Virgin Galactic Holdings, Inc Q1 FY2022 Earnings Call

Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's First Quarter 2022 Earnings Conference Call. Hosting today's conference call will be Liz Calvillo of Investor Relations. As a reminder, today's call is being recorded. I would now like to turn the conference over to Ms. Calvillo. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to Virgin Galactic's First Quarter 2022 Earnings Conference Call. On the call with me today are Michael Colglazier, Chief Executive Officer; and Doug Ahrens, Chief Financial Officer. Following prepared remarks from Michael and Doug, we will open the call for questions. Our press release was issued about an hour ago and is available on our Investor Relations website as well as the slide presentation that will accompany today’s remarks. Let me refer you to Slide 2 of the presentation, which contains our Safe Harbor disclaimer. During today’s call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements made on this call. For more information about these risks and uncertainties, please refer to the Risk Factors in the company’s filings with the SEC. Readers are cautioned not to put undue reliance on forward-looking statements and the company specifically disclaims any obligation to update those we may discuss during this call. Please also note that we will refer to certain non-GAAP financial information on today’s call. With that, I would now like to turn the call over to Michael.

Thanks, Liz, and good afternoon, everyone. 2022 is an important and busy year for us. We made good progress across our core priorities, which are the enhancement program for our current fleet, preparations for commercial service, and setting up the business to operate at scale. I look forward to sharing updates on all these priorities with you today. Turning to Slide 4 and today’s agenda. I'll start with an update on the enhancement program in our flight schedule, followed by an update on our future fleet and then I'll turn to our commercial strategy. Finally, I'll hand the call over to Doug, who will provide a financial review of the quarter. Moving to Slide 5, our vehicle enhancement program. We continue to make good progress on the enhancements to our current fleet, including our mothership Eve and our spaceship unit. As a reminder, these enhancements are designed to significantly improve the building and reliability of these ships, enabling a higher frequency flight rate for commercial service. We've outlined the details of this work in previous earnings, but let me give you one example of what we've recently completed. These enhancement programs include modifications to the center wing and launch pylon to enhance durability in a high-frequency commercial setting. A launch pylon is a mechanical attachment that holds the spaceship and passes air and electricity for the mothership to the spaceship until the spaceship is released. We are implementing a new pylon design that attaches to the mothership wing with a four-point construction rather than the three connection points we had previously. If you're following the presentation on Slide 5, you'll see an image from when the launch pylon was installed in April. This was a major milestone for the program, and these various other enhancements continue to progress. The work we are doing on VSS Unity is also moving ahead. We continue to expect that Unity's enhancements will be completed in advance of the scheduled for Eve. Last quarter, we shared that we are closely monitoring increased supply chain risk and are proactively working to mitigate issues. Like many companies around the world, we’re experiencing elevated levels of supply chain disruption. We have an outstanding team dedicated to managing this increasingly complex environment, and they are actively working to address and mitigate these supply challenges as they arise. We are also growing our talent base in a constrained labor market. While we are having much recruiting success, our talent growth rates have not kept pace with planned ramp-up. These combined labor and supply chain challenges are bringing out the best of Virgin Galactic's innovation and resources, and we've been able to mitigate most scheduled risks as they arise. At this point, though, our projections on hybrid base and our forecast of certain long-lead material deliveries suggest we may need additional schedule contingency. For this reason, we are shifting the expected commencement of commercial service from Q4 of '22 to Q1 of '23. Turning to Slide 6 on our flight update. While our commercial flights are expected to start a bit late, we anticipate VSS Unity to return to space in Q4 of '22 as part of our planned post-enhancement period flight test procedures. We expect our second spaceship, VSS Imagine, will make a debut test flight to space in Q1 of 2023. Following several revenue-generating test flights, we expect VSS Imagine to commence private service midway through 2023. Flight testing will remain critically important as we design and build our new spaceships and motherships. In March, we announced the promotion of Kelly Latimer to the Director of Flight Test. Kelly is a veteran pilot and has been with the company for more than six years. She brings a wealth of experience, having previously worked on system development and aircraft design at Boeing, following 20 years of service with the U.S. Air Force. As Director of Flight Test, she will oversee the conclusion of our test program for Unity and Imagine while working in parallel to design our test program for the Delta spaceships, the next-generation motherships. We're excited to have Kelly in this important role. With Unity and Imagine achieving their planned cadence for commercial space flights in 2023, we expect to fly to space about three times per month, which will be an incredible achievement. With the market for human space flights being large and growing, the real step change in our ability to meet the demand for the experience will come with our future fleet. Now let's turn to Slide 7 and our manufacturing and design update. As we shared previously, the Delta class is our production model spaceship, which we are designing to fly once per week. The Delta fleet and next-generation motherships are evolutions of our current vehicles. More than 17 years of research and development have enabled us to build space vehicles that are differentiated and elegant. We've proven both that our technology works and that our spaceship design delivers a one-of-a-kind consumer experience. For our next-generation fleet, we are adjusting the existing design of our ship to make it faster to produce and easier to maintain to support faster vehicle turn times. As we move towards scale, we are evolving from a primarily in-house vertically integrated manufacturing process to one that leverages Tier 1 and Tier 2 suppliers for major subassemblies, such as the wing and fuselage. A key goal of our strategy is to utilize the nationwide aerospace ecosystem to access pre-existing innovation, new technology, and existing highly skilled labor pools. For example, by working with new Tier 1 suppliers, we are able to incorporate a more efficient, high-temperature composites that will reduce weight and improve production lead times. Establishing these third-party relationships is critical to how we scale our business. We are making good progress in selecting these important partners. Turning to Slide 8. In March, we hosted a Supplier Conference at our engineering and design headquarters in Orange County and our manufacturing facility in Miami. It was well attended by Tier 1 and Tier 2 suppliers who expressed interest in working with us on the subassemblies for our Delta fleet. A number of available and interested suppliers is excellent and gives us great confidence in our path forward. We've now issued RFIs and are working through a meticulous process to identify the primary suppliers we will work with. Turning to Slide 9. We are deploying a digital twin architecture that underpins our build-to-class next-generation mothership schedules. This approach enables a comprehensive digital database for each vehicle, which captures the vehicle system requirements and design as well as manufacturing and operations data to create a digital thread for all production activity across the supply chain. This digital thread enables seamless integration with our partners, allowing for real-time collaboration, strong governance, and increased production efficiency, safety, and reliability. A key benefit of this approach is that it allows our in-house team to focus on the complex and critical elements that are core to our intellectual property for our design and engineering and final assembly. We continue to progress design and location choices for a new final assembly facility for our Delta class spaceships. We expect the facility to be operational in late 2023. We're planning for this facility to eventually deploy hundreds of Virgin Galactic technicians and engineers, with a production capability of up to six spaceships a year. We look forward to sharing an update on this soon. In summary, we've made good progress this quarter towards establishing our long-term manufacturing model. We feel confident that our manufacturing approach will improve our speed to market, help us minimize supply chain disruption, and realize meaningful efficiencies. Turning to Slide 10, our commercial strategy. In February, we announced Blair Rich as our President and Chief Business Officer, Commercial and Consumer Operations. In the near term, Blair and her team are focused on three top priorities: sales, the customer journey and experience, and building our global brand. I'll now take these in turn. Ticket sales continue to progress well, and we're seeing strong uptake across our product offerings. This includes single seats as well as multi-seat tickets. We remain on track to have our first 1,000 committed astronauts ready for the launch of commercial service. We currently have approximately 800 future astronauts in our community. Our purchase and sales strategy is highly personalized and is proving to be extremely successful in converting consumer interest into ticket sales. These early sales are also helping us build a valuable bank of customer data and insights to help us refine and scale our sales process as our business expands. We shared before that one of our key differentiators is our end-to-end customer journey, which starts at the point of sale and extends far beyond this baseline experience as part of our Astronaut Membership. The multi-year anticipation of our flights is intentional. Our customers place a high value on the time and opportunities this membership provides. As we build this community, we're expanding the membership experience around three or four pillars: education and enrichment, astronaut development and training, and impact and inspiration. The training and space experience components may be familiar to you. I'd like to take a moment to explain the focus on education. Many future astronauts would like to use their time in the future astronaut community as an educational experience by deepening their understanding of space, engineering, technology, and the planet. Examples include multi-seat tickets and parents and families who emphasize the role they would like the preflight astronaut experience to play for their teenage children during the run-up to the flight. Our customers are hungry for knowledge, and giving them a peek behind the hangar door and access to the experience and expertise within our team is something they highly value and is also something that sets us apart. For our membership community, we have the opportunity to curate and personalize the customer journey, further enhance our product distinction, and leverage signature Virgin customer experiences, which will in turn attract potential customers and help build our brand. As we resume space flights following our enhancement period, we expect to see a spike in global engagement, as we did with previous flights. We've shown how effectively we can use these milestone events to capture the imagination of millions of people and the attention of global media, which in turn builds our global cultural relevance, engages our brand, and increases affinity towards Virgin Galactic. I'll now turn the call over to Doug for an update on our financials.

Thanks, Michael, and good afternoon, everyone. Turning to Slide 11 and 12. Let's review our financial results for the first quarter. We generated revenue of $398,000 in the quarter, driven primarily by future astronaut membership fees associated with new ticket sales. Operating expenses for the first quarter were $92 million compared to $81 million in the prior year period. The increase in expenses is primarily attributable to higher manufacturing labor spend as we're progressing through the fleet enhancement period. GAAP net loss for the first quarter was $93 million compared to a loss of $130 million in the first quarter of 2021. The smaller net loss is primarily due to the absence of any associated change in fair value of those items flowing through the income statement. Adjusted EBITDA was a negative $77 million compared to a negative $56 million in the prior year period. Free cash flow was negative $68 million compared to negative $50 million in the same period last year. The increased spending was primarily attributable to growth in manufacturing headcount during the fleet enhancement period as well as an increase in marketing expenses. Regarding our guidance for the second quarter, we forecast free cash flow to be in the range of negative $80 million to $90 million. The projected growth in spending quarter-over-quarter is expected to be driven by the ongoing work during the fleet enhancement period, combined with the ramp-up and design effort for our future fleet, as well as investments to increase the scale of our flight operations leading up to commercial service. Our balance sheet remains strong, with over $1.2 billion of cash, cash equivalents, and marketable securities. Going forward, we'll continue to evaluate opportunities to raise capital as we grow and scale our business. We plan to use a combination of cash on hand, revenue from commercial space flights, and future inflows of capital to fund our strategic objectives. I'd like to now hand the call back over to Michael.

Thanks, Doug. I'm pleased with our positive start to 2022 and the progress we've made so far. Against a global backdrop of escalating supply chains and labor constraints, our teams are containing the majority of issues to minimize impact on schedules. We look forward to returning to space in Q4 and launching commercial service in the first quarter of next year. To recap, we expect to begin space flight later this year, with commercial launches in the first quarter of 2023. We are seeing strong uptake across our product offerings, including multi-seat sales as well as interest in research plans. Our future astronaut community stands at approximately 800 reservations. The design work for the next generation of our spaceflight system is well underway, and we are making progress in establishing the infrastructure to scale our business. The coming months will continue to be very busy for us as we complete our enhancements and approach commercial service. I'm looking forward to sharing updates on our progress. With that, we'll turn to questions. Operator, we're ready to begin the Q&A portion of the call.

Our first question comes from Robert Spingarn with Melius Research.

Michael or Doug, with all the changes to the spaceship and the mothership, do you foresee a scenario where the FAA wants the updates to go through a different certification process than just a few test flights? Does there anything changed there?

No, we do not foresee that, Rob. The ships are the same. You're familiar with our licensing process, I believe, and the updates that are going through here aren't changing the foundational structure of the ship or any of the systems there. We're simply strengthening various structures and getting things ready for higher volume commercial use. So the license that we operate under will stay the same.

Okay. And then just on the process of developing these spaceships, you've talked about leveraging the aerospace supply chain to build both the ships and the motherships. With the struggles that many suppliers are having now with raw materials and labor, just general supply chain issues, how are you getting them to agree to work with Virgin Galactic under these conditions? Or are the volumes so low at this point they really don't have to make these decisions?

So I think you've got a couple of things going on. One thing that we've been purposeful about is talking about evolving, right, because it's an evolution of our current ship that has 17 years behind it to this Delta class. The main work is allowing us to take what used to be many subsystems or subassemblies and consolidating that down to just a few so that when we take those few major subassemblies into the market, they're substantial dollars, right? There are substantial contracts that are meaningful to people. So that's one thing that has allowed us to attract people to the table. I think the essence of what we're doing is also quite exciting in the marketplace. But people need to make money, and we're putting together contracts and buys that will be material for them. The availability of capacity within the market is still good and solid for us. We're pleased to see the turnout and responses as they're starting to come in on the RFI process. While the supply chains are snarled around the world, we're managing that well. The timing, I'm not going to predict two to three years out. What we're doing upfront is not dealing with major supply complications. We're focused on the engineering of this and deciding what part of the design we will finish ourselves and what we'll ask these suppliers to handle. The main material ramp-up will come later. I believe we're ahead of it, and everyone will have time to manage what they need to.

And you mentioned these dollars, maybe Doug can take this. Should we see any kind of movement in CapEx here over the next several quarters as more and more people get involved? Or does that just not happen that soon?

The R&D expense doesn't actually become CapEx until we get to a later stage. It will cross over perhaps like in late 2023 or 2024. It's actually an accounting convention that everything is reflected as R&D until we reach that point.

Fair enough, but then how does that trend?

So what you'll see is we gave a one-quarter guidance of $80 million to $90 million. You'll see a ramp happening through 2022 and into 2023. We didn't quantify that, but you can see the layers of spending coming in between the design work and the building out of the factory and other infrastructure that we're doing. So you'll see a ramp into 2023, but we haven't quantified that publicly.

Our next question comes from Oliver Chen from Cowen.

On the decision to delay to Q1, I was just curious about the rationale there. Would it have made more sense to give yourself more cushion to Q2, just given a lot of the uncertainty that we're seeing out in the market? Also, with regards to ticket sales and the demand that you're seeing, I would love your thoughts on if it's been volatile? And any updated thoughts on the ticket window would be helpful?

Sure. Oliver, it's Michael here. On the first one, we try to provide as accurate a point of view on the schedule as we can, and we've been improving our ability to forecast. We're still several months away right now, in early May. But the teams have been doing an incredible effort to basically contain all these little issues that have the potential to push schedules back. They've really done an excellent job with that. We are seeing enough things that have taken one week here, two weeks there that have extended on a critical path. So we think it's appropriate to add further contingency in. We expect to have a flight with Unity in the fourth quarter. That gives you some sense of containment in the schedule. So moving from Q4 to a projection of Q1 of '23 for commercial service seems appropriate. We've built in an assessment of our own schedules and added contingency against this new timeline as well. We want to be accurate; we don't want to be in a position of not meeting expectations. But we also don't want to be so padded that we're not being truthful. So we believe we've given the right direction. Regarding ticketing, can you ask that question again?

Curious about the demand profile and also the duration of the sales window in terms of any updated thoughts on what you're seeing for ticket sales?

Ticket sales are going really well. We have a backlog of people who have gone through our CRM processes and said, yes, I'm ready to go now. We have effectively a two-way interview with people, just understanding what they're looking for and how the service will work. It's going really well. We have about 800 people right now in our backlog, which is quite a bit relative to starting commercial service in Q1 of the upcoming year. Our conversion rates are excellent. At this stage, where we only have 200 left, we don't need to add more people to the team. We're on track to get to our goal of 1,000 people for the first commercial service launches. The demand is robust, and we've seen customers interested in purchasing not just individual seats but also group tickets. It's encouraging to see.

Okay. That's very helpful. Last question on the membership community comments. Do you have any updated or further thoughts on what kinds of partnerships and/or experiential focuses you have? And then on the Digital Twin. That was interesting. What's the implication for that kind of technology? I assume, speed, agility, and quality enable you to collaborate in more real-time across suppliers?

So I don't have anything new to share on the community piece. It's a meaningful part of the dialogue we have with customers as they come in. They recognize this journey to a critical moment, and that journey matters. Some of these interactions will be virtual moments that we can include the community. Some will be very purposeful gatherings, like one we have coming up in the fall in Wyoming. The importance of this strategy remains strong. Regarding the Digital Twin, Doug, would you like to take that?

Sure. Yes. The Digital Twin can be thought of as a suite of digital tools that enable higher quality and velocity through the design and production cycle. This has been proven by leading aerospace companies, allowing seamless integration with the supply chain through a shared digital database. It enhances model-based systems engineering and design, incorporating all aircraft requirements and facilitating CAD, simulation, and optimization. This integration leads to better governance on change control and allows us to work faster and more efficiently than before. It's extremely helpful as we move into rapid aircraft development.

Our next question comes from Greg Konrad from Jefferies.

Just maybe to start, on Unity and Imagine, you mentioned three flights per month once those ramp up. Is there any learning curve? Or should we expect that three flights a month will happen right away once they're both in service?

I think on Unity, we understand that ship well. We've been working with it for many years and understand what we've put into this enhancement program. Our teams in New Mexico are getting ready to execute. We expect to have a test flight coming out of the enhancement period, and there will actually be two: one, we'll perform a glide flight, where we take Unity out and release it to come down unpowered, which confirms all the air handling services and flight dynamics, and then we'll do a space flight as well. Those two will let our maintenance teams practice and prepare for commercial service. We're confident by the time we reach that point, we will be very close to where we're expecting in terms of our flight cadence. There might be a couple of flights where we learn something, but we're targeting about three flights a month soon after starting commercial service.

And then, just checking the math on the 750 to 800 customers, is it fair to assume they're offered a slot in the 2026 timeframe? How do we think about the current customers who are signing on when their flights are planned?

Yes, that's a fair estimate. We have the same conversation with customers as we do on these calls. We talk about our expected rates for Unity and Imagine and the first flights coming out on the Delta in 2025, with commercial service really starting in 2026 for the Delta. So, everyone does that math and recognizes that by the time they're at the tail end of this first 1,000, it will be around 2026. People are understanding the scarcity of this particular group, which helps overall interest.

Our next question comes from Pete Osterland with Truist.

This is on for Mike First, just regarding the labor constraints you called out. What kind of roles within the company are you mainly seeking to expand your hiring for right now? What have been the biggest challenges that you've encountered on the labor front? Do you see this dynamic improving over the next quarter or two, or does the situation seem to be becoming more challenging?

Primarily, we have labor constraints within the engineering group. Manufacturing has staffed well, both with our own team and contractors. The engineering aspect is where we've seen challenges. We're ramping up for the future fleet and are doing well with that, hiring 40 engineers this month. The enhancement program is taxing our existing engineers, who have experience primarily focused on one ship. Now they are spread across three ships, which has created scope limits. We're supplementing but slower than planned. That's why we talk about labor constraints. As the enhancement programs finish, many of those experienced engineers will transition into the Delta class and new mothership designs.

Okay, that makes sense. And then just a question on pricing. With broad-based inflation on everyone's mind, has there been any indication at all in your conversations that might suggest demand or interest has slowed versus what you were expecting at the beginning of the year? Is there a potential that you would need to modify your pricing strategy at all?

No, we're not seeing that. The customers who joined us early are in a really good value position, having invested early when prices were $200,000 to $250,000. They’re in a great position now. For the remaining first 1,000 tickets, we'll be charging $450,000. We don’t plan to inflate that price for the remaining tickets. Once those are sold, we’ll assess pricing appropriately against the market. While inflation is impacting other costs, we plan to keep the prices for the remaining 200 seats at $450,000.

Our next question comes from Kristine Liwag with Morgan Stanley.

On the supply chain issue, I mean, you've touched on it a lot. Could you provide more details on exactly what you're facing? I would have thought that with parts for Inspire, you'd have some spares?

Sure. To clarify for everybody, Inspire was a ship that was going to follow Imagine, and we have parts built for that. Most of our ships are carbon, and we join carbon-carbon with epoxies and other materials. However, we also use high-performance metallics in certain areas. It’s the metallics where we’re seeing extended delivery times. For example, we had a part from an aluminum alloy, and its redesign process has caused delays of weeks. The supply chain has done well to creatively manage these delays, but they're cumulatively adding up. That's why we chose to refer to our schedule shifting. It's not just this, but it’s these factors together that have led to our revised timelines.

That's really helpful. And then also, when we think about the enhancement actions on Unity and Eve, can you describe the milestones you've already achieved? You've been at it for eight months now, so I imagine you have accomplished quite a lot. Can you share what some of those milestones have been?

The teams have done amazing work given the scope increase. Unity is in solid shape, and the scope we set for Unity is likely to complete on the original schedule. We have a few extra items we may complete. Eve will require more time. The launch pylon, which attaches the spaceship to the mothership and serves as a key structural component, has been a big milestone. We fitted a new part into an existing area of the wing in April, and that was a major achievement. This will provide the foundation as we finish additional work. We feel good about the progress so far.

Our last question comes from Myles Walton from UBS.

To touch on the Delta a bit more, Michael, you confirmed on the call that late 2025 remains the target. So this recent shift in reentering commercial service does not impact that timeline, right? It's still late 2025?

Yes. The timing table we have out on Delta is not impacted by this. At a practical level, some experienced engineers may arrive a bit later to the process, but we don’t see this affecting our schedule materially.

Okay. And then, on the RFIs that you are currently processing or have issued, does this mean that you are in a firm design stage at this point? Or are you still in a collaborative design with what their capabilities are, deciding what you will outsource versus in-source? Or have these RFIs indicated that you've frozen the design, and now it's just a question of price?

This isn't a brand-new ship; it's an evolution of our current designs. The majority of that design is locked in place. By working with suppliers through the RFI process, we find new capabilities we weren’t aware of or discover that a supplier has multiple capabilities we may have thought were separated. This allows us to continue making trades on the decision of what we want to outsource and what we'll do in-house. Much of this design work is already set in place, but we’re still making adjustments based on what suppliers bring to the table. So, I think for the last point, regarding the timelines for issuing contracts for supply, it will not be at the end of the year but rather sooner.

There are no further questions waiting at this time. So I'll pass the conference back over to the management team for any closing remarks.

I always appreciate everyone who both asked questions and all of those who are listening. We're excited for what’s still to come, and thank you for your time today.

That concludes Virgin Galactic's First Quarter 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.