Earnings Call Transcript - SPCE Q4 2024

Operator, Operator

Good afternoon. My name is Louella, and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's Fourth Quarter and Full Year 2024 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. Thank you. I will now turn the call over to Eric Cerny, Vice President of Investor Relations. Please go ahead, sir.

Eric Cerny, Vice President of Investor Relations

Thank you. Good afternoon, everyone. Welcome to Virgin Galactic's fourth quarter and full year 2024 earnings conference call. On the call with me today are Michael Colglazier, Chief Executive Officer; Mike Moses, President of our Spaceline; and Doug Ahrens, Chief Financial Officer. Following our prepared remarks, 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 2 of the presentation for 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, 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 SEC filings made from time to time. You 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 today, whether as a result of new information, future events or otherwise. Please also note that we will refer to certain non-GAAP financial information on today's call. Please refer to our earnings release for a reconciliation of those non-GAAP financial metrics. Turning to our agenda for today's call on Page 3, Michael will open the call with a recap of 2024, followed by an in-depth update on the progress of our SpaceShip program. Mike Moses will join the call, followed by Doug Ahrens, who will provide a financial overview, before we turn the call over to Q&A. With that, I would now like to turn the call over to Michael. Michael, go ahead.

Michael Colglazier, CEO

Thanks, Eric. 2024 marked an inflection point for Virgin Galactic. We opened the year with our prototype SpaceShip, demonstrating the amazing customer experience delivered by Virgin Galactic spaceflights, and we closed 2024 by wrapping up the multiyear design phase of our groundbreaking new SpaceShips. 2025 will be a year of momentum as we are now building the SpaceShips that will dramatically expand human spaceflight with unprecedented levels of safety, rapid reusability and cost efficiency. Fabrication of tools and parts for these ships is well underway, as you'll see in a moment. And our teams are excited to kick off assembly of our first SpaceShip next month at our SpaceShip Factory in Phoenix. The production and launch timeline for the new ships remains on track, with our first commercial research spaceflight expected in the summer of 2026, and the first private astronaut spaceflight in the fall of 2026. We are able to be more specific with projecting our timelines because we now have line of sight to the delivery dates of each and every tool and part that supports assembly. With this work accelerating, we will spend time on today's call showcasing the advances already made, as well as the milestones that will mark our progress going forward. One of the things that I am most excited about has been the transition of Virgin Galactic from an R&D-focused company to a company that builds real assets that drive real value. I'd like to highlight five of these key assets that differentiate our company. Turning to Slide 4. First is our new SpaceShip. These ships will have longer life, faster turnaround times, and lower cost per flight than any human-rated SpaceShip in the world. They are designed to fly twice a week with a lifespan of over 500 spaceflights. This is a breakthrough design and a huge step forward in commercial space. Second is our SpaceShip Factory. We've made the needed non-recurring infrastructure investments, and we are now able to add ships to our fleet quickly and cost-effectively with a start-to-finish cycle time of new SpaceShips measured in months versus years. Third, our rocket system. We have created the world's most powerful hybrid rocket system, which is proudly on display in the Smithsonian. Our rocket system has outstanding safety features that are part of its elegant and reliable design, and the quick change capability of our rocket motor supports the fastest refueling and turnaround time of any single space vehicle that is capable of human spaceflight. Fourth, our customer and client experience, which is beyond compare. We have curated, honed and demonstrated our industry-leading customer experience, delivering human-first spaceflight for private astronauts and unparalleled microgravity environments for space research and space scientists. Our fifth, and enormously valuable asset, is our carrier ship platform, internally known as our mothership, which rarely gets the attention it deserves. So, let's give our carrier ships some airtime as we turn to Slide 5. The first of our carrier ships named Eve has supported every test flight and commercial space flight for Virgin Galactic to date. This aircraft has several incredible capabilities. Its unique design allows it to reach altitudes of over 50,000 feet, and it can carry payloads weighing up to 35,000 pounds. Many aircraft can carry heavyweight to mid-level altitudes, and some aircraft can carry modest payloads above 50,000 feet. But this combination of high-altitude heavy-lift capability is very rare. We believe this is an opportunity. Turning to Slide 6. As we've worked with industry experts to advance the design and planning of our next carrier ship, we believe the same high-altitude heavy-lift capability that supports Virgin Galactic's suborbital spaceflight business can also be of value to government and research customers, especially when a derivative model has extended flight duration. HALE aircraft, HALE being an acronym for high-altitude long-endurance air vehicles, are needed for several types of government and research missions, and we plan to explore the opportunity for a unique HALE-heavy derivative of our carrier platform in the future. But first things first, and the absolute first thing is to bring Virgin Galactic to EBITDA positive operations by putting two of our new SpaceShips into service. So, let's turn to Slide 7 and talk about how we are unlocking the growth and profitability of Virgin Galactic. 2024 was the year we designed our new SpaceShips. 2026 will be the year we fly our new SpaceShips. But 2025 is the year we actually build the first of these amazing new vehicles. With safety above all as the bedrock value of Virgin Galactic, we are working diligently to bring these ships to life with exceptional quality embedded at every stage. One of the places we have invested heavily in quality is the long-lasting aerospace tools that are used to build the parts of our SpaceShip. These tools are key to creating the best possible parts and the most efficient assembly for each and every SpaceShip. These tools are also key to creating long-term value as they will be used again and again to expand our fleet. Slides 8 through 13 of the presentation have been included to provide a glimpse into the incredible progress that's been made by our Virgin Galactic teammates as well as by the hugely dedicated teams at Qarbon Aerospace and Bell Textron. And while I can't name them all on this call, we are extremely appreciative of the outstanding work that is happening across the many companies who make up our extended supply chain. All these groups are excited to be part of commercial SpaceShip development, and they are building momentum as our collective efforts become very visible and tangible. This is an unusual topic for an earnings call, but I think it's important to share this level of detail as it underpins our progress and our forecasted delivery dates. There are three structural elements that come together to build our SpaceShips: the fuselage, the feather, and the wing. If you're following along with the presentation, there will be a graphic of the SpaceShip in the upper right corner of these upcoming slides, and the images on the slide refer to the sections highlighted in green. In Slide 8, you can see the primary fuselage subassembly tools that are located in Qarbon's fabrication facility. These tools are used to fabricate the upper and lower skins of the cabin shell. Moving to Slide 9, you can see the feather subassembly tooling. These tools have highly complex geometries, and they are used to make the largest part in our SpaceShip. Slide 10 shows the bulkhead, which is the major structural element that separates the cabin from the rocket system. The image shows the sheets of carbon fiber being laid up within the bulkhead tool before the entire assembly is sent to the autoclave to cure the part. On Slide 11, we are using an example with the wing to give you a sense of how the entire part fabrication process works. Starting at the left, the first image shows technicians placing layers of carbon fiber in precise patterns with varying thicknesses on the tool. Once this layup process is complete, the tool and the carbon fiber are moved into an autoclave, which is a huge pressurized oven that cures the part in a way that gives our composite structures their strength. On the right, you can see the finished wing part ready for inspection and shipping to the SpaceShip Factory in Phoenix. On Slide 12, you can see the process steps used to create our oxidizer tank. This tank is a critical component of the SpaceShip that holds our liquid oxidizer for the rocket motor, which powers the SpaceShip to space. The oxidizer tank in our prototype ship, Unity, only supported 40 to 50 flights before needing replacement, which would have required extensive maintenance downtime. The first of our new tanks is complete and is shown here in the test stand about to enter cycle testing. Cycle testing will establish the expected lifespan of the tank, which we project to be many times higher than Unity's. This is one example of the many places we have redesigned our SpaceShip to minimize maintenance downtimes and enable multiple space flights per week on a sustained basis. Our next tank will be entering the autoclave this coming week. This tank is designated for our first SpaceShip, and it is on schedule to arrive in Phoenix in time for installation into the fuselage. Slide 13 shows a still frame from a video our Spaceline President, Mike Moses, released this morning highlighting the top 10 things he was excited to see happen over the last month. If you haven't seen it, it's a quick and a fun way to showcase our progress, and I encourage you to watch it on our website or social channels. This will be an ongoing feature for Mike every month or two, and we will make it available to our customers, our investor base, and our fans, so they can track along with our progress. Slide 14 previews several key milestones that will be taking place in 2025 and 2026. In March, we'll start assembly of our first SpaceShip in our new SpaceShip Factory. This moment has been years in the making, and our manufacturing team in Phoenix is chomping at the bit. Building and testing of the first ship continues throughout the year, and we'll be highlighting the many tangible milestones along the way to mark our progress. Our first test flight, a glide flight, is expected in spring 2026, which will lead to our first research spaceflight in summer 2026, and our first private astronaut flight, which is expected in the fall of 2026. It's exciting to see the momentum and visible progress ramping up. As the ship comes together, we will be inviting our customers into our SpaceShip Factory to meet the team and see how the ships that will bring them to space are being built. Speaking of our customers, I was recently talking with one of our future astronauts about how different our approach to building these new SpaceShips is relative to how our prototype SpaceShip was built. She was very curious to understand how we are building and flight testing new SpaceShips so much faster than we had done in the past. I imagine that if a long-term customer is curious, it's likely some of you are as well. So, I've invited Mike Moses, our Spaceline President, to share his perspective on the changes that drive confidence in our current schedule. Over to you, Mike.

Mike Moses, President of Spaceline

Thanks, Michael. I've been part of Virgin Galactic as we built and did the flight testing for SpaceShip Unity. Building and flight testing are two important phases. I want to talk about how we are approaching both of them in a different way with our Delta Class program. Let me start by talking about the build phase, where we have high confidence in the schedule based on three factors: design software, high-quality suppliers, and an experienced team. First, before we even started making tools and parts, we built the SpaceShip digitally using advanced model-based software. This digital twin of our SpaceShip allows for precision in the design, especially as it relates to how various parts will fit together and interact in the real world. Each part is referenced to a fixed plane exactly where it will be placed in the SpaceShip, and this lets us determine everything from where to place the bolts on one part to the bolt holes on the adjacent part to where the brackets need to be placed to hold the wiring in the plumbing. Despite best efforts, sometimes parts don't perfectly line up, so our design allows for certain parts to have tolerance to float and absorb any small deviations that may occur during manufacturing. This allows for a speedy assembly as the parts arrive in Phoenix. Second, our parts are being made by suppliers who are industry leaders, companies that are used to mass producing parts. They have proven processes and controls in place to make and inspect all parts before shipping them to our SpaceShip Factory in Phoenix. Coupled with the digital thread I just mentioned, we are making these Delta SpaceShips in the same manner and with the same suppliers as modern aircraft. By comparison, our prototype SpaceShip Unity was built and assembled in a very linear fashion, often requiring the assembly sequence to pause as we needed to rework parts to ensure the proper fit. Lastly, our team has experience with assembling SpaceShips. The folks setting up and running our SpaceShip Factory are our most experienced technicians and leaders. They built Unity, and we'll be bringing all of these learnings to bear. Our factory itself is laid out based on our past experiences. We have assembly work areas designed to provide an extremely efficient and effective build flow, and our engineering teams will be deployed directly to the shop floor so they can enable rapid resolution of any issues that may arise. In summary, Delta was designed intentionally to allow for an efficient build using aerospace industry-proven methods. The model-based software, the precision of the tools combined with our suppliers' process controls and our highly-experienced assembly team enables a much shorter timeline. Now, let me pivot to discuss what happens once the SpaceShip is built, which is flight testing. It's important to keep in mind that Delta is able to take advantage of the years of flight testing that went into SpaceShip Unity. Unity required moving in small incremental steps to build up the knowledge about the SpaceShip's performance and limits. The test flights of Delta will be much more like regression testing, where we are incrementally expanding how Delta flies, but doing so by comparing it to how we know Unity flew. We aren't forging ahead into unknown territory. Another key difference between Unity and Delta is the use of our Iron Bird, a full-scale engineering test bed of the Delta SpaceShip systems and electronics. Gathering this test data prior to flight test helps shorten the timeline. Finally, while Delta will fly a similar number of test points, its ability to fly more frequently means that we will complete flight testing in months instead of years. These specific differences in how our Delta ships are being built and tested underpin the confidence in our delivery, and we are incredibly excited to send our first Delta ship to space in the summer of next year. With that, I'll hand the call over to our CFO, Doug Ahrens, to share a financial update and outlook.

Doug Ahrens, CFO

Thanks, Mike. Good afternoon, everyone. Turning to Slide 15, in addition to presenting our recent financial results, I'll share my perspective on the tremendous strides we've made to build the assets that will create a powerful economic engine for Virgin Galactic. Starting with the fourth quarter of 2024, we generated revenue of $400,000 from future astronaut membership fees. As our Delta SpaceShip program advances, it drives a favorable trend in operating expenses. Total operating expenses for the fourth quarter were $82 million compared to $117 million in the prior-year period as our spending has shifted from R&D to capital investments in manufacturing assets that will be leveraged to build multiple SpaceShips. Adjusted EBITDA showed a favorable trend as well, being negative $63 million in the fourth quarter compared to negative $84 million in the prior-year period. Free cash flow was negative $117 million in the fourth quarter, at the low-end of the range we guided in our last earnings call. Turning to Slide 16. For the full fiscal year 2024, we generated revenue of $7 million, driven by two commercial spaceflights as well as future astronaut membership fees. Notably, average ticket prices on the last spaceflight rose to $800,000 per seat compared to just over $300,000 per seat in the prior year, indicating the incredible value being delivered to our astronauts through our spaceflight experience. The favorable trends in our financials were even more visible for the full year. As a result of cost reduction efforts and a shift toward investment in manufacturing assets for SpaceShip production, total operating expenses were $384 million in 2024, reflecting a 29% reduction from $538 million in the prior year. We reported a GAAP net loss of $347 million, representing a 31% improvement compared to $502 million in the prior year. Adjusted EBITDA for the year was negative $289 million, an improvement of 32% from negative $427 million in the prior year. Obviously, these improvements are a result of Virgin Galactic moving beyond the heavy R&D phase of SpaceShip design and now building manufacturing assets we will use to cost effectively build our fleet. Michael showed pictures of the tooling that has been created to build SpaceShip components. These are high-quality, value-creating assets that give us the capability to repeatedly build additional SpaceShips at a relatively low variable cost of $50 million to $60 million each, enabling a payback period of under six months for each new SpaceShip. Approximately half of our spending in 2025 is expected to be for one-time capital expenditures for tooling and manufacturing capacity and the production of our first two new Delta Class SpaceShips. Our balance sheet reflects this growing capital investment, which appears as property, plant and equipment, or PP&E. With these investments, the book value of our PP&E currently exceeds $200 million, and the book value of PP&E is expected to continue to grow and to nearly double by the end of 2025. Moving to Slide 17. We ended the year with $657 million in cash, cash equivalents and marketable securities. In 2024, we generated $138 million in gross proceeds through an at-the-market equity offering program. Moving to our projection. Revenue for the first quarter of 2025 is expected to be approximately $400,000 for astronaut membership fees. Forecasted free cash flow for the first quarter of 2025 is expected to be in the range of negative $115 million to $125 million. We expect cash spending to decelerate in 2025 as we complete the investments in tooling and manufacturing capacity to build SpaceShips. We are tightly managing our spending with fiscal discipline across the board. Turning to Slide 18, we are providing a recap of our economic model, which clearly shows the business opportunity in front of us. Right now, we are laser-focused on achieving the economics in the first column with the introduction of our initial fleet of two new Delta Class SpaceShips. With just two SpaceShips and current pricing of $600,000 per seat, we expect to achieve an annualized level of approximately $450 million of revenue. Because of the tremendous value being delivered to our astronauts at current pricing of $600,000 per seat, our contribution margins are forecasted to exceed 80%, resulting in adjusted EBITDA of about $100 million per year with just our first two SpaceShips in service. Profits have the potential to grow exponentially as we add SpaceShips and another launch vehicle to our fleet at Spaceport America in New Mexico. Michael outlined the outstanding progress we are making with SpaceShip production and the key milestones ahead, leading up to commercial spaceflight next year. As we progress through these exciting milestones and march toward profitability with two new SpaceShips, we will continue to evaluate opportunities to optimize our balance sheet and also deliver a winning outcome for all our stakeholders. With that, I'll turn the call back over to Michael.

Michael Colglazier, CEO

Thanks, Doug. As you can see, outstanding progress is underway across the company. As I mentioned at the opening, 2025 is a year of momentum, and that momentum has already begun. Our entire company is laser-focused on delivering these first two Delta SpaceShips in a timely fashion, consistent with the scheduled milestones discussed today. We are driving effective execution across all elements of the program, and we do so with a belief in our mission and excitement to see our first ship in space next summer. Let's open the call for questions.

Operator, Operator

Before we take our first question, I'd like to turn the call over to Eric Cerny from Investor Relations. Please proceed.

Eric Cerny, Vice President of Investor Relations

Thank you. For awareness, we filed a couple of post-effective amendments to our Form S-3 registration statement and a prospective supplement this afternoon. These filings relate to our existing ATM program and our filing status. There is no new ATM program. Thank you, operator. We're ready for the first question.

Greg Konrad, Analyst

Good evening. Appreciate all the detail with the timeline of flights in 2026, but how quickly do you think you can ramp up from there? And then, if we think about your baseline initial fleet model, is that a good baseline for 2027 now that timeline has been locked in just thinking about the speed of flights in 2027?

Michael Colglazier, CEO

Hey, Greg. It's Michael, and I'll give a start to that. And Mike Moses is, as a bonus, with us today, and I'll let him add his two cents as well. So, we will have done the ground testing and the flight testing to give us confidence in the vehicles, and we will have planned and have planned our maintenance strategies to enable these ships to turn on the pace that we've talked about twice a week, pretty much from the time we're ready to put them into private astronaut service, so which we talked about in the fall. And so, to your second part of your question, 2027, we feel we should be pretty much on track for the pace we've been talking. I think it's prudent for us to give ourselves a little bit of pacing, help our teams get ready to what will be truly unprecedented volumes of, not just commercial space, but any humans in space at that volume, and make sure that we are delivering the best customer experience every time. So, we will prudently ramp ourselves up a little bit as we lean into that, but I believe 2027, if not right January 1, at the beginning of that year, we should be up at a pace that we've talked. Mike, anything you'd like to add on that?

Mike Moses, President of Spaceline

Yeah. No, just in support of that, our test campaign, if you're familiar with flight testing, can be made up of several parts, a thing called DT and OT, development test and operational test. And we're able to combine the two. So, while we do our flight testing program, we'll be testing out the operational side of things both in the air and on the ground. And so, you'll see some turnaround times during our flight test program that are fairly short, representative of the commercial service turnaround times, and you'll see some that are longer as we do more detailed data analysis. But the idea being, we get our feet underneath us in the development program, the test program, and then that last part of 2026, so, Michael, as you said, we would hit the ground running at full rate in 2027.

Greg Konrad, Analyst

I would like to follow up on that. In the summer, we will conduct our first research spaceflight, followed by the first private astronaut flight in the fall. Should we anticipate multiple research spaceflights taking place before the first private astronaut flight, or can you clarify what is planned between these two events?

Mike Moses, President of Spaceline

Yeah, Greg. Exactly. I won't give specific guidance on the numbers of flights planned, but, yeah, on the order of six to ten spaceflights to test out all the various aspects, we'll be flying a mix of research payloads, employees, test subjects, checking out the cabin, but really the point is to test out the systems as they go to space. And again, in my remarks, you heard me say, just as a reminder, this isn't the first SpaceShip to go to space, right? So, we're building off the back of Unity. So, we're really just testing the differences that we built into Delta. And so, similar number of test points, but, yeah, I think we'll be able to go rapidly through the test program.

Greg Konrad, Analyst

And then, maybe just one last one. As the schedule has firmed up and you kind of have dates, like, what's your current thinking around reopening the order book, and maybe any indications when we could see that happen?

Michael Colglazier, CEO

It's back to Michael, Greg. I still believe the right timing for people to come on in Virgin Galactic is around a two-year window. And as you, I believe, know, we have a solid book of business that will consume our first year. So, as we reach, I'd say, the end of this year, perhaps the opening of next, but probably the end of this year, I think that's the right time to begin opening up, say, reasonable sized tranches of sales. I don't think we'll just throw the gates open. I think we'll pull in a group at a time and continue to ensure we've got an order book in advance of the capacity of our vehicles going forward.

Michael Leshock, Analyst

Hey. Good afternoon, everyone. I wanted to ask first, maybe on the rocket motor. I know you've been testing the propulsion system for the rocket motor. Have there been any changes in the propulsion system for Delta compared to Unity? Do you expect those to have similar thrust, efficiency and burn time?

Mike Moses, President of Spaceline

Hi, Mike. This is Mike Moses. So, no changes to the motor itself from what we flew in Unity to what we'll be flying in Delta. As you saw in our presentation today, we did make a little bit of change to the tank, propellant tank that holds our liquid oxidizer. So, it's a slightly new design aimed at giving us lifetime. So, basically, more uses out of that tank on the order of hundreds of flights. So, that's a change, but we'll be able to check all that out on the ground before we get into flight. So, as it relates to the motor itself, similar thrust, similar performance profiles, as to what we were doing on Unity.

Michael Leshock, Analyst

And then, on the first Delta flight being for research payloads, as we think about maybe the first year or two of Delta shifts in commercial service, have you considered having a higher percentage of research flights at that higher margin, at least initially, to kind of accelerate your path to positive free cash flow?

Michael Colglazier, CEO

I believe we'll take a balanced approach. Our primary focus will be on maintaining the company's financial health and ensuring that our flights contribute positively to EBITDA. We can achieve this while accommodating a significant number of customers who have been patiently waiting, even though they initially paid lower prices. It's time for us to take them to space. We'll manage both research flights and our existing astronaut backlog. Our Delta ships allow us to estimate around 125 flights per year, each carrying six people, which means we can address our backlog quickly. This will enable us to include a substantial number of research flights at potentially higher rates than those offered earlier, while also accommodating our existing astronauts efficiently. The capacity we have will facilitate both objectives, allowing us to scale from there.

Michael Leshock, Analyst

Okay. And then, lastly for me on the Redwire announcement, it was good to see that. How do you see the commercial research market evolving over the longer-term? Maybe you could talk a bit about that agreement that you have? And just wondering if you see more opportunities for similar contracts going forward, or if you've maybe thought about the size of what that addressable market might be. Thanks.

Michael Colglazier, CEO

It's nice having Mike Moses on this call. He and I look at each other and, like, 'Hey, okay, you're from NASA in your past. Why don't you take that one, and I'll pick up on it.' So, go ahead, Mike.

Mike Moses, President of Spaceline

The agreement with Redwire is excellent and demonstrates not only what we're achieving at Virgin Galactic but also the broader trend in the commercial spaceflight industry, which is seeing significant growth in commercialization opportunities. Our platform may not be unique in its capabilities, but it does provide a distinct approach to what I consider an exciting and transformative aspect: allowing researchers to fly with their experiments. Unlike in other scientific fields, where you conduct experiments in a lab and analyze results yourself, in spaceflight, researchers hand off their work to a professional astronaut aboard the space station, who then conducts the research on their behalf. This human-tended research potential in spaceflight is enormous. The commercial suborbital market enables frequent flights and quick re-flights of research payloads, allowing for more flexibility and lower costs since it doesn't require the same level of automation or long-term presence on a space station. This could be revolutionary for our capabilities. I believe there is significant interest from the research community. The Redwire contract specifically enhances the technological applications we’ll employ, featuring a smart locker equipped with power, data, and communications systems that facilitate greater access to functionality for researchers using our space platform.

Michael Colglazier, CEO

And it's Michael. I believe I've shared this before, but as we watch the government, especially, really push both to the Moon and to Mars, those will have lots of science and research, being able to be leveraged and take advantage of those flights. It's still going to be very expensive to get to the Moon. It's incredibly expensive to get to Mars. And so, any research that's going to be on those ships, for those longer-duration missions wants to be really figured out. And the best way to really figure out is to test and trial and trial. And that's where we believe we have an incredible platform to allow people to refine, maybe adapt, toughen or change their research that is planning to go further places. So, we provide an excellent stepping stone into the longer-duration missions that research is so important to.

Myles Walton, Analyst

Thanks. Good evening.

Michael Colglazier, CEO

Hi, Myles.

Myles Walton, Analyst

I was hoping you could touch on the potential augmentation of the mothership for other applications. I know that your plan is, I think, for 2026 to start on the mothership, too. Is there a way, or do you see a path where co-funding is possible to maybe take away some of that burden as you bring on additional mission profiles?

Michael Colglazier, CEO

Let me provide some context for your question, Myles. We've been consistent in sharing our growth strategy. First, we need to get our first two ships operational at Spaceport America and reach EBITDA-positive operations. After that, as Doug hinted at, we plan to add two more SpaceShips and an additional launch vehicle in New Mexico to build out that initial spaceport, allowing us to leverage fixed costs for significant growth. This constitutes phase one, achieving a fully operational spaceport in New Mexico. Phase two involves replicating this model in other parts of the world. We've made good progress in discussions with partners in Italy, looking at an air force base in the Puglia region as one of our potential locations. This is just one of several possibilities but it’s an exciting opportunity, and we’re making strides there. The tools we've developed and showcased today can also be used to build SpaceShips for the spaceport in Italy. The designs are already completed, making it efficient for us to add additional shifts. So, phase two of our business plan is to establish second spaceports. As for what comes next, there are various possibilities. We’ve internally referred to the mothership, which many might find confusing, but we’re now calling it a SpaceShip launch vehicle, with Eve being our first. We are progressing beyond the initial design phases, making headway into solid preliminary design and conducting necessary trade-offs, with outside experts assisting us. Eve and its derivatives have a remarkable capability to carry heavy payloads to high altitudes, which we’ve discussed. Specifically addressing your question, these carrier ships can transport SpaceShips, but they can also carry pods for various missions, including intelligence, surveillance, and reconnaissance (ISR), as well as testing missions. The current landscape in the U.S. presents several opportunities for heavy payloads at high altitudes. Our derivative would require extended range capabilities for long-endurance operations, and we know how to modify Eve to meet those needs. To your question about potential partnerships, we see this as a valuable opportunity and are actively exploring partnerships, particularly with those involved in military support for the government. However, our primary focus remains on getting the first two ships operational to achieve positive cash flow. We have a dedicated small team examining these carrier ship platforms and how we can collaborate with others, ensuring mutual benefits.

Myles Walton, Analyst

Okay. No, that's crystal clear, Michael. And then, Doug, I think I heard you right, but just correct me if I'm wrong, did you say that 2025 cash consumption would be below the $475 million in '24? And then I think on the last call, you were looking for 2025 first quarter to potentially tick up in cash flow consumption, which doesn't look like it's happening. Has there been sort of resequencing of cash profiles since the last call for the better?

Doug Ahrens, CFO

No. There's no been no real changes other than we talked about a peak in Q1. I think that peak is a little lower than we projected. So then, the trend down for the year will continue and exiting, we had talked about exiting below $100 million in spending by the fourth quarter. So, yes, definitely lower spend in 2025 than 2024.

Tom Nass, Analyst

Hi. It's Tom Nass on for Oliver. I wanted to ask a follow-up on the previous free cash flow question. Between now and summer of 2026 or fall of 2026, how should we expect the trajectory of free cash flow to ramp to positivity over time?

Doug Ahrens, CFO

Thank you for the question, Tom. To provide some perspective, we are currently in a strong position with our balance sheet. We have been building up cash to convert it into assets, which now includes manufacturing capacity, tooling, and our first two SpaceShips. As indicated in our earlier remarks, you can see this growth reflected in our book value, which has exceeded $200 million in property, plant, and equipment, and it will continue to increase significantly. We expect spending to decrease throughout 2024 and into 2025, and by 2026, we will have completed our investment in capital and will be advancing toward commercial operations. As we approach 2026, we will have valuable assets, including multiple SpaceShips, and will be entering commercial service. This will allow us to start seeing cash inflows prior to our flights. At this stage, as we begin commercial service, we are in a very promising position. The company's value will become apparent as we reach these milestones and transition into commercial operations. To summarize, we expect expenditures to decline through 2025, with 2026 being a pivotal year because we will begin commercial service in the summer of that year and initiate cash inflows, moving us towards profitability as we launch spaceflights.

Tom Nass, Analyst

Great. And then, as a follow-up, I wanted to ask about any potential updates you might have on the customer experience side of the business, especially given the potential progress on the second spaceport in Italy. And then, overall, given the potential for a second spaceport, is there any updates to your existing private astronaut TAM estimate?

Michael Colglazier, CEO

I'll take that one, Tom. It's Michael here. One thing, if you watch the top 10 video that Mike Moses put out this morning, it's great. It's quick. It's fun. One of the things you'll see in there is where we had a group from ENAC, the, I'll say, the FAA of Italy, was at Spaceport America. And one of the things that we've done is been able to adapt our pilot simulator. It can get geographically accurate in the world and looked at various flight profiles and ways to go from the base in which we're talking about in Southern Italy. And, boy, if you just even look at that video, you can imagine how glorious it is to not just look over the boot of Italy, but all of what you're seeing in Southern Europe there is pretty spectacular. So that's real progress being made against that. I think I'm looking over to Mike Moses. I think that effort wraps up in 2025, the exploratory effort there. So, we'll have some points of view by the end of this year about how we go forward in Italy, but it's a really good partnership and working relationship. You asked the question about TAM. I think you asked it specifically with the notion of an extra spaceport. I think the ability to go to space from everybody that we've taken up and everybody we've heard that has gone to space is so stunning and so impactful that people will really travel to where the opportunity is. If you wanted to climb Everest, you have to go to Everest. So, I think people will travel for this, and they clearly are. We have our astronaut bases from all across the world, 60-plus countries. With that said, I think being able to see different parts of the world increases the frequency of repeat visitation on this. I think it is not a one and done experience, and I think being able to have the just the visceral experience of going and seeing the earth from space is worth doing multiple times. So, when you can see different parts of the planet, I think that becomes an opportunity to not just go again, but then if you're going again, bringing other people. So that's one way I'll call it the individuals don't change, but the number of times an individual goes to space probably does. And I also think there's just something natural to having deeper penetration of a market when you're kind of around your home base. And so, I would imagine we'll see deeper penetration from Europe. If we have a spaceport in Italy, we'll see deeper penetration from Southeast Asia if we have a spaceport in Southeast Asia. Same thing in the Middle East. So, we're excited to be over multiple places, but, again, right now, we're just focused on New Mexico and bringing that spaceport up to full capacity.

Operator, Operator

Mr. Chen, your line is still open.

Tom Nass, Analyst

Great. Thank you. No more questions for me.

Michael Colglazier, CEO

Thanks, Tom.

Operator, Operator

That concludes our question-and-answer session. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.