Terran Orbital Corporation (NYSE:LLAP) Q1 2023 Earnings Call Transcript May 15, 2023

Terran Orbital Corporation misses on earnings expectations. Reported EPS is $-0.31 EPS, expectations were $-0.25.

Operator: Hello, and welcome to the Terran Orbital First Quarter 2023 Earnings Call. My name is Elliott and I’ll be coordinating your call today. [Operator Instructions] I’d now like to hand over to Jonathan Siegmann, Senior Vice President of Corporate Development. The floor is yours, please go ahead.

Jonathan Siegmann: Thank you, Elliott. Good morning, everyone, thank you for joining Terran Orbital’s first quarter 2023 earnings call. With me this morning are Marc Bell, Co-Founder and Chairman and Chief Executive Officer of Terran Orbital Corporation; and Gary Hobart, Chief Financial Officer of Terran Orbital Corporation. Marc will provide a business update and highlights for the past quarter, and then Gary will review the quarterly results. Terran Orbital’s executive team will then be available to answer your questions. During today’s call, we may make certain forward-looking statements. These statements are based on our current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from forward-looking statements made on this call.

For more information about these risks and uncertainties, please refer to the company’s filings with the Securities and Exchange Commission, each of which can be found on our website, www.terranorbital.com. Readers are cautioned not to put any 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. You can find reconciliations of the non-GAAP financial measures with the most comparable GAAP measures in our earnings press release. With that, I will turn it over to Marc.

Marc Bell: Thank you, John. And thank you everyone for joining our first quarter 2023 earnings conference call. I am excited with our year-to-date performance especially our order flow. A new, even broader mix of customers are increasingly looking to Terran Orbital with the design and manufacturing other satellite constellation and new space based projects. Customers are choosing us because of our 10-year plus track record of success, our state-of-the-art design and mission breadth, our rapid pace increased manufacturing speed, and our world-class quality. We added a $2.4 billion, 300 satellite order from Rivada Space Networks in February, which we believe is the largest single constellation award — commercial constellation award ever.

This has driven our March quarter end backlog to over $2.5 billion. In addition, we are pleased to announce today that we have signed a new $87 million, 16 satellite order with yet another new customer. This award combined with several other awards we recently signed brings our total order book to over 30 programs. More to say on this, but our pipeline to order conversion year-to-date is a standout highlight. Now turning to our overall performance and quarterly updates. First, I am happy to announce that our team’s positive momentum continues across our Space Development Agency contracts. After our successful delivery last year of our 10 Transport Layer Tranche 0 satellite to our partner, Lockheed Martin, we are very much looking forward to their launch next month.

These Tranche 0 satellites will demonstrate the low-latency communication links to support the warfighter with a resilient network of integrated capabilities from low earth orbit. As a reminder, the SDA’s transportation layer is a mesh communication network that will use 100s of low-earth orbiting satellite to connect with other satellite layers plus critical ground, air and sea-based systems. As such, the transport layer is foundational to the SDA-based architecture for this decade and beyond. We are pleased to contribute it’s critical National Security mission through the work on the first award to this layer, known as Tranche 0 and Tranche 1. Our team is hard at work manufacturing SDA’s Transport Layer Tranche 1, their 42 satellite order, and we are pleased to confirm that we are on track to begin delivery of the first batch of these satellites during 2023, and the balance by the end of the first quarter of 2024.

Tranche 1 will be the first operational generation of the proliferated warfighter space architecture and it’s schedule for deployment by the SDA in late-2024. The Space Development Agency strategy for construction of this advanced base architecture, which will consist of 100s of satellites, has been to rapidly acquire and deploy lower orbit satellite [confronted] (ph) every two years. The SDA recently issued a solicitation with Tranche 2 satellite, and we expect this award to be announced later this year. We believe our experience and track record with Tranche 0 and Tranche 1 in partnership with Lockheed Martin, differentiate us and position us well for additional awards for the Space Development Agency. Many of you are familiar with our relationship with Lockheed Martin.

This seven-plus year strategic partnership was recently extended through 2035, and we continue leveraging the full spectrum of our combined capabilities to support the Space Development Agency. Tranche 2 is a transport layer, along with the space development layer opportunity remain key pursuits for our team over the next 12 months. Second, we are very pleased to update you on the company’s record $2.4 billion contract, design, manufacture, integrate and test 300 satellites for Rivada Space Network. As we announced last month, we have received a further milestone payment along with completion of the screening of our industrial partner. This vision will consist in satellites orbiting a low-earth orbit on multiple planes using laser communication terminal.

Our initial $2.4 billion contract covers only the first 300 satellites. The contract includes an option for Rivada to purchase an additional 300 satellites at an additional cost. The contract is broadly grouped into a design phase and a build phase. We are currently executing on the design phase, which includes a — demonstrate emission that will support the verification of gateway less transmission from one user to another, routed within a small network of four satellites in space Mission operations for the on-orbit demonstration satellites will be conducted from Terran Orbital’s new state-of-the-art satellite — new state-of-the-art satellite operations control center, which is currently under construction in Irvine, California. An additional 25 satellites will be built and commissioned as part of this phase.

The build phase which is delivering the balance of the 300 sellers in late 2025 and the first-half of 2026. We are still ramping this program and recently received a milestone payment, Rivada revenues are projected to steadily ramp up in the coming months. Third, we are thrilled to announce today an $87 million award from a new customer for 16 low-earth orbit satellites. We are pleased to be partnering with this new customer, who has a long history of advancing space technology. We see ourselves not just as a pioneer, but as an industry leader and a supplier of choice, which is validated by our most recent constellation contract awards. Our backlog and pipeline both remained robust and as of March 31, our backlog stood at $2.5 billion, representing orders for over 360 satellites and our pipeline has $11.8 billion.

These March 31 metrics includes a successful conversion of the Rivada Space contract from pipeline to backlog, but exclude today’s announced award. In addition to the programs we noted, we have other active programs, many of which are precursor to larger constellation both for the existing customers and as well as new and other customers will remain, who value our deep mission experience and track record. These missions and others we are pursuing are diverse across customers, channel and mission. Including today is the prototyping and development of satellite and supporting a larger potential constellation. While many of these programs are undisclosed today, they serve the seed — as a seed corn for a larger potential constellation awards tomorrow.

Our announced Lockheed Martin LINUSS mission success of two Terran Orbital geosynchronous satellite completing the Rendezvous and Proximity operation demonstration is just one example of the revolutionary program our team is currently working on. Another is our record-setting NASA Pathfinder technology demonstrated three satellites, which enabled a record 200 gigabits per second space to ground optical link. Low-latency, secured communication, proliferated systems, speed to orbit, technology innovation, each of these are customer demands for which we are delivering advances [Technical Difficulty]. Supporting all of these orders and opportunities is our vertically-integrated scale design and manufacturing capability. We are investing in world-class production system to support execution of our 360 satellites backlog and over 2,600 satellites identified in our pipeline.

Our new facility, which we call 50 Tech in Irvine, California adds a 60,000 square feet of workspace and brings our manufacturing capacity of approximately 20 satellites per month, once the facility is fully commissioned, later this year. Critically, this includes testing equipment, printed circuit board assembly equipment, and robotic and automated assembly lines to vastly improve throughput, quality and speed. And we are pleased to announce we are progressing with the development of our recently announced 90,000 square foot facility also in Irvine, which we expect to increase our capacity to multiples of our current capacity after commissioning in late 2024. Importantly, this new capacity includes 36-foot highway for assembly and integration of significantly larger satellites.

In summary, Terran Orbital has established itself as a leading supplier of the enabling satellite infrastructure of the new space page. Constellations of smaller, low-earth orbiting satellites are the preferred architecture of the future. What used to cost billions and take a decade to launch, Terran Orbital is building at a fraction of the cost in months. Our investments in scale, vertical integration and automation leverages our 10-year legacy. Our production system is designed to deliver satellites at a mass scale and at a speed and quantity our customers desire, at a price point to stimulate new markets and at margins to reward our shareholders. We are thrilled our strategy was recognized by the two new franchise contract awards in recent months.

Now let me turn it over to Gary to review our financial performance in the quarter and provide a financial outlook for the full-year. Gary?

Gary Hobart: Thank you, Marc, and good morning, everyone. I’m happy to report that in the first quarter, we achieved multiple milestones in satellite production, resulting in a record first quarter revenue of $28.2 million for the first quarter of 2023. This is a 115% increase over the same period of the prior year. As a reminder, we recognize revenue on most of our programs on a percentage of completion basis, and adjustments and changes to our contract values and estimated cost of completions or EACs have a cumulative impact in the period in which we make the adjustment. In the first quarter, adjustments to EACs increased revenues by an estimated $800,000. Gross loss was $1.4 million for the first quarter, compared to $2.8 million in the same quarter in 2022.

Excluding share-based compensation and depreciation and amortization included in cost of sales, adjusted gross profit in the first quarter was $2.3 million, compared to adjusted gross loss of $0.2 million in the same quarter in 2022. EAC adjustments positively impacted adjusted gross profit by an estimated $1.5 million during the first quarter of 2023. Selling, general and administrative expenses were $32.5 million in the first quarter of 2023, compared to $30.2 million for the same quarter in 2022. The increase was primarily driven by higher research and development activities, labor and benefits, and other costs as a result of our growth initiatives, offset by a decrease in share-based compensation expense. We continue to increase our staff to meet upcoming demand.

Share-based compensation is an important part of acquiring and retaining employees. Although down year-over-year, share-based compensation still represented over $10.2 million of our first quarter expenses with approximately $6.9 million running through our GAAP SG&A expenses and $3.2 million balance, reflected in our cost of sales. Subject to future equity program activity, we currently expect share-based expenses could be being below $7 million per quarter through the balance of this year. Adjusted EBITDA was negative $22.6 million for the quarter, compared with negative $14.7 million in the same period in the prior year. The decrease in adjusted EBITDA was primarily due to an increase in selling, general and administrative expenses related to higher research and development activities, labor and benefits and other costs as a result of our growth initiatives, partially offset by an increase in adjusted gross profit.

Overall, adjusted EBITDA loss is largely a function of our ramping capabilities across the company to serve our multibillion dollar backlog and pipeline in the coming quarters and years. This is part of an overall investment in our capabilities that supports our path to profitability, for which we are well positioned, particularly given the strength in our signed order book. Our backlog at the end of the quarter was $2.5 billion. Capital expenditures for the quarter were $3.2 million. Finally, as of March 31, we had approximately $57.4 million of cash on hand, and approximately $305.3 million in gross debt obligations. Now for outlook. We are very excited about our outlook for the coming year. The efficient and successful execution of our new and existing contracts remains the number one priority for our team.

The exact timing of execution on our new contract work is the primary variable affecting our projected full-year 2023 results. But these contracts are the building blocks for what we believe will be a substantially higher sales base in 2024. Given our current view of our seat ramp ahead, we anticipate in excess of $250 million in sales in 2023. Upside beyond this level is possible depending on a successful execution of our customer commitments, just as our ability to achieve this target will be impacted by such execution. The timing of our new capacity commissioning and our anticipated scheduled contract milestones with LIBOR revenues to be weighted towards the second-half of this year, particularly in the fourth quarter. We expect gross margins to demonstrate year-over-year improvement, but pace in improvements may be variable given the timing impacts.

Finally, we note that our CapEx for the year is expected to be less than $30 million. I will now turn the call back over to, Marc.

Marc Bell: Thank you, Gary, and thank you, everyone, on the call for your continued support of Terran Orbital. I will now look forward to taking your questions, and I’ll turn it over to the operator.

Q&A Session

Operator: Thank you. [Operator Instructions] First question comes from Ron Epstein from Bank of America. Your line is open.

Operator: We now turn to Mike Crawford with B. Riley Securities. Your line is open.

Operator: Our next question comes from Greg Konrad with Jefferies. Your line is open.

Operator: [Operator Instructions] We’ll now turn to Erik Rasmussen with Stifel. Your line is open.

Operator: We now turn to Robert Spingarn with Melius Research. Your line is open.

Operator: We now turn to Gene Inger from Inger & Company. Your line is open.

Operator: Our next question comes from James Byron from Ostrowski Investment Management. Your line is open.

Operator: We have a follow-up question from Mike Crawford with B. Riley Securities. Your line is open.

Operator: Our next question comes from [Ari Santillo] (ph) from Orange Consulting. Your line is open.

Operator: Our final question comes from Christopher Frost, a Private Investor. Your line is open.

Operator: Ladies and gentlemen, today’s call has now concluded. We’d like to thank you for your participation. You may now disconnect your lines.