Rocket Lab USA, Inc. (NASDAQ:RKLB) Q3 2023 Earnings Call Transcript

Rocket Lab USA, Inc. (NASDAQ:RKLB) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the Rocket Lab Q3 2023 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the call over to Colin Canfield, Head of Investor Relations. Please go ahead.

Colin Canfield: Thank you, Eric. Hello, everyone. We are glad to have you join us for today’s conference call to discuss Rocket Lab’s third quarter 2023 financial results. Before we begin the call, I’d like to remind you that our remarks may contain forward-looking statements that relate to the future performance of the company. And these statements are intended to qualify for the Safe Harbor protection from the liability established by Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and factors that can influence our results are highlighted in today’s press release and others are contained in our filings with the Securities and Exchange Commission. Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments.

Except as required by law the company does not undertake any obligation to update these statements. Our remarks and press release today also contain non-GAAP financial measures within the meaning of Regulation G enacted by the SEC. Included in such release and our supplemental materials are reconciliations of these historical non-GAAP financial measures to the company’s comparable financial measures calculated in accordance with GAAP. This call is also being webcast with the supporting presentation and a replay and copy of the presentation will be available on our website. Our presenters today are Rocket Lab’s Founder and Chief Executive Officer, Peter Beck and Chief Financial Officer, Adam Spice. After our prepared comments, we will take questions.

And now, let me turn the call over to Mr. Beck.

Peter Beck: Thanks, Colin and welcome everybody for joining us. Today’s presentation we will go over our key business accomplishments for the third quarter of 2023 as well as further achievements we have made since the end of the quarter. Adam will then talk through our financial results for the third quarter before covering the financial outlook for Q4 2023. After that, we will take questions and finish today’s call with the near-term conferences we will be attending. Alright. On to what we achieved – excuse me, in the third quarter for the year. Starting with Electron, in July, we launched a mission with several satellites for NASA and others, which was the first of the two back-to-back reusability focused missions. After successfully deploying the first Mission 7 spacecraft, Electron’s first stage was bought back to Earth and recovered from the ocean.

Then we followed that up with our 40th Electron launch and even more recovery milestones, including a return for stage and thea first launch, reflowing Rutherford engine previously flown on our 26 Mission, There and Back Again. The engine performed flawlessly like a new one, completely validating our pursuit of reusability for Electron and setting us up well to refly an entire engine set as our next major reusability goal. Next, I will provide a bit of an update for Electron. Following those two successful flights, as you know, we unfortunately experienced an anomaly on our 41st Mission. It’s important to remember that up until this launch, we have had 37 successful orbital missions to place 171 satellites in orbit. And the past two years have been flawless, with a record of 20 successful missions one after the other.

For Flight 41, as soon as the issue occurred, a team jumped into action in the week since the team has been scarring through thousands of channels of flight data and manufacturing data to determine what was the probable root cause. I will take you through their investigation in detail over the next couple of slides. Working in parallel with the FAA. The FAA has conducted its own review of the mission safety processes, plans and procedures, which concluded that they all worked as they should to keep the public safe and I am pleased to confirm that the FAA has since given us approval to resume launching from Launch Complex One. With their investigation in its final stages and our launch license remaining active, we are fully anticipating to return to flight within the next few weeks.

Following updates and changes to our testing and manufacturing processes, we will be returning to the pad with an even more reliable vehicle to meet our busy launch manifest for the remainder of ‘23 and into ‘24. Now, let me take you through what happened and what we have learned. So here is a slide on the anomaly timeline. The anomaly that ended the mission happened incredibly quickly. From the first action in the chain of events when Electron cutoff its data relay, the team only had 1.6 seconds of anomaly flight data to work with. This was always going to be a highly complex issue to figure out, but with deep diligence and analysis, here is what we have been able to determine. On its 41st Mission launched September 19, from LC-1, it completed all the usual launch milestones through lift-off Max-Q stage separations.

At 151 seconds, the second stage engine tried to ignite, which is confirmed by flight telemetry that showed the ignited pressure is building and the locks and kerosene pump speed rising to pump propellants into the combustion chamber. The voltage levels from the battery packs that power the engine and the motor controllers were nominal at this point and normal at that point of ignition, but within milliseconds, in fact, 151.7 seconds, we get our first indication of the anomaly. The system’s high level voltage levels take a sudden dip and rise of about 100 volts within 30 milliseconds, indicating an energy escape from a system that then led to a full loss of power to the second stage lower avionics, cutting off telemetry and communication with the second stage.

And with that, it was all over. So move on to the issues. So you have to bear with me on this was a little bit to talk about here. But with good visual evidence with the on-boarded cameras and over 12,000 channels of data and this high level timeline to draw from, the investigation narrowed in on the issue. More than 200 sub-investigations were launched to rollout hypothetical causes of the anomaly. After more than 7 weeks of extensive analysis of the mission’s manufacturing test and flight data, the findings of the Rocket Lab investigation team overwhelmingly indicate an unexpected electrical arc occurred within the power system. Shown in the image on the top right, the team did some tricky optical triangulation and image processing of a small shadow on the engine bell caused by the arc.

From that, they are able to pinpoint and retriangulate the failure’s points origin to an area where the two battery packs connect known as the fix-packed to supply the high voltage power. So now, we are all going to take a little lesson in passion law and passion curves. So passion law describes how in partial pressure environments the likelihood of an act to occur changes in high voltage systems depending on the environmental composition. An approximate guide that can then be applied across different situations called the passion curve, which uses the relationship between voltage pressure, multiplied by distance to indicate what the range of danger is for an arc to form through various gases like helium, argon, nitrogen etcetera. So the graph on the bottom right is what’s known as a highly simplified passion curves.

So basically, the easiest way to think about this is if you have a positive in a negative terminal of a battery at 500 volts down here on earth, you could place those two terminals of the battery about 0.03 millimeters or one-third of the thickness of a human here beside each other and they would not create an arc or jumper spark between them. Now, take the same 500-volt battery in terminals and put them in the worst part of the passion curve, which just happens to be just after stage separation and Stage 2 ignition of Electron and the same 500-volt battery in terminals will now act to each other when they are nearly 1 meter apart. So different gases, different pressures affect this distance. And there is also other things like AC ripple that can have a huge negative effect.

But for now, let’s just keep it simple. For Electron, with its high voltage 500-volt power supply, we have to ensure that every connection is essentially hermetically sealed. A tiny pinprick or installation failure will result in arcs given that they can travel over large distances when in the passion curve. One of this is influx and very transient, because as we ascend higher during the second stage burn and go into the high vacuum of space, the arcing distance goes back the other way and it becomes hard to arc again. It’s really just at stage separation where things are the worst and we bought them out on the passion curve. As you can imagine, this is extremely difficult to test for down on earth. We actually currently put the whole rear engine assembly in a vacuum chamber, pull it down and inject gases like argon to try and aggravate the phenomenon.

But even the smallest installation compromise cannot always be detected, especially when you compile that with other factors like AC ripple and trace gases. Excuse me. So, now that everybody understands passion curves during the second stage ignition, we are at the worst part of the curve and we had a small concentration of helium in the vicinity of the upper stage, which is normal and a high voltage AC ripple that lowers the spark threshold even lower and a tiny undetectable fault in the HV loom installation. All of which – excuse me, all of which combined allowed for an arc to briefly occur. If any of these things were not present, then the failure would not have occurred. All four had to be there. And to be honest, with all the testing we do before flight, you would also have to be incredibly unlucky to have the installation failure point, also line up with an electrical path to be able to act a chassis.

And look, I don’t generally believe in luck as an engineer, but in this instance, I would say that so many things had to line up that most people would say that this – the current probability of this occurring would be largely improbable. So with that, now that we kind of understand and we have explained the failure, what are we going to do to get back to flight? So the failure is obviously a highly complex set of conditions that are extremely difficult to predict. A team’s top priority through the investigation has been to find a way to make sure that this never happens again. And as a result, there is a couple of key corrective measures. The first is to increase the fidelity of a stage level vacuum testing. We now have a much more sensitive instruments implemented in the pre-flight test both at the component level and the stage level, that can sense partial discharge all the way down to a picocoulomb now.

This gives us much more confidence in the testing. However, I was not happy to stop there. And so we have implemented a rather brute force solution. What we have done is seal up the battery frame, that contains all the high voltage connections and equipment and then pressurize, it to about 0.5 of PSI. I will draw your attention to the graph on the top right. Surprise, surprise, it’s another passion curve that shows that by pressurizing the high voltage area, we shift the passion curve to the left out of the red zone and into the green zone, meaning basically, we are back to what it’s like on earth, where it’s not really possible for big archy distances to occur. Now, this has been a lot of work to implement by the team and it’s a fairly extreme solution.

But really, I thought of the only way we can put the passion law well back in its box. So the best way to solve a problem in my opinion is always to eliminate the problem. And that’s what we have done. Getting to the bottom of the issue and back to the pad for our customers has been the team’s number one priority. It’s been incredible to witness their perseverance, dedication over these past few weeks, not only on the anomaly investigation, but in the work that they have completed in parallel to make sure that we are good to go as soon as we get back to the pad. The launch window for our return to flight mission will open on November 28 and extend into December. This dedicated mission will be for iQPS, a Japanese-based Earth imaging company, with the rocket for that mission going through pre-launch testing on the pad at launch complex right now.

So move on to Electron launch manifest. So in 2024, we have a really big year ahead of us. Even with air pores in operations, Electron remains the world’s most frequently launch small orbital rocket. Dedicated missions for small satellites continue to experience strong demand, which we have seen in multiple buys by returning customers and constellation operators. In fact, we have booked out Electron launches next year completely booked. We see the market for the Electron product being very strong and this manifest validates that. Frequent launch opportunities, flexibility over schedule and control over orbiter deployment are what our customers are looking for and that’s what Electron has been providing and will continue to provide in the new year.

And all that, all we have to do really in – with our 2024 manifest is execute as and with anything in the space industry. By ramping Electron production and keeping on top of demand with recent acquisitions as well as continuous improvement in automation across our manufacturing processes, we look to continue improving on our already impressive performance in manufacturing. We also note that the scaling is coming with improved gross margins in Q3 2023, we achieved a 27% GAAP launch gross margin, which should look to enable to progress our profitability targets for Electron as we drive scale and efficiency into the business. I now want to take you through and highlight some of their accomplishments in Q4. So Neutron Structures, we will start with a Neutron update.

Earlier this quarter, we reached a major milestone and had frosty second stage tank, up on the stand for structural and cryogenic testing, which is really a key marker for our Neutron program development, an embedded program. The team’s job was to push the tank to its absolute limits by loading it up with cryogenic fluids and test to destruction. Something like 96,000 liters of liquid nitrogen was used for this test campaign and an exploded tank in this instance is very much a good thing and what we wanted to achieve. The team took the tank past me up or maximum expected operation pressure at more than 7x atmospheric pressure. What they have learned in the campaign has been applied to the next Stage 2 tank and currently under production, really to vacant structural reliability early as we get closer to our date with the launch pad.

Speaking of baking, this is quite literally what carbon composites team has been up to, with their next full scale Neutron structures and components. The images on this slide here show you the scale of some of the in-tank devices being produced more than 7 feet in diameter for those circular propellant management devices and the Stage 2 dome being eliminated in the bottom section. Most of Neutron’s fixed fairing sections are coming together nicely. And of course, we have another second stage Neutron Tank being built for our next test stint and – to go on our next test in the first half of ‘24. And then over to Neutron’s Archimedes engine, another test we are celebrating was a critical combustion test that the team achieved with Neutron’s Archimedes engine.

There is plenty of benefits to pursuing methane LOX propellants, but it does come with some of its own challenges. The critical piece really and one of the challenges was in using methane and liquid oxygen for Archimedes is getting the pre-burner dialed in, where generally you want a fuel mixture ratio in a chamber of something like 3:1 oxygen fuel, we are running an oxygen rich pre-burner cycle on Archimedes that forces us to flow all of our oxygen through the combustion device. Therefore, our ideal mix is something between 60 to 100 to 1, which is a challenging thing to achieve without all the excess oxygen extinguishing combustion. Archimedes also has an extremely benign operating point, making it great for reliability and reusability, but it does mean that the pressures are low and ironically harder for the pre-burner.

But I am happy to say that we met all the operating points that we wanted to on those tests. That was a great accomplishment by the team. At the same time, the Archimedes team had been producing and testing full scale hardware like valves, chambers, injectors, controllers and assemblies in preparation for development and propulsion tests making for a really impressive sight when all the pieces come together, like you see in the photo on the side as well. Over to Neutron infrastructure, so supporting infrastructure for Neutron has also scaled quickly over the past few months. Ground works are being completed in Virginia, where our Neutron pad will be. Test facilities and support services will be based there as well. And we are ready for construction to begin at our launch site located close to our key government customers, which will enjoy the benefits of a less congested launch site then obviously the case.

In Q4, we opened our new engine development center in Long Beach that will support the development and production of the Archimedes engine. And once the engines are completed at EDC, they will to go to testing at our standard NASA Stennis Space Center, where the Neutron team has been busy with site improvements to accept the engine for hot fires. And then finally, Neutron timeline, all of these achievements across Q3 and Q4 that I have mentioned and several others are shown here have been great to tick off along with – along the Neutron timeline. We’ve completed second stage tank testing, printed key Archimedes engine parts and components had success with our combustion testing devices, completed qualification testing of our composite over our pressure vessel, run through separation lock deployment testing and stage pusher system testing, completed our actuator microcontroller testing, finished test on our power management module, confirm Neutron’s engine and stage controller functions that should completed avionics controller testing, successfully tested the vehicle’s thermal protection system, setup a test rig for incoming Neutron and system testing.

The team is obviously working hard to keep our ambitious schedule for the rest of the year and into ‘24 with the same – with some of the next year milestones to look out for including first stage qualification tank test completed, Archimedes engine testing campaign and the first simulated flight orbit with our hardware connected to our flight computers. Now, we will continue to provide updates on how Neutron is tracking outside our quarterly reviews. Beyond Electron and Neutron, our hypersonic test vehicle, HASTE has seen significant amounts of interest from new and returning government customers looking to further develop the nation’s hypersonic testing capability. We have actually booked 7 launch contracts in the 6 months since HASTE program was introduced, including our latest mission announced today.

HASTE launched from Virginia from the U.S Department of Defense Innovation Unit, this mission will demonstrate HASTE direct inject capability by deploying its payload during ascent, while still within the earth atmosphere, a long sought-after capability for the nation’s strategic defense and civil needs at a fraction of the cost of the current full scale tests. On to space systems now and we have a new spacecraft order on the books for our confidential constellation customer that builds on a strong demand for our satellite products. This particular spacecraft will include a full suite of our own satellite components and subsystems, including star trackers reaction wheel solar panels, radios, flight software and so on and so forth. This contract in particular speaks to the popularity and configurability of our spacecraft bus, but the confidence also in our satellite components in the market and our ability to grow an end-to-end mission grow as an end-to-end mission partner for the space industry.

Now importantly, we will also be managing the mission’s operations and a further demonstration of our end-to-end business model of building and operating satellites that we build for our customers. Continuous space systems to our largest space system contract now, the $143 million contract we have with MDA global staff. We are getting close to the delivery of our first of 17 spacecraft for the program by the end of Q1 next year. Having cleared significant milestones in the contract in the past few months, the spacecraft critical design review and delivery of a structural thermal model for the customer, we expect to recognize revenue from those invoice payments to MDA in the fourth quarter of 2023. This sets the stage for a more meaningful revenue contribution from this contract as we enter 2024.

We continue to pursue increasingly complex and financially needle moving space system opportunities and are encouraged by progress being made in this part of our business. And we believe that these pursuits position us to continue scaling as an end-to-end space solutions leader. Lastly, in space systems updates, we are proud to have directly supported the success of NASA’s groundbreaking Psyche mission launched in October, with their solar panels powering the spacecraft on its 6-year journey into deep space. These solar panels we provided to the mission hold the record for being the largest solar panels ever installed on a NASA JPL satellite, which we are immensely proud of. And then finally into post-quarter achievements. I am thrilled to welcome retired U.S. Space Force Lieutenant General, Nina Armagno to Rocket Lab’s Board of Directors.

Lieutenant General Armagno served more than 35 years in leadership positions across the U.S. Space Force and U.S. Space Force, including U.S Air Force and U.S. Space Force including being the first Lieutenant General Officer appointed to and Director of Staff for the Space Force where she established America’s first new military branch in 72 years. She has had an accomplished and distinguished career in the military and will be an invaluable asset to the board. And then over to Adam for the third quarter financial highlights.

Adam Spice: Thanks, Pete. Third quarter 2023 revenue was $67.7 million, which is near the high-end of our prior revised guidance of $66 million to $68 million. Third quarter 2023 revenue reflects sequential growth of 9%, the result of three launches and continued growth in our space systems business. Our Launch Services segment delivered revenue of $21.3 million in the quarter from three launches and is in line with post-anomaly revised guidance of $22 million, with the slight under edge due to timing of revenue under our launch study contracting. The resulting average revenue per launch came in at $7.1 million below our target average selling price of $7.5 million for 2023 and the result of less favorable mix in the quarter.

Our current backlog continues to reflect our target average revenue per launch with variability tied to LSA volume commitments, launch location and unique mission assurance requirements. Our Space System segment delivered $46.3 million in the quarter, which was up 17% sequentially and modestly above the high-end of our prior revised guidance range of $44 million to $46 million driven by a step-up in our MDA contract revenue offset somewhat by a reduction in our components business, which is poised to rebound in the fourth quarter guide that we will discuss later. Now turning to gross margin. GAAP gross margin for the third quarter was 22.1% above the high-end of our prior revised guidance range of 18% to 20%. Non-GAAP gross margin for the third quarter was 29.5%, which was also above our prior revised guidance range of 26% to 28%.

GAAP and non-GAAP gross margin improvements relative to our revised Q3 2023 guidance reflect continued efficiencies in both our launch and satellite manufacturing businesses. We ended Q3 with production weighted headcount of 816, up 49 from the prior quarter. We also note that non-GAAP gross margins reflect a 430 basis point improvement versus Q2 2023 when adjusted for Q2’s one-time $1.1 million release of a loss reserve related to a legacy launch contract. We are encouraged by the trend in gross margin improvement and expect this trend to continue into 2024 as we return to launch and resume growth Electron’s launch cadence against our strong and growing launch backlog. Turning to backlog, we ended Q3 2023 with $582.4 million of total backlog, with launch backlog of $260.7 million and Space Systems backlog of $331.7 million.

Relative to Q2 2023, total backlog was up 9% sequentially or $48.1 million, thanks to healthy bookings at our launch business partially offset by declines in Space Systems. For launch specifically, backlog was up 55% sequentially or $88.8 million as Electron continues to benefit from return orders of both commercial and HASTE customers. For Space Systems, backlog was down 11% sequentially or $40.7 million as we continue to work through our larger satellite manufacturing contracts and the timing of additions to Space Systems backlog are lumpy due to the increasingly – increasing complexity and magnitude of these contract opportunities. We expect approximately 57% of current backlog to be recognized as revenues within 12 months and expect continued meaningful growth in our backlog as we exit 2023 and progress through 2024, thanks to continued man for Electron platform as well as anticipated orders for significant satellite manufacturing opportunities we have aggressively been pursuing over the last year or so.

Turning to operating expenses. GAAP operating expenses for the third quarter of 2023 were $53.8 million modestly above the high-end of our original and unrevised guidance range of $51 million to $53 million. Non-GAAP operating expenses for the third quarter were $39.8 million, which is at the high end of our original and unrevised guidance range of $38 million to $40 million. The decreases in both GAAP and non-GAAP operating expenses versus the second quarter of 2023 were primarily driven by R&D credits related to Neutron upper stage development from our U.S. government partners partially offset by higher Neutron development spending, increases in headcount and higher depreciation and amortization expenses. In SG&A, GAAP expenses decreased $1.5 million quarter-on-quarter, due to a change in continued consideration related to our PSC acquisition due to a lower average stock price in the quarter.

Non-GAAP SG&A expenses increased by $700,000 primarily due to increases in headcount, along with the step up in depreciation and amortization primarily related to additions to corporate IT and security infrastructure to further enable efficient scaling of the business. Q3 ending SG&A headcount was 236, representing an increase of 8 from the prior quarter. In R&D specifically, GAAP expenses were down $4.4 million quarter-on-quarter to the increased contract R&D credits related to previously referenced Neutron upper stage development partially offset by step-up in Neutron development spending, non-GAAP expenses were down $4.3 million quarter-on-quarter driven similarly to GAAP expenses by Neutron related contra R&D credit and development spend.

Q3 ending R&D headcount was 520, representing an increase of 2 from the prior quarter. In summary, total third quarter headcount was 1,572, up 59 heads from the prior quarter. Purchase of property, equipment and capitalized software licenses was $21 million in the third quarter of 2023, an increase from $10.6 million in the second quarter of 2023. The sequential increase was due to our continued investment in Neutron research, testing and production infrastructure projects, along with its expansion of our satellite production and space solar solutions capacity. Cash consumed from operations was $25.2 million in the third quarter of 2023 compared to $6.1 million in the second quarter of 2023. The sequential increase of $19.1 million was driven primarily by timing of receipts and payments associated with our satellite production programs, which for some of our larger programs have significant periods between milestone achievement, invoicing and ultimately collections, which at the end of the day are purely timing related.

More specifically, Q2 was a quarter that benefited from a working capital dynamic, where we collected on material milestone invoices that were invoiced in the prior quarter, where payment terms are more lengthy in our target of 30 to 45 days. Cash consumed by asset acquisition and business combinations was $800,000 in third quarter of 2023, a decrease from $16.1 million in the second quarter of 2023. The sequential decrease of $15.3 million was driven by the majority of our Virgin Orbit select asset acquisitions being realized in the second quarter. Overall, non-GAAP free cash flow defined as GAAP operating cash flow reduced by purchases of property equipment and capitalized software in the third quarter of 2023 was a use of $47 million compared to $16.7 million in the second quarter of 2023.

For a more apples to apples comparison of $32.8 million when including the impact of our acquisition of select Virgin Orbit assets, most of which were classified as PP&E. The material step-up and negative non-cash – and negative free cash flow was as noted in my early GAAP operating and cash flow commentary was a result of lumpy timing of payments and receipts associated with our Space Systems manufacturing operations and we expect a reversal of this negative working capital cycle in early 2024. The ending balance of cash, cash equivalents, restricted cash and marketable securities was $374 million at the end of the third quarter of 2023. Reflecting in the past four quarters, we have made meaningful progress towards our long-term financial model.

We have delivered consistent revenue growth. And when adjusting for the one-time release of a loss reserve in Q2, gross margin expansion and shrinking adjusted EBITDA losses each quarter. With our strong launch manifest and greater contribution from Space Systems contract execution in 2024 we expect this trend to continue. Overall, we expect gross margin trends will continue to improve over time, thanks to the same factors that have helped drive improvement we’ve seen this year. In terms of when we can get to adjusted EBITDA breakeven from Neutron investment, especially R&D spend continues to be the pacing item to achieving this critical milestone. Although we view that Rocket Lab has demonstrated that its existing businesses are on a trajectory to offset the weight of this Neutron investment spend.

With that, let’s turn to our guidance for the fourth quarter of 2023. We expect revenue in the fourth quarter to range between $65 million and $69 million, which reflects $48.5 million to $52.5 million of contribution from Space Systems and $16.5 million from launch services, which assumes two launches. As referenced earlier, based on our manifested launch backlog, we now expect 11 launches in 2023 and 22 launches in 2024, with an expectation that our average selling price that continues to trend towards our current target of $7.5 million through the remainder of 2023 and into 2024. We expect fourth quarter GAAP gross margin to range between 24% to 26% and non-GAAP gross margin to range between 30% to 32%. These forecasts of GAAP and non-GAAP gross margin improvements reflect a favorable mix between launch and space systems, along with a favorable mix within space systems.

We expect fourth quarter GAAP operating expenses to range between $61 million and $63 million and non-GAAP operating expenses to range between $50 million and $52 million. The quarter-on-quarter increases are driven primarily by having recognized a substantial amount of contra R&D credit related to our Neutron upper stage development agreement with the U.S. Space Force in the prior quarter, along with increases in staff costs, prototyping and material spend a we continue ramping our Neutron development program. We expect fourth quarter GAAP and non-GAAP net interest expense to be $2 million. We expect fourth quarter adjusted EBITDA loss to range between $23 million and $27 million and basic shares outstanding to be approximately 487 million shares.

Additionally, the unique situation created by the anomaly and related pent-up impacts to the launch manifest as we prepare to return to flight and head into 2024, combined with better visibility on Space Systems program, execution and revenue recognition as we prepare to ship the first spacecraft against the MDA Globalstar program in the middle of the first half of 2024 provides us with the visibility and confidence to estimate Q1 2024 revenue to range between $95 million and $105 million putting in sight our first $100 million revenue quarter. This forecast would be the result of 4 to 5 launches in the quarter yielding between $30 million and $37 million of launch revenue and $65 million to $68 million of contribution from Space Systems. This would represent a significant milestone for the company.

And we believe a strong endorsement of the end-to-end space solutions business model we are delivering on. And with that, we will hand the call over to the operator for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Edison Yu with Deutsche Bank. Please go ahead.

Edison Yu: Thanks for taking our questions, and appreciate the level of detail provided on the investigation. First question on the manifest for next year, can you give us a sense of your confidence level on the 22? Is that sort of your base case? Or in other words, the ranges are 20 to 24? And the midpoint would be 22? Or do you need kind of everything to go right to hit that 22 target?

Peter Beck: Well, hey, listen, it is with any launch contract, right. We are always somewhat susceptible to factors that we can’t control. Like customer readiness is always a big one, the customers need to turn up with the satellites on time. We’re there. And of course as I mentioned, in my commentary, we have to execute from a manufacturing standpoint. But I think the key takeaway there is we have a completely sold-out manifests for next year, at a number that is really solid. So I would say that we have to execute. And there’s always some uncertainty from some things that we don’t control. But that’s certainly what we’re targeting.

Edison Yu: Understood. And then just a follow-up to that, can you give us a sense or maybe a bridge on the margin in launch? You got a very, very good quarter actually, in 3Q? How does that margin look if you can get to that 22 launch cadence?

Adam Spice: I’ll take it that, Pete. So yes, I mean, we’ve long stated that we get to our target model for non-GAAP gross margins of around 50%, that requires launching 24x a year. So, we’re going to make significant progress towards that, as we launched, as we kind of strive to hit that 22 number next year. So, if you look at any given quarter, if we have, again, six launches in the quarter, that should be at or very close to our long-term 50% non-GAAP gross margin target.

Edison Yu: Got it. And if I can just sneak one more in on Neutron kind of the milestones, do we feel comfortable with the timeline? Should we interpret that as you guys feeling comfortable with the timeline on next year?

Peter Beck: Well, there’s still a lot of work to go and the year is not finished yet. So we’re pushing hard, but at this stage, we’re not making any adjustments to our predicted timeline, but I’m just highlight there are still some really significant tests to be completed. But right now, we’re not making any major changes.

Edison Yu: Got it. Thank you very much.

Operator: Thank you. Your next question comes from line of Matt Akers with Wells Fargo. Please go ahead.

Matt Akers: Yes. Hey, guys. Good afternoon. Thanks for the question. I wanted to ask on Neutron. After that first launch, what sort of rate do you envision doing Neutron launches? And what rate are you kind of capacitors to support now at what point would you need to sort of have capacity there?

Peter Beck: Yes. Hi, Matt. It’s good question. So we’re not trying to do anything Herculean on Neutron. We’ve lived through the pain of creating a launch vehicle and standing it up and bring it in to production. So it follows a pretty similar cadence profile to what we are able to achieve with Electron. So, we will do a test flight or a couple of test flights, and then move into sort of 3 or 4-year and then continue to bootstrap and grow that. And really follow the same model that we followed with Electron, where we launch a little bit, we generate some revenue, and we make improvements to the vehicle, and we make improvements to the infrastructure. And we found that to be by far the most cost effective way rather than going out and building a giant factory to do huge volumes from day 1.

And just consuming tremendous amount of capital, we have kind of always bootstrap their way along and increased flight rate and cadence along with that end facilities along with that.

Matt Akers: Got it. Thanks that’s helpful. And then if I could ask one, I guess free cash flow. How much sort of additional expense was there around kind of the investigation in Q3 and maybe into Q4 and sort of how are you thinking about free cash flow into 2024?

Adam Spice: Yes, Matt, we didn’t see a tremendous amount of – I would say resource diversion, a lot of these kind of anomaly investigations take a select group of very capable people to dive in and do the analysis and investigation there. There’s not a lot of capital spend associated with it. And we continue to keep our foot on the gas when it came to production of Electron. So the anomaly investigates yourself really won’t have any kind of noticeable material effect on cash flow in the fourth quarter. I think the biggest thing for us for cash flow is really around timing for the big space systems contracts. I mean, if you look at our launch business, people – typical model is you get the people they pay a 10% deposit at contract signing, and then there’s milestone payments along the way.

And typically, where there’s only 10% left to collect at the time that we actually launch the mission. So that’s always been a good cash flow model. It’s just all about that, getting that business to scale, which again, we’re making great strides and being able to do. When it comes to space systems, they’re large contracts, I mentioned lumpy a few times in prepared commentary. And that’s really, really true, because you can have the achievement, you have some delays of achievement of critical design milestones, you going to get through those gates before, you can turn that over into the AIT phase of the program, you’re doing the assembly integration test side of it. And so you can have periods of depending what your payment terms are with your customers, and our largest space systems contracts, and we were dealing with pretty sophisticated organizations that had pretty tough terms, it was we were chasing our first large and meaningful space systems contracts.

So we weren’t necessarily in the best position to negotiate those types of terms to our advantage. But it leads to some – I would say some, a little bit of interim to near-term pain on that side, we’ve experienced that in 2023, we expect that dynamic from the operating parts of our business to turn around and the much stronger from a cash flow perspective in 2024. Now we’ll continue to see consumption when it comes to Neutron, particularly around prototyping, quickly run infrastructure, because we still have the infrastructure investments that we need to continue to make to prepare for that first launch and at the end of 2024.

Matt Akers: That’s great. Thanks for the color.

Operator: Thank you. Your next question comes from line of Cai von Rumohr with TD Cowen. Please go ahead.

Cai von Rumohr: Yes. Thanks so much. So first quarter, it looks like you have a target price of $7.5 million. Is that the price likely to be for the entire year or given the vigor and demand? Are you guys increasing prices as we move forward and if so, by how much?

Adam Spice: Yes, it’s a good question, Cai. So the manifest that we showed in the deck, I mean, that is confirmed backlog pricing is not in question, right. So that does drive to our long-term pricing model in 2024. So that’s all contracts, of course, that we can continue to add to the backlog. I – as we move forward, we certainly are seeing an environment that allows us to drive for firmer pricing, as being one of the few truly operational launch providers, we do have, we do see pricing power coming in, in our direction. And so we expect that longer-term, we will see upward movement to the ASP for Electron launches. But I would say again, there’s really no volatility, the ones that we showed in the manifest, because they’re all kind of they’re booked and they’re their firm price.