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?

Gary Hobart: Hi, Mike. We have — are still evaluating how we want to present the Rivada contract. For now, what you’re seeing in this press release and in the 10-K is going to be just a separate reference to the Rivada contract. And we’ll make determinations as we finish the March quarter on how properly to approach that in terms of backlog of the overall presentation. For now, we’re just going to separate — separately present it to you guys so you can see it separate from our year-end backlog.

Mike Crawford: Okay. Let me try it differently. So, well, first, we find intriguing that Rivada appears to have spectrum rights that have priority over Starlink. But what can you tell us about your understanding of approvals that Rivada needs both to start launching its satellites and also regarding the funding that it has to pay you to build these, at least these first 300 satellites. So a portion thereof.

Marc Bell: Sure. So, I can’t comment on Rivada’s business specifically. That’s the customer’s job to do that. I can tell you about what we know about the ITU process. Rivada is entitled to a waiver of the deployment of 10% of the constellation against the deadline this year. The Radio Regulations Board, which consists of 12 elected ITU experts can grant this. The regulator from the country where Rivada filed its orbital positions, which is the Office of Communications for the Principality of Lichtenstein, submitted all the necessary documentation to the Radio Regulations Bureau on time. Rivada believes that this submission contains full and clear evidence as requested in the relevant procedure. Rivada submitted evidence in time to receive a positive decision as early as possible as possible — in March, would be the end of March.

But understands this framework allows for the actions to be taken at the July RRB meeting instead. The German letter did not argue against granting the waiver. It merely asks that the RRB uses maximum time foreseen until June and a considered reading of the process will be applied. And as far as funding goes, they have given our attorneys comfort where they’re in the funding process and they have to get their ITU stuff finished. And otherwise they — I can tell you, they did make our first payment to us already.

Mike Crawford: Okay. Excellent. Thank you. And then just one final question is regarding your new Irvine expansion. So, you also have the new high bay facility right next to your existing components factory, but that also will just be for higher – bigger size components that then you would move to Irvine. Is that the new plan?

Marc Bell: The plan is to take what we call Barranca, which is the original facility, and we’re going to attach it to the building next door, which is 50 Tech, which is our new facility coming online April 1st. Those two buildings will do all of our module set — all our module and component manufacturing development and testing. All the assembly will move down the street to this new building. And that will be — that will just be for assembly and TVAC and a final testing. And so — but it’s — the 50 Tech building with the high bay you’re talking referring to is 25 foot high bay. The new building is 36 foot tall high bay, allowing us to do significantly larger sized satellites. We’re seeing satellite buses get larger and larger.

Even though we invented the cube set over a decade ago, we’re seeing the request for — people are going the opposite direction. Everybody wants smaller and now people want larger. We’ve seen it go, we’re now building. I think we have a single satellite house down that’s 800 kilograms. So, we’re seeing things get larger and larger requests because people want more power. But we’ve also are learning that responsive space and the go-fast model is what is more important than price and more important than anything else is getting it quickly. And so, we are seeing incredible interest in us being able to deliver stocking buses, and reducing down our cycle to do buses. But we’re also looking to expand into payloads and to go ahead and have payloads that’ll be stocking payloads as well.

So, instead of right now having a two-year cycle to design, build, and deliver a satellite, we want to shorten that up dramatically. And we have to — especially coming out of Satellite 2023 the big conference in DC overwhelmingly customers prefer speed to price. It was a very interesting conversation. And so, with all the robotics that we’re putting in, speed is something that we will excel at. And price is how is where we’re going to go make our margin and become profitable.

Mike Crawford: Okay. Thank you very much.

Marc Bell: Thank you.

Operator: Okay. Okay. Next we have a question from Erik Rasmussen from Stifel. Erik, please go ahead.

Erik Rasmussen: Yeah. Thanks for taking the questions. Maybe just staying with the Irvine expansion, seems like you’re working on bringing up capacity to 250 satellites throughout the year. When do you expect to be at that run rate? And is there additional capital needed to get there?

Marc Bell: I expect to be at that run rate in the next 60 days. I’d say enter the capacity. The new facility’s coming online, April 1st. We’ll go through some testing to make sure everything’s working as planned, but over — by the end of Q2, that facility will be humming along and that bring — basically, we look at this 20 satellites a month is what we’re able to produce, give or take. That’s how we view these things. So, we do — we can do 10 a month. Now, we learn that in T1 we can do 20 a month with the new facility and the facility that we’re just constructing now dramatically increases that because it is a space purely designed for assembly, nothing else.

Erik Rasmussen: So, would you say then — you said you mentioned multiples of that, and so at some point you’re looking at 500, 750, a 1,000

Marc Bell: We have– it depends on the size of the satellite. It’s all size dependent, but we haven’t released the numbers yet. We will — as we get further down this year where we’ll be, and just to preface, we will continue to — we always have to hire ahead and we have to build ahead of programs that we are getting. So, Rivada was a great deal. People look at our back — our pipeline, and we talk about a $14 billion pipeline. And everyone’s like, wow, that’s such a crazy big number. But the reality is we just converted $2.4 billion of that pipeline, and that shows that our pipeline is quite real and quite active. And so, we try — we have to build ahead of programs and we have to hire people ahead of programs. So, I would expect for people to see that we will be making later this year other announcements in terms of other new facilities that will be coming online over the next couple of years.

Erik Rasmussen: Got it. And then maybe just my follow up. You delivered on time the 10 satellites by year-end to support the T0 TL program. And it seems like you’re now transitioning to build the next trenches of 42 satellites. Can you just remind us though that the timing of delivery for these satellites, what are the milestones, you guys are targeting? And then maybe just give a little more color on how you think you positioned for the other tranches that that will be awarded by the SDA. Thanks.

Marc Bell: Sure. I can tell you, we have to have all the satellites delivered by Q1 of 2024. And we are — well, we are well on — we are well on our way as we’ve already begun manufacturing. And as far as how we do with the SDA, we believe we’ve proven ourself to the SDA. They said, those who deliver will continue to win, I think was the quote. And we will start to — obviously we start delivering Tranche 1 in 2023. But they said those who deliver will continue to win, and we are delivering. We’re doing everything we said we’re going to do. And we will continue to do that. So — and I will do it at a price that makes sense. So, we feel like we’re in a pretty good — it’s obviously a very competitive bid that we’re all, I think 17 people who bid on Tranche 1. So, we expect to have a lot of bidders. But we continue to prove ourselves and that means something.

Erik Rasmussen: Great. Thank you.

Marc Bell: Thank you.

Operator: Next we have a question from Elizabeth Grenfell from Bank of America. Please go ahead.

Elizabeth Grenfell: Hi. Good morning.

Marc Bell: Good morning. Thank you.

Elizabeth Grenfell: Did you give — yeah. Thanks. Did you give any color on what you expect revenue growth to be this year, or CapEx associated with this facility expansions or any additional color in terms of just general modeling for the year?

Gary Hobart: Hi, Elizabeth. In general, what we are doing is not providing guidance, just given the magnitude of the award regarding Rivada. Away from Rivada, we’ve said in the past, we’re looking to double our revenue is a general matter each of the coming years. And I would still look to that as a principle of guidance, if you will. But we’re really not guiding until we have more color on — not only Rivada, but other pipeline conversions that we are in the middle of doing.

Elizabeth Grenfell: Okay. And what — can you give us any sort of idea around the cadence of how you expect Rivada to come in, and how we should think about that?

Marc Bell: We are waiting for Rivada to — they got to get their — they have to get their IT license finished, and then everything goes full speed ahead. So, they — one more step in the — one more step to do, and then we’re great. Good to go.

Elizabeth Grenfell: Okay. All right. What about CapEx associated with these facility expansions? And how should we think about that? And at what point is it a little bit of putting the cart before the horse in the –?

Marc Bell: We always — in our business, you always have to put the cart before the horse because if the horse shows up and is no place to go, then we’re in deep trouble. So, because you’re always building — everybody has an 18th to 24 month horizon, right? And we know what programs we believe we’re going to be winning, and we have pretty good insight in our P1 rate of what we think we’re going to get. And so we’re not building for the sake of building. We knew, for example, we were going to be winning. We knew we had not — we know — we had a high of confidence, we were going to win T1. So, we went ahead and we started building an addition onto our exist 60,000 square feet, because we knew our existing facility wasn’t big enough to do T1.

And we’ve won T1 and now we have enough space to build T1. We now have — we had a good feeling that we were going to be winning something like Rivada. So we went ahead and we leased — we signed a lease earlier this year to go begin building another facility that gives us a space to build Rivada. Now, so I — if you look at us as we sign more leases for more space and assembly space, manufacturing space, that should be a good indicator to the market that we expect to be getting more customers in house.

Elizabeth Grenfell: Okay. Thank you very much.

Marc Bell: Yeah. And one other thing I’d like to add is, in building these facilities, there’s a very long lead time for — a lot of specialized equipment that goes into these things. So, we have — so, some of the stuff takes as much as 48 weeks to get. And so — but when we get a program, they want it delivered on time. And we can’t say we got to wait 48 weeks to get equipment. So, it is — we’re not a capital intensive business. We’re a technology intensive business, but we’ve made massive strides forward. I mean, we’ll be opening — we just opened up a 3D printing facility. We are opening up in about a month our printed circuit board assembly facility. We have now — we will be opening also in about a month our own testing facility with our own TVAC chambers that could fit entire sat — it could fit an entire satellite and our own shaker tables.

So, we are taking a lot of the stuff we used to send outside, bringing it inside, going back to — if you control your supply chain, you control your destiny. And we are vertically integrating. So, we control our supply chain, so we don’t have supply chain issues down the road, like a lot of other people are having. And this is one of the keys to our success.

Operator: Okay. And next we have a question from Greg Konrad from Jefferies. Greg, please go ahead.

Greg Konrad: Hey, good morning. Maybe

Marc Bell: Good morning.

Greg Konrad: to start, I appreciate that you’re not giving guidance, but you called out, you delivered 19 satellites in 2022, and it seems like maybe majority of Tranche 2 or sorry, Tranche 1 delivered in 2023. How many satellites do you plan to deliver in 2023?

Marc Bell: Gary, you want to answer that? Gary?

Gary Hobart: Sure. In our — Greg, this may help at least guide you a little bit. The backlog at the end of the year is about $171 million. And in that backlog, there are a little over 60 satellites that are in various stages of construction. And generally speaking, our backlog converts inside of two years from the date of order. So, while we’re not guiding precisely to when that backlog will be converted or those satellites are delivered, it’s going to be closer to inside of two years. And so, you could probably start modeling around using those as at least a reference point. And then Marc mentioned earlier that the 42 satellites for Tranche 1 are due before the end of the first quarter of 2024. So hopefully that gives you a little more color.

Greg Konrad: And then just on the $14 billion pipeline, I mean, you called out the Rivada award. If you think about just the breakdown, how much of that is these larger, chunky awards versus maybe smaller awards? Just thinking about catalyst as some of that pipeline converts.

Marc Bell: Well, the biggest chunk of the pipeline is the $6 billion NASA Rapid Rewards contract for. So that is where NASA can call us up and order satellites off that contract. We haven’t — we just met with NASA the other day. We haven’t seen a lot of that, but Rivada really demonstrates the size of the things that we are spending our time going after. We are whale hunting, and it is working. We’re trying to — we’re spending a lot less time with people who are trying to build one satellite than we do that. But we are spending our bulk of the time with people who want to build hundreds of satellites. And what Rivada did it for us as a business is it gave us a — gave us credibility in the marketplace that we can build a large satellite.

So, we spent the past week meeting with multiple constellation opportunities, the size of Rivada, some smaller, some larger, but it was an incredibly — people are viewing us now very differently, very credibly, both around — both within the DOD and in the commercial marketplace. And we’re seeing a lot of interest now from foreign companies and foreign governments that we didn’t see before. It’s really been a huge transformation. I mean, we have — if you look at our pipeline, you have 125 different — positive different opportunities with over 3,700 satellites kicking around in there. And with the new facility we just announced today, that gives us a huge advantage. And with all the automation we’re doing, and we — and keep in mind, we make 85% of our components in house, most of our competitors buy components from lots of other manufacturers.

And we all know when you buy components from 20 different manufacturers and put them all together, they work perfectly every time. It doesn’t work. So, it doesn’t work like that. And that’s one of the reasons, all of our stuff is plug and play. They’re all designed to work with each other. So — and most of our stuff is flight pro — flight proven at this point, which gives us all also a huge advantage. So — and you have a lot of foreign entries coming into the United States. People like Airbus, people like Leostella, a lot of foreigners coming in, but the DOD is getting — and then Congress is getting to a point that they want to create jobs here in the U.S. and we shouldn’t be suspending taxpayer dollars on defense programs built by foreigners.

And that is becoming a bigger, bigger topic up on the hill. And we expect that over the next year to have some real impact on our business as we are made in the USA.

Greg Konrad: And then, just last one, just two-part question on cash. I might have missed it, but in terms of CapEx for 2023 and given expansion plans, I mean, does CapEx kind of peak in 2023 or 2024? And kind of tie to that — you actually had really good working capital in 2022, just given the upcoming contracts, would you expect that kind of carry into 2023, and just in terms of staying positive on working capital?

Gary Hobart: Yeah. So, two parts to that question. On CapEx, as we’ve now ceased pursuing the self-funded constellation, that will reduce to zero, that type of spend in the CapEx. Predominantly CapEx will be a combination of facility and equipment expansion, both in Irvine this year and in the new facility this year and next. I — right now we haven’t fully scoped that, but think about the two facilities as roughly a number that’s maybe $10 million all in. It could be more, depending on how exquisite we get for each facility. We spent a little bit of that already for the existing Irvine expansion. I would also say maybe that there’s a maintenance CapEx or an IT spend that’s anywhere from five, maybe as high as $10 million depending on how we think about equipment.

So, right now, now, generically speaking, I’m looking at a CapEx profile that’s anywhere from plus or minus $15 million, maybe less, maybe more depending on how accelerated we are on bringing on this additional facility in Irvine, as well as how we think about the equipment that we’re adding and testing capabilities. Regarding working capital, we do have fairly significant swings of working capital. You saw that a little bit throughout last year. We had positive working capital swings and pretty chunky working capital swings. A part of that is, is quite frankly, the teeing of growing. When we had revenue growth in the fourth quarter almost 200%, the working capital swings can be quite dramatic. And so, part of how we think about our cash flows is factoring in working capital.

And it’s one of the reasons why we’re looking at our liquidity constantly and thinking about how to manage that both our growth and also our liquidity profile.

Greg Konrad: Thank you.

Operator: Next we have a question from Robert Spingarn from Melius. Please go ahead.

Robert Spingarn: Hey, good morning everyone. Marc, just all the color you’ve given us net-net, how would you say the market has changed from a demand perspective as the economy changes and maybe marginalized players are moving away? So, how is the demand changed? And then how is the supply chain? Are you seeing any of your competition exit the market?

Marc Bell: Sure. So, let’s bring this down a couple pieces. So, on the market side, NDA is the only thing Democrats or Republicans always agree on. It’s recession proof. It’s interest rate proof. It will be for 61 years. It’s always been near unanimous. We don’t see that — we don’t see us cutting our defense budget anytime soon. With everything going on in Ukraine and China, we just don’t see that as a reality. We always see our biggest threat to our business is world peace. We don’t see that happening anytime soon as well. What we do see in the commercial side is people are seeing that commercially owned satellite constellations are now economically viable. When they were building billion dollar satellites in geosynchronous orbit, they weren’t economically viable.

When you’re building million dollar satellites and low earth orbit, they become — business applications become economically viable, whether it’s 5G, internet of things, all sorts of other things. There are things we can do for — there are things we can do to light it to make — the world has changed that has made it more productive for companies to do business. On the supply chain side, by continuing to build things in house, we are seeing less and less supply chain issues. We are seeing a lot of our competitors and our competitors per se, a lot of people — a lot of the new space spacs, we see them continuing to get into trouble. You saw what happened to Virgin Orbit. All these guys are building it and hope they will come. In our case, we don’t build something unless they come to us first.

So, when — we have a very different business model, but we’re just lumped into a bad neighborhood, and unfortunately our stock doesn’t represent that.

Robert Spingarn: Okay. And then, Gary, you talked about a lot of positives and negatives, just — with regard to the numbers. So, when you put all that together, how should we expect free cash burn to continue as we go through the year? I know you’re not guiding, but what should the trend be between the facility expansions against the prototyping, winding down, and so on?

Gary Hobart: Yeah. Rob, thanks for the question. The — it’s a little bit difficult to say, in addition to not providing guidance, but I can point to the history — the near term history that we could see swings particularly in working capital that impact our liquidity or at least our free cash flow to the tune as much as $25 million to $30 million in any one quarter. Could be a little bit higher than that, could be a little bit lower, particularly if Rivada onboards on the timeframe, but take thinking about. So, it is a fairly big swing that we are managing. And that one — working capital is probably the biggest one, as well as overall the timing of new awards, and the execution of those awards that, that has a very dramatic impact.

Generally positive with new awards is we bring them on. And so it makes it difficult to guide, but it also is kind of a function of where we’re at in terms of growth and use of liquidity. And so, let me pause there, because it’s really difficult to give much more guidance in that.

Robert Spingarn: Okay. And just a housekeeping question. Where are you on the B Riley facility?

Marc Bell: So, the B. Riley facility is still open and available to us. We have available to us. The lesser of about $98 million of proceeds or the sale of about 27 million shares. So, we’ve barely tapped it last year.

Robert Spingarn: Okay. Thanks. Okay. Thank you both.

Operator: Next we have a question from Josh Sullivan from Benchmark. Please go ahead.

Josh Sullivan: Hey, good morning.

Marc Bell: Good morning.

Josh Sullivan: As far as the EACs, any areas or aspects of the contracts to call out or for lessons learned? I think you mentioned might have been related to some legacy program.

Marc Bell: I mean, it’d be more specific.

Josh Sullivan: So, I mean, just as far going forward, should we think about, you mentioned they were part of legacy programs, so should we anticipate going forward in a better position or just?

Gary Hobart: Yeah. So, like, as I mentioned, it’s possible that we have additional EAC adjustments in the future. We’ve finished the year with our estimates in our EAC based on what we knew. So, what I — we’ll just reiterate is, a large portion of the EAC adjustments we saw throughout 2022, we’re on programs that we are substantially completed on. And so those programs tended to be more prototype and early phase programs, where quite frankly, technical challenges, supply chain challenges, running additional shifts, all those things contributed to additional costs. And also just quite frankly, trying to move things and accelerate the speed to get things out the door. So, there’s a little bit of teething here as we bring on board things, but those one-off programs tend to be the ones where you have a million or $2 million impact.

And if you have a couple of programs like that, it adds up each quarter. And that’s what we’re seeing. What we can see going forward is a lot of our programs now are the bigger, more scaled programs where if we do have an impact, the size impact relatively overall program is much more muted. So, we have the — we’re encouraged by where we are to begin the year. And — but a lot of EAC adjustments, we hopefully are our rear view mirror, but there is possible, we have some in the future.

Marc Bell: Yeah. I mean, 36 months ago we were building satellites you can hold in the palm of your hand. Today, we’re holding things that need to go into a truck, but more — but the sizing seems to be stabilizing and 350 to 500 kilogram ranges where most people are soon to be stabilizing. But there was a learning curve to get to that point. But now the size of stabilizing, we’ll see less NREs going forward than we have in the past.

Josh Sullivan: Got it. And then maybe just one on the announcement on Monday with cognitive space. Can you talk about the dual use assets there? Is that going to be owned by you and does it include any SAR?

Marc Bell: Terran Orbital is now scheduling. And on orbit asset using cognitive spaces, Sentient software platform. We expect this partnership to help drive down costs of internal operations as well as our customers grow the larger constellation easier. I can’t comment as to what we’re using it for. That’s all I could say at this point.

Josh Sullivan: Thank you for the time.

Operator: Next we have a question from . Please go ahead.

Unidentified Analyst: Hi. Thank you for taking the question. I do have a question regarding the $14 billion pipeline that I would assume doesn’t include a 2.4 of Rivada. Can you give us any color on the composition in the stage of that pipeline, and what are you expecting of that to convert in 2023 and what would that go into 2024?

Marc Bell: Sure. Well, it was a $16.4 billion pipeline. That’s now a $14 billion pipeline. But there are about 125 programs in there that could make up about 3,700 satellites. The biggest of that $14 billion is a $6 billion NASA Rapid Rewards contract. And then after that you’ve got some very, very large programs and some smaller programs as well.

Unidentified Analyst: Thank you.

Operator: We have a question from James Byron . Please go ahead.

Unidentified Analyst: Hi. Thank you so much for taking my call. I’m not sure really if I have any kind of a question, but just an observation. I’ve been a finance guy my whole career. And when I see the kinds of losses I see you folks act up last year, I just get very concerned that there might be fundamental problems in the manufacturing operations that are hard to see. And so, I — it’s just — I have quite a few shares of your stock. I think I’m going to be acquiring more, but I hope you have a very strong cost accounting person on your staff so that when you ship a satellite, they can say immediately this is how we did on that satellite or this group of satellites. And so, that’s my only comment. The other thing I see is I’ve been at — I’ve also been involved in a number of startups and unfortunately for me, not one of them has succeeded.

And one thing I see very much is that people are very focused on trying to get more and more and more sales. You guys got $2.4 billion worth of a contract, focus on that. Never mind trying to get any more business. You need to succeed on this $2.4 billion or you’re going to get overwhelmed. And I see people run out of cash very quickly and all of a sudden there’s a problem. And then the next thing, the company’s gone. So, I’m putting a lot of faith in you guys. I’ve got a lot of shares. I’m going to acquire some more, but I’m just giving you some of my thoughts and my experience in the future. You got a huge contract and make sure you succeed with what’s in front of you and don’t be so focused on trying to get more.

Marc Bell: So, we — I appreciate very much your comments. We are a — so be to — my business partner Dan Staton and I, we’ve built seven unicorns. This will be our eighth. We’ve taken 17 comedies public successfully. We are old experience management team. We understand that we’ve had losses and part of that is, we are hiring ahead of programs. We are a hundred percent committed to Rivada in getting it out the door on time and profitably. And as we are to all the programs we have going forward. But we needed to build up scale, because we knew what programs we would be — we knew that we would be getting some big programs and you have to hire ahead of scale. But you will start to see the financials improve going into 2024 because obviously gain to EBITDA positive and free cash flow positive is enormously important to all of us.

And so — but we had to spend a lot of money to get where we are today, but we totally understand your concerns and trust me, Gary, myself, and the rest of the management team are working to make sure — are in a great place. And thankfully with a partner like Lockheed Martin, they have been very supportive of us and have be — we’ve been keeping us enormously busy. Running two shifts a day, seven days a week in our existing facility. And we will be — with the new facilities, we will get to a more normal work cycle. And we’ll also help to keep our costs down, especially with all the robotics we’re building. And as with any investor on the call, we invite people to come to see our facilities, see what we do. We’re always welcome to have investors come take a tour.

Unidentified Analyst: Very good. Thank you so much.

Marc Bell: Thank you.

Operator: Now we have a question from Den Ramp from Ascending Capital. Please go ahead.

Unidentified Analyst: Hi. Appreciate your time guys. I’m wondering if you could speak to this — your cash needs and how that could change once the Rivada gets the ICU approval. Could — is that a benefit to you guys, or would that make your cash needs worse? In other words, is there a possibility of getting a large upfront payment when this project kicks off that could ameliorate some of your cash needs?

Gary Hobart: Yeah. So, with any commercial program, see, we don’t give a lot of credit. We’re a cash in the advance — cash in advance kind of people, and God we trust, but all of them must pay cash. And so we want — we try — most commercial contracts are pay in advance, then we work, pay in advance, then work. It’s like a law firm working off a retainer. We give very little credit. Unlike the Department of Defense where we give credit to, but they pay very, very quickly. So — but we are under the commercial side, all of all of our commercial contracts are written, so we very, very little cash upfront we have to spend.

Unidentified Analyst: Okay. And kind of a follow up to that. Regarding — you’re seeing in the market now and the banking crisis, I think part of the reason you’re seeing some pressure on the stock before today, the last few days we’ve seen this across the stock market, is any companies that require cash has really been punished because of this crunch in regional banks, et cetera. And I’m wondering if you have that on your radar and what kind of alternatives you may have in mind to be able to limit dilution if you do need to go and get that capital. And part of that as well, are there any concerns, and your lawyers feel comfortable with the financing for Rivada, but if there is some sort of a crunch in the banking space, a further one, would that risk the funding coming into Rivada as far as you know?

Gary Hobart: While we are thrilled that we have Rivada, we don’t count on any one contract. We continue to go out. And just like we will be bidding on the new SDA programs coming up, we continue to bid on lots of things, and we have a very high success rate in winning what we bid on. So, we continue to bid. We — with Lockheed Martin, we’ve had a tremendously high success rate, and I think we have 11 Lockheed programs in house right now, and we continue to be — they continue to be a phenomenal partner and working together. So, we don’t — we are — we have done very well on the cash management side. We just raised a hundred million last year from Lockheed. We feel pretty good about where we are and have no concerns at this point about our cash.

Unidentified Analyst: Okay. Thank you.

Gary Hobart: Thanks.

Operator: We currently have no further questions, so I’ll hand it back over to the management team.

Marc Bell: Great. Well, on behalf of Gary Hobart, myself and the rest of the Terran Orbital management team and all of our employees, we thank you very much for your support and your continuing confidence in Terran Orbital. We appreciate everybody tuning in for today’s call. And as always, we try to make ourselves as accessible as possible to the investing community. We’re going to be at the Sidoti conference this week tomorrow — Wednesday and Thursday this week for those of you who wish to attend and we continue to make ourselves available. So, feel free to reach out to us at ir@terranorbital.com and we are happy to answer any and all questions, and look forward to seeing you in another quarter. Thank you very much.

Operator: This concludes today’s call. Thank you for joining. You may now disconnect your lines.