?

Yes, Ryan, sure. So on the star rays in particular, we had a lot of customers coming to us with quick turn opportunities where they need to get on a little bit super quick. And the SolAero business had built a very nice way of building cells and panels and producing high-quality things, but that like super quick. Here's a complete array. It is not really a product that is readily available in the U.S. right now in the market. So we saw that as an opportunity given kind of what customers are asking for. And it's a very modular things so you can add multiple kind of panels to the array. And it just gets our customers on orbit much faster. The total opportunity for that product, we'll have to wait and see. But we're very commercial in these things, like we need a certain number of evidence of inquiry before we make those investments, but it also enables the company as a complete array manufacturer. Typically, SolAero historically just made cells and some panels, but since the integration with Rocket Lab, we are able to add all of the other elements, deployment mechanisms, hinges and whatnot to produce these entire arrays.

Got it. That's really helpful, Peter. Then you mentioned opportunities in Europe. Can you maybe summarize those at a high level? I assume maybe there's some sovereign government programs and commercial as well. Maybe you can expand on Europe?

Yes, we have been considering our entry into the European market for quite some time due to its highly regulated nature, particularly with government programs through ESA. Establishing a business presence there not only allows us to participate in these programs but also opens up opportunities to offer a range of our products, including communication and satellite terminals. This presents a significant opportunity for market expansion, as getting involved with large European programs is usually challenging without having a local presence.

And Peter, is that mostly from the Space Systems perspective? Or are you thinking Launch as well?

Mostly Space Systems, I mean, yes, the prominent opportunity for us here.

Peter, Adam, thanks for the question. Real quick touch on SolAero. I understand, maybe an update on the backlog there. How are things progressing in terms of working through some of that lower-margin work that you guys still had? I know it was targeted to be done already and you guys are continuing to work towards that. So maybe just a status update.

Yes, I can address that. We have made significant progress in improving the margins in that business. When we acquired it roughly two and a half years ago, it had a high single-digit gross margin. Looking at this quarter's results, we have nearly reached the goal we set for ourselves. While we may have been a couple of quarters behind our initial timeline, we have ultimately achieved what we aimed for. More importantly, this acquisition has strategically strengthened our portfolio and enhanced our competitiveness in bidding for these growing opportunities. I'm very pleased with the gross margin improvements we've made in that business, and I believe there is still potential for further growth. Overall, I feel confident that we have met our initial objectives.

Yes, I agree. I'm pleased to hear that you have reached that target. Regarding Mynaric and the supply chain, when you announced the acquisition, you mentioned difficulties in sourcing some key components due to shortages, which impacted the ability to deliver products. Is that still an issue, or are there plans in place to improve the situation?

Yes. I mean, I think some of the supply chain issue was obviously the company's distress. If you're a supplier into that that's kind of a challenging place to supply into and make investments against. Obviously, that goes away with Rocket Lab's ownership. So at least some of those supply chain issues get resolved.

Got it. Got it. And then if I could just squeeze in one more. I mean, you guys talked or link about Neutron reusability and the value of that, which was super helpful. But can we get another update maybe on Electron reusability, some milestones to look forward to?

Yes. So Electron reusability is we've kind of paused that to put all efforts and all team on Neutron. We had an extremely talented reusability team on Electron. And as we look across the business and where the priority lies really is we can get a much bigger bang for our buck with all of those engineers working Neutron and taking their experience over there. So it was just a priority decision that we've made within the company. It's obviously, a Neutron sticker price of $55 million, so if you can get the majority of that back, it's a much bigger impact than a rocket with a sticker price of $8.5 million. So yes, it's just a priority call within the company that we'll put that on pause until we get Neutron to the pad and flying. And as Adam said before, it's all hands to the pump.

Yes, yes. No doubt. So those engineers were just moved over from one program to the other, no loss there, right? On the headcount base?

No, correct. Yes. Yes, no, no, no. They've...

Hey guys, good afternoon. Thanks for the question. I wanted to ask a couple on the federal budget. I guess one on Golden Dome, just if you guys are involved in some of the discussions there? Is there maybe an opportunity on kind of the space layer there? And then I guess the NASA budget was proposed to be cut pretty substantially. I don't think you guys have a ton of kind of direct exposure there, but just curious if that's a risk if that does end up going through to Congress.

Yes, that's a good question. Firstly, regarding the Golden Dome, we plan to play a significant role there. We have already positioned ourselves as a prime contractor for international security programs. Part of the reason we restructured the company into a corporation is to better address these critical national security programs. We are quite optimistic about our involvement with Golden Dome and our capabilities extend not only in Space Systems but also in Launch and throughout various opportunities. As for NASA, you accurately noted that we do not have a large amount of NASA work. Personally, I have a fondness for planetary missions, so we actively pursue those, and we remain a reliable launch provider for NASA. However, NASA does not constitute a major part of our pipeline or backlog.

Hi, Peter, hi Adam. Maybe on the financials, maybe in picking question, but the percent of backlog that's recognizable in the next 12 months seems to be trending up on a secular basis. I would have thought if you have more multi-year contracts that would trend down. Am I thinking about that correctly? Or maybe you could clarify something?

Yes. The backlog is somewhat misleading. If you examine the duration of programs, like the SDA program and the previous Globalstar MDA program, the main revenue period typically spans about three years. There are some early and late impacts, but most revenue recognition occurs within that three-year timeframe. Even more specifically, much of it is concentrated in approximately 18 months. Revenue starts to accumulate as we finalize platform designs and meet initial design milestones. However, the majority of revenue recognition comes when we take possession of materials, as that represents a significant portion of costs under the Earned Value methodology. While it might seem like the process would be more elongated, it's actually more compressed than it appears. For instance, regarding the SDA program, we announced it at the end of Q4 2023. We are nearly six quarters into it, and we are now entering the core of that revenue recognition cycle. Most of the revenue recognition will occur over the next six quarters at most, with substantial recognition expected in the next four quarters before it starts to decline. This brings us back to our focus on backlog. We have been emphasizing the importance of adding the next significant piece of backlog to our books. We are concentrating on several opportunities, including well-known ones like the next submission for SDA, which is due very soon. We believe we are well-positioned for that and other commercial and government programs. On the Space Systems side, we feel confident. The components business is not characterized by long-term contracts, focusing more on shorter terms, typically 12 to 18 months. As for the launch business, overcoming certain program milestones—prerequisites for opening larger opportunities—has been crucial, especially for Neutron. We are now in a position to build backlog more significantly. While $1 billion is respectable, we believe it has the potential for significant growth now that we have entered the next phase of these major satellite programs and expanded Neutron's involvement. It may require some patience, but historically, we have successfully converted opportunities into backlog, and we are more confident than ever in our ability to do so.

Okay. That's very helpful. And then this question may be a little further out. Thinking about sort of Neutron and sort of the landing infrastructure strategy longer term. I wouldn't have thought about this for a few years, but it's this AFRL announcement you had today about being a global logistics provider for them. I'm curious, is it more than one ROI barge globally? Or what are the elements of kind of reentry and landing for Neutron that require investments potentially?

Yes, good question, Suji. So it's primarily just a barge. It does have return to launch-like capabilities as well and its cadence increases then there could be further asset needed to be deployed in the form of additional barges. The point-to-point cargo, look, that program is really at the very beginning of its development within the U.S. government. So I think we're very much in the experimental phase. It will be interesting to see if that turns into a full requirement for an operational capability, but it's good to be on that program and working on early.

Great. Thanks. Peter, you mentioned in your comments about Mynaric that they got quite a bit of backlog and are struggling with getting shipments out. What I thought was more interesting about your comments were how you might utilize that technology in future constellations that you plan to build and operate on your own. So I'm just kind of curious, the strategic rationale behind purchasing Mynaric. Was it more for that purpose and enabling your future constellation? Or was it more to be a merchant supplier?

Jason, to be honest, we are focused on both aspects. We have established robust and profitable merchant businesses in all of our components, including solar fraction wheels, and we are pleased to supply customers globally. However, when it comes to our own projects, we need a dependable and scalable supply of components to meet our goals. The space industry is filled with small manufacturing shops providing these essential components, which causes challenges for our customers in scaling production quickly. We're addressing two issues: being a merchant supplier at scale for the industry and ensuring that when we decide to build our own projects, we possess the capabilities at scale. We are systematically evaluating every component of the satellites we will need now and in the future, and we seize opportunities as they arise.

Okay. Yes, fair enough, thank you. Another question for you, Peter. I'm curious about transport. Could you provide some context? What do you think are the unique features of the SDA transport layer as envisioned by your customers? How does it differ from what they could purchase from commercial providers today? Could you elaborate on why they would choose to pursue SDA tranches for the transport layer instead of simply opting for commercial options?

That's a valid question. It's important to view what SDA is aiming to accomplish as a comprehensive system. While it's divided into different layers, including transport layers and track layers, we need to consider the overall goal and identify the crucial components. It's essential to approach this not only from the perspective of a single satellite but as an integrated system that needs to work seamlessly with both existing and future infrastructure. While it is a reasonable inquiry to ask if transportation can be handled commercially, it is crucial for it to fully comply with all DOD standards and security requirements, accommodating all current and planned spacecraft. Space technology often involves trade-offs, leading to tight requirements that need to be met. It is conceivable that commercial providers could supply part of the transport layer, and this is something SDA and the Pentagon are actively exploring. However, our main emphasis is on layers like the track layers, as those are currently not being met by commercial solutions. There is much more to the SDA program than just the transport layer.

Right. And that's a pretty segue into my final question, which was about the pipeline. As you look at your pipeline for constellation builds, and I would consider this transport layer that you're working on now to be a constellation build. Do you think you are more likely to see government constellation builds? Like the next announcement comes along, are we likely to see more government wins from you all? Or are you trying to balance this out and we could very well see a commercial one? Just kind of curious how you are going to market at this point. Thanks.

We have the advantage of selecting the types of projects we want to pursue, focusing on those that align strategically with our future goals. This includes both government and commercial ventures, whether it's smaller satellite numbers or small volume constellations that we consider strategically important, as well as larger projects. Our business development team and senior management are primarily concentrating on these larger constellations because that’s the direction we want to head in. We have reached a level of maturity and scale that enables us to competitively pursue these opportunities. As we've mentioned, we are very vertically integrated with many key satellite components at scale and have demonstrated our capability to execute technically challenging missions and serve as a prime contractor for national security projects. Therefore, we are looking at significant opportunities across both commercial and government sectors. I hope that clarifies your question.

Hey good afternoon everyone. I want to stick with the satellite constellation topic, and you had mentioned the potential for government contracts that could be to build the entire satellite constellation. How do you think about prioritizing that type of work versus building your own constellation first?

Yes. Well, I mean that is a good question and something that we talk about a lot. But the most important thing for us is to build a large scalable profitable company. So we are not about to embark on huge R&D projects that would make that a much more far-out goal. So the answer to the question is probably not a very good answer is that we balance that, right? We look at those opportunities and I can say that everything we've done to date leads us to that point. When we have a full conviction and thesis that we can talk about around what kind of constellation that we intend to go after, you really have to have that extremely well-baked because at that point, you're committing significant resources to go after those kinds of things. So yes, I mean, like I said, the focus is on strengthening the company and we're moving as rapidly as we can into constellations and where we think is important, but we're not going to do that at the cost of the security of the business.

And then shifting to Archimedes, how long are you targeting that engine to burn for a full launch? And maybe what's the duration of the half hires that you're doing today relative to that full burn expectation?

Yes. So I mean, a full duration second stage upper burn profile is on the order of sort of 5 minutes and where we're targeting the testing right now, it's really all about all the start-up and shutdown transients and all of those things. Once you reach thermal equilibrium when the engine is just running at equilibrium, you are not learning anything because everything is in a steady state. You're just burning for coming at that point. So our focus has not been on big long durations. Our focus has been on all the operating conditions that we need to meet, especially when a reusable launch vehicle when you come in to landing, one of the more challenging things is your propellants are hot and there are different pressures, so that's a far more challenging environment to be able to reignite an engine than a steady-state burn. So that's really been our focus.

Thank you for the question. I would like to revisit the situation with Mynaric. From what I recall, the press release indicated that the deal depended on terms acceptable to Rocket Lab. However, in your comments, you seemed much more confident about finalizing that transaction. Are there any remaining issues that need to be addressed before we can close this deal?

Yes, Erik, I'll make a few comments, and Adam probably has better ones. But you have to go through a whole process in Germany and that process can take some time and that's probably the longer pole in the tent. And it's not really a process that we have much kind of control over. The bankruptcy laws and stuff are different in Germany than the States, but Adam, you might have a better comment?

No, exactly right. It all comes down to regulatory, and there's a couple of regulatory processes that you got to get through. But the first one is really get through the bankruptcy process over there in Germany, which there is a court date that's scheduled. And so things are progressing. I think we have always had confidence where kind of with our deal that we have with the primary lender here, and that's why we have confidence in kind of leaning forward and announcing the deal. So everything seems to be on track. I mean I think the difficult thing I was trying to predict kind of how the regulatory process will have a timeline for that. But we feel good about where we're at because we have a committed plan to, as Pete mentioned earlier, to invest in that business in Germany. It's great technology. There's great initial property. We're going to continue to invest in. We are going to have what we believe to be a thriving merchant business supplying the broader ecosystem. So yes, we have no reason to be concerned at this point.

Great. Can you provide feedback or interest you've received since announcing that spacecraft? Also, do you have any updates on progress so far, including the timing for bringing that spacecraft to market?

We have strong interest from both commercial and government constellation providers. The light serves as the gold standard for high volume, high cadence deployments of constellations, and is also useful for our own needs. This product was specifically developed based on the feedback from a group of customers.

Okay. And maybe switching topics. Regarding the NSSL program, there's clearly a significant opportunity there. You received $5 million in the last quarter. At what point can we expect to see backlog booked for that? Is it dependent on the first flight, or what milestones should we look for that might generate more excitement about the program?

Yes, absolutely. The team will be collaborating with us for the next few years on all aspects of mission assurance and everything necessary for these critical missions. We will be eligible for task orders after the first flight. However, in the meantime, there are already task orders in place for various components of mission assurance to ensure readiness for these types of payloads. It is after the first flight that we can bid for those task orders. The Phase 3 set of task orders will extend through 2029.

Great. Reaching the pad is a significant milestone for operations. Regarding Electron, Adam mentioned higher average selling prices. While Q1 was lower, we anticipate seeing an improved trend. Do you foresee the year ending with a substantially higher rate, or will it gradually increase from this point in terms of average selling price? It's important to note some fluctuations we've discussed regarding certain volume deals.

Yes. Currently, the backlog suggests that we will see an increase in both the rate of production and average selling price as the year progresses. I anticipate that the highest average selling price will occur in the fourth quarter. There will be improvement in the second quarter compared to the first, and further progress in the third quarter, leading to a peak in the fourth quarter for both average selling price and production rate. This aligns with our goal of reaching target margins in the 40s, which we have discussed over the past few years as being contingent upon achieving a couple of launches per month or six per quarter. Everything we observe now is consistently moving us closer to that goal, and we are satisfied with the way things are unfolding as planned.

Great. And that's still is 20-plus launches for the year?

Correct.

Hey everyone, good afternoon. This is Andres Sheppard. Sorry about that. Peter, Adam, congratulations on the quarter and all of the accomplishments. I think most of our questions have been asked by now. I wanted to maybe get your thoughts with the international space budgets growing, how do you expect this can benefit Rocket Lab? Where do you see the most demand from international coming across launch satellites and components? Thank you.

Yes, hi Andres. So primarily Europe, and Electron has done incredibly well in Japan. So Japanese market is like the second biggest market for Electron. But as we think about larger opportunities and programs, I think it really sits with allies in Europe.

Got it. Okay. That's helpful. As a follow-up, with our previous discussions in mind, as we approach Neutron, do you have a clearer idea of how you expect your revenue mix to change? I've noticed an increase in launch systems compared to space systems in the latest backlog. As we get closer to Neutron, how quickly do you anticipate the shift towards launches over space systems? How long do you think that transition might take? Thank you.

Sure. I can add to that, Pete. We are currently facing significant opportunities that may lead to a lot of fluctuations. I don’t believe it will be possible to forecast a consistent trend. A single substantial win in constellations could rapidly shift the balance, potentially resulting in more than two-thirds of our revenue coming from Space Systems. However, as we begin to sell these programs, every Neutron launch we secure, especially with our target price in the $50 million to $55 million range, will also have a considerable impact. If we can negotiate bulk pricing, this could lead to over 50% of our backlog being launched at some point. It’s really difficult to predict. The positive aspect is that we have multiple opportunities in play, with Launch and Space Systems both having significant potential for growth. Currently, Space Systems accounts for a larger portion of our revenue due to the size and scope of the programs we’ve been pursuing, while Electron has proven to be a strong product achieving our target margins. However, the lower revenue figures for those launches mean it takes more to tip the scales in their favor, but Neutron changes that dynamic. It’s challenging to make predictions, and the volatility is apparent, but it's encouraging that both areas are positioned for strong growth, presenting a favorable dilemma on which will advance faster.

That's very helpful, Adam. Really, really appreciate that color and congrats again to the team.

All right. Thank you so much. This does conclude our Q&A section for today. And with that, I will hand it back over to Peter Beck for our closing remarks.

Yes. Thanks very much, everybody. And before we close out for today, here are some of the upcoming events and conferences that the team will be attending. We look forward to sharing more exciting news and updates with you there. Otherwise, thank you very much for joining us. That wraps up today's call, and we look forward to speaking with you about the exciting progress we are making at Rocket Lab again soon. Thanks. Bye.

Thank you so much for joining us today. This does conclude our conference call. You are now free to disconnect. Thank you.