Terran Orbital Corporation (NYSE:LLAP) Q2 2023 Earnings Call Transcript

Terran Orbital Corporation (NYSE:LLAP) Q2 2023 Earnings Call Transcript August 15, 2023

Terran Orbital Corporation misses on earnings expectations. Reported EPS is $-0.18 EPS, expectations were $0.24.

Operator: Ladies and gentlemen, welcome to the Terran Orbital Q2 2023 Earnings Call. My name is Grant and I’ll be the operator for today’s call. [Operator Instructions] I will now hand you over to your host, Jonathan Siegmann, Senior Vice President of Corporate Development to begin. Jonathan?

Jonathan Siegmann: Good morning, everyone, and thank you for joining Terran Orbital’s second quarter 2023 earnings. With me this morning are Marc Bell, Co-Founder, 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 Gary will review the quarterly results, and Marc will finish with closing remarks. Terran Orbital’s executive team will then be available to answer your questions. During today’s call, we may make forward certain 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 a reconciliation 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: Great. Thank you, Jon, and thank you to everyone for joining our second quarter 2023 earnings call. Let’s start with an update on our largest program. The $2.4 billion contract with Rivada Space Networks. I am pleased to report we are steadily ramping up the program. Our team is currently executing on the design phase of the program, which represents $460 million of the $2.4 billion contract. This portion of the contracts kicked off in earnest in July with our successful completion of the first milestone, the system requirements review. The system requirements review defines the design and system requirements for the space and ground elements. Then the next significant milestone, the preliminary design review, or PDR, is planned for the fourth quarter.

In regards to payments from Rivada, Rivada remains current on all payments to Terran Orbital. Material milestone payments are expected in the second half of this year as the design phase of the program continues to ramp up. In addition, to payments related to preparing and delivering the PDR, payments are expected for the sourcing of long lead materials and critical vendors. Overall, we are anticipating invoicing and collecting approximately $180 million from Rivada in the second half of 2023. Please note that our June cash balance and receivables do not include material amounts from the Rivada program as more meaningful activity only started in July. I would also like to publicly congratulate Rivada on the successful conclusion of their previously announced regulatory process.

Last month, as expected, Rivada Space Networks announced that the ITU’s Radio Regulations Board approved their waiver request, which is a major regulatory milestone. I am excited with our increased backlog year-to-date. As of June 30th, our backlog is $2.6 billion, representing orders for over 370 satellites, including the 300-satellite order from Rivada, which we believe is our single largest commercial constellation award ever, and the company’s third largest award ever, a previously announced $87 million 16-satellite order with a new customer we signed in May. Additionally, we received a contract extension from our fourth largest active space program, a confidential mission in the national security space. For this program, we are not just supplying the satellite bus, but also integrating our own internally developed payload.

Our combined awards with the current total order book to over 30 programs. We estimate that approximately 80% of our $2.6 billion backlog will be converted to revenue by the end of 2025. We believe this increase in backlog will drive revenue growth this year and beyond. Operationally, we are also delivering on our commitments to our customers. We demonstrated this with our successful on-time delivery last year of our 10 Transport Layer Tranche 0 satellite buses to our partner, Lockheed Martin, for the Space Development Agency. We look forward to the extended launch of the completed Tranche 0 satellites in the coming weeks. In addition, we are on track to begin developing — delivering the first batch of the SDA’s Transport Layer Tranche 1 satellite in 2023.

The balance of the 42 satellites will be delivered by the end of 2024, which will bring in approximately $65 million of additional cash. Additionally, I am pleased to announce that our RUNNER-1 satellite launched successfully on June 12th on a SpaceX Falcon 9 rocket from Vandenberg Air Force Base in California. This multipurpose, remote sensing satellite, Terran Orbital’s first microsatellite was jointly developed with ImageSat International. We have successfully completed the spacecraft bus commissioning on July 31st. Our next upcoming step is payload commissioning. Congratulations to the ImageSat team for the great progress so far for commissioning this newest satellite. As of June, our identified pipeline represents over $20 billion of opportunities.

The expansion of our pipeline is due in part to increase in commercial engagements following the Rivada award announcement earlier this year. We are also harvesting benefits from our investments and broadened product offerings, expanded capacity and strengthen business development team. To support our backlog and pipeline opportunities, we are continuing to increase production capacity with our continuing investments in our design and manufacturing capabilities. We are investing in a world-class production system to support the execution of over 330 satellites in backlog and over 5,000 satellites identified in our pipeline. Our new 50 Tech facility in Irvine, California is now open, adding 50,000 square feet of floor space, bringing our manufacturing capacity from 10 satellites to 20 satellites per month, a 100% increase.

Critically, this includes additional testing equipment, our new printed circuit board assembly lines and automation that we expect will vastly improve throughput, quality and speed. Since the spring, we’ve been moving employees at equipment and have — now have our certificate of occupancy for all floors. We expect our now operational 50 Tech facility will be a key facilitator and completing the majority of the planned work for the 42 Tranche 1 buses. In addition, we are progressing and developing another 94,000 square foot facility in Irvine, which we expect to increase our capacity to multiples of our current capacity after commissioning in 2024. Importantly, this new capacity includes 36-foot high bay for assembly and integration of largest satellites.

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To help successfully manage the steep ramp in sales, we hired Tony Gingiss, an aerospace and defense industry veteran as the company’s new Chief Operating Officer. Tony is based in Irvine, California and brings more than 30 years of aerospace and defense experience and design production, operations and leadership to Terran Orbital. We are thrilled to have Tony on board. He brings an innovative and experienced mind to Terran Orbital as we expand our facilities and execute on customer programs. Also in the second quarter, Terran Orbital and Safran Electronics & Defense announced the signing of a memorandum of agreement to study and validate the prerequisites for the production of a new generation of election propulsion systems for satellites in the United States.

This system will be based on Safran’s PPSX00 plasma thruster. We believe this agreement reflects Safran’s Electronics & Defense space and the value of Terran Orbital’s industry-leading products and innovative personnel while adding to our strategic investments to create more scalable, automated vertically integrated production systems. 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 we are on a clear path to increase revenue and improve profitability. In the second quarter of 2023, we achieved record revenue of $32.2 million, a 51% increase over the same period in the prior year. We recognized revenue on most of our programs on a percentage of completion basis and adjustments and changes to our contract values and estimated cost at completion or EACs, have a cumulative impact in the period in which we make the adjustment. In the second quarter, adjustments to our estimated completion or EACs decreased revenue by an estimated $1.2 million. Gross profit was approximately $0.8 million for the second quarter compared to a loss of $3.7 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 second quarter was $2.8 million, compared to adjusted gross profit of $2.1 million in the same quarter in 2022. EAC adjustments negatively impacted adjusted gross profit by an estimated $2.5 million during the second quarter of 2023. Selling, general and administrative expenses were $28.7 million in the second quarter of 2023 compared to $29.4 million for the same quarter in 2022. SG&A expenses remained virtually flat compared to the same quarter in 2022. The decrease was primarily driven by decreases in share-based compensation expense and legal and other professional fees, partially offset by higher labor and benefits, research and development expense and other costs as a result of our growth initiatives.

Although down year-over-year, share-based compensation still represented approximately $3.6 million of our second quarter expenses with approximately $2.8 million of that running through our GAAP SG&A expense line and the $800,000 balance reflected in our cost of sales. Subject to future equity program activity, we currently expect share-based expenses to be below $5 million per quarter through the balance of this year. Adjusted EBITDA was negative $21.4 million for the quarter compared with negative $14.8 million in the same period of the prior year. The decrease in adjusted EBITDA was primarily due to an increase in selling, general and administrative expenses 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 — adjusted EBITDA is largely a function of our ramping capabilities across the company to serve our multibillion dollar backlog 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 of our signed order book. Capital expenditures for the quarter were $9.2 million. As of June 30th, we had approximately $48.6 million in cash on hand and approximately $311.4 million in gross debt obligations. Turning to our outlook. We have over $2.6 billion of backlog as of June 30th, 2023, and estimate approximately 80% to be recognized as revenue by December 31st, 2025.

We expect a steep ramp in revenue ahead and confirm our expectation of generating in excess of $250 million in revenue in fiscal year 2023. Additionally, we expect gross margins to demonstrate quarter-over-quarter improvements but the pace and size of improvements may vary depending on the program mix and execution. Overall, our capital expenditures for year 2023 are expected to be less than $30 million. I will now turn it back over to Marc.

Marc Bell: Great. Thank you, Gary. In closing, I’d like to add the appetite for satellite constellations is significantly growing with new commercial applications and geopolitical tensions as the primary drivers of demand. We have been very busy. We have 11 proposals currently outstanding within total value of $1.6 billion today. In addition, we have 27 RFIs or ROMs active valued over $900 million of additional potential revenue. Terran Orbital today is showcasing its ability to win and execute contracts with Lockheed Martin, Rivada and other marquee customers. We have a strong customer base consisting of the US Defense Department, NASA, European Space Agency and a strong long-term strategic partner in Lockheed Martin. Lockheed Martin has shown commitment and confidence in Terran Orbital not only becoming a long-term strategic partner, but also as the shareholder.

Thank you for everybody on the call for your continued support of Terran Orbital. I now look forward to taking your questions, and I’ll turn it over to the operator.

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Q&A Session

Operator: Thank you. [Operator Instructions] With our first question comes from Greg Konrad from Jefferies. Your line is now open.

Greg Konrad: Good morning.

Marc Bell: Good morning, Greg.

Greg Konrad: Maybe just to start on the backlog disclosure. You said 30 programs across 370 satellites. And if we strip out Rivada and SDA Tranche 1, it seems like maybe there’s 28 programs at an average of one satellite per program. Can you maybe talk about what’s in that pipeline, how much of that follow-on opportunities and how you think about some of those other programs is maybe seed corns for larger future awards?

Marc Bell: Sure. So we have a lot of programs, and we call it the crawl-walk-run approach. People start with one satellite, and they go to 3 to 10, then they look at 100. So for example, we have a program in-house now that we’re building three satellites for. Upon successful demonstration, they could be placing an order for 300 satellites. So you have a lot of programs that are feeder programs. And then also in that, you have a few things that are studies that don’t actually have a satellite attached to it, but they are the studies that lead up to a satellite. So it’s a little misleading how it breaks out. I apologize for that.

Greg Konrad: And then maybe just on free cash flow. You raised some money in the quarter, but I appreciated the disclosure around the money that you expect from Rivada and also SDA Tranche 1 next year. I mean when you think about those moving pieces, are you expecting to be free cash flow positive for the second half of the year? And how are you kind of thinking about free cash flow generation in general, given working capital needs?

Gary Hobart: Sure, Greg, it’s Gary. We have a backlog from invoicing and performance and our expectations from our EACs, which are basically our budgets for our program. Sufficient capital to be free cash flow positive on a run rate basis by the beginning or during 2024. It will be plus or minus in the second half year of the year. So the cash flow we generate from our programs and invoicing and collection and invoicing should cover our needs going forward, and we’ll start seeing that ramp up even more so going into 2024.

Greg Konrad: And then maybe just one last one. You gave the disclosure 80% conversion of backlog through the end of 2025 and we can kind of see what the implied revenues are in H2 based on guidance. You’re kind of at close to run rate if you just split in 2024 and 2025 at nearly $1 billion each year. How are you thinking about the capacity in place to kind of meet backlog today and maybe just kind of the path to supporting that level of revenues in the next two years.

Marc Bell: Yes, I mean, we feel very confident of our capacity with the opening of 50 Tech. That gets us the ability to do 20 buses a month. With the opening of our new facility beginning of 2024 that will bring us up to almost 96 buses a month. But more importantly, that lets us to do about 42 complete satellites per month in the new facility, including solar panel assembly, payload assembly and everything under one roof. So the new facility is a game changer because what we’ll do is the existing Barranca, our original facility and 50 Tech, our new facility will be dedicated exclusively to modules when what we call, we’re calling right now Riverside opens and Riverside will be 100% assembly and final satellite testing. So it’s a game changer on how we do things. But we are more than prepared for not only the Rivadas of the world, but to handle multiple Rivada-sized contracts under the existing infrastructure we’ve built or are building now.

Greg Konrad: Thank you.

Operator: Thank you. With our next question comes from Scott Buck from H.C. Wainwright. Your line is now open.