Earnings Call Transcript - SPCE Q2 2022

Operator, Operator

Good afternoon. My name is Irene, and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's Second Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference call over to Eric Cerny, Vice President of Investor Relations. Eric, please go ahead.

Eric Cerny, Vice President of Investor Relations

Thank you. Good afternoon, everyone. Welcome to Virgin Galactic's second 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 and slide presentation that will accompany today's remarks are available on our Investor Relations website. Please see slide two of the presentation for our Safe Harbor disclaimer. During today's call, we may make forward-looking statements. These statements are based on current expectations and assumptions and as a result 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 the forward-looking statements that may be discussed 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.

Michael Colglazier, CEO

Good afternoon, everyone. First off, I'd like to welcome Eric Cerny to Virgin Galactic. As many of you know, Eric joined us a couple of months ago to lead our Investor Relations function. We are excited to have him on the team and I am confident you will all enjoy working with him as well. We are more than halfway through a transformational year for Virgin Galactic. Over the last few months, we have put in place significant pieces of our strategic roadmap for our medium- and long-term operations. We have in the past talked about what we intend to do. But these recent steps lay out the specifics of how we will ramp up the production of our future fleet and deliver hundreds of spaceflights each year to spaceports. We are progressing with the enhancement program for our initial fleet. However, important work on our mothership has taken longer to complete than we planned and we now anticipate private astronauts service commencing in Q2 of 2023. While the short-term schedule flight is unfortunate, our team in Mojave is working diligently to complete the work and we continue to take a long-term approach to managing the business. The initiatives we have set in motion are powerful. I look forward to sharing more detail about some on today's call. Today's agenda on slide three includes advancements in our future fleet, followed by a commercial strategy update. We will then go into the enhancement program and updated flight schedule for our initial fleet before handing the call over to Doug, who will provide a financial review of the quarter. Let's turn to slide four and discuss the production of our future fleet. Increasing the frequency of flights for each of our spaceships is how we unlock the true economic impact of commercial spaceflight. We are scaling our business and our spaceline very intentionally around the space clean architecture, which enables us to collaborate with outstanding firms in the aerospace industry, companies that have the knowledge, technology, and capacity to help us produce vehicles with high-frequency turnaround characteristics and volumes that can quickly meet our needs. Our next generation motherships and spaceships are production versions of our existing vehicles rather than so-called clean sheet designs. This means that the fundamental aerodynamics and core engineering of the vehicles will allow us to move through the development process with our partners at a much faster pace than starting a new vehicle design process from scratch. A major part of our production approach is evidenced in our recently executed strategic agreement with Aurora Flight Sciences to design and manufacture next-generation motherships. These vehicles are planned for final assembly at our facility in Mojave. Aurora's business is built around agility, innovation, and creativity. This is exactly the type of company that we want to be working with. As a subsidiary of Boeing, the largest aerospace company in the world and a long-time supporter and partner of Virgin Galactic, Aurora also has access to the industry’s top engineers and manufacturing facilities, as well as an existing base of supply and strategic partnerships. It has been exciting to see the leaders from both Aurora and Boeing and I have watched their teams collaborate. There's genuine excitement from both sides about what we are going to achieve together. We began working with Aurora several months ago to develop design specifications, as well as workforce and resource requirements. There is a long-term agreement now in place. We are full steam ahead on development. Under the agreement, Aurora will deliver two new motherships, the first of which we expect to enter service in 2025 in time to begin carrying the first of the completed Delta class spaceships as they begin test flights to support our plan for 400 flights a year out of Spaceport America in New Mexico. The agreement also enables us to realize cost and speed benefits for additional motherships as we expand to other spaceports. Turning to slide five, our production line spaceships, the Delta class. Last quarter, we shared the bid issued for RFIs to Tier 1 and Tier 2 suppliers who expressed interest in working with us to deliver major services for our Delta class spaceships. We are very encouraged by the response RFPs have been released, and while we are not ready to share which specific firms will be joining our supplier base, the approach is generally consistent with our first two motherships, with major sub-assemblies outsourced to premier aerospace firms and final assembly and testing taking place at Virgin Galactic facilities. Important to the design and integration efforts for the Delta ships is the digital twin technology we are utilizing, which allows us to work quickly and efficiently with our partners, utilizing a single digital thread database for all production activity across the supply chain. In July, we executed a long-term lease for a new final assembly facility for the Delta class spaceships, which will have the capability to produce up to six spaceships per year, providing the scalability needed to support our business model. Construction has already started and we anticipate the facility will be fully operational by late 2022, supporting our goal of rolling out the first of the ships in 2025. The location at the Phoenix Mesa Gateway Airport is highly advantageous to our plans. The Greater Phoenix area is an innovation hub with outstanding engineering and technical talent, driven by a long history of aerospace development there. There are excellent aerospace technicians located in the area, and the facility's location on the airport land allows for new spaceships to be picked up and flown by our mothership to Mexico for flight testing operations. With Aurora, our new final assembly facility, and teams soon to be selected for Delta class spaceship collaboration, we will have in place most of the core pieces of the supply chain and manufacturing footprint that leverage the best in the aerospace industry. We are confident this manufacturing process will be able to deliver the quality and speed to market that we desire to scale quickly. Turning to slide six, a major part of delivering the astronaut experience is the technical operations team, which consists of maintenance, ground services, support engineering, and quality assurance personnel that ensure our spaceflights are stable and ready to fly at the intervals that we expect. We have a terrific tech ops team in Spaceport America who carry out our flight-test program. We will be expanding the capabilities of this group as we enter commercial service. To lead this expansion and architect of the operations model and the technical infrastructure and processes needed for weekly turnaround times on ships, I am very excited to share that Mike Moore has signed on to Virgin Galactic as Executive Vice President of Spaceline Technical Operations, reporting to me. Mike has over 37 years of experience in aerospace, starting as an Air Force mechanic and most recently serving as Senior Vice President of Maintenance Operations & MRO Services Group for Delta Airlines, leading global technical operations for one of the nation’s premier air carriers. We are thrilled to bring a leader of Mike's caliber into Virgin Galactic as we chart the course for this critical part of our business focused on high-rate service and operation. Turning to our customer experience on slide seven. For the first years of commercial operation, our astronauts will spend several days before their spaceflight training together at Spaceport America, which has facilities that can support several flight crews per month. However, as our Delta class ships come off the line in Phoenix and flight volume increases materially, Spaceport America will transition from a multipurpose facility into a high-volume spaceport, a technical and flight operations facility where groups of people arrive on a near-daily basis to embark on a life-changing trip to space with Virgin Galactic. At this stage, we will need separate facilities to accommodate, train and engage larger volumes of astronauts and their guests during the multi-day lead-up to the flight experience, while still providing a personalized high-touch and truly distinctive experience of signature service. The astronaut campus is where the elements of the consumer experience come together. As we shared earlier this week, we acquired land in Sierra County, New Mexico, which will be home to our first astronaut campus. Our intention for each astronaut campus is to create a one-of-a-kind destination that enhances the astronaut's journey by taking design and programming inspiration from the location on Earth above which we fly. Our first campus in New Mexico will do just that. As you can see from this aerial view of the land, which is located in driving proximity to Spaceport America, our astronauts will be training for their flight from a perfect location. The master plan for the campus will include training facilities, purposeful accommodations, tailored experiences, as well as an observatory, wellness center, recreation activities, and unique dining options, all underpinned by Virgin's signature hospitality. The campus will be built amidst stunning picturesque landscapes with a focus on sustainability and minimal impact on the surrounding environment. The campus will be designed to work in synergy with New Mexico’s spectacular natural surroundings and the buildout will be timed to match the expansion of our future flight operations. We have a team of best-in-class experience creators working through the somatic designs to create an immersive environment and we look forward to sharing more about the astronaut campus experience in future updates. On slide eight, I'd like to spend a moment on our astronaut membership experience. As a reminder, when customers join our future astronaut community at the point of sale, they gain access to one-of-a-kind experiences, events, trips, and activities around the world, all curated to enhance the astronaut training and delivered with trademark Virgin style. This community is essential to deepening the understanding and appreciation of space, preparing our customers emotionally and physically for the transformative experience that awaits. We are developing this membership experience around three core pillars: education and enrichment, astronaut development and training, and impact and inspiration. An example of our approach will be our marquee membership event, Space for the Curious. The inaugural event is scheduled for early fall and we intend for it to become an annual or biannual event that we can export to markets around the world as we continue to grow our global footprint. This upcoming event will be a three-day program for future astronauts, set against the rugged backdrop and dark night sky of Wyoming. It’s curated to enhance our customers’ understanding of why space exploration matters and to give them access to world-class insight, expertise, and skills to help optimize their own spaceflight experience. It even includes thoughtful discussions, outdoor activities, music, and hospitality experiences, all designed to support these three core pillars. At a high level, the programming will include guest speakers to facilitate education and enrichment and help prepare and develop our future astronauts on how to fly. Discussions on the importance of space to science, research, and the planet, activities focused on health, wellness, and preparation for the journey to space, and a wide range of social activities that will inspire and excite, including stargazing with professional astronomers. Events and activations like these are all purposely designed to ensure our customers’ two- to three-year journey, culminating with a trip to space on board our distinctive spaceships, is even more enjoyable, transformative, and fun than expected. While the first of these future astronauts will begin flying to space next year, the limited capacity of our initial fleet means that our later-booked customers will have a waiting period extending beyond the preferred two- to three-year timeframe. We expect this extended wait period will resolve with the near completion of our Delta class ships and enhance our flight capacity. Turning to slide nine for growth markets. As we look ahead to higher volumes, we are using the limited availability remaining in our initial tranche of 1000 reservations to purposefully develop two market segments that we expect will contribute meaningfully to our future demand. The first of these market segments is scientific and government research. We have long-stated goals of building a meaningful research business by offering routine and reliable access to space. With a flight profile that can be tailored to the payloads on board, we are able to offer something entirely new and highly valuable to the private and government research market. This is a strategically helpful market for our business model as it commands a significant price premium compared to our current commercial passenger price point and also provides a positive brand benefit to the company by contributing to scientific advancement. Market interest and feedback around our research product has been very positive. We continue to receive inquiries for research admissions from across the world, including from government and scientific researchers. We plan to accelerate this market now to develop its volume in advance of our future capacity increases. We have learned that the nature of research funding lifecycle means these customers require a shorter and more clearly defined timeframe to sale on flight. To strategically pursue and grow this market, we are reserving 10% of our first 1000 seats for science and technology research admissions. We will manage these through a separate flight manifest that runs alongside the private astronaut manifest. This limited allocation will allow us to meaningfully engage and grow the research marketplace over the next one to three years without having a material impact on the flight timing of our private astronaut customers. The second market we wish to develop is the luxury travel sector. As commercial spaceflight becomes more normalized over the next few years, we expect the high-end luxury and adventure travel markets to comprise a material percentage of our demand. We expect to ramp up our internal sales team to capture much of this business and we have recently hired a dedicated Vice President of Sales to begin building up this team. We have also received interest from travel industry experts with deep connections within specific geographic markets to augment our internal sales efforts. To assess the potential of a travel industry partner, as previously announced, we are very pleased to provide exclusive access to a limited number of our remaining seats to Virtuoso, the world leader in experience-driven travel. This partnership aligns with our goal of scaling our fleet. When we look at ramping customer acquisition scale, this alliance with Virtuoso serves as a natural extension for us in a strategic, cost-efficient way to access new customers. Partnering with Virtuoso gives us immediate access to deep relationships with customers around the world who are looking for a one-of-a-kind journey, but who may not yet have considered space travel. We will continue to manage our own sales process and plan to continue selling our product directly. At the same time, it makes sense to explore a superb quality partner that opens the door to an untapped, established, and diverse clientele, as we expand interest and increase access to space. As a referral arrangement, Virtuoso will leverage their network and expertise to identify and refer potential leads to Virgin Galactic, and we will maintain control of our high-touch end-to-end customer sales journey and the powerful data and insights that come with that. Allowing for the research and Virtuoso allocations that will help prime these future growth markets, we are reaching the end of our first tranche of 1000 seats. We intend to reserve the remainder of the seats that are available at the current price point of $450,000 for referrals from our existing customers. We plan to open our next tranches based on reservations after we begin flying our current customers. On the topic of flying our current customers, please turn to slide 10 and the enhancement programs associated with our fleet. The enhancements to Eve and Unity are designed to significantly improve the durability and reliability of these ships, enabling a higher frequency of commercial service. Last quarter, we shared that like many companies around the world, we were experiencing elevated levels of supply chain disruptions, as well as labor constraints. Many of these conditions have persisted through Q2 and our teams have put forth incredible efforts to navigate the many challenges presented. I want to thank everyone at Virgin Galactic who has been part of that ongoing effort. However, despite our best efforts, progress on our enhancement program in Mojave, particularly the complex work to prepare Eve for commercial service, is taking longer than we planned. Our customers, our investors, and indeed our entire team are all eager to see us return to the skies, taking astronauts to space. Work on Eve must be completed before we can fly, and we have shifted resources within the Mojave team to bring additional support and help bring this enhancement program to a successful and expeditious conclusion. Given where we are in this enhancement program and factoring in appropriate contingency, we are shifting the expected launch of commercial service from Q1 to Q2 of 2023. We anticipate conducting spaceflights with VSS Unity in Q1 of 2023. The work specific to Unity's enhancement program, which we can report is nearly completed, should allow for a monthly turnaround time. The image you see here is a peek at Unity's new metrics being installed at Spaceport America. As we have concentrated our Mojave-based talent to support the work on our mothership Eve, the planned timeline for VSS Imagine will be extended due to this reallocation of resources. As it stands today, Imagine is scheduled to commence test flights in mid-2023 and private astronauts service as soon as Q4 of 2023. Imagine is a new vehicle and will require a sequence of planned test flights before it can carry private astronauts. The variability inherent in flight tests makes it prudent for us to allow for appropriate scheduling flexibility, which could potentially extend Imagine's window for private astronauts service into early 2024. Work on Eve needs to be completed and we are very excited to see that come out of the hangar this month. Even more exciting are the building blocks that we have put in place for the development of our future fleet and our astronaut experience. We continue to manage the company for long-term growth and value and we are very pleased with the progress we have made in that regard. I will now turn the call over to Doug for an update on our financials.

Doug Ahrens, CFO

Thanks, Michael, and good afternoon, everyone. Turning to slide 11 and our financial results for the second quarter. We generated revenue of $357,000 in the second quarter, driven by future astronaut membership fees. Operating expenses were $110 million, compared to $74 million in the prior year period. The increase of $36 million is primarily attributable to higher R&D costs tied to our fleet enhancement activity and the ramp-up of development work on our future motherships and spaceships. We reported a GAAP net loss of $111 million, compared to $94 million in the prior year period. Adjusted EBITDA was negative $93 million in the second quarter, compared to negative $56 million in the prior year period, primarily driven by an increase in operating expenses. Free cash flow was negative $91 million, at the high end of our guidance for the quarter, compared to negative $66 million in the same period last year. The increased spending is largely due to higher operating costs tied to our fleet enhancement activity and the ramp-up of development work on our future motherships and spaceships. Our balance sheet remains strong, with over $1.1 billion in cash, cash equivalents, and marketable securities. The details Michael shared with you around our manufacturing approach for the motherships and spaceships, as well as the investments we are making in our future astronauts, are all consistent with the long-term commentary we have provided over prior quarters regarding our business model. Leveraging the aerospace industry supply chain for major sub-assemblies allows our team to focus on design, engineering, final assembly, and ongoing operations and maintenance. Collaboration with companies like Aurora enables us to minimize our capital expenditures for the infrastructure required to scale the fleet and significantly accelerates our time to market. As you can see, we are rapidly moving ahead on our plans to scale the business. Many of the building blocks that Michael and I have talked about over the last several quarters are now in place. We are making strategic investments from a position of financial strength, with momentum in the business and a healthy balance sheet. Furthermore, we believe it is appropriate to take steps to give us financial flexibility going forward. To that end, we filed a prospectus supplement today and established an aftermarket program to sell up to $300 million of additional common stock. We are excited about the investments we have outlined in the spaceships, motherships, and infrastructure surrounding the astronaut experience. We therefore plan to always maintain a strong balance sheet, enabling us to fulfill our strategic plan to become a scaled commercial spaceline. Moving to guidance on slide 12. For the third quarter, we forecast free cash flow to be in the range of negative $110 million to $120 million. As we continue to ramp up our efforts to scale the business, we anticipate this number will continue to grow over the next several quarters. With that, I will hand it back to Michael for some closing comments.

Michael Colglazier, CEO

Thanks, Doug. 2022 is a year we set ourselves up for scale and for the long-term. We are moving into a building phase for the future, building out the factories, cultivating partnerships, and growing the campuses, teams, and networks that will take us into the future. Shifting our commercial service launch to Q2 2023 presents a short-term challenge but does not compromise our longer-term objectives. We are taking an intentional, value-driven approach to this business and we now have several core elements in place for us to scale the world’s first commercial spaceline in a meaningful way. These include the development of our next-generation motherships with Aurora, leveraging the aerospace supply chain to provide major sub-assemblies for Delta class spaceships, our new spaceship factory in Phoenix, and creating an unforgettable and truly unique consumer experience in New Mexico. The next few months will continue to be very busy for us and I look forward to sharing updates on our progress. And with that, we will turn to questions. Operator, we are ready to begin the question-and-answer portion of the call.

Operator, Operator

Thank you, dear speakers. Our first question comes from Greg Konrad from Jefferies. Greg, your line is open.

Greg Konrad, Analyst

Good evening. To begin, I didn't hear an update on our backlog. Last quarter, it was at 800 seats. What is the current status, and does the current commentary indicate any government seats in that number? Does that suggest that more than 10% of the remaining 1000 seats are allocated for government, with the rest being for referrals?

Doug Ahrens, CFO

Yeah. So as of the last quarter, we talked about having approximately 800 future astronauts and it's a mixed group, but very few of those were in the research market. We closed out some more of those private astronauts earlier in the quarter. As we have been looking to build our research markets, we have received a great response and consistency, indicating that the research needs to proceed within certain timelines. If researchers arrive at the end of the manifest, they can't commit, as they need to get funding secured with a defined date ahead of time. Therefore, we made a strategic decision to take 10% of that first 1000 seats and allocate them to the research market. Currently, there are about 100 seats reserved for research purposes. We also clarified that a significant portion of our current customers are space enthusiasts, while we anticipate tapping into the luxury and adventure travel market to grow our customer base. The partnership with Virtuoso will help in this aspect. So, essentially our current figures bring us back to the original mentioned backlog with a strategic shift towards accommodating research efforts.

Greg Konrad, Analyst

And then on the cash usage for $110 million to $120 million for Q3, I mean you announced the number of agreements in the quarter. I mean, how does that compare to peak and maybe what is accelerating when we look versus Q2, and any more insights on peak cash usage given the initial agreements in place?

Doug Ahrens, CFO

Sure. The increase between Q2 and Q3 is primarily around the scaling of the aerospace activities we have. We have the continuation of the enhancement period, but now include the beginning of the work with Aurora for the new motherships. We are ramping up the engineering for Delta class spaceships, which will contribute to these expenses. Though the exact peak is difficult to determine, we expect to see continued growth in expenditures related to our aerospace development as we move forward.

Greg Konrad, Analyst

Okay. Thank you.

Michael Colglazier, CEO

Thanks Greg.

Operator, Operator

Thank you. Our next question comes from Matt Akers from Wells Fargo. Matt, your line is open.

Matt Akers, Analyst

Hey. Hi. Good afternoon. Thanks for the question. I wanted to ask about the partnerships, Delta and kind of progress on RFPs and if there's any update on that or sort of the timing of when you think you might be able to announce an update there?

Doug Ahrens, CFO

I can start with that. The RFIs are long due and the RFPs were released a while back and will be coming back in the upcoming month or two here. We need to spend time in the selection process. We are pleased with the quality of the firms that are interested in working with us. We are sorting for partners who not only have the technology and skills but also capacity within their manufacturing and engineering organizations. Overall, we are optimistic about the upcoming collaborations.

Matt Akers, Analyst

Okay. Thanks. And then, I guess, one more, just on the kind of the delays on the Eve upgrades, and if you could dive into more detail on the biggest drivers of the delay.

Doug Ahrens, CFO

Sure. The delays are primarily around the time it is taking to accomplish the work scope on Eve. The most significant challenges involve modifications at the center wing area, where we are changing from a three-point attachment to a four-point attachment to the spaceship. We need to conform the existing drawings to the as-built model, compounded by labor availability issues in the Mojave area. We have shifted resources to accelerate progress on Eve as we need to prioritize getting Unity back into the air. While we are facing challenges, our skilled teams are committed to overcoming them.

Matt Akers, Analyst

Yeah. That’s great color. Thank you.

Operator, Operator

Thank you. Our next question comes from Oliver Chen from Cowen. Oliver, your line is open.

Oliver Chen, Analyst

Hi. Thank you, Michael and Doug. Regarding the astronaut campus, what should we know about the cash flow and CapEx implications and how this plan might manifest globally over time?

Doug Ahrens, CFO

In terms of timing and cash flows, it will occur over a period of years. It’s a real estate development project, and our intention is to have it ready by the time the Delta class is ramping up. We expect some incremental real estate development costs over about a four-year period, but it's significantly lower than the investments in the spaceships and motherships.

Michael Colglazier, CEO

This astronaut campus is designed for effective training before the Delta ships are operational. We will be accommodating several groups of future astronauts at once, which highlights the necessity for a facility that supports our operations efficiently. The site's natural beauty in New Mexico will enhance the training experience, aligning perfectly with our overall objectives.

Oliver Chen, Analyst

Thank you, Best regards.

Doug Ahrens, CFO

Thank you.

Operator, Operator

Thank you. Our next question comes from Kristine Liwag from Morgan Stanley. Kristine, your line is open.

Kristine Liwag, Analyst

Hey. Good afternoon, guys.

Michael Colglazier, CEO

Hi, Kristine.

Kristine Liwag, Analyst

Hey, Michael. Thanks for the color on Eve. But with a longer time frame and a more complicated work scope, can you provide more color on how much the total enhancement program will cost versus your initial expectations?

Michael Colglazier, CEO

We can comment on that. If we look at the collection of the three vehicles we are working on and what we had planned for, we were initially seeing savings due to favorable contract conditions. However, we've found that the extended timelines are consuming those savings. So we are back to where we originally budgeted. This new extension with Imagine is an incremental cost, but overall, we are still in line with our forecasts.

Kristine Liwag, Analyst

Thanks. And as a follow-up, can you provide some numbers around the Imagine cost increase?

Michael Colglazier, CEO

Cost increases for Imagine are difficult to quantify given it's a multi-year effort and moving into Q4, but it remains a small fraction compared to overall program costs focusing primarily on Eve currently.

Doug Ahrens, CFO

Moreover, the costs associated with Imagine will primarily revolve around engineering resources as it transitions into its testing phase.

Kristine Liwag, Analyst

Thank you for all the color, guys.

Doug Ahrens, CFO

You're welcome. Thank you, Kristine.

Operator, Operator

Thank you. Our next question comes from Pete Osterland from Truist Securities. Pete, your line is open.

Pete Osterland, Analyst

Hey. Good afternoon. I have just got a question for you on R&D expense. So you start commercial operations in the second quarter of next year, are you going to see any meaningful step down regarding the first ship up and running or the work you are doing with Imagine and Delta, would it really be more of just a reaction of resources where you would expect to see R&D continue at or above where it is right now?

Doug Ahrens, CFO

We would expect to see R&D at or above current levels because we will be ramping heavily on the Delta class and the next-generation motherships. Therefore, you will see this upward trend continue into next year.

Michael Colglazier, CEO

Thanks, Pete.

Operator, Operator

Thank you. Currently, we have no further questions. Therefore, I would like to say thank you to our speakers for their time and presentation during this event. And ladies and gentlemen, this concludes today’s conference call. Thank you for being with us today. Have a lovely day ahead. You may disconnect your lines now.