Terran Orbital Corporation (NYSE:LLAP) Q4 2022 Earnings Call Transcript

Terran Orbital Corporation (NYSE:LLAP) Q4 2022 Earnings Call Transcript March 21, 2023

Operator: Hello. Thank you for joining us and welcome to today’s Terran Orbital Fourth Quarter and Full Year 2022 Earnings Call. My name is Leo, and I’ll be your moderator for today. I would now hand over to our host today, Jon Siegmann, Senior Vice President of Corporate Development. Jon, please go ahead.

Jonathan Siegmann: Thank you, Leo. Good morning everyone, and thank you for joining Terran Orbital’s year-end 2022 earnings call. With me this morning from Terran Orbital are Marc Bell, Co-Founder, Chairman, Chief Executive Officer; and Gary Hobart, Chief Financial Officer. Marc will provide a business update and highlights for the quarter and full year and 2022, and then Gary will review the quarterly and annual 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 these 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, Jon and welcome and thank you everyone for joining our year end 2022 earnings conference call. 2022 was an exciting and pivotal year for Terran Orbital. In March, we became a publicly traded company and started trading on the New York Stock Exchange under the symbol LLAP, livelong and prosper. We built backlog capacity and revenues throughout 2022. We are well on our way to achieving the vision of industrializing small space satellite production. We made extraordinary progress in a very short time. Today, I am thrilled to review the highlights from 2022 and provide a business update, including the company’s record $2.4 billion contract from Rivada Space Networks, which we announced last month. Gary will provide more detail on our financial results and then we’re happy to take all your questions.

Starting with a recap of Terran Orbital’s achievements from 2022. In March, our company became public via merger with Tailwind Two Acquisition Corp. during challenging capital marketing conditions. Since then, our revenue has grown by 130% year-over-year to $94.2 million. Our backlog rose a similar percentage over the last 12 months from under $74 million to over $170 million as of December 31st. Our backlog includes over 60 satellites in various stages of completion, which we expect to deliver in the coming quarters. Over the last year, escalating geopolitical tensions and new space technology advances drove unprecedented and urgent demand for low earth orbit satellite solutions beyond even our earlier expectations. Our team has moved decisively and strategically to expand and vertically integrate our production facilities.

I am delighted to report to you that our strategy is paying off. We delivered a record 19 satellites in 2022. Our investments in facilities, workforce, and automation are creating an industry-leading production base in Irvine, California facilities. And in October, 2022, we were thrilled to complete a new $100 million investment and extension of our strategic cooperation agreement to the year 2035 with our partner Lockheed Martin. Our steady execution was demonstrated by our early delivery of the 10 satellites to Lockheed Martin in support of the Space Development Agency’s Transport Layer Tranche 0. I couldn’t be proud more — I could be any more prouder of our Terran Orbital team’s performance in delivering this important customer commitment.

As discussed on every earnings call since our listing, meeting our commitments to Lockheed Martin, the Space Development Agency and our nation’s war fighters on this critical program was a top goal for our team in 2022 and continues into 2023. I thank the entire production program and engineering teams for working hard to accomplish this goal and serve our customers’ missions, which we believe differentiates our performance relative to our competitors. As an established small satellite manufacturer with a first mover advantage, we are expanding our competitive moat. Accordingly, we are landing bigger and even record shattering new contracts. For example, the Space Development Agency has awarded the Lockheed Martin Terran Orbital team two successive tranches of the of the SDA’s Transport Layer.

The first award was for 10 satellites, which was awarded in early 2020, which we just completed. The second tranche 1 award is for 42 satellites and was awarded just 12 months ago. We are executing on this tranche and expect to begin deliveries later this year. We expect the Space Development Agency to award the Transport Layer Tranche 2 contracts later this year as well. And just last month, we received our largest contract ever. We were awarded a $2.4 billion contract to deliver 300 satellites and ground support to Rivada Space Networks. Rivada also has the option to purchase an additional 300 satellites as well. This advanced constellation will utilize the most advanced production — advanced space technologies available to a low earth orbit proliferated constellation, and provides cyber secure communications and data services for the protection of the U.S. and its allies in Europe.

Terran Orbital offered Rivada both manufacturing (ph) to meet the critical mission and regulatory time stones and a more capable satellite design and architecture to provide mission assurance. To solidify our leadership position in small satellite manufacturing and support diverse customers such as the Space Development Agency, Rivada and others we are pleased to announce further progress in expanding our capacity. Today we are in the commissioning phase of our previously announced new facility in Irvine, California. This facility adds 60,000 square feet of manufacturing space and once fully ramped is expected to support the buildup up to 250 satellites per year. In addition, we are thrilled to announce today our next capacity expansion step, an incremental 94,000 square feet of lease manufacturing and assembly space, also in Irvine, California.

Importantly, this new facility, which has already begun construction will have 36-foot high bay assembly space to accommodate the complete assembly and integration of larger size satellites along with their payloads. We are planning to transition all satellite assembly to this new facility and dedicate our existing facilities to the production of components and modules that will comprise our satellites. This optimization will enhance the efficiency and capacity of our entire production system. When fully ramped, this addition has a potential to raise our satellite capacity to multiples of our prior 250 per year target. We have a formal ground — we will have a formal groundbreaking ceremony in May of this year and expect the facility to begin commissioning in 2024.

Let’s take a moment and talk about our outlook. As we look to the year ahead, we remain focused on continuing to convert our $14 billion pipeline of opportunities into firm contracts, scaling our capacity and executing our government — our customer commitments. Given the potential material impact of our contract Rivada and other opportunities, on our 2023 financial performance, we do not intend to provide 2023 guidance until the first phase of the Rivada program has commenced and progressed sufficiently to permit us to have a good sense of our projected results. We expect progress on this program to accelerate throughout 2023 and 2024 with deliveries concentrated in 2025 and 2026. As a reminder, these affordable low earth orbit satellites are designed for replacement every few years, with a potential for recurring revenue stream as they need to continuously be replaced as do all low earth orbits satellites.

Additionally, we expect to begin delivering SDA Transport Layer Tranche 1 satellites in 2023. The SDA has indicated they plan to run their procurements for new tranches of satellites every two years. They have announced multiple plan procurements over the next year, which we intend to participate. We are pleased that our on time delivery and support of the early SDA missions positions us well for future awards. SDA programs — program priorities this year and next include tranche 2 of the transport layer T2’s demonstration and experimentation, and the tranche 2 of the SDA’s tracking layer represent nearly 300 additional satellites. We are proud of our team’s achievements in 2022 and excited for the year ahead. A highlighted year was just last week when Terran Orbital’s long legacy and satellites was recognized by the receipt of one of our earliest prop cube satellites, which is now on permanent display at the Smithsonian National Air and Space Museum in Washington, DC.

We highly encourage you to go see our success at the museum and thrilled to have it displayed there in perpetuity. Now I will hand the meeting over to Gary to review our financial performance and for the year-end 2022. Gary?

Gary Hobart: Thank you, Marc and good morning, everyone. I’m happy to report our strong finish to the year resulted in revenue of $31.9 million for the fourth quarter, a 197% increase over the prior year. The increase in revenue was primarily due to our continued support of the SDA’s Transport Layer, inclusive of the completion and delivery of 10 satellites to Lockheed Martin for the Trance 0 program and continued progress made in satisfying other customer contracts. Full year 2022 revenues were $94.2 million, a 130% increase over the prior year. Overall, we are actively executing on our growth initiatives in order to position ourselves to be awarded large constellation contracts with recurring revenue opportunities. As a reminder, we recognize revenue on most of our programs on a percentage of completion basis, and changes to our estimated cost at completion for a program, or EAC, will generally result in a cumulative impact on program revenues and margins in the period in which we make an EAC adjustment.

During 2022 adjustments to our EACs reduced revenues by an estimated $7 million. Gross profit was negative $10.8 million for the fourth quarter and negative $17.3 million for the year in 2022 compared to $0.7 million and $7 million for the fourth quarter and full year in 2021. Excluding share-based compensation and depreciation and amortization, including cost of sales, adjusted gross profit was negative $7.3 million for the fourth quarter and negative $2.2 million for the full year in 2022. This compares with $1.7 million and $9.5 million in the same periods in the prior year. EAC adjustments negatively impacted gross profit and adjusted gross profit by an estimated $18.3 million in 2022. This includes approximately $7 million from revenue previously noted and approximately $11.3 million from cost of sales.

A large portion of the adjustments relate to programs that involve prototypes in early phases of potentially large customer missions. During 2022. We focused on delivering quality satellite solutions on tight timeframes, often involving technical design and supply chain challenges. While EAC adjustments are possible in the future, I’m pleased to say that most of the drivers of the 2022 EAC adjustments relate to programs that are substantially complete at this point. Selling, general and administrative expenses were $27.6 million in the fourth quarter of 2022 compared to $13.1 million in the same period in the prior year and $111.9 million for the full year of 2022 compared to $43.7 million for the full year of 2021. The increase for the full year was primarily due to a increase in share-based compensation expense as a result of a Tailwind Two merger, an increase in research and development expense, increases in sales and wages — in salaries and wages, facility costs related to capacity expansions and other operating costs, partially offset by a decrease in accounting and legal fees.

During the fourth quarter of 2022, the company abandoned plans to invest in a company-owned constellation of earth observation satellites. As a result, we recorded a loss on impairment of $22.4 million related to cost previously capitalized as construction and progress associated with the development and construction of those initial satellites. Our net loss for the fourth quarter of 2022 was $33.0 million compared to a net loss of $40.3 million for the same period in the prior year. Our net loss for the year was $164 million compared to a net loss of $139 million in the prior year. In addition to the items discussed earlier, the increase in net loss was driven by a higher interest expense recorded in 2022, partially offset by a decrease in loss on extinguishment of debt and a decrease in the fair value of warrant and derivative liabilities in 2022.

Adjusted EBITDA was negative $26.1 million in the fourth quarter of 2022. This compares to a negative $11.3 million in the same period for the prior year. Adjusted EBITDA was negative $69.5 million for 2022 compared with negative $26.1 million in the prior year. The decrease in adjusted EBITDA for the year was primarily due to a decrease in adjusted gross profit and an increase in selling, general and administrative expenses related to salaries and wages, research and development, and other operating costs. Our backlog at the end of the year was approximately $170.8 million and this does not include any contribution from the Rivada contract award announced in February. Capital expenditures for the year 2022 were $22.5 million. Finally, December 31st, 2022, we had approximately $93.6 million of cash on hand and approximately $302 million in gross debt obligations.

I will now turn the call back over to Marc.

Marc Bell: Great. Thank you Gary and thank you everyone 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, Marc. Firstly, we’ve got Austin Moeller from Canaccord on the line. Please go ahead.

Austin Moeller: Hi, Marc and Gary. Good morning.

Marc Bell: Good morning. Thanks for joining us.

Austin Moeller: So, I just have a question here on the fiscal year 2023 budget. So, Congress added an incremental $500 million to the Space Development Agency’s budget for 2023. So, how do you see this as benefiting Terran Orbital going into bid on the tranche 2 of tracking and transport layer along with other planned constellations like the ?

Marc Bell: The fiscal 2024 request continues to aggressively integrate space force into the fabric of national, international security by collaborating across the Department of Defense, interagency commercial industry, our allies and our partners. With the request of $26.1 billion, which is an 8% of the investment budget request, or for perspective this is 181% higher than the $9.3 billion requested five years ago, which represented just less than 4% of the budget. We see this moving in a very positive direction for us. We see the SDA specifically approaching almost $3 billion now of total funding and growing rapidly as Congress gets more and more comfortable with their mission and as they prove results that they’re able to deliver satellites quickly on time and on budget.

Austin Moeller: Great answer. And then just a follow up is probably a question for Gary, but do we see improvements in the pipeline on materials and labor costs? And is the timeline to be EBITDA and free cash flow positive, is that more — would we think maybe in 2024 now?

Gary Hobart: Yes. Hi, Austin. So, we are seeing improvements. As I mentioned in our prepared remarks, a lot of the programs we’ve been working on are prototypes and early versions of bigger missions. And so, as we have those programs are retired and we’re building and scaling up with bigger programs, our ability to really leverage and scale and have economies of scale are starting to manifest themselves. I think that’s going to play out over the next several quarters. Our general update with regard to response – your question about EBITDA, continues to be that we have a reference to in our debt covenants a requirement to be EBITDA breakeven or positive by LTM June of 2024.

Austin Moeller: Okay. Great. Thanks for all the color.

Operator: Okay. Next we have a question from Mike Crawford from B. Riley. Please go ahead.

Mike Crawford: Thank you. Hey, Marc, what do you expect to show in your backlog to now at the end of Q1 for the $2.4 billion Rivada contract?