Virgin Galactic Holdings, Inc Q3 FY2020 Earnings Call

Thank you, and good afternoon, everyone. Welcome to Virgin Galactic's Third Quarter 2020 Earnings Conference Call. On the call with me today are Michael Colglazier, Chief Executive Officer; Mike Moses, President, Space Missions and Safety; and Jon Campagna, Chief Financial Officer, who will provide prepared remarks. Earlier today, we issued a press release and made a slide presentation available on our Investor Relations website, which provides an overview of our business and financial highlights for the third quarter 2020. During today's call, we will make certain forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are predictions, projections, and other statements about future events that are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from the forward-looking statements in this communication.

Thanks Michelle, and good afternoon, everyone. I hope you and your loved ones are keeping healthy and safe. When I last spoke with you, I was two weeks into the job. Over the last three months, I've immersed myself in the company's engineering, operations, brand, commercial, and financial areas, and I'm well underway in getting to know our incredibly talented team members. Let me start this call by saying that the exposure I've gained in just three short months has caused my excitement to far exceed my expectations for when I joined. I'll start today with a brief recap of our Q3 accomplishments and an update on how we are working within the constraints of the COVID-19 pandemic. Then I'd like to give you a glimpse into some of the key insights and observations that I've had in my first hundred days. I'll then ask Mike Moses to share an update on our upcoming flights and a review of our flight test program, which I know many of you are eager to hear about. We'll talk about progress with our second spaceship, and then I'll share initial thoughts on our commercial plans and provide an update on the reopening sales. With that, let's get started with a summary of our Q3 accomplishments beginning on Slide 4. Despite the challenges brought on by the pandemic, we accomplished many milestones this quarter across the company. We've made good progress in preparing our spaceflight system for our fall flight, including completion of data analysis that follows the June 25th glide flight, and installing the cabin camera system and the hardware needed to provide a live video downlink.

Thanks, Michael. Since our last powered flight to space, we've relocated our teams to New Mexico, and we have integrated our operations with the local agencies here; New Mexico Spaceport Authority, White Sands Missile Range, FAA Albuquerque Center, and several other New Mexico state agencies. We have also flown two successful glide flights as part of our testing program. During this time, we have made several planned upgrades to our spaceship: VSS Unity. A big part of what we do on these flights is assess any modifications and changes that may be required to optimize the vehicles for operations, customer experience, and of course safety. One of the upgrades we made is in the passenger cabin. As you saw with our cabin reveal in quarter three, we've put significant work into the interior design. We've installed the crucial elements of that cabin in preparation for the full testing of the customer experience and our upcoming quarter one flights. On our upcoming November flight, we will test the new cabin hardware, including our reclining seats with test mannequins strapped in the seats. We will also test the full complement of cabin cameras and downlink hardware, which will allow us to assess our capacity to livestream future flights. This upcoming November flight will also include test points to continue evaluation of our upgraded horizontal stabilizers and flight control system.

Thanks, Mike. Upon successful completion of this November flight, including a satisfactory review of the post-flight data and checkout of the vehicles, our flight test program will move to the next phase. This will begin with our second rocket-powered flight for New Mexico, which we expect to launch in Q1, when our spaceflight specialists will test and verify cabin interior hardware, the weightless experience in space, and our livestream camera systems. We expect the third rocket-powered test flight, also planned for Q1, to include our Founder, Richard Branson. I've been speaking to Richard frequently about his flight and, needless to say, he is incredibly excited, and we are all looking forward to seeing this wonderful milestone arrive. Turning to Slide 11 and our second spaceship. Our next spaceship is planned to roll out for ground and flight testing in Q1. We had originally planned to have this vehicle ready for rollout by the end of the calendar year, and this is one of the areas where the inefficiencies of operating with pandemic protocols have contributed to some delays. We have an exciting virtual event planned for the unveiling of this second spaceship, and I don't want to spoil that, but there are some important things to note about this rollout.

Thanks Michael. Looking at Slide 14, our third quarter results reflect the progress we have made completing the final steps in preparation for VSS Unity's first powered flight from Spaceport America and our ongoing work ahead of commercial launch. We remain in a strong cash position and ended the quarter with cash and cash equivalents of $742 million as of September 30, 2020. In the period, we completed a public offering of 23.6 million shares of common stock at a public offering price of $19.50 per share, generating over $440 million in net proceeds. The net loss for the quarter was $77 million compared to a $63 million net loss in the second quarter of 2020. The increase in net loss primarily reflects certain non-cash expenses, which I will cover shortly. Non-GAAP SG&A expenses and non-GAAP R&D expenses have been adjusted to exclude stock-based compensation and non-capitalized transaction costs, as applicable. GAAP SG&A expenses for the quarter were $31 million compared to $26 million in the second quarter of 2020, due primarily to additional cash charges and non-cash stock-based compensation costs, including those incurred in connection with the hiring of our new CEO and the appointment of our Chief Space Officer, as well as increased costs incurred to ensure proper COVID-related safety standards.

Thanks everybody. Just a couple of questions, first on the COVID issues that you highlighted. You expect them to persist into the first quarter, yet the Branson flight is on track for Q1. Is this because the Q1 Branson flight already factors in these delays? Or is it that the delays just aren't as significant for that part of your operation due to differences in working conditions in close quarters?

Thanks, Adam. This is Michael. We are seeing impacts from COVID. As I said, there's a lot of close-quarters work that is just delayed as we spread out and follow our protocols. What we've been doing, though, is really focusing our talent and the resources that we can get into the shifts on our flights, the upcoming flights. That's one of the reasons why you see a bit of a delay in our second spaceship coming off. So, today, we do believe we have in the schedule the ability to successfully do this flight, like I said, between November 19th to 23rd. We expect the second one to go off in Q1, and it'll probably be the end of Q1, but we do expect our third rocket-powered flight to go still within that quarter. Of course, we're going to assess the date after each one of these flights, and there's always things that we may learn, but that is our expectation.

Yes, sure, Adam. Yes, this is Jon. Yes, I mean, I think the best way to look at that is it's probably in the sort of $400,000 range for the payloads, but there are three NASA payloads that will be on that flight that we have planned, as Michael mentioned earlier, for later this month.

Hi, good afternoon. Michael, I wanted to ask you a sort of longer-term question. You mentioned $1 billion per year per Spaceport, I guess that's a mature revenue number. And I wanted to understand that a little bit better, just what the flight portion of that is relative to the ancillary because that number is about double where we would get with 300 flights, but you mentioned 400. So it sounds like you're going to perhaps utilize the spaceships a little bit more, and I was hoping you could elaborate on that; maybe talk about if pricing bridges some of that gap between our number and yours, and maybe talk a little more about the ancillaries.

Thanks, Rob. One thing I am really, really bullish on is the nature of the truly transformative experience that we're going to be providing. I spent time talking to those in our company that have made this journey, and it will be incredible. I am also looking forward to expanding what we'll do. I think we focus so far on the space flight itself, which of course is going to be the peak emotional part, but this transformative journey really starts from the moment people sign on with us. When they come to New Mexico, we will build an experience around the flight itself. That's one where I believe there will be a lot of opportunity for friends and family to join in and participate in parts of that. We think, of course, the experience will carry on. We're going to be adding into what that value that experience will deliver. When we add value in there, we will not have so much of a demand problem. It's more about supply. So I do think that will help support pricing over the experience as we go. I think that $1 billion does reflect those things.

Yes, Adam, so on that point, I think we're still evaluating those reductions that we're going to have. As Michael mentioned, as we move from an R&D focus to a production focus over the coming months here, in particular, we'll continue to look at how we're driving down those costs for future ships—second, third, and onward. At this point, we're not in a position to sort of give an estimate as to what those cost reductions are, but as we are able to, we will certainly share that with you.

Sure, a couple of surprises. I was really pleasantly surprised with the depth of talent that we have, really going up and down across all levels of the company. For a company doing what we're doing, it is grounded in talent. So that was really excellent to see. As I mentioned earlier in the call, the quality of the assets that we have is really incredible between the space flight system itself, but also what we've developed in our learnings through 15 years of flying and designing these things is really important. What I am also excited about is the ability now to monetize and scale this business. And I think this first chapter has really been an incredible start. We're on the cusp of technological feasibility of this, and now as we move into the second chapter, it is going to be about growing the business, and that will require a shift in footing for us as we move away from prototype and R&D focus into manufacturing for scale. I'm really excited, yes surprised that we have such great talent that we can already put into some of those key roles as we now look to build a business. Well, like I’m sure everybody on the call has been following the elections closely. I appreciate your time breaking away from that to join us today. One thing I will say is regardless of where the next administration plays out, we have a really great history of working with administrators and leaders in government on both sides of the aisle. I fully expect that will continue. We have excellent relationships with government teams, and I think we're on a good path forward, regardless of how the election plays out. Thanks, Oliver. On the first part of that; well, let me take the second part first, if you don't mind. So when I think about 400 flights per year, we obviously are going to need several motherships to accomplish that at a spaceport. Many spaceships and obviously lots and lots of rocket motors. In our current footing, we have been focused on flight testing. In order to pivot to be able to supply the demand that we expect, we are going to have to ramp up manufacturing. But I think it will be on the order of a few motherships, many spaceships, and like I said, a rocket motor for every flight as we go. When we reach that, I think 400 is a good approximation for a fully utilized spaceport. I think that will be an incredible economic engine, driving economics for our company and the communities in which we operate. Our first focus is New Mexico, and as that comes together, this will be a powerful product that will be of interest in other parts of the world. Right, thank you. Obviously, I'm coming from a background where a relationship with a customer is not a one-and-done experience. While we believe this is truly going to be a transformative experience, I don't think it's a once-in-a-lifetime experience. I think the opportunity to fly and get this perspective from space is going to be compelling enough that people will want to bring others with them if they come back. As we look over time to scale to different markets, it will be a different experience from different spaceports. The commitment to the community that they have joined, along with the shared journey they've undertaken, has been powerful. There’s a lot of opportunity in that, but we'll focus on delivering value for our customers, which will play out over time. Certainly, we've always said we would be flying our first powered flight from New Mexico in the fall. What I think you may be referring to is, as part of an FCC license request for spectrum that we'll use as we're transmitting our downlinks, we had to open up a flight window that was put out on October 22nd. That was never planned to be part of when we'd be flying Unity here. As to spacing, well, I'll say this: at this stage today, we feel good about the second flight in Q1. We feel good about our third rocket-powered flight; it'll be at the end of Q1. But with that said, as we always do, we take each of these flights one by one and assess the outcomes. We are going to go forward prudently with safety, absolutely; it's our utmost priority. We will analyze all data post-flight and assess the ships as they return down. So it's always possible our engineers may want us to retest or perform additional tests. But as we sit with our knowledge today, I feel good about the upcoming flight dates. Our second spaceship will come off for rollout in Q1. When we bring this out for rollout, we will start with ground testing. After finishing ground testing, we will move into flight testing, and we will carry through the same type of data analysis that we had here. Currently, we aren’t providing guidance on the timing of all these pieces, but we are excited because this ship will provide higher rates of higher service and shorter turnaround times, enabling a model for our future spacecraft. I appreciate everyone joining this call. There's a lot going on with the election news, and I appreciate your time. I'd like to take a moment to thank our entire team at Virgin Galactic. People have been working hard in preparation for this first powered flight from New Mexico, both people in New Mexico and Mojave. The support has been incredible. I know I speak for all of us when I say we cannot wait for this upcoming space flight, and to all of you on the call, we appreciate your continued interest and support of our company. We look forward to updating each of you on our progress after the spaceflight in a few weeks and during next quarter's earnings call as well.

And this does conclude today's conference call. We thank you for your participation. You may now disconnect.