Earnings Call Transcript - RKLB Q4 FY2025

Operator

Hello, and welcome to Rocket Lab's fourth quarter and full year 2025 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Instructions will be given at that time. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Morgan Contant, Vice President, Marketing and Communications at Rocket Lab. Thank you. You may begin.

Speaker 9

Thank you. 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 founder and chief executive, 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. 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.

Peter Beck, CEO

Sir Peter Beck Thanks very much, Morgan. So I'm going to start today by stealing some of Adam's thunder and sharing some of their financial highlights up front. We had a new annual revenue record in 2025 coming in at $602 million, which represents 38% growth year-on-year compared with 2024. We also had a record quarter in Q4 with revenue coming up at $180 million, which was up 36% from Q4 last year. At the end of Q4, our backlog sat at a record $1.85 billion, which is up 73% from the same time in 2024. And finally, we also achieved record gross margins in Q4 at 38% GAAP and 44% non-GAAP. As you tend to say on launch day, that's greens all across the board and a great result. It comes down to one thing, and it's simply relentless execution from the Rocket Lab team across our launch and space systems programs. Here are some highlights from that execution. I won't labor on these now as we'll go into more detail in the up and coming slides, But ultimately, we launched and signed a record number of Electron missions and led the way on hypersonics testing with haste and achieved some significant qualification and development milestones on Neutron. On the space systems front, we were awarded the largest contract in Rocket Lab's history, successfully delivered the escapade mission to Mars for NASA, and we had record growth across all of our space systems component businesses. On acquisitions, we welcomed Geost in 2025, which officially marked our entrance into payloads. And followed this up in Q1 2026 with the acquisition of Optical Support Inc, which further strengthens our optical systems offering. We also expanded our machining and manufacturing footprint with the acquisition of Precision Components Limited, which actually just closed today. And will ultimately support continued scaling of the components manufacturer for both launch and space systems. More on these in the slides ahead. So on to some quick highlights for Electron and Haste. Rocket Lab remains the small launch leader globally as the only rocket delivering reliable and high cadence launch opportunities for SmallSat. We launched 21 missions across Electron in haste in 2025, which was a new company record. We also launched seven missions in Q4, our highest number of launches in a single quarter to date. Meanwhile, there were no successful orbital launches of a new US or European small launch vehicle in 2025 at all. And it's very clear when small set operators need a dedicated ride to orbit, they come to Rocket Lab. And we're proud to hold this title and look forward to expanding it again, the record again, even further this year. The US government has made no secret of the fact that faster and more frequent hypersonic testing is an urgent need and a national priority. Rocket Lab is the only credible provider that has demonstrated the ability to deliver this capability right now, not years into the future. In 2025, we conducted three successful Haste missions, and the next one is on the pad in Virginia, now just days away from launch. This kind of cadence and reliability positions as well for programs like Golden Dome. With more Haste missions on the books this year, we'll be rapidly building that moat even further. It was a record year for launching missions, but also for signing them. We added more than 30 new launches to the manifest across Electron and Haste. They came from a nicely diversified customer base spanning the US, NATSEC and Defence, commercial constellations and international organisations. We had many returning customers sign new contracts, often for bulk buys and multiple launches, but also added new names too, which demonstrates that our small launch customer base continues to expand. In Q4 alone, we signed a new multi-launch deal with Black Sky for four new launches, which brings the total number of missions they've booked with us to 17. We also signed a contract with a new confidential customer in support of national security. As always our pipeline for Electron and HACE remains strong and we're excited to continue signing new and novel missions as well as a standard repeat and mission profiles in 2026. Now on to space systems. Rocket Lab is not new to being a prime contractor but in Q4 we made an announcement that highlights their substantial growth in satellite in a satellite market and further cement our position as a preferred disruptive prime. The Space Development Agency, or SDA, awarded us an $816 million contract to build an advanced constellation of 18 spacecraft equipped with advanced missile warning, tracking, and defense sensors to provide global and persistent detection and tracking of emerging missile threats. It's the largest single contract in Rocket Lab's history. What's more, as a leading merchant supplier into the other tranche, three prime contractors, there are additional subsystem opportunities that could add a total capture value to approximately $1 billion for supplying payloads, solar power, reaction wheels, and star trackers, software, and other solutions from a broad portfolio of capabilities. It's important to point out that the acquisition of GEOS played a significant role in securing this award. Rocket Lab is the only commercial provider producing both the spacecraft and payloads in-house for SDA and for the tracking layer Tranche 3, supporting the government's goals for speed, resilience and affordability in space-based missile defence. This award follows on from our previous prime contract award for SDA's transport layer Beta Tranche 2 programme. With the two programmes combined, we now have more than $1.3 billion in contracts signed with SDA. I think an important takeaway from this announcement is not just that we've won a significant contract, it's that Rocket Lab is repeatedly winning large awards that have historically been the exclusive legacy, exclusive to the legacy aerospace primes. We're seeing a new world order established in the defence world with the rise of companies like Andreal and Palantir playing leading roles in disrupting slow bloated traditional players. Rocket Lab is clearly doing this in space and unseating the old guard. Okay, on to Mars. In Q4, the ESCAPAD mission launched and the twin satellites we built for NASA and UC Berkeley are now well on their way to the red planet. With ESCAPAD, we've proved that it's possible to deliver decadal class missions on a drastically shortened timeline and for significantly smaller budgets than typical interplanetary missions. We made this possible through vertical integration, maintaining strict control over schedule and budget. With both spacecraft now successfully commissioned and in a loiter trajectory near L2, that's a Lagrange point, around 1.5 million kilometres from Earth, Rocket Lab's primary role in the mission will soon be complete when we hand it over to the team at UC Berkeley next month. Even once control has been transferred, we'll be cheering blue and gold along as they arrive in Mars orbit in September next year. A roll in escapade might have reached mission success, but we're not quite finished yet with Mars yet. We've made no secret of the fact that we think Rocket Lab is the strongest contender to deliver NASA's Mars Telecommunication Orbiter Program. An MTO will be fundamental to everything else on Mars, enabling science now and human exploration in the future. We'll make it possible with a rare combination of proven spacecraft, deep space mission experience, reliable rockets, and end-to-end space systems capability as a vertically integrated mission provider. Our hardware and our software has enabled some of the most ambitious and successful Mars missions in history, including the Mars InSight Lander, Perseverance Rover, Ingenuity Helicopter. Mars is in our DNA, and Rocket Lab has more hardware on and orbiting Mars than just about any other company today. Okay, on to programs. We had a key milestone for LOCSAT, which is a launch plus spacecraft mission to build and deploy an on-orbit cryogenic fuel depot for NASA. This spacecraft is now complete and will be marching steadily towards launch later this year. Okay, we also have an exciting development to share from our space solar business. It requires some background on kind of the state of the art of space solar power, so bear with me a little bit on this one. The satellite industry is rapidly expanding and projected to grow seven times by 2035. Those satellites will all need solar power. Rocket Lab is the world leader in solar space power, so it should come as no surprise that the best position to serve this growing market. In addition, ambitious opportunities are on the horizon from space-based data centres. As AI and compute demand soar and data centres on Earth reach their limits, companies are beginning to seriously explore moving data centres to orbit where they can take advantage of the cool conditions and infinite solar energy. But rapid market growth of this size, both for typical constellations and futuristic projects like space-based data centers will be hampered if traditional solar cells are the only option. So it's against this backdrop that I'm proud to announce that Rocket Lab is introducing a space-optimized silicon solar arrays. While silicon is not new in space, it's always suffered from low radiation tolerance and very low life expectancy with poor performance. Our team of the experts in space solar, having developed some of the most complex cells for flagship missions to the sun and most of the missions on mars today the team has produced a silicon array that is a game changer by harnessing silicon we're able to deliver a really low cost per watt at industrial scale enabling gigawatt class power generation in space at kilometer size scale using mass manufacturable lightweight and modular systems we've also taken the additional step of developing a hybrid solar array solution that incorporates both high efficiency cells and silicon cell an approach that lever leverages the benefits of both technology when size weight and power or performance are at a premium traditional high efficiency high efficiency cells are enabling when cost schedule or cost constellation scale are required silicon cells can meet that demand when these factors must be traded off and balanced hybrid arrays enable a combination of the two to deliver an optimum performance at a compelling value so for new products we move into new acquisitions. On the top of the acquisitions no doubt everybody is interested in an update on Menarik. The German government is still working methodically through the regulatory review process so there's not much to add at this stage while that sort of runs its course as expected. But we look forward to providing an update once that's concluded. There are a few stories floating around in the media with different theories on how the transaction is progressing. All I'd say there is don't believe everything you you read in the media and online otherwise this month we have welcomed optical support inc to the rocket lab team osi is a tucson based leader in the design and manufacture of custom high precision optical and electro optical mechanical instruments osi's technology is a key enabler for national security and commercial satellites they're a key subsystem and rocket labs payloads for space protection space domain awareness missile warning and track and defense The vertical integration opportunities here are clear, while we look forward to scaling production and capabilities to serve our customers and our own programs, as we've done with many of our other successful acquisitions. And last but not least, we've also acquired Precision Components Limited in New Zealand. Again, a known and trusted supplier to us that's now part of the family. With this acquisition, we've established a new precision machining complex that enables a huge increase in machining capacity. So I think it's worth spending just a quick moment here on the strategic importance of our recent optical-focused acquisitions. Vertically integrated high-performance RF and optical payload technologies unlock high-value opportunities for national security and commercial customers. They are key to unlocking programs like Golden Dome and other proliferated mission architectures. Owing the payload chain enables discriminating performance plus greater control over schedule, cost and especially for high-volume constellations. We've already seen the strategy in action with SDA Tranche III award and we expect to deliver more value and opportunities to us this year and beyond. We received another strong vote of confidence and our ability to deliver on critical national security and defense programs when we were recently selected by the MDA for S.H.I.E.L.D. In short, we're now onboarded to the program which has a contract values up to $151 billion, giving us the opportunity to compete for future launch and space assistance contracts that deliver these capabilities to the warfighter with increased agility. All of the above ultimately points to one thing. Rocket Lab is a disruptive leader in building the future for space and defence. This was driven home by a recent visit to our facilities in Long Beach by the Secretary of War, Pete Hesketh, during the Arsenal of Freedom tour. The visit highlighted the critical support we already delivered to the Warfighter today, and showcased our capability to meet ever-evolving needs in the future. And last but not least, before Adam digs into the financials, here's the latest on Neutron. We've got lots of progress to share across Neutron, but I'll start with a topic on everyone's mind, I'm sure, which is the Stage 1 tank update. In January, we shared that Neutron's a stage one tank had ruptured during a hydrostatic pressure test at Space Systems Complex in Middle River. Now, failures aren't uncommon during the qualification phase of any rocket development program, but I do want to point out that this was unexpected, and ultimately we had anticipated that this tank would pass qualification. Now, the tank did meet its anticipated flight loads, but as we prepared to open up the test bounds and push the pressures and loads beyond this to understand the margins in the structure, the tank let go earlier than we expected. The post-test review process identified that a manufacturing defect introduced a reduction in the strength at a critical joint in the structure, specifically around the tank closeout, which is an autoclave produced part that interfaces with the bulk composite laminate of the tank and the dome. The review of the hardware and test data suggested that the tank otherwise performed as expected. The first tank was hand-laid by a third-party contractor while we're getting the automated fiber placement machine up and running and it's in this hand-lay process that a defect was introduced. Now the decision to work with a third-party contractor was ultimately driven by schedule as it would allow us to produce the first tank rapidly while simultaneously commissioning the AFP machine for future tank production. Now it's not uncommon for us to run parallel development paths like this to accelerate schedules as it can be a cost-effective way to iterate prototypes and first articles while also standing up long-term production capability to enable fast scaling down the track. Now the next tank is already in production, this time it's being built on the AFP machine, completely eliminating the possibility of this hand defect reoccurring. It's worth pointing out that Neutron's second stage was largely produced, was entirely internally passed and qualification, sorry, it's worth pointing out that Neutron's second stage was produced entirely and internally and passed qualification comfortably. Beyond changing the manufacturing process, we also are making some minor design changes to the first stage tank to introduce more margin and improve manufacturability. To be clear, we're happy with the overall tank design, but since we're making a new one, we thought we'd take the opportunity to tweak things a little bit and optimize it. Once completed the new tank will undergo an extensive test and qualification campaign to verify flight readiness and we're going to take our time with that process. The priority will always be to bringing a reliable rocket to market even if it means taking a few extra months. Ultimately the combination of the new tank and the production design tweaks and the test and qualification campaign will adjust Neutron's time frame a little bit. As such, Neutron's first launch is now targeted for Q4 2026. Neutron is still scheduled to come to market in an incredibly aggressive time frame, and what's more, we'll be bringing a robust and thoroughly tested vehicle to the pad. We look forward to sharing more development progress as we run through the final development phases this year. Okay, so on to some milestones in the Neutron program over the past quarter. you would have seen over the next few slides why i'm dubbing this the quarter of qualification we've taken massive strides in q4 as well as q1 so far successfully qualifying critical flight hardware from large structures through to component level systems in q4 the hungry hippo fairing successfully passed qualification and then on into q1 it made its way to wallops so exciting time in virginia as neutron flight here flight hardware starts arriving and we can get into the final assembly and integration and test phase For the Hungry Hippo, specifically, that looks like fluid systems, an installation of canards and thermal protection systems, and then, of course, end-to-end testing. While we work through that in preparation for the first flight, we have the second Hungry Hippo in production for the next Neutron launch vehicle as well. Another successful qualification on the board is Neutron thrust structure.

Adam Spice, CFO

This is a really complex part of Neutron.

Peter Beck, CEO

It must be able to withstand 2.1 million pounds of thrust, which is more than 44 electrons simultaneously lifting off to give everybody kind of a sense there the structure is now officially onto final integration which is the final hurdle before we get into integrated system checkouts cryogenic proof tests vehicle hot fires wet dress and then of course launch it'll go through avionics and fluids and sub component integration before shipping out to lc3 meanwhile in middle river a neutron's interstage is undergoing its own qualification qualification campaign before being shipped to LC3. Neutron's second stage is hung inside this during flight. It then passes through the mouth of the Hungry Hippo and carried to orbit. Like the Hungry Hippo, the interstage remains attached to the first stage and reused, so it needs to undergo a robust testing program so you can ensure that it can withstand the forces of launch and landing multiple times. And then stage two is in its final integration and getting ready for its debut on the test stand at LC3. This is a specially built rig on the top of the LC3 launch mount where we'll go and conduct a barrage of integrated tests before ultimately moving into hot fires on the stand. That will be L3's first taste of an Archimedes engine and a huge milestone for the development program. So we look forward to testing that soon. Which brings me to the last but not least Archimedes. Right now the engines are in boot camp. We have not been nice to them at all. It's all well and good to test engines to expected bounds. But through experience, I've learned that spaceflight has a way of throwing things at you that aren't expected. Rocket engines don't tend to fail when everything's boring and when you can rely on analysis and simulation to bound and then truly understand performance. Ultimately, engine reliability is gained via testing. There's just no substitute. so that's what we're doing and we're really pushing them through the edge cases backing right off the inlet pressure and juicing cavitation and generally doing really nasty stuff to them ultimately you want to know how the engines are going to perform in a really wide range of scenarios on the ground before you put them in the air and find out in flight too many rocket companies have not done this and it typically doesn't end well this is the same kind of process we undertook when developing Rutherford the engine on Electron and right now we've flown more than 800 of those engines successfully to space so we'll be bringing the same level of reliability and rigor to Archimedes. Beyond the stage one tank we've had a really positive quarter for Neutron progress and this gives you a snapshot of just how much progress we've seen and made on the path to first launch. Major structures and subsystems are passing qualification and for the the first time we have hardware and final integration these are the final steps before we go into integrated testing on the pad with hot fires stage tests and then wet dress and then of course launch beyond the vehicle itself we have established uh all the supporting infrastructure to enable first launch and beyond lc3 has obviously stood up plus production and test facilities are all humming while the regulatory work is all tracking along as we expect the things to look out for the next few months um to know that we're marching steadily towards launch, includes seeing more hardware making its way to the launch site. We will be conducting extensive testing of flight hardware, and then obviously that'll lead up to Neutron's first flight. So that wraps up the operational highlights. So I'll hand over to Adam for the financial

Adam Spice, CFO

overview and outlook. Thanks, Pete. Fourth quarter 2025 revenue was a record $180 million. Coming in at the high end of our prior guidance range and representing an impressive year-over-year growth of 36 percent. This strong performance was driven by significant contributions from both of our business segments. Sequentially, revenue increased by 16 percent, underscoring the continued momentum across the business. Our space system segment delivered $103.8 million in revenue in the quarter, reflecting a sequential decrease of 9.1 percent. This decline was primarily stemmed from our satellite platforms business and our solar businesses, both of which continue to perform exceptionally well, despite the time-to-time programmatic non-linearity of revenue recognition under ASC 606 and related subcontractor progress. We're fortunate that the growing diversification across space systems and launch can often provide more predictable top-line growth, despite underlying volatility at the individual product line level. This was one of those quarters where strength and launch services more than offset the declines in space systems, generating $75.9 million in revenue, representing an 85% quarter-over-quarter increase due to the increase from four to seven launches during the period, including one haste mission. On a full-year basis, 2025 revenue was $602 million, an impressive 38% growth year-on-year. Now turning to gross margin. Gap gross margin for the fourth quarter was 38 percent, at the center of our prior guidance range of 37 to 39 percent, and an increase of 100 basis points, quarter-over-quarter. Non-gap gross margin for the fourth quarter was 44.3 percent, which was also in line with our prior guidance range of 43 to 45 percent, and an increase of 240 basis points, quarter-over-quarter. The sequential improvement in gross margins was primarily driven by an increase in electron fixed cost absorption due to the increased launch cadence within the quarter, paired with increased contribution from our higher margin space systems components businesses. On a full year basis, gap gross margin was 34.4%, an increase of 780 basis points year over year, while non-gap gross margin was 39.7%, an increase of 770 basis points year over year. Relatedly, we ended Q4 with production related headcount of 1,244, up 46 from the prior quarter. Now, before moving on to backlog, I want to take a moment and zoom out and provide perspective on the progress we've made towards our long-term financial model since our NASDAQ listing in 2021. Revenue has grown nearly 10x, achieving a compound annual growth rate exceeding 76%. Gross margins have increased each year, more than doubling the contribution from each dollar of revenue this expansion highlights our strong and disruptive competitive position in the industry as well as our highly valued and differentiated products and services across the business the combination of this revenue growth and margin expansion has put the company on a solid foundation and path towards achieving meaningful operating leverage and long-term cash flow generation lastly i thought it important to call out our SG&A spending as a percentage of revenue, as I'm encouraged to see this continue to trend downward as we scale the business. We are constantly driving the business to be fiercely efficient, and I believe that we're positioned to drive even more growth in efficiency in 2026 and beyond. Now turning to backlog. We ended Q4 2025 with approximately $1.85 billion in total backlog, an impressive 69% growth sequentially, primarily due to our recent SDA Tranche III tracking layer contract award, which we announced last December. As we've mentioned before, space systems backlog in particular can be lumpy given the timing of these increasingly larger needle-moving program opportunities. But once awarded, they can significantly de-risk revenue growth for several years. We continue to cultivate a strong pipeline that includes multi-launch agreements across Electron, Haste, and Neutron, as well as large satellite platform contracts across government and commercial programs. Currently, launch backlog accounts for approximately 26 percent, while Space Systems represents approximately 74 percent. Looking ahead, we expect approximately 37 percent of our current backlog to convert into revenue within the next 12 months, which includes preliminary tranche three revenue recognition estimates, which we believe will prove to be conservative, which in addition to the healthy sales pipeline are expected to drive incremental top-line contribution beyond the current 12-month backlog conversion. Turning to operating expenses, GAAP operating expenses for the fourth quarter of 2025 were $119.3 million, below our guidance range of $122 to $128 million. Non-GAAP operating expenses for the fourth quarter were $104.5 million, which were also below our guidance range of $107 to $113 million. The sequential increase 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, investments ramped up in propulsion as we continue to test Archimedes engines, as well as test and integration of mechanical and composite structures at our facility in Middle River, Maryland. In R&D specifically, GAAP expenses increased $8.1 million quarter over quarter, while non-GAAP expenses rose $7.7 million. These increases were driven by the ramp-up of Archimedes production and testing, along with higher expenditures related to composite structures and fluids, as just mentioned. Q4 ending R&D headcount was 1,012, representing a decrease of 7 from the prior quarter. In SG&A, GAAP expenses decreased $5.1 million quarter-over-quarter, while non-GAAP expenses declined $1.3 million quarter-over-quarter. These decreases were primarily due to a reduction in transaction-related legal and other professional services fees related to M&A and capital markets transactions, paired with a slight reduction in marketing expenses. Q4 ending SG&A headcount was 389, representing an increase of 4 from the prior quarter. In summary, total head count at the end of the fourth quarter was 2,645, up 43 heads from the prior quarter. Turning to cash, purchase of property, equipment, and capitalized software licenses were $49.7 million in the fourth quarter of 2025, an increase of $3.8 million from the $45.9 million in the third quarter. This increase reflects ongoing investments in Neutron development as we continue testing and integrating across the pad at LC3 in Wallace, Virginia and Middle River, Maryland, expanding capabilities at our engine development complex in Long Beach, California, and build out of the return on investment recovery barge in Louisiana. As we progress towards Neutron's first flight, we expect capital expenditures to remain elevated as we invest in testing, production scaling, and infrastructure expansion. Gap EPS for the fourth quarter was a loss of $0.09 per share, compared to a loss of $0.03 per share in the third quarter. The sequential increase to GAAP EPS loss is mostly attributable to the $41 million tax benefit we recorded during the third quarter, which was due to the partial release of the valuation allowance against our corporate deferred tax assets, as a result of acquiring an equal amount of deferred tax liabilities emanating from the GEOS acquisition purchase price accounting. GAAP operating cash flow was a use of $64.5 million in the fourth quarter of 2025, compared to $23.5 million in the third quarter. The sequential increased use of $41 million was almost entirely due to the timing of employee equity program-related tax payments. Similar to the capital expenditure dynamics mentioned earlier, cash consumption will remain elevated due to neutron development, longer-lead procurement for SDA, investments in subsequent neutron tail production, and infrastructure expansion to scale the business beyond the initial test flight. Overall, non-GAAP free cash flow, defined as GAAP operating cash flow, less purchases of property, equipment, and capitalized software in the fourth quarter of 2025 was a use of $114.2 million, compared to a use of $69.4 million in the third quarter. The ending balance of cash, cash equivalents, restricted cash, and marketable securities was approximately $1.1 billion at the end of the fourth quarter. The sequential increase in liquidity was driven by proceeds from sales of our common stock under our at-the-market equity offering program, which generated $280.6 million during the quarter. These funds are primarily intended to support acquisitions, such as the announced pending Monaric acquisition, the recently consummated acquisitions of Optical Support Inc. and precision components limited, as well as other targets in our robust M&A pipeline, along with general corporate expenditures and working capital. We exited Q4 in a strong position to execute on both organic and inorganic growth initiatives and to further vertically integrate our supply chain, expand strategic capabilities, and grow our addressable market, consistent with what we've done successfully in the past. Adjusted EBITDA loss for the fourth quarter of 2025 was $17.4 million, which was below our guidance range of $23 to $29 million loss. The sequential decrease of $8.9 million in adjusted EBITDA loss was driven by significant revenue and gross margin improvement, partially offset by increased operating expenses related to neutron development. With that, let's turn to our guidance for the first quarter of 2026. We expect revenue in the first quarter to range between $185 and $200 million, representing 7% quarter and quarter revenue growth at the midpoint and growth of 57% from the year-ago quarter. We anticipate slight slip down in both GAAP and non-GAAP gross margins in the first quarter, with GAAP gross margin to range between 34% to 36%, and non-GAAP gross margin to range between 39% to 41%, with a modest sequential decline driven by a greater mix of space systems versus higher margin launch and a weaker margin mix within our space system segment. We expect first quarter gap operating expenses to range between $120 and $126 million, and non-gap operating expenses to range between $106 and $112 million. The quarter-over-quarter increases are primarily driven by ongoing neutron development and spending related to Flight 1, including staff costs, prototyping, and materials. However, we expect to see a shift in spending from R&D and into flight to inventory throughout 2026, which is an encouraging sign of progress as we move closer toward Neutron's first flight and adjusted EBITDA positivity as a result. I'm optimistic that with the impressive strides we've made towards this milestone and currently expect Q1 to mark peak Neutron R&D spending, we expect first quarter GAAP and non-GAAP net interest to income to be $8 million, which is a function of higher cash balances, as well as conversion of approximately $117 million of convertible notes since December 31st. We expect first quarter adjusted EBIT of loss to range between $21 and $27 million, and basic weighted average common shares outstanding to be approximately $605 million shares, which includes convertible preferred shares of approximately $46 million and reflects the conversion of approximately 23 million shares from our outstanding convertible notes thus far in Q1. There remains only 7.5 million shares, or 11% of the original $355 million issuance outstanding. And when taken into the additional context of the retirement of the Trinity equipment line in Q4, we have substantially eliminated indebtedness from the business. Lastly, consistent with prior quarters, we expect negative non-GAAP free cash flow in the first quarter to remain at elevated levels, driven by ongoing investments in neutron development and scaling production. This excludes any potential offsetting effects from financing activities. last but not least here are some of the upcoming investor events that we'll be attending in the next few months and with that we'll hand the call over to the operator for questions thank you if

Operator

you'd like to ask a question please press star one one if your question has been answered and you'd like to move yourself in the queue please press star one one again our first question comes from Andres Shepard with Cantor Fitzgerald. Your line is open. Hey, everyone. Good afternoon.

Andres Sheppard, Analyst — Cantor Fitzgerald

Thanks so much for taking our questions, and congrats on all the great progress, and thanks for the update on Neutron. Adam, maybe I want to start with the backlog. I'm wondering if you can maybe help us drill a bit deeper in it and maybe remind us what is included in here. Does this include the 40% of revenue from SDA Tranche 2, 10% of maybe the Tranche 3, and what are you including from Neutron and Electron here? Thank you. Hello? I'm sorry, the mic went off. I don't

Adam Spice, CFO

know how much you caught on that. So all of the SDA contracts were added to backlog, so what remains for SDA Tranche 2 transport layer is still in the backlog. Obviously, what's been recognized as revenue is no longer there, through the end of Q4, we hadn't recognized any of the tranche three contract awards. So all of that value is currently in backlog and that will start to convert into revenue and come out of backlog obviously in that process. As far as Neutron's concerned, I think we've spoken before that we have several flights that are representative in our launch backlog that's reflected in our filings. So hopefully that answers your

Andres Sheppard, Analyst — Cantor Fitzgerald

question, backlog composition. Yeah, that's helpful. Thank you. And maybe just as a follow up. So, you know, on Neutron, with the shift to Q4 now with the first launch, how should we think about cadence? You know, will you still target maybe three launches within the first 12 months after the first one? How confident are we in the development of the second tank? And wondering if maybe we should expect any step up in CapEx now with the second tank in production? Thank you.

Peter Beck, CEO

Adam, I can answer a couple of those and maybe you and someone as well, Andreas. So, you know, with respect to, you know, the tank, I think, you know, it's well understood, you know, what needs to be done there. And, you know, we had built a lot of the second stage tank on the AFP machine. So, you know, that really solves that problem. And, yeah, the way to think about just sort of follow-on flights is it's not quite, you know, as dire as like moving all of the follow-on flights 12 months, you know, or to the first flight. because as you've seen in the presentation, we're already building flat out additional neutron tail numbers. So it'll probably be a slightly faster convergence into subsequent flights because, you know, none of the other hardware that's qualified is being halted, obviously. It's just that tank. And the AFP machine enables us to build a tank just way more rapidly than with a hand-lay process. So, you know, I think we'll be in better shape there.

Adam Spice, CFO

Yeah, and Andre, I guess with regards to your question as far as CapEx and so forth related to the second tank that's replacing the first one that ruptured, I mean, the benefit now, as Pete said, of being on the AFP is not only can we produce it faster, but the actual cost to produce that second tank is quite low. The first tank was very expensive because, as Pete mentioned earlier, you know, it was a hand-laid-up tank. It took a long time. This will be much quicker. And also, you know, since we've now commissioned the AFP, we're really just talking about variable costs related to the tank materials more than anything else because the existing labor is already kind of in the model. So there won't be any increased CapEx. And, you know, the impact to R&D as a result of the tank failure is actually not – that tank itself is actually not that significant.

Andres Sheppard, Analyst — Cantor Fitzgerald

Got it. That's super helpful. Thanks so much for all the detail, and congrats again on the quarter. I'll pass it on.

Operator

Thank you. Our next question comes from Edison Yu with Deutsche Bank. Your line is open.

Edison Yu, Analyst — Deutsche Bank

And great quarter, as always. I wanted to ask a question on space data centers, and I think you had alluded to a lot of interest. I think it's obviously become a hot topic in the industry. Can you give us a sense on how these kind of early discussions are going with potential customers interested in doing this? And is it realistic to see some type of rocket lab content in a space data center, let's say, within the next two or three years?

Peter Beck, CEO

Hey, Edison. Thanks for the question. So I think, look, we're early with data centres. If you look at some of the models, there's a number of things that sort of have to come into focus before they become the logical choice versus terrestrial. But, you know, we never want to miss an opportunity. And, you know, we've been developing these silicon arrays and power solutions for a while now, focusing on mega constellations and, you know, these you know high um high volume uh power applications but uh if you stand back objectively and you think about what are all the challenges with with putting um you know data centers in orbit uh this it boils down to the really three things um one is uh cost and cadence of launch um to be able to make the model close and then two is heat rejection um through various means and three is just sheer power like these are gigawatts of of electricity electrical power so uh you know solar arrays of multi kilometers in in scale are um are what's needed so you know we wanted to make sure that um that uh you know whether they they they leave this earth or not um there'll be rocket lab logos all over that stuff so um you know as far as i'm aware there's nobody else has a has a silicon solution quite like we've developed understood and to your point

Edison Yu, Analyst — Deutsche Bank

on on heat rejection i guess the radiator is that a a capability you you have in-house that you need to develop over time um or is that something you know inorganic just curious on on what needs to

Peter Beck, CEO

be kind of technically done there yeah i mean look all of our spacecraft have radiators i mean you generate heat you have to you have to reject it so um you know uh there's various various kind of ways of doing that piping heat around the spacecraft to radiate it so i don't i don't see that as um is a huge uh technical challenge it's just um you know on the scale the scale that's required is um you know hasn't hasn't been achieved before so that's you know that that's that's the challenge there but to be clear i mean i i don't you know i don't foresee us building massive ai our data centers anytime soon. But those who are at least experimenting with it and looking to go down that path, I think we have a lot of compelling solutions. Gotcha. If I could just sneak one

Edison Yu, Analyst — Deutsche Bank

quick one in, in terms of just the discussions, can you give us a sense of like the flavor of customers? Are these kind of new customers, non-traditional customers kind of exploring

Peter Beck, CEO

this idea with you? Yeah, I mean, we have to be a little bit careful here, but I would say that So there's certainly more non-traditionals looking at this kind of solution than traditional players. Great. Thank you so much.

Operator

Thank you. Our next question comes from Ronald Epstein with Bank of America. Your line is open.

Speaker 11

Hey, this is Alex Preston on for Ron. Can you guys hear me all right?

Adam Spice, CFO

Yeah, we can hear you.

Speaker 11

So I know you talked a little bit about progress on the Menorik acquisition, but I was a little more interested maybe broadly in the environment in Europe and more generally, right? It seems like there's a growing appetite for, call it indigenous launch and national security space capabilities. And I'm interested if you sort of see this trend yourselves or how you see this developing. I know Pete mentioned no other small launch provider has really succeeded in the last year, but it's still, I think, focused for a lot of people.

Peter Beck, CEO

Yeah, Alex, it's a great question. Look, one of the reasons why we like Monarik and why we think it's important, Europe more in general, is exactly that point, is that there's a lot of space nations there that have very little capability with giant aspirations and really short timeframes. and I think it's always everybody's desire to build domestic capabilities but the reality is if you want to stand up these kind of capabilities really really quickly you don't have the decades that it takes to build often these these sovereign capabilities they're very specialist often equipment and facilities and also intellectual property and knowledge. So we see Europe as a great opportunity for us and a real, you know, expansion beachhead where, you know, we can provide solutions at the component level. We can provide solutions at the complete system with respect to a satellite. We can provide launch. And you've seen even European space agencies procure launch from us now. And, you know, once we have, footprint in Europe proper, being eligible for participating in European programs becomes possible. So I think it's a great opportunity. There's literally billions and billions of dollars of well-funded government programs underway right now. And the timelines associated with those a conducive, or I would say not conducive necessarily always to, you know, creating

Speaker 11

sovereign capability. Got it. And then I guess it would sound like the attitude is still broadly constructive from what you said versus maybe Europe starting to get a little more distant from US-based providers. No, I think it's very constructive. I think,

Peter Beck, CEO

you know, naturally that Europe is looking to create sovereign capability, but I think that Also, you know, the conversations we've had, they're very pragmatic and realistic that, you know, the capability they're looking to create takes a long time. So, you know, working with, for example, a rocket lab Europe is a great way to move forward.

Speaker 11

And just real quick, would you characterize that the same on launch as you would on space systems, where I think there's a bit more existing indigenous capability in Europe already?

Peter Beck, CEO

Yeah, they're certainly giving it a good college try. but not having tremendous success i would say um but that is that is just how difficult launch uh launch is um but uh you know i think launches is just so strategically important you can build all the satellites you want but if you can't put them in orbit it's kind of pointless so um this is the reason why uh you know you have um the european union in and esa's uh launch vehicles um that you know on the face of it aren't that commercially competitive but they'll never go away because you know the nations need access to orbit so um you know i would i would expect to see that persist for some time um and you know continue investments made in uh in into into launch um for for the you know for europe um but um in saying that uh you know everyone's pragmatic and if you need to get stuff to orbit then um you know pick up the phone got it thank you very much thank you our next

Operator

question comes from Eric Rasmussen with steeple your line is open yeah thank you

Speaker 15

for taking the questions maybe just back on Neutron I appreciate the so that the update on cadence and it sounds like with the push out naturally you continue to sort of build out some of those more capabilities and just Neutron infrastructure around Neutron but hosts sort of test flight and we think that That's sort of Q4, and if it's late Q4, I don't know the timing. But what do you think, then, that first revenue flight, what do you think the timing around that could be? Also, when considering that, you know, that probably needs to have a higher level of reliability, and then with that, are you still targeting this as a recovery mission?

Peter Beck, CEO

Yeah, hey, Eric. Thanks for the question. So, you know, the timing of flight two will always depend on the results of flight one. You know, if flight one goes swimmingly, then, you know, the time to get the second vehicle on the pad, you know, we'll endeavor to make as short as possible. If there's things to fix, there's kind of things to fix. But, you know, nominally, the, you know, the timing remains consistent to what we've kind of talked about. and, you know, the vehicle will be outfitted with, you know, all of its kind of requirements for, you know, flight one even for a downrange landing. You know, we'll attempt to do the re-entry and landing burn and splash it down. Once again, if all that goes well, then the next one we would intend to slip a barge under. If we pole drive it into the ocean, then, you know, we'll probably, you know, go to a flight two and get that soft landing right before we go and put infrastructure on, but that could be costly, you know, if we're damaged.

Speaker 15

And maybe just on Electron, you had a nice launch campaign in 2025, 21 successful launches. What does the manifest and internal planning suggest for this year? And then maybe just the mix between, you know, standard electron emissions and heat?

Peter Beck, CEO

Yeah, I mean, I'm not sure how much we've disclosed about that, but I mean, certainly this year we're looking for, you know, more launch than last year. You know, as you saw, the bookings and manifest are bulging and, you know, we're banging electrons out every sort of 11 or 13 days now. So that's going extremely well. But I'll pass over to Adam if he wants to comment on, you know, launch schedule for the year.

Adam Spice, CFO

So I think consistent with prior discussions, you know, we see good growth opportunities in Electron. And when I say Electron, I mean Electron and Haste. So I think you'd expect, you know, increase in both standard Electron launches plus growth in the Haste side of the business. You know, we've normally point people towards kind of 20 percent growth. you know, I think is a pretty, you know, kind of, I would say, I would say reasonable estimate for where we see this business growing over the near and intermediate to maybe long term. So I would say, you know, we certainly given the production team direction to produce, you know, significantly more rockets in 2026 than in 2025. And as Pete mentioned on the call earlier, we booked over 30 electron launches in 25. And we always get turns orders. So look, I think if you kind of nominally assume a 20% growth in kind of the launch business, excluding neutron, of course, I think that's

Operator

probably a pretty good place to be. That's helpful. Thanks. Thank you. Our next question comes from Trevor Walsh with Citizens. Your line is open. Great. Hey, team. Thanks for taking the

Trevor Walsh, Analyst — Citizens

questions. Peter, maybe first for you, some of your prepared remarks around the OSI acquisition made it sound like that was even further enabling you with the customer as far as just attractiveness for your services, your capabilities, even though it sounded like from the announcement that OSI was actually already in the chain of suppliers with Geos. So is the customer that focused really then, can we assume, on just the vertical integration aspect, or is there also just capabilities, functionality features of that acquisition from a systems perspective that are also attractive, just trying to gauge kind of how you think customers really looking at this, if that makes sense.

Peter Beck, CEO

Yeah, no, that's a great question, Trevor. And, you know, to be fair, the customers probably don't care that much other than the fact what they really care about is does their sensor arrive on time at a cost and a performance capability that they've never seen before? And that's what we're delivering. And in order for us to be able to guarantee we deliver that, the most critical element of many of these optical systems are, in fact, the optics. So bringing and owning that optics in-house really, really drives certainty for us around cost and schedule and innovation. And they were a supplier to Geost, that's for sure. And when we acquired the Geost business, the first thing we sat down with the leadership team there and said right where are the where are the the critical supply chain elements that might trip us up and being able to deliver you know really disruptive um and um and affordable um you know parts or programs for our customers and this was the number number one thing i think this makes us very unique amongst the other the other suppliers of payloads who are outsourcing optics and um you know it is it is the most expensive the most longest lead item uh in any of these explicit optical payload so you know it was important to own it terrific thank you super

Trevor Walsh, Analyst — Citizens

super helpful um adam maybe just a quick follow-up for you um for your prepared remark commentary around the backlog and how tranche three is gonna you know sounds like it's maybe conservative in terms of the what's going to be recognized in that first 12 month period can you just maybe walk us through a little bit of the puts and takes of how what's what's i guess influencing that Tranche 3 RevRec? Is it just customer timing of when they want deliverables? Just give us

Adam Spice, CFO

maybe one level deeper. That'd be terrific. Yeah. So I think we've articulated previously that typically when you win one of these programs, you can recognize revenue kind of like 10% in the first 12 months after award, then 40% in the second 12 months, 40% in the third 12 months, in the last 12 months, it's about another 10%. So you got a pretty kind of normal bell curve. And what I would say is that, you know, what really gates our ability to kind of move faster is really our subcon deliveries, right? So what really either kind of helps us accelerate and get through these gates and milestones and rev rec quicker is our subcon's ability to deliver on time. And so I think that, you know, that all goes back to what Pete was talking about earlier and the importance of vertical integration. So to the extent that we can just own more of the platform, we have greater control. and that allows us to have more predictability to you know how we how we kind of you know time revenue recognition and so forth so i would say that you know a big job for us in 2026 is to you know across our engineering and production you know teams is to really make sure we stay on top of what parts are still coming from third parties make sure that we they stay on their deliverables so we can kind of you know again get the program accelerated as much as possible and get more of that revenue recognized so again we go into it pretty conservative i think you know what we've If you look at the pure conversion, that 37%, I think that was mentioned earlier, of backlog converting, I mean, obviously a portion of that is launched, but the portion that's related in space systems, some of that is coming from the components and subsystems, completely unrelated to STA tranche 2 and tranche 3. But what is in there for tranche 3 is, again, assuming some pretty conservative delivery dates from our subcons that hopefully we can work with them to do better.

Trevor Walsh, Analyst — Citizens

Great. Thanks both.

Operator

leave it there. Thanks for the questions. Thank you. Our next question comes from Ned Morgan with BTIG. Your line is open. Hey, you actually got Andre on. I don't know what happened there,

Ned Morgan, Analyst — BTIG

but all good. I wanted to ask about space systems. Seems like it came in a little bit weaker than what consensus might have expected at first. So just wanted to know the puts and takes there. I know you explained it, but why might have consensus gone a little bit ahead here in the quarter?

Adam Spice, CFO

Yeah, I don't know that ConsenSys does a great job in breaking out the various pieces of the business, even differentiating much between launch and space systems. And then certainly within space systems, I'm not sure they really look at between kind of our platforms business versus the subsystems business. So one of the things I mentioned this in my in my prepared remarks is that it is difficult to, I would say, I mean, you can't can the extent that you can control the execution for your rev rec requirements under ASC 606. It just depends on how well your subs are executing. Right. And how how how tightly you're working with them to make sure they stay on track and your best efforts. I think we've all seen in some fairly public venues, customers of these programs talking about how there's been some snags in the supply chain, including from those, for example, like from the optical terminal providers. And so if you look at what we do is we continually look for ways, as Pete mentioned, to just reduce any kind of dependency on third parties as much again. That's why if you look at Electron, how vertically integrated that vehicle is, Neutron will be very similar. We're getting that way more and more with our space systems platform offerings, where very little is still, I would say, outsourced to third parties. So it's really just a function of, again, you work with them and get them to deliver as aggressively as you possibly can, while not sacrificing quality or cost where you So yeah, I wouldn't read too much into the granularity that people may have expected from our space systems business, because one of the benefits that we have now from having such a diversified business is we really just look at the top line how can we deliver that sequential growth of the business and sometimes more of it's going to come from launch and sometimes more it's going to come from space systems and within space systems you know platforms can have a great quarter and components can be weak and vice versa and then you know it just gets that much better and we'll have that many more tools at our disposal when we have neutron coming online which is why obviously getting that first flight off is so important

Ned Morgan, Analyst — BTIG

why we're all looking so forward to that yeah no it's super helpful thanks adam um i guess to stick with you, I mean, around the two acquisitions that were just announced, are there any financials that you can give any kind of color as to what they were doing on a performance basis? And I guess just how much cost we might be able to see taken out as a result of them being brought in

Adam Spice, CFO

house? Yeah, you know, our pipeline is always kind of interesting. It's got a mix of kind of more needle moving deals from a financial perspective, as far as, you know, revenue contributions, and so forth. These particular deals really much more strategically around, again, vertical integration, reducing risk versus, you know, I would say providing big access to large external third, you know, kind of TAMs, if you will, or adjacent markets. So these are really more, I would say, reducing some margin stacking, and also just taking greater control over the programs. So I wouldn't say there's not a, I would say, material amount of revenue contribution that's going to move the needle from the deals that we just announced. Clearly, you know, So Monaric would be a different story if and when that deal gets approved because that would come with significant backlog and revenue opportunity. And, again, our pipeline also has lots of other deals that have a mixture of just, again, elimination of margin stacking and, in some cases, also more meaningful revenue contribution. But these two, I don't think you need to change your models at all for the impact for these two relatively small deals. Got it. Got it. That's helpful. I'll leave it there. Thanks, Adam.

Operator

Thank you. Our next question comes from Guadam Khanna with T.D. Cowan. Your line is open.

Gaudam Khanna, Analyst — T.D. Cowan

Yeah, thanks. Good afternoon, guys. I was wondering on the neutron tank failure, have you guys, are you of high certainty that it was that manual layup process and therefore the new process is not going to have the same anomaly? Or is the study still ongoing of what happened?

Peter Beck, CEO

Yeah, no, we undertook a complete failure tree analysis and we're able to find the piece of tank that could cause the initiation of the failure. We're able to reproduce the results through analysis and then also through coupon testing as well. So, no, we're very, very confident. We understand that failure extremely well.

Gaudam Khanna, Analyst — T.D. Cowan

okay that's great to hear and then you mentioned some areas where you'd like to take more in-house vertical integration can you can you describe some of those product areas that might be of

Peter Beck, CEO

interest yeah i think i think um you know if you look across a spacecraft these days um you know the areas that that we we still don't have 100 control of uh are starting to to get smaller and smaller. You know, we have a great RF team, but I think that's an area that we will look to bolster and, you know, we'll seek opportunities, you know, to add scale where possible. But I think, you know, this is just going to be bread and butter for us to, you know, to constantly make sure that, you know, we don't get stung with, you know, suppliers that aren't able to deliver for us and continue to vertically integrate. But as Adam pointed out, our M&A pipeline is pretty full. And there's a range of opportunities there from these kinds of things that, as Adam pointed out, don't add huge revenue bottom lines, but they kind of guarantee revenue because we're not going to miss milestones. But they're all ranging through to some real needle movers that are much more transformational. And as Adam also pointed out, we're always making sure that we have plenty of capital reserves to go and do those more meaningful acquisitions.

Operator

Thank you. Our next question comes from Ryan Koontz with Needham & Company. Your line is open.

Ryan Koontz, Analyst — Needham & Company

Thanks for squeezing me in. I want to ask that backlog, Adam, your commentary there as you think about the opportunities ahead over the next, say, 12, 18 months. Obviously, the SDA has been very, very active, and how you think about the composition of your backlog relative to DOD versus commercial just in terms of the next 12, 18 months.

Adam Spice, CFO

Yeah, I think we're in a really fortunate spot where traditionally government business has not really been ever viewed as a hockey stick. I think for us, since we're coming in in such a disruptive way and, you know, we're disruptive, but also the whole architecture where you've gone from geo to Leo and the number of satellites that are required to support that architecture, you know, it's just been so strong. You know, we've got so many things that are pushing us in the back as far as, you know, kind of where the opportunities are. But I'd say, I'd say overall, we've got really big commercial opportunities that we continue to chase, even though for me, you know, if I was given the choice of chasing a government hockey stick or a commercial hockey stick, you know, I would take the government hockey stick because even though they may not be as dynamic in some cases at a program level as commercial, you know, they, they always pay their bills. They're pretty clear cut how you work with them. And, you know, in that government market, we're just competing with, with people that seem to be fighting with their hands tied behind their backs. Right. So we move much more quickly. We have a lot more tools at our disposal because of our vertical integration. So I love the mix as it's trending towards government. I do think it's also very comforting to have this big commercial hockey stick opportunity out there as well. But I would say that it's the pipeline. When you look at the pipeline of business opportunities, forget the M&A side, it's a pretty balanced set of opportunities between commercial and government. I'll let Pete provide his view, but it seems like we don't just have a choice of taking one fork or the other in the road. We can try to think about How do we take both of those things? And I think we've done a pretty good job balancing, but maybe Pete will speak about that.

Peter Beck, CEO

Nice, thanks. You know, I think you've said it perfectly, Adam. Yep, I can't add anything better than that.

Ryan Koontz, Analyst — Needham & Company

Great, maybe just a quick follow-up. As you think about, you know, Golden Dome and timing and, you know, PWSA fitting into that architecture, you know, any updated thoughts on, you know, your role there or opportunities when you think that emerges as a truly viable business opportunity for you?

Peter Beck, CEO

Yeah, I think Golden Dome's quite a complex one. Obviously, it's a huge program, but a lot of it is also classified. So it's very difficult to discuss too much. But I would say that in multiple fronts, I think we're well positioned to, you know, have a good chunk at this, whether it be launch or satellites, optical terminals, you know, a lot of the optical payloads, the SDA win, you know, the transfer SDA win is a, you know, is a clear missile track payload, which is very complicated payload, obviously, and critical for the Golden Dome. So, you know, as that program formulates and continues to grow, you know, I think we're a pretty key piece of that foundation. Thank you.

Operator

Thank you. Our next question comes from Michael Leshock with KeyBank Capital Markets. Your line is open.

Michael Leshock, Analyst — KeyBanc Capital Markets

Hey, good afternoon. I wanted to ask a longer-term question on a potential future rocket lab satellite constellation, just given some of the recent announcements across the industry. And as you mentioned in the presentation, the significant growth in satellites that's expected over the next decade, have there been any changes to your approach on a future constellation of your own or what potential applications you may target? Or is this still a longer-term growth opportunity that really won't be a priority until Neutron is launching consistently?

Peter Beck, CEO

Yeah, thanks for the question, Michael. I think what's kind of cool here is that, you know, you've all heard me say that space is going to get blurry. It's going to be difficult to determine what is a space company and what is something else company. And, you know, that continues, that thesis really continues to firm now that you look at, you know, data centres and all these other kind of, you know, opportunities that are growing in space. it's like it is that the large successful companies are going to be blurry are they going to be a space company are they a telecommunications company are they a data services company and your point is really accurate and you know until kind of neutrons online and we have multi-ton reusable launch capability I think you know that's the time that we can really lean into you know deploying infrastructure but in saying that we're not sort of sitting back and sitting on our hands thinking about, you know, what we could do. I think you can see in just about every avenue, you know, we at least have knowledge or components or exposure. When I say every avenue, every kind of, you know, opportunity that's potentially, you know, being thought about or used in space today. So it's still too early, Michael, but, you know, there's not a day that doesn't go by where there's not an internal discussion about it.

Michael Leshock, Analyst — KeyBanc Capital Markets

And then maybe on the stage one tank rupture, I don't know if I missed it, but how fast can you produce the second tank now with the new AFP machine? And then will that get even faster as you repeat this process over time?

Peter Beck, CEO

Oh, God, yeah. Like, it's ridiculous. The AFP machine is just totally ridiculous. I can't remember the exact timeline to lay up a dome, but we measure a dome manufacturer on the AFP in days. actually the the the the longer pole and the tent there for a tank manufacturer is not actually laying up um and curing the components it's the uh it's the joining of the the various domes and tanks and and barrels together and um you know all of the all of the tabs and details for baffles and all those kinds of things actually take the the time but um you know you know a new a new tank we're talking you know months here not uh you know for a complete tank but from an actual you know manufacturing of the raw components it's it's ridiculously fast and also that's to adam's point it's it's like now that it's all automated really the only cost is the raw material that's going in

Operator

there great appreciate all the detail thank you our next question comes from jan engelbrecht with

Jan Engelbrecht, Analyst — Baird

baird your line is open good afternoon peter adam and morgan thanks for taking our questions um i'd like to get your just go back on pwsa and just get your sort of your high level thoughts about that program it does seem like your focus uh will shift more towards the tracking layer given this really impressive win uh that the geos acquisition um just how you're thinking about the future of that for rocket lab and then also just we've heard a lot of you know government reports being issued on that on the transport layer piece like how difficult would it be for a commercial variant, like Starshield with MULNET, to sort of act as the transport layer. It seems like there's a lot of things that would stand in the way of that, because a commercial, you know, Starshield orbits at much lower altitudes than the transport and tracking layers. There would be a lot of redesign work, but I'll stop there just to get your overall thoughts

Peter Beck, CEO

Oh, man, we could geek out about this for days, Jane. So yes, it was intentional for us to move up the value chain, if you will. Not that the transport layer is elementary, by no means is it elementary, but it's an order of magnitude more difficult and more valuable to be able to do the tracking stuff. And the tracking stuff is critical for things as things develop for Golden Dome and other kind of programs. So that's the high value stuff where you want to be, that there's really only a few people in the nation that can successfully execute on. With respect to, you know, the transport layer going away, I mean, we haven't heard or seen any evidence to that. obviously um you know there's a lot of discussion about um you know other other providers but um the whole point of you know the sda program is is kind of you know all of the spacecraft are integrated very closely with each other even though they're from other providers there's a set of requirements that we all must meet for interoperability so i think um i think your point is a good one um it becomes more difficult to have interoperability when you have something that's it's quite different um but uh you know it'll be interesting to see how it all shakes out but i think for the tasks that that sda is trying to achieve um to me at least it makes more sense to have a dedicated uh transport layer and and then the other layers of course if you know tracking and then custody and so on on top of it thanks peter very helpful then just a quick follow-up

Jan Engelbrecht, Analyst — Baird

if i may um want to be respectful of the minoric deal you know let that play out as it will um But on optical terminals, at sort of at which point, and again, hoping like it works out well here, but at which point do you potentially look at maybe an alternative supplier of OCTs or does Geost or the new acquisition OSI have any capability that you could look towards developing these optical terminals over time?

Peter Beck, CEO

Yeah, so Geost has developed some optical terminals and obviously, you know, we have the optics now in-house as well uh but you know there's just it's incredibly difficult to do and um as we look across uh as we we looked across you know the landscape of all of these optical terminal suppliers on which there's really only three um you know monarch just stood out as you know the absolute best with respect to technology now they suck at other things um uh like running their business but um but they make the the best terminals um so uh you know to go out and develop your own terminal yep totally feasible um it's just a time thing and um you know it would just take longer to to do that than it would to um to acquire it perfect thank you very helpful i jump

Operator

back in the queue thank you our next question comes from jeff van rey with craig hallam capital

Speaker 10

group. Your line is open. Hey, this is Daniel Hipschman on for Jeff Van Rie. Congrats on the quarter and the SDA win in particular. On Mars Telecommunication Orbiter, the 700, 750 million thereabouts, wondering, you know, it looks like earlier this week NASA put out an RFP for a Mars Telecommunications Network, so a little bit of a name change there. Sounds like that might be a multi-satellite architecture where previously they were just looking at that one single orbiter. But anyway, what can you tell us just about how the competition and MarketLine's positioning for that has been evolving?

Peter Beck, CEO

Thanks, Jeff. Great question. Yep. So, you know, the MTO, as you point out, there's a slight change there to network. And, you know, as more infrastructure is built on Mars, then, of course, you know, a network will need to be created. You know, the MTO was always intended to be the first of more to come. Look, obviously, we think we're well positioned here. You know, we have the experience, we have a lot of the capabilities and a lot of the demonstrated capabilities. But, you know, I think, you know, we'll put our best foot forward there. And, you know, of course, others think they can do the job too. That's the great thing about competition.

Speaker 10

And, you know, we'll we'll see who wins. And then, Adam, one for you just on the gross margins, which, you know, obviously are growing tremendously. I think, what, eight points up in 2025. And then the guy for 2126 has those stepping back down a few hundred bits. And he called out the space system mix shift. Is there anything persistent about that mix shift, either in terms of the new business coming online and potentially with the SDA transport layer that it's going to have some persistent margin pressure? or should we be assuming in our models that we'll be getting right back to that, you know, more normal cadence of a few hundred bits of expansion, you know, as we get back into the

Adam Spice, CFO

later half of the year? Well, you know, I think gross margin is a, there's a lot of things that are going on underneath the surface there. So, you know, as we continue to grow, you know, there was a call, a question earlier from Eric about the electron launch cadence. So I mentioned a 20% launch cadence, the growth in that. The extent that we can do better than that, which I think there's opportunities to grow faster in 2026, then that's going to be a positive upward bias to margin. These larger, longer-term programs like SDA, Tranche 2, and Tranche 3, they typically come in at the low end of our gross margin mix, but they have really good operating margin characteristics to them or contribution margin because of the fact that you know, there isn't a tremendous amount of incremental R&D that's kind of outside of the programs. So I would say that, you know, in a quarter where you've got a lot more contribution from the big programs like Tranche 2 and Tranche 3, that'll put downward pressure, offset hopefully by growth from, you know, increased in the electron contributions. The components business has a quite interesting range of margins. You know, you have some products in there that are more towards, say, 30 points of non-gap gross margin, other ones that are, you know, kind of north of 70 points of non-gap gross margin. So there's a widespread and mix is hard to predict, you know, that far out in the year. I mean, I do think there will be a supportive trend towards gross margin, but I think it's difficult to really get a lot of granularity kind of, you know, much more than, you know, I'd say maybe one or two quarters out. But overall, I think, you know, as we can do to kind of grow that components, mix the business, more electron in the mix. It's all going to be positive. Now, I think the one caveat to that is as we bring Neutron into production, it'll have a margin expansion curve, you know, probably not too dissimilar to what we've experienced on Electron, which has been incredibly, you know, it's been a great margin expansion story. But when you bring a new product like a rocket to market, you do things like block upgrades. And then, you know, that all helps bring down cost, increase performance, so you can sell out more capacity on the rocket, which is helpful to ASP and so forth. But I think the most important thing in the launch business is rate, right? So it's all about absorbing your fixed overhead or fixed costs related to that program or product. So I think that you're going to see what we'll start to do. Our plan is to give you guys as much clarity as we can or break up between electron, for example, and neutron as that comes into production. So you can see that continued expansion and kind of that Electron business operating at model and then the trends as Neutron ramps as that goes towards target model as well. Hopefully it's a bit quicker to get to target model, target margins on Neutron because it's a reasonable launch vehicle, but it will still take several years. So you'll start off with fairly kind of low to even maybe negative gross margin for some of the early flights. But then, again, you'll see just like Electron, it pop back up and become pretty positive pretty quickly and get to target model. So it's a long-winded answer. I do think, again, the trends are supportive of gross margin expansion, but it could be a little bit kind of volatile and hard to predict quarter to quarter when you get more than one or two quarters out.

Operator

Thank you. Our next question comes from Suji De Silva with Roth Capital. Your line is open.

Suji DeSilva, Analyst — ROTH Capital

Hi, Pete. Congratulations on the progress here. Just real quick on the Electron launches. Are there any ASP trends to note, Adam, any tailwinds in the second half, or are they fairly steady the next couple of quarters?

Adam Spice, CFO

You know, I think we're going to continue to see, you know, I'll march towards, you know, I'd say, you know, as we increase more of the mix towards haste, that's helpful to the ASP. I think margins are relatively consistent because even though hastes are priced higher, there's a lot more mission assurance and other things go along with them. So absolute dollars are higher. The gross margin percentage is relatively consistent across haste and Electron. um and then um you know so i would say overall we've seen a very nice expansion in asp over the last several years because of the increased mix from haste and i don't see that changing in fact you know we we continue to grow that that sub segment of the business quite nicely and again i just given the things that pete was talking about earlier regards to golden dome and the importance of you know the hypersonics test capabilities you know that's a really strong area of growth for us going forward. So I think overall, a positive bias towards higher ASP per launch, just as we've seen over the last several years. Okay. And my follow-up question maybe is

Suji DeSilva, Analyst — ROTH Capital

for Pete. You know, Pete, maybe you can reflect on versus a few years ago to get to the launch cadence, the customer's payload readiness was something that was variable. Has that changed? Has the nature of the customers changed where you can feel more comfortable that you can hit a 11 to 13 day cadence is it just a higher number of customers coming in that you can kind of

Peter Beck, CEO

load them off or what just any color that'd be helpful. Yeah thanks Ajit I would just say that we've probably got better at looking like a duck where it's just you know on a glassy pond and it looks normal and there's legs flat out underneath it and with a higher cadence gives us the ability to move customers around so I would say that you know that's just the reality of the launch business payloads are ready until they're not, I think we've just got way better at managing those customers, having more WIP, having more rockets integrated, ready to go, and managing that. So it's great to hear that it looks smoother, but behind the scenes, there's everyone's flat out mixing and matching and making sure that it all looks smooth from the outside.

Suji DeSilva, Analyst — ROTH Capital

Helpful call. Thanks, Pete. Thanks, guys.

Operator

Thank you. Our next question comes from Christine Lewag with Morgan Stanley. Your line is open.

Peter Beck, CEO

Hi, this is Justin Lang on for Christine. Thanks for taking the questions. Pete, I'm curious just back on the neutron timeline. Had you not run into this stage one tank issue, would the program have met the earlier goal of getting to the pad here in 1Q? It sounded like from your earlier comments, there's a good volume of qualification work completed in the quarter.

Trevor Walsh, Analyst — Citizens

So just trying to assess, you know, whether there are other factors at play in this new timeline or are really isolated to the stage one tank issue.

Peter Beck, CEO

Yeah, thanks, Justin. It's kind of hard to say because when the tank let go, it like, you know, the reverberation went through the test stand and the entire business. So the moment that happened, everybody just stopped what they were doing in a lot of sense to get onto the tank to figure out what went wrong. so you know we moved a lot of resources around um and from lots of parts of the business so um i'd have to go back and have a look and see if we if we played everything forward whether you know what what what that timeline would have looked like but it's sort of hard at this point because um you know we we had uh we had an anomaly i would add one more thing to that i think the if

Adam Spice, CFO

there's a silver lining to the tank anomaly it's the fact that because of what happened you know it just has given the other kind of subsystem teams the opportunity to really kind of fully exercise all the demons, if you will, as much more than they, they could have under the compressed time schedule that we were working towards. So in some ways, you know, the tank letting go will create certainly a lower risk test flight when that happens later this year. So I think, yeah, it's, it's, it's, you know, nobody's ever happy when you have an anomaly, something wasn't planned and certainly wasn't anticipated, but I think it does help us bring down the overall kind of risk stance of the program as we move towards that first test launch. Got it. That makes sense and helpful. Thanks.

Trevor Walsh, Analyst — Citizens

And Adam, actually just one for you back on the SDA award. Curious if you could speak a little bit more to the cash profile in particular and how that lines up against the revenue bell curve

Adam Spice, CFO

that you sketched out earlier. Thanks. Yeah. So actually kind of interesting with these types of programs because of the way that you do the accounting and the REVREC. So under ASC 606, you know, you, you, we model these things that you always have to be in a positive cash position. So you, when you kind of work out your milestones and how you're flowing out dollars to your subs and so forth and spending money on the program internally, you always need to be in a position of positive cash in order to be able to recognize revenue along the way. And so this program is consistent with that. You know, we've gotten some questions as to whether or not the partial government shutdown has impacted our customer in this case, ability to pay as they know. In fact, We got a very large payment earlier this week from that customer. So the money's still flowing, and, you know, everything seems to be green lights right now. Okay. Thanks, both.

Operator

Thank you. There are no further questions at this time. This does include the program, and you may now disconnect. Everyone, enjoy the rest of your day.