Terran Orbital Corporation (NYSE:LLAP) Q3 2023 Earnings Call Transcript

Terran Orbital Corporation (NYSE:LLAP) Q3 2023 Earnings Call Transcript November 14, 2023

Terran Orbital Corporation beats earnings expectations. Reported EPS is $-0.15, expectations were $-0.19.

Operator: Hello, everyone, welcome to the Terran Orbital Q3 2023 Earnings Call. My name is Emily, and I’ll be coordinating your call today. [Operator Instructions]. I’ll now turn the call over to our host, Jonathan Siegmann. Please go ahead, Jonathan.

Jonathan Siegmann: Thank you, Emily. Good morning, everyone, and thank you for joining Terran Orbital’s Third Quarter 2023 Earnings. With me this morning are Marc Bell, Co-Founder, Chairman and Chief Executive Officer of Terran Orbital Corporation; and Matt Riffel, acting Chief Financial Officer, Corporate Controller of Terran Orbital Corporation. Marc will provide a business update and highlights of the past quarter, and then Matt will review the quarterly results. Terran overall 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: Well, thank you, John. Thank you, everyone, for joining our third quarter 2023 earnings conference call. I also want to thank those of you who attended our virtual town hall event on October 26, which is part of our effort to increase investor engagement. During our town hall, we were pleased to highlight the team’s recently announced contract wins across three several programs and two continents, our active engagement on 80 opportunities relating to more than 2,800 satellites for 40 different customers [indiscernible] valued at over $2.7 billion, and our current expectation that we will have sufficient cash to cover capital investments and operations until becoming cash flow positive, which is expected in 2024. We had an excellent quarter with year-over-year revenue growth of 58%, increasing revenue to $43.9 million from $27.8 million.

Our third quarter adjusted gross profit increased over 270% from $12 million — to $12 million from $3.2 million in the comparable period. Our team is successfully executing on converting our pipeline and to sign contracts resulting in a new record-breaking backlog inclusive of our $160 million surge of orders announced in October. We are starting to see the benefits of our investments in capacity, equipment, and automation with initial — with improvements in operating efficiency. These investments are intended to lay the foundation and position us for growth for the years to come. To establish us as the leading supplier of satellite buses globally, we recently announced two important strategic initiatives. First is the introduction of our new lineup of seven standard satellite bus platforms.

These standard platforms feature a flexible architecture using our comic components, which have extensive flight heritage and modular design. This design methodology allows us for a minimal level of customization, depending on our customers’ needs and enables us to deliver satellites that mass scale with speed, quality and pricing that our customers desire. Second, we launched our responsive space initiative, which represents turnouts of objective to be able to deliver to customers a standard bus within just 30 days and complete payload integration within 60 days by maintaining a stock of standard and interchangeable components, we will be able to deliver in days, not years. The satellites required by both government and commercial customers or critical missions.

We plan to have the initiative fully operational by Q4 of 2024. Now turning to our overall performance and quarterly updates. I’m happy to update you on our team’s progress and support of the Space Development Agency programs. We are pleased to announce in October our selection by our partner, Lockheed Martin, to build 36 satellite buses for the beta award of tranche two of the transfer layer. This brings us to a total of 88 satellites, we are providing in support of S-3 transfer later, of which 10 were launched in September. Meanwhile, on the production side, our team is hard at work at manufacturing 42 satellites and support a tranche 1 of the transfer layer. We are on track to begin delivering the first of these stellites during the fourth quarter and the balance by the end of the second quarter of 2024.

To enhance the security of our supply chain of critical components to this program, we made the strategic decision to commit to a new propulsion supplier. One of the very few components we don’t currently produce in-house. We are proud of the decade-long track record of not missing the satellite launch, and we took this action now to protect — to protect the program schedule. We believe that our experience and track record with T-0 and Tranche 1, we’re trying to be on tranche 1 of the transfer layer and a partnership with Lockheed Martin help differentiate us and position us well for SCA’s awards outside of the transfer layer. I am pleased to report our margin performance has significantly improved. Our increase in gross profit and adjusted gross profit primarily represents the fact that we are working on larger programs and that our mix of contracts have better margins.

Our year-to-date adjusted gross profit margin of 16.5% is double last year’s gross margin of 8.2% for the comparable period and is now in line with our previously disclosed year-end targets. As we move to become EBITDA positive by next year, this is an important metric and it shows great progress. We continue to improve control of our supply chain. I believe that if we control your supply chain, we control our destiny. We now produce over 85% and growing of all our components in-house, which lowers our costs and speeds up our delivery. Some companies lay off employees we lay our vendors. We have bought in-house now, CNC machining, printed circuit board assembly, wire harnessing, torque rod assembly, live testing, and full bus TVAC. We will be adding other components, modules and subsystems and AIT in the coming months.

Any vendor who is not price competitive or cannot keep up with our schedule will be removed and that product to scale when we bought in-house. We live in a world of firm fixed price programs. The days of cost plus are long gone, and we are ready to meet the challenge. I’d like to provide a quick update on the company’s contract with Rivada Space Networks. As disclosed late last month, and at our first investor town hall meeting. Since our last earnings call, we have not received expected further milestone payments and do not yet have a definitive schedule and when further may be received. As a result of this delay, we have removed the expected revenue contribution related to Rivada for our full year 2023 outlook, hence the change in guidance.

We remain engaged with Rivada on a regular basis and have been reassured as recently as today by Rivada that we should expect to receive our contractual milestone payments this year. Accordingly, we continue to believe our Rivada contract will provide significant future revenue and cash flows, the timing of which over is uncertain, and we want to be conservative in our guidance going forward. Overall, I am proud of what we’ve accomplished and where we are heading. Now let me take the opportunity to introduce Matt Riffel who is joining us on the earnings call for the first time. Matt has been Terran Orbital Corporate Controller for the past last two years and has done an amazing job. And we couldn’t ask for anyone more prepared to serve as our acting Chief Financial Officer.

With that, I’ll hand the call over to Matt to review our financial performance in the quarter and provide the financial outlook for the full year. Over to you, Matt.

Mathieu Riffel : Thank you, Marc, and good morning, everyone. I’m happy to be here today and to help support the company at this exciting point in its journey. As we plan our 2024 budget, it’s the breadth and magnitude of our pipeline opportunities as well as the additional capabilities, which we have added, which I find most compelling about our company. While it’s difficult to forecast and model these discrete opportunities, it’s a privilege to help steer the company’s efforts to execute and deliver on these attractive opportunities. Now on to the financial results for the quarter. I am pleased with our continued growth in revenue, which was $43.9 million for the third quarter of 2023, a 58% increase over the same period in the prior year.

The increase in revenue was primarily due to the work performed on our SBA programs on a comparative basis as well as additional contribution from Rivada. Gross profit was $9.7 million for the third quarter compared to $37,000 in the same quarter of 2022. Excluding share-based compensation and depreciation and amortization included in cost of sales. Adjusted gross profit in the third quarter was $12 million compared to adjusted gross cost of $3.2 million in the same quarter in 2022. Our gross profit and adjusted gross profit benefited from EAC adjustments and certain nonrecurring changes in estimates relating to our inventory during the third quarter of 2023. Selling, general and administrative expenses were $29 million in the third quarter of ’23 compared to $24.7 million for the same quarter in 2022.

The increase was primarily driven by higher cost of labor and benefits, sales and marketing expenses, and business development activities due to our growth initiatives, offset by a decrease in our share-based compensation. Adjusted EBITDA was negative $13 million for the quarter compared to negative $13.9 million in the same period in the prior year. The increase in adjusted EBITDA was primarily due to an increase in adjusted gross profit partially offset by an increase in selling, general and administrative expenses. Overall, adjusted EBITDA loss is largely a function of increased expenses related to the ramping of our business development capabilities in back office across the company to serve as the foundation of supporting our multibillion-dollar backlog and pipeline in the coming quarters and years.

This is part of an overall investment of vision ourselves for future growth. Our backlog at the end of the quarter was $2.6 billion, of which $2.4 billion is related to our contract with Rivada. Capital expenditures for the quarter were $6.1 million and primarily related to our investments in capacity and capabilities. Finally, as of September 30, we had approximately 3.8 million — $38.7 million of cash on hand, which was aided by our $32.5 million equity offering in September and approximately $313.0 million of gross debt obligations. As of October 31, we had over $70 million of cash on hand. We remain excited about finishing the full year on a strong note and hope we can announce new awards heading into 2024. Efficient and successful execution on our new and existing contracts remain the number one priority for our team.

As highlighted in our previous calls, the exact timing of execution on our new contracts is an important variable impacting our near-term results. As a reminder, recognition under our accounting po — for revenue recognition and other accounting policies, revenue is not recognized in our results until we performed work on the contracts. That is cash receipts do not drive the recognition of revenue. We now expect our 2023 full year revenue to be greater than $130 million or at least a 38% increase year-over-year compared to 2022. The decrease in revenue guidance is primarily related to the removal of Rivada, the delayed start in awarding of certain larger programs and the potential for challenges we’re working through on other programs. Our year-to-date adjusted gross profit margin of $16.5 million is now in line with our previously disclosed year-end targets, and we expect gradual improvement in future periods.

The pace and magnitude of margin improvement may vary depending on program mix and execution. Finally, we know our CapEx for the year is expected to be less than $30 million. I’ll now turn the call back over to Marc.

Marc Bell : Thank you, Matt. Today, we’re going to do — and thank you, everybody, for your supportive turnout. We’re going to do questions that answers a little differently this time around. We’re going to start with institutions who cover us. And then we’re going to open it up to anybody who ask. As some people have e-mailed those questions, feel free to add yourself to the queue. And we’re going to take — we’re going to — unlike the Town Hall, where we did all reading off questions. Here, all questions will be asked live and answered live, and anybody can ask a question. With that, we’re going to turn over to our first — if you turn it over back to the operator, I guess, right? Operator, back to yours.

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Q&A Session

Operator: [Operator Instructions]. We’ll now go to our first question, which comes from Greg Konrad with Jefferies. Greg please go ahead. Your line is open.

Unidentified Analyst : This is Sam Gates from Jefferies dialing in for Greg Konrad. Congratulations on winning a role in the third tranche transfer layer. With that order in the backlog, how should we think about where economics can go from here relative to the two prior tranches? And sort of how should we think about the economics on this tranche compared to tranches 0 and tranches 1?

Mathieu Riffel : Thanks, Greg. I’ll take an answer at that one. So, for this particular — as a reminder, this award was in our backlog as of September 30, it was an October award. The economics of which — it is a larger award. And with our larger awards, we generally expect it to be a little bit lower margin, but we think it’s going to be in the mid-teens — mid-to high teens as we go forward. And it’s — that’s relatively comparable with some of our other SDA programs.

Marc Bell: Yes. And we’re seeing, as we go — as time goes on, margins will continue to improve as we bring more and more components and modules in-house.

Unidentified Analyst : Got it. That’s helpful. And I guess, just maybe as a quick follow-up. You highlighted the responsive space initiative and some of the new products that you’ve been working on to enable that mission set. What should we think about in terms of timing for that to convert into revenue? And then could you maybe size the sort of the TAM on that and why you guys think you’re in a good spot to compete in that space?

Marc Bell: Can you repeat the very beginning of that again?

Unidentified Analyst : Yes. You’ve been highlighting the responsive space initiative and some of the new products that you’re working on to enable that? And just trying to understand sort of what that looks like in terms of revenue conversion and then what that does to your TAM and how you think about that opportunity set from here?

Marc Bell: So, it all started — a little background here, in 2005, Kernel J. Raymond at the time, wrote a paper called Tactically Responsive Space. Nobody really paid a lot of attention to it. And then we became two years ago at National Space, I suppose. I was [indiscernible] with him and he became the fourth or general who started space for us. And he was talking at that dinner about his dream was to order a satellite on the first of the month to get it delivered on the 30th of the month. And we’re making that dream come true as he just recently came down and visited the facility where we’re going to be doing this. It’s all about the days of — it used to cost take a decade and cost billions to build a satellite. They need things faster.

They need it now. The world stage is very fluid. Ukraine, Israel has shown us how quickly things could change overnight and they want the ability to get assets to put them into space. The government has always talked about only 4% to 6% of all their ISR currently being met from space. There’s just incredible demand and not enough supply, and it was taking too long. Space development agency has helped shorten that cycle, but only by — down to two years for a program, and the goal is to, they want to get it down to days, not years. And so, we see the TAM just incredibly large, not just for the U.S. but globally for any country who has been able to do it, but we’re going to start slow. We’re seeing — we just bid on three different programs where it’s a six-month to eight-month turnaround for the satellites.

We’ll know by the end of this year if we won. And that will be the first shot of us get doing it. Once we have all our components and modules in stock, at the end of next year in our new facility, which will be called Goodyear for now or calling Goodyear. That will allow us to really assemble things robotically, very quickly. We currently assemble modules, one-third of our modules are assembled robotically. By next year, all of our models be robotically assembled and the satellite buttons as well will be robotically assembled. So, any time a conflict on pops up, that country could order satellites from us and get an orbit within 60 days. It’s a big difference. Does that help?

Unidentified Analyst : Yes. Thank you, Marc. That’s very helpful. I appreciate it.

Marc Bell: Any other questions?

Operator: Our next question comes from Erik Rasmussen with Stifel. Please go ahead. Erik your line is open.

Erik Rasmussen : Great. I just wanted to ask about the progress with the SDA programs to date and in the context of what we’ve learned from various sources on future programs so far. It seems that the team has executed well, but — if we think about what has been awarded thus far, it seems that Terran is sort of under-indexing what others have been awarded. What are your expectations for additional FDA awards? And — and what could you share be? And were you surprised on how the alpha award played out?