Rocket Lab USA, Inc.

Good afternoon, and thank you for attending today's Rocket Lab fourth quarter 2022 financial results update and conference call. My name is Donyell, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. It is now my pleasure to hand the conference over to our host, Colin Canfield. and head of investor relations. Colin, please proceed.

Hello, everyone. We're glad to have you join us for today's conference call to discuss Rocket Lab's fourth quarter full year 2022 financial results. Before we begin the call, I'd like to remind you that our remarks may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the safe hardware protection from liability established by the private securities litigation reform act. Any such statements are not guarantees of future performance and factors that could influence our results are highlighted in today's press release and others that are contained in our filings with the Security and Exchange Commission. Such statements are based upon information available to the company as of the day hereof and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update these statements. Our remarks and press release today may also contain non-GAAP financial measures within the meaning of Regulation G enacted by the SEC. Included in such release is a reconciliation of these non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP. This call is also being webcast with a supporting presentation. A replay and copy of the presentation will be available on our website. Our presenters today are Rocket Lab founder and chief executive officer Peter Beck and chief financial officer Adam Spice. After our prepared comments, we will take questions. And now let me turn the call over to Mr. Beck.

Thanks very much, Colin. So welcome, everybody, and thank you for joining us today. Today's presentation will go over our key business accomplishments for the year of 2022, as well as specific highlights from the fourth quarter. We'll also discuss further achievements we've made since the end of the quarter. Adam will then talk you through our financial results for the fourth quarter and full year and also cover the financial outlook for Q1 2023. After that, we'll take questions and finish today's call with the upcoming conferences we'll be attending. All right, on to what the company achieved in 2022. Starting with a quick recap of our launch activity for 2022, it was our busiest year of launches yet. We retained our position as the leading small launch vehicle globally, and once again, Electron held the title of second most frequently launched US rocket annually. Across nine Electron launches, we deployed more than 40 satellites to precise orbits for our customers, including commercial constellation operators NASA and the NRO and more. Across these launches, we had 100% mission success rate for the year, providing our customers with a reliable path to orbit. 2022 was also the year we successfully delivered the Capstone mission to the moon for NASA with a launch plus spacecraft solution using Electron and Photon. We completed two successful ocean recoveries of electrons per stage as part of our rocket reusability program. We conducted five successful missions for constellation operators. We put all three electron pads to use, including our first launch attempt out of LC2 in Virginia in Q4, which was successfully launched in Q1 2023. And we also caught electron with a helicopter for the first time. More on each of these achievements later in the presentation. As mentioned in 2022, we reached our highest annual launch cadence with nine missions, ensuring that Electron remains the global market leader in small launch. With 100% mission success in 2022, Electron is the most reliable dedicated small launch vehicle globally. As of 31st December 2022, we've completed 32 Electron missions and deployed 152 satellites. I'm pleased to say that both those numbers have already increased thanks to another successful mission in Q1 23. 2022 was also the year that Electron sent a mission beyond Earth orbit and for the first time successfully deploying the capstone mission to the moon for NASA. This mission was far from just a standard Electron launch. It was a highly complex mission that showcased a strength as an end-to-end space company, not just a launch provider. In addition to providing the launch for Electron, on Electron, our team developed and built and operated the Lunar Photon, a highly capable interplanetary spacecraft that set Capstone on a course to the moon. And the team developed a highly efficient lunar trajectory to enable such a small rocket to transport a payload into land orbit. Rocket Lab is the only small launch provider to have designed, built, launched, and operated its own satellites in orbit, further expanding our total addressable market. The Capstone mission was the first launch of NASA's Artemis program to return humans to the moon, and we're immensely proud to have enabled this crucial first step. Just 15 days after launching Capstone, most complex mission to date, the team turned around the next launch, which was a dedicated national security mission for the NRO. This rapid launch turnaround not only set a Rocket Lab record, but is by far the fastest turnaround between successful launches for any other small launch provider. Overall in 2022, we averaged a launch approximately every 40 days compared with a launch nearly every 60 days in 2021. And from April to November last year, we successfully hit a launch every month. So far, I've touched on some of the key launch achievements for 2022, but it was also a significant year of growth for our space systems arm of the business. More than 200 spacecraft were launched in 2022 featuring Rocket Lab space systems products, including reaction wheels, star trackers, radios, solar power, flight software, separation systems, and more. Rocket Lab technology was featured in one form or another on 30% of globally addressable launches in 2022, demonstrating the success of our strategy to extract value from the full space chain, not just from our own launches. We delivered space systems products to more than 60 customers globally, spanning commercial and government sectors. In 2022, we built a new space system production lines, including one to support high volume reaction wheel production to serve mega constellation customers. and a new satellite manufacturing facility at our Long Beach headquarters. 2022 was the year that really cemented Rocket Lab's position as a leading spacecraft manufacturer. We had more than 25 spacecraft in development for various customers, including a NASA mission to Mars, a communications constellation for global staff, in-space manufacturing satellites, and orbit fueling devices. To achieve this, we've scaled our space systems team, expanded our manufacturing and development facilities, and of course, integrated our four space system acquisitions into our spacecraft programs. And finally, before we wrap up the four-year highlights and dive into the fourth quarter in more detail, in 2022, we saw backlog more than double from 241 million at the end of 21 to more than 500 million at the end of Q4 2022. The growth driven by a healthy mix of launch and space systems bookings. So with that, let's move on to the key accomplishments of 2022's fourth quarter in more detail. The final quarter of 2022 saw us successfully launch two Electron missions, delivering satellites to orbit for the Swedish National Space Agency and General Atomics. We were also honored to be selected by NASA to launch two dedicated Electron missions to deliver the Tropics mission to orbit to monitor hurricanes and tropical storms. In Q4, we also received the required licenses and approvals for a first mission from Launch Complex 2 in Virginia. It was a long road to bring LC2 into operation, but with those approvals in place, at the end of the year, we were able to launch the first electron mission from U.S. soil early 2023. To top that off, we also introduced Rocket Lab National Security, a new subsidiary to deliver reliable launch services and space systems capabilities to U.S. government and its allies. We found our largest order of satellite separation systems in the company's history, totaling $14 million in hardware to serve the Space Development Agency's Tranche 1 transport layer. It was also the quarter that Capstone reached lunar orbit, signalling final mission success for the NASA mission more than five months after the successful launch on Electron. We also got testing underway at the NASA Stennis Space Center for Archimedes engine hardware and completed construction of the new satellite production line and clean room at our Long Beach headquarters. Okay, let's start off with the key achievements in Q4 for Electron. We rounded out 2022 with two successful Electron launches in Q4. Both missions were from Launch Complex 1 and saw our total launch tally for the year reach nine successful missions. As mentioned, this is a significant increase in launch cadence from six missions in 21. And we look forward to continuing to increase that cadence in 23. Electron is already a trusted launch provider to NASA, having successfully delivered missions to low Earth orbit and to the moon for the agency previously. So once again, we're honored when NASA entrusted Electron to deploy the remaining spacecraft in the tropics constellation across two dedicated missions. This is a constellation close to our hearts because it aims to enable scientists to study hurricanes, tropical storms, and ultimately leading to improved modeling and prediction to help save lives and livelihoods in the path of storms. These missions are scheduled to launch no earlier than May this year, and we look forward to sharing more about them in the lead up to launch. In November, during our final mission for 2022, we conducted another successful splashdown and ocean recovery of Electron's first stage as part of our rocket reusability program. We had initially planned to attempt a helicopter catch for this mission, but not all the requirements were met to ensure a successful capture due to a brief telemetry loss with Electron's first stage during atmospheric reentry. This turned out to be quite a happy turn of events, as it gave us another chance to bring back a stage that had been for swim. You never want to waste an opportunity. Our team put the return stage and components through analysis and testing, and we started to see a bit of a pattern here that we hadn't initially expected. Electron survives an ocean recovery in remarkably good condition, and in a lot of cases, its components actually pass a requalification for flight. In one of our upcoming flights, we're going to attempt another ocean recovery, this time with a few additional waterproofing modifications to the stage to protect some of the key areas and the bits we want to keep dry. Pending this outcome of testing and analysis of the stage, the mission may move us towards sticking with marine recovery altogether and introduce significant savings to the whole operation. In 2022, we proved that it was possible to rendezvous with a returning stage mid-air and get it on the helicopter hook. But if we can save ourselves the extra step by just plucking out of the water, we will. Without the helicopter, if we're able to, to determine that ocean recovery is the most viable and effective path for recovery, this opens up even more flexibility with our launch windows and takes us from around 50% of electron missions being suitable for recovery to anywhere between 60 and 70. We look forward to sharing the developments of this following our next recovery mission in the coming months. Moving on to Neutron achievements for the fourth quarter of 2022. In Q4, we officially opened the Archimedes test complex at NASA's Stennis Space Center in Mississippi. The site will be home to engine testing for Neutron's Archimedes engine, and the team made fire at the site for the first time before the end of the year with the commencement of a pre-burner igniter testing. Q4 saw some major movements at NASA Wallops Flight Facility for Neutron. including the completion of their first Neutron development building, which will be home to some stage assembly and integration activity. The team also started moving dirt at the side of Neutron's launch pad, with construction moving into full swing now that we're in the new year. We also started to see some really exciting hardware developments in Q4, with carbon composite structures for Neutron's first stage and second stages in production. As you can see here, we're working on a much bigger scale than Electron, but we've been able to take that deep composite experience we've developed with Electron and use that knowledge to rapidly streamline Neutron's development. We're designing Neutron to be the world's first carbon composite large launch vehicle with the lightest and highest performance upper stage in history. And when I say light, I mean really light. The vehicle's full tank combined, that you see in the image, two of those halves together weighs about the same as a Harley-Davidson motorbike, some 380 kgs, so incredibly high performance. Rupert Clayton, Moving on to from launched into space systems in the final quarter of 2022 we had some great milestones with faith systems, including Kevin rocket lab hardware on 30% of. Rupert Clayton, All globally addressable launches in the quarter alone more than 90 spacecraft launch to orbit featuring rocket labs space systems technology. Rupert Clayton, One of the most exciting of those was the atom is one launch of NASA sls rocket in November. That mission featured Rocket Lab solar arrays, satellite dispensers, and software, helping support NASA's goal of returning humans to the surface of the moon. In Q4, we were selected to develop the Satellite Operations Control Center, or SOC, for GlobalSTAR's growing low-Earth orbit constellation. The SOC contract builds on the existing relationship between NDA, Rocket Lab, and GlobalSTAR, established in February 2022, when Rocket Lab was awarded a $143 million contract to design and manufacture 17 spacecraft buses for Global Star's new constellation of satellites. These new satellites and SOC will augment Global Star's existing constellation, delivering reliable mobile satellite voice and data services from space. The SOC will provide 24-7 monitoring and management of Global Star's constellation, including continuous satellite control and monitoring using Rocket Lab's MAX ground data system satellite orbit determination, maneuver planning, collision avoidance, orbit maintenance, and propellant management. By designing and manufacturing global spacecraft buses, delivering the flight and ground software solution, and developing and supporting the spacecraft operation center, we're once again executing on our strategy of going beyond launch to deliver complete space mission solutions. And finally, in Q4, our solar team in Albuquerque, New Mexico, delivered the final solar panels for the NASA Gateway Power and Propulsion Element. These solar panels will enable NASA's Gateway Lunar Space Station to be the most powerful electric propulsion spacecraft ever flown, and they're a critical part of returning humanity to the moon. That wraps up Q4 2022, but we've been busy since then, so let's take a quick look at some of the company's key accomplishments so far in Q1 2023. Electron took to the Virginia skies for the very first time in January 23, marking the beginning of Rocket Lab launches from the US. It was a successful mission that delivered three satellites for commercial constellation operator Hawkeye 360. This was a significant moment for us and for the small satellite industry, is the new launch new us launch pad represents even more flexibility and responsive launch capabilities for small satellite operators all three rocket lab launch pads across two hemispheres are now operational and we look forward to many launches from them all with that first lc2 mission successfully launched we're on to the next in fact right now there are Rockets had both Launch Complex 1 and Launch Complex 2 preparing for a launch within a mere few days of each other. From Launch Complex 1 in New Zealand, we're preparing to launch two satellites for Black Sky Global and what will be our sixth mission for the Constellation Company. Meanwhile, at Launch Complex 2 in Virginia, the team is preparing to launch a mission for Capella Space, a cycle installation operator that we previously launched in 2020. Both missions are currently scheduled to launch in March, with launch windows to be finalized in the coming days based on final customer requirements and range status. And while we have one rocket in the pad for Capella Space, we've just signed a multi-launch contract with them to launch another four dedicated Electron missions through 2023. These missions are on the top of our second launch for then coming up in March, so five launches to look forward to this year altogether. We're honoured that they've entrusted us with five missions in 2023 to help build their growing cell constellation. The latest multi-launch deal with Capella Space further cements our leadership position as the trusted small launch provider of choice for constellation operators. We've now launched and signed deals with some of the most prominent constellations and operators globally, demonstrating the value that Electron provides to these customers by offering reliable and flexible launch to tailored orbits. Onto our space systems, and we've started the quarter strong by releasing two new space systems products, a new satellite radio and reaction wheel specifically designed for Constellation-class spacecraft. These products bolster our existing heritage in space system components and provide an entry point to new programs and mission profiles. This quarter, we also formally established a new subsidiary, Rocket Lab Australia, to explore opportunities to support the expansion of Australia's national space capabilities. The Australian government has set a goal to triple the size of the Australian space sector from an estimated $4 billion Australian in 2016 to $12 billion by 2030. To help facilitate this growth, the Australian government has committed more than $2 billion to the civil space sector since 2018 for programs spanning earth observation, satellite infrastructure, high-tech manufacturing and support of NASA's Artemis program. The Australian government has also committed $17 billion above and beyond the civil space investment for the development of defence space capabilities. Rocket Lab has already played a key role in supporting Australia's rapid growth in space through supplying launch and space system products to Australian organisations. By building on our deep expertise and proven heritage in the space sector, we're well positioned to advance Australia's capabilities in space. We have people on the ground already and we look forward to exploring opportunities where they make strategic sense for us as a business and where we can truly strengthen Australia's position as a global space sector. On the neutron front this quarter, we've made investments and progress into establishing manufacturing infrastructure that will support scale production of neutron. This includes composite tank moulds for stage one and two, as well as the installation of large 3D printers and milling machines to enable rapid production of the Archimedes engine. Q1 2023 brought welcome news in the form of a new acquisition strategy for the National Space Security Launch. This is the Space Force's program to launch the nation's most critical and valuable government assets. Under NSSL Phase 3, RFP, which was released earlier this month, new entrant launch vehicles qualify to bid for launches. Neutron is designed with NSSL launches in mind, and we look forward to making Neutron available to meet the national security needs. You know, this wasn't a chance of good luck for us. We actively engaged NSSL on this to introduce this change on the back of our strong relationship with them. The first vote of confidence in Neutron came back in September 2021 when we won a $24 million contract for the development contract for Neutron's upper stage through the Space Forces Assistance Command of Launch Enterprise, which falls under the NSSL program. The contract recognized Neutron's design to maximize mass to orbit capability, orbital insertion accuracy, and responsive dedicated launch for the U.S. government. All key requirements for the highest priority missions awarded through the NSSL. And I'm pleased to see this further strengthening of our relationship with this new path opened up. And finally, before I hand over to Adam for the financial highlights, I'd like to share that David Cohen is wrapping up his time on Rocket Lab's Board of Directors. David is a partner at Bessemer Venture. Our partner is one of our earliest investors and he joined Rocket Lab's board in 2014. Since then, we've been grateful for his leadership and guidance as we grew Rocket Lab from a small startup to a publicly listed company. He was a leading small launch provider and now Global Space Systems firm. I'd like to personally thank David for his support and efforts at Rocket Lab over the past nine years and wish him the very best for this continued work in deep tech. And with that, I'll hand over to Adam to discuss the financial highlights.

Great. Thanks, Pete. I will first review our fourth quarter 2022 results and then discuss our outlook for the first quarter of 2023. Fourth quarter 2022 revenue was $51.8 million, which was within our initial guidance range of $51 to $54 million and well above our revised guidance range of $46 million to $47 million provided in December Fourth quarter 2022 revenue reflects growth of 88% over the year ago fourth quarter of 2021. And the result, two successful launches and continued strong contribution for our space systems business. The overage to our revised guidance range was a result of higher than anticipated revenue recognition from a Solero contract to a major prime contractor program. This closes out a very successful year with full year 2022 revenue of $211 million. up 239% from 2021, with launch and space systems finishing the year with revenue growth of 56% and 546%, respectively. Now turning to gross margin. GAAP gross margin for the fourth quarter was 3.5%, below the low end of our original guidance range of 5% to 7%. Non-GAAP gross margin for the fourth quarter was 15%, which was also below our original guidance range of 16% to 18%. Gap and non-gap gross margins results relative to both our revised guidance and to our Q3 2022 results reflects a combination of reduced launch cadence and a related lack of fixed cost absorption, below average revenue contribution from the catch me if you can R&D recovery mission, and unfavorable mix within our space systems components revenue. More specifically, launch cadence was impacted by the push out of the Hawkeye 360 launch from the December quarter due to weather and other factors. The below average revenue contribution from a successful Q4 2022 Catch Me If You Can recovery mission was a conscious decision to trade off acceleration of the electron recovery margin improvement initiatives versus maximizing revenue from additional payloads that would have taken longer to secure and integrate. Our current launch manifest and proven execution capabilities gives us confidence that we'll see a return to growth and gross margin expansion in the launch segment of our business as we progress through 2023. Lastly, the unfavorable mix within space systems was a result of the timing of revenue recognition under a legacy low-margin pre-acquisition Solero contract with a major prime contractor. We anticipate significant top-line growth to resume for our space systems segment in the second half of the year as we forecast to begin benefiting from more meaningful revenue contribution under the MDA Global Start contract, which brings with it gross margin uplift in addition to forecasting a beneficial mix and change in our space systems component revenues as our higher margin component solutions contribute at a greater rate versus the lower margin component solutions. We ended Q4 with 818 production-related headcount, up 21 from the prior quarter, which positions us well to not only scale production, but also the resources to exploit margin-expanding production efficiencies. We're turning to operating expenses. GAAP operating expenses for the fourth quarter were $39.1 million, at the low end of our guidance range of $39 to $41 million. Non-GAAP operating expenses for the fourth quarter were $27.3 million, which was below our guidance range of $28 to $30 million. The decline in both GAAP and non-GAAP total operating expenses versus the third quarter was primarily driven by an R&D grant benefit and lower stock-based compensation, partially offset by increases in headcount and prototyping expenses supporting neutron and space systems. In R&D specifically, gap expenses decreased by $2.5 million, or 14% in the fourth quarter, driven by, again, R&D grant benefits and lower stock-based compensation. Non-gap R&D expenses were down $1.6 million, or 13% quarter-on-quarter. We anticipate a return to sequential growth in R&D as we ramp investment in our neutron launch vehicle. Quarter-ending R&D headcount was 348, representing an increase of 18 heads from September 30, 2022. In SG&A, GAAP expenses increased $1.1 million quarter-on-quarter, or 5%, driven primarily by outside services, primarily owing to the first-year SOX compliance-related expenses. Non-GAAP SG&A expenses increased by $1.6 million, or 10% quarter-on-quarter, mostly driven by outside services as previously mentioned. Quarter-ending SG&A headcount was 197, representing an increase of one head from September 30, 2022. On a year-on-year basis, GAAP operating expenses for the fourth quarter of $39.1 million were up $8 million, or 26% year-on-year, while non-GAAP operating expenses of $27.4 million were up $7 million, or 34% year-on-year. The growth in both GAAP and non-GAAP operating expenses were primarily driven by the acquisitions of ASI, PSC, and Solero, which occurred in Q4 2021 and Q1 of 2022, as well as increases in staffing costs related to neutron vehicle development, the electron booster recovery initiatives, and photon development projects. In R&D specifically, GAAP expenses decreased by $3.1 million, or 25% in the fourth quarter. while non-GAAP expenses were up $2.6 million or 33% year-on-year. In SG&A, GAAP expenses increased $5 million or 26% year-on-year. Cash consumed from operations was $19 million in the fourth quarter compared to $23 million in the third quarter. The sequential improvement of $4 million was driven primarily by improved cash collections during Q4. Purchases of property, equipment, and capitalized software licenses increased from $8 million in Q3 to $15 million in Q4. These investments are primarily aimed at new equipment facilities underpinning our neutron development initiative and expansion of our photon production capabilities. Overall, non-GAAP free cash flow consumption in the fourth quarter was $33.9 million compared to $31.3 million in the third quarter. The ending balance of cash, cash equivalents, restricted cash, and marketable securities was $484.33 million at the end of the fourth quarter. With that, let's turn to our guidance for the first quarter of 2023. We expect revenue in the first quarter to range between $51 and $54 million, which reflects $32 to $35 million of contribution from space systems and $19 million of contribution from launch services. which assumes three launches or two remaining launches in the quarter. One of the three launches forecasted in Q1 was a successful January Hawkeye 360 mission out of LC2 in Virginia, which was a partially filled rideshare mission where, similar to an R&D mission, we made a conscious choice to focus on expediting our first ever LC2 launch versus maximizing revenue by filling the rest of the mass capacity on the launch vehicle. Based on our manifested launch backlog, we expect our average selling price to increase back to our standard pricing as we progress through the remainder of 2023. We expect first quarter GAAP gross margins to range between a negative 5% and negative 3%, and non-GAAP gross margins to range between positive 7% and 9%. These forecasted GAAP and non-GAAP gross margins reflect greater contribution from our launch services segment, as well as lower margin product mix within our space system segment. We expect first quarter GAAP operating expenses to range between $44 million and $46 million, and non-GAAP operating expenses to range between $33 million and $35 million. This quarter-on-quarter increase is driven primarily by increased R&D staff costs and prototype expenses related to accelerated investments in the neutron launch vehicle development and scaling of our photon product family. We expect first quarter GAAP and non-GAAP net interest expense to be $1 million. We expect first quarter adjusted EBITDA loss to range between $28 million and $30 million, and basic shares outstanding to be approximately 476 million shares. And with that, I'll turn it back to the operator for questions.

Certainly. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Also, on behalf of the management team, we would ask that you limit yourself to one question and one follow-up. The first question comes from the line of Christy Luong of Morgan Stanley. Please proceed.

You know, first question for me, on Global Star, we've seen their difficulty in raising financing. It's great to see that they finally have a resolution with Apple now prepaying to help fund the satellite build. So in this environment where capital is more expensive, how prevalent are financing challenges amongst your commercial customers? Is this a one-time thing, or are you seeing this continue into the supply chain?

Yeah, I can take a pass at that. And Pete, you can also provide your thoughts, Christine. So I would say that certainly with the capital market conditions the way they are, it's difficult for a lot of people to continue to finance their businesses. We've been relatively immune from that, largely given the mix that we have of either direct government contracts or also with customers who have deep ties and rely on a great amount of their revenue to come from government programs. So I think we've probably been impacted a lot less than maybe some other folks you've come across But, you know, we're not completely immune to it. We've certainly seen some of our smaller customers, you know, struggle from time to time and, you know, have required a little bit longer to pay or in some cases, you know, having to take small, relatively small amounts of bad debt reserves for amounts owed us. But for the most part, you know, it really hasn't been a tremendous factor on us today. Hopefully, you know, it continues to be that way. But, you know, there's hard to determine how this is going to roll out going forward given the environment that we're in. Pete, I don't know if you have any different thoughts on that.

Yeah, no, I think that's exactly right, Adam. And one of the benefits, I guess, with a number of these programs is a very long time horizon program. So when someone secures funding, it's not typically for a one-year time horizon. So a lot of these, especially constellations, have a very long time horizon. So depending on how long this financial environment takes, last, that may influence that. But as Adam said, at this point, we don't see particularly big issues.

And Christina, I think the other thing I was going to say, I think one of the advantages that we have relative to some of our other NewSpace peers is that we obviously have a very healthy balance sheet. And we're also, you know, really particular about who we take on as customers. So when we look into our backlog, you know, we don't see a lot of kind of financing risk in there, again, because of the mix of customers that we have. And again, I think that we've been able to be a little bit more creative and flexible in some cases in working with customers to kind of help support their business and also kind of make sure that, you know, we're in a good position from, you know, maintaining and growing market share in many cases.

Thanks for the addition, Adam. And so maybe, Peter, as a follow-up on government contracts, you touched on the Space Force RFP for the National Security Space Launch Phase 3. And, right, it looks like Lane 1 is geared more towards medium-sized launch vehicles where Neutron would play in. So can you talk about the timing, milestones to watch and size the opportunity for Neutron?

Yeah, absolutely. So, you know, from a milestone perspective for our program, the things to kind of watch are, you know, tanks rolling out, obviously engine testing and integration. There's a lot of stuff going on in the background where it's less obvious. You know, we talked about moving dirt on a launch pad where actually to get to the point of moving dirt on a launch pad, there's a tremendous amount of kind of work that needs to be done to get to that point. So those are the things I'd be watching out for. We obviously, we have a great relationship with the whole program and industry cell program, and we're encouraging them to certainly think about how can the US maximize its capabilities across a wide range of launch vehicles. and opportunities to leverage that. So, yeah, we're very happy to see, you know, the second line come in and that aligned exactly with what, you know, what we had been promoting.

Great. Thanks, guys.

Thank you. The next question comes from Eric. Rasmussen of Stiefel, please proceed.

Yeah, thank you for taking the questions. So first, maybe just on launch, you have slotted for three in Q1, two additional coming up. It looks like your timing is sometime in March. But, Adam, you previously talked about maybe 14 for the year. We had one slip from Q3 to Q4, so I'm assuming maybe that makes the number 15. Is that still a good number for us to be modeling and thinking about as we look at launch?

Yeah, no, Eric, I think so. I mean, we typically have seen, I mean, it's a relatively young business, so we don't have a great amount of track record as far as seasonality is concerned, but It does seem like Q1 gets off to a slower start, probably a function of, you know, a little bit of a hangover from the vacations, launch ranges, you know, kind of being, you know, kind of closed at the end of the year. So it takes a while for programs to get respun up. But, you know, with the targeted three launches in the first quarter, I think we're in great shape to get to that 15 number of launches a year. You know, demand actually is higher than, would indicate a higher number of launches than 15 this year, but we've also learned you know, through the School of Hard Knocks that, you know, we can get burned when we rely really upon what just our customers are telling us what their demands are because, you know, customer spacecraft all, you know, oftentimes seem to slip and push out to the right at the last moment just because of the nature of how these programs develop and when things come through their final qualification and testing. So we think that we've got, we've kind of risk adjusted the numbers. So we think 15 is the right number for the year given where we're at and given the likelihood that some programs could push to the right. But, you know, time will tell, but right now it feels like the right number.

Okay. Maybe just adding to that, you mentioned, you know, we've seen it with the Q1 outlook for launch at 19 million for three launches, but you mentioned that you probably would get back to more of a normalized ASP, you know, throughout the year. Is that fair to say, right?

Absolutely. Yeah. Again, we made a conscious choice to get that launch off earlier in the year versus kind of just kind of take more time to backfill all the volume capacity on the vehicle. And given right now, I mean, we have very, very strong visibility and conviction in where the manifest is, and we know what the launch prices are for those. So, yeah, we're confident where the ASP is migrating back to where it has been and more towards our kind of advertised kind of sticker price.

Okay. And maybe just my follow-up question. You know, on the MBA contract, any milestones that maybe you can call out? You know, where are you in terms of building out the manufacturing line and sort of what sort of volumes can you achieve? And then maybe just on the opportunity for launch, any updates there? Thank you.

Yeah, I'll let Pete. You want to take a first pass with that?

Yeah, sure. Yeah, absolutely. Eric, things are looking good. So if you come and visit us, you can see a fully stacked integration facility at headquarters. So that was completed last year. And that facility is more than capable of processing the 17 that are on contract and any further that may be options. So no, I think we're in good shape there. We continue discussions for the launch of those particular spacecraft.

Eric, I think I'll just add on a little bit there. We continue to knock down the gates towards these milestones on the program. We've cleared quite a few of the scheduled milestones. We're on schedule. Everything looks to be in good shape. We won't go into all the details of all the kind of milestones and sub-milestones, but so far we've been very fortunate to be hitting all of our milestone dates, getting through successful reviews. So, yeah, all that looks very, very good. So far we've also been pretty fortunate that we haven't been burned by any supply chain issues at this point. So, yeah, the product is still relatively early, but given everything that we're seeing right now, everything looks to be on track, and so far we've got happy customers.

Sounds good. Thank you.

Thank you. The next question comes from Scott Duschel of Credit Suisse. Please proceed.

Hey, good afternoon. Adam, it looks like the Q1 EBITDA loss you're guiding to is about double the loss in Q4 and pretty close to what the street was expecting for the full year in 23. So just given the market's focus on profitability, I was wondering if you could... give some further context on what's driving that increase and then how we should think about the trend from Q1.

Sure. Yeah, you know, I think that there, you know, I don't think there's been a tremendous amount of resolution in some of the models that are out there. I think that when, you know, we've communicated to investors kind of the level of investment required for the Neutron program, You know, when we came out, we said it was going to be roughly a $250 million program to get the first neutron to the pad at the end of 2024. And we believe we're still on schedule with that. So if you kind of just look at kind of what that, we kind of, we provided a breakdown of how much of that was going to be, you know, in CapEx versus, you know, prototyping and then, you know, OpEx through headcount and so forth. I think the ability there is to model out what that should be, especially given where we are now as we are in Q1 of 2023 and then anticipated launch date in Q20. for of next year. So, you know, I guess it shouldn't be too much of a surprise kind of where we are kind of on that adjusted EBITDA basis. And I think that, you know, at least for internal purposes, it feels like it's pretty consistent with where we thought we'd be given kind of where we are in the lifecycle of the program. You know, from a modeling and trending going forward, you know, we're going to see continued uptick in spending related to Neutron. You know, I think we've crossed the hump or gotten over the hump for a lot of our photon space systems are related, pure R&D work. There's still more to come, but a lot of it's kind of behind us. But I think that, you know, we'll crest the neutron spending hump probably sometime in the middle of next year, again, as we get closer and closer to the launch date in Q4. So, again, I think the uptick in spending the current or the forecasted Q1 adjusted EBITDA, while we don't give, you know, guidance beyond kind of the next quarter, I think that's a number that's going to be, you know, I don't think we're looking at the low watermark as far as adjusted EBITDA loss in a quarter because, again, spending has continued to ramp up. But I also don't think that, you know, we're looking at that it's going to get dramatically higher than where it is. But it feels like we're kind of in a new range of kind of spending on the program. But we also see revenue increasing over the same time period. So, you know, hopefully a lot of that is because offsetting. So, yes, spending will increase fairly significantly, but we believe that revenue is going to be helpful in growing along with that growth in R&D spend so that we don't kind of balloon that adjusted EBITDA loss on any quarterly basis.

Okay. So, I mean, if Q1 is not below watermark, I mean, could full-year EBITDA losses be $120 million or more? Like, I'm just trying to put some sort of finer point on it because, to your point, there's not a lot of resolution in street models.

Yeah, again, a lot of it depends on you. A lot of things are still in flux as far as the major prototyping items, when we're going to get invoiced for those types of things. So it's really hard to predict right now exactly what the curve is going to look like or the slope of the line on R&D spending increase related to Neutron. We also have some pretty significant revenue growth coming in the second half of the year related to some of our space systems programs, again, which depending on how hard they hit up and the related margins that accompany those, hopefully moderates quite a bit of that spending increase. So, yeah, at this point, I'm not able or kind of willing to go really beyond what the next quarter looks like. But as we spend more time together and we get a little more color and visibility, we'll certainly share that with you and others.

Okay. I mean, that's super helpful. And then just as a follow-up, does the $143 million contract with the MDA – Does that include any inflation protection mechanisms on it, just given that it's kind of a multi-year contract and you're in an inflationary environment? Just curious on inflation protection on that contract specifically. Thank you.

Yeah, Scott, no, it's a good question. No, that's a firm fixed price contract. So we were able to secure some incremental scope under that agreement with the SOC to operate the satellites on orbit for the customer. So we got some uplift to total revenue from that. We didn't disclose the exact amount. But, you know, I think we feel pretty good because when we were modeling out the, you know, the bomb and other factors building the satellites, we took into consideration a certain amount of inflation. Now, is inflation running hotter than we thought it was going to be, you know, a year and a half ago when we were doing that modeling? Certainly, but we also put in some cushioning factors to make sure that we'd come out on the right side of that. So we feel very good and we don't see anything right now that would kind of impact the margin expectations for that program versus where we originally modeled it.

Thank you, Adam. Really appreciate it.

Thank you. The next question comes from Sujit De Silva of Roth MKM. Please proceed.

Hi, Peter. Hi, Peter. Hi, Adam. So, our first question on the launch is the 14-15 million for the year. What number are you roughly expecting from Virginia? And what's the incremental launch opportunities that are available from the U.S. soil that, you know, maybe weren't unavailable to New Zealand. If you could talk about that, that would be helpful.

Yeah, hi, Sajud. Yeah, so of the 14 and 15, it kind of depends a little bit on readiness of customers, and it could be anything up to sort of, you know, six launches out of that side this year, like I say, depending on readiness of customers. Yeah.

Okay, and the incremental opportunity Peter, U.S. government or other specific to Virginia?

Yeah, yeah, yeah, sorry. Yeah, no, and incremental opportunity. You know, the one thing that we built that paid for was kind of a rapid response for our U.S. government customers. And, you know, we are seeing that capability really being valued. And, you know, more on that shortly, I would say. But it certainly will be... It certainly opens up, I would say, much greater access to doing, you know, defense or national security work, which is frankly why we intended to build that pad.

Okay. Yes. On the impact of having this Virginia launch site now operational, you know, there's some variable incremental costs that come along with launching from that range because, you know, we don't own the range like we do in New Zealand. But at the same time, we are seeing a strong degree of acceptance or willingness for customers to pay a premium to launch out of that range for obvious reasons. It's three, three and a half hours outside of DC. And there's a lot of benefits that come from a logistics perspective and having that in the backyard of some of our largest customers. So I think for us, it's hugely enabling. And it's something that our customers seem to be very, very grateful that it's come online now. So I think it's going to be long term be a very busy range for us. And I think we're well set up to kind of leverage that into more and more U.S. government business.

Okay, great. Thanks for that, Adam. And then as my follow-up with the backlog growing here, I think 500 million, should we expect additional direct sell-related opportunities like GlobalSat, MDA, or maybe was that a one-off, just to kind of set the expectations for what could be coming now that you've successfully won that?

Yeah, I mean, this kind of goes to the pace at which the backlog grows. We tend to be working on fewer larger deals now than perhaps, as Adam mentioned before, the quality of our backlog is super important to us. So we're always working on some pretty significant deals. So I would hope that we would continue to see those kind of larger lumps drop in as we close those out.

Yeah, I think, Suji, maybe a little bit more on that as well. So obviously, we're very happy with what we've been able to secure for this type of application. And certainly, we think that we're at the earlier stages of what this ultimate application could look like for us. But we're also very selective in who we work with, and we're not looking to basically go work with every kind of random opportunity that they're looking to take advantage of this direct to mobile type of opportunity. So we're pretty focused on staying engaged with the absolute tier one of customers on this type of opportunity. So yes, we see more opportunities, but it's probably going to be in a very concentrated customer area, if you will.

OK.

That's helpful.

Thanks, guys.

Next question comes from Matt Akers with Wells Fargo. Please proceed.

Hi. This is from Matt. Just quickly wanted to ask about the margins at Solero. if there's any progress being made so far for getting it to 30% by early 24?

Yeah, I'll take the first pass at this, because there's a bunch of different initiatives ongoing. Certainly, we believe that that 30% gross margin is the right target for that business. I will say that we're still going through the process of burning through the legacy backlog that was there that came at pretty compromised gross margins. But if you look at the new business that we're booking, and we've been booking quite a bit of new business, all of that is at or above our target margin. So we feel very good about how we're replenishing the backlog with new business as we burn off the old business. But there are also some longer-term opportunities for that legacy backlog, for that to become better gross margin over time. But that's kind of just the traditional blocking and tackling, getting the efficiencies out of the operation, you know, investing more in systems and processes and people and equipment. So, you know, I think that we've got the right things kind of in focus and we're actually doing the right things to get the margin up. But I would say that, you know, it's definitely a longer initiative to get the margins to where we thought we were. And I think it's aggressive at this point to think that we are going to be at that 30-point target. You know, in the early part of 2024, I think it's going to take us a little bit longer. And again, that's just a function of, you know, how quickly we kind of burn through the backlog and get some other efficiencies in the business. But longer term, we absolutely feel like that's the right number to be had. And we say longer term, we're not talking like, you know, three, four, five years. It's a shorter time horizon than that, but it's probably not the next 12 months. Pete, do you have any further color on other margin enhancement opportunities for the Solera business?

Yeah, I mean, that's a good point. I mean, one of the reasons why we're attracted to that acquisition was their new IMN beta cell technology, which is the highest performing cell technology in the world. So as we kind of take that from relatively small production volumes and almost R&D into volume production, that really expands significantly. some of those margin opportunities as well. And as Adam pointed out, I mean, we've just got to burn off some of this long legacy stuff that everything that the team has been booking and is looking, you know, exactly where we need it to be. It's just we're going to have this drag for a little bit.

Okay. Thank you. Thank you.

The next question comes from the line of Andre Madrid of Bank of America. Please proceed.

Hey, guys. How are you? Kind of wanted to touch base on the comment you made regarding ocean recovery versus midair recovery. I mean, is there a big difference in between how much you might be able to recover for it to be received in midair versus ocean? Is there, like, an amount of the electron that you might not be able to recover in the event that it splashes down?

Yeah, hey Andre.

No, not really at all. The reason why we didn't want to get it wet is there is some remedial work that's required when you get it wet. You know, purging and slightly more intense kind of recertification activities rather than it being dry. But as we've placed a whole bunch down now and retrieved them back, that's become really well understood for us. So when you trade the extra work that you need to do to replenish them and recertify a vehicle for launch against the cost of operating the helicopter, it's pretty much neutral. So at that point, What the water landing does enable us to do is recover more vehicles because we don't have the constraints of the operations of the helicopter. So financially, it's kind of the same, but we get to actually reuse more vehicles. And as we splash more and more down, we kind of learn more and more. And as I mentioned in the deck, we're making modifications to the vehicle that make it far more kind of seaworthy, if you will. Sorry, it's only going to get better.

I understood. Is there any read-through to neutron development then? I mean, it seems like it's not that much of an issue if it splashes down. Is it worth the incremental development cost to develop the landing system if you could also do recovery from the ocean for the neutron platform? I mean, is that something you guys are considering as well?

Yeah, sure. I mean, they're just such different vehicles of scale. One of the advantages of, you know, electron being so small is that these kind of sea recoveries and things make it simple and viable. A vehicle of that scale, you know, an ocean splashdown is not something you'd want to do. It's a very large thing floating in the ocean. So, you know, the big difference between electron and neutron is that you know, neutron is designed from day one to be landing and reusable, whereas electron, you know, I thought it was impossible for the longest period. So it was never conceived. And the mass margins you have on a small launch vehicle versus a large launch vehicle just make, you know, small launch vehicle recovery infinitely more difficult. So when you've got a fresh piece of paper and you can design it from scratch, then, you know, landing a neutron, you know, that it dries is by far the most sensible thing.

ownership. Thanks.

Thank you. The next question comes from Edison Yu of Deutsche Bank. Please proceed.

Hey, guys. Thanks for taking the question. First one, I'm sure you've seen there's been quite a few high profile failures since the last earnings call by some of your peers. Have you seen any increased activity from maybe customers that weren't considering you before that are coming to you now because of this?

Yeah, I mean, I'm not aware of one particular customer that's kind of offloaded, but I would say it's kind of a general sentiment that, you know, as more of these kind of emerging providers and others have these failures, it's kind of a reminder that this is way more difficult than people sometimes give it credit for. So I think as you get more data points of how difficult it is and more data points of people failing to execute against it, it certainly changes the sentiment and I would say that customers that we've been in discussions with for longer periods of time, those failures solidified their decision to come with us pretty quickly.

Understood. As you ramp up the spend on Neutron, how should we think about the next couple of big milestones? And I sort of ask that in the context of maybe a couple in the second half, And also, when would you consider announcing when exactly that first launch is for Neutron? Is that like a 4Q23 thing? Is that a 1Q24? Just how to think about the sequencing of leading up to the first launch.

I'll deal with the announcement, and I'll hand it over to Adam to talk about the spin profile. You know, a launch vehicle, you think you're golden until, you know, you do a particular test. And in fact, it's, you know, it's across the whole space industry. This is why so many satellites delay as you do like a final test and find that, you know, you've got a thermal issue. And it's the same with launch vehicle development. You think you're golden until you go and do a test and realize that something's not right. So you have to operate in the mindset of kind of like a green light schedule until something proves otherwise. So I wouldn't expect us to make any kind of formal announcements of a launch date until it's pretty obvious that we're ready to launch it and we've got stuff on a pad and things are moving along. Because as you've seen from some of the other emerging players, some of them have had a rocket on the pad for a year working through various launch vehicle issues. So it's pretty hard to just put a stake in the sand, but we'll keep everybody updated on that progress, and if there's anything that crops up that we think is going to have an impact to timing, we'll let everyone know.

Yeah, as I said, I would say that our baseline plan of record that's built into our financial plan assumes a launch in Q4 of 2024. All right.

Appreciate it, Colin. Thanks.

Thank you. And the next question comes from the line of Austin Moeller of Canaccord. Please proceed.

Hi. Good afternoon. So just my question about Peter's comment around the ocean recovery of the electrons. If we go from recovering 50% of the electrons to potentially recovering 60% to 70% of electrons by doing water recovery, What does that do to your projections for gross margins for the launch business relative to your prior expectations?

Yeah, Austin, that's a good question. I mean, I think it really doesn't change it because, you know, this basically just buys down the risk of getting to that margin target, right? So I would say the margin targets, you know, in a business like this are never slam dunks. There's a lot of hard work that goes into it, you know, Recovery is part of it. There are other elements that we're driving, getting to our target margins, including a launch cadence of launching twice monthly. Also some kind of, you know, I would say more traditional savings from BOM elements and labor efficiencies and so forth. So all of it kind of factors into our longer-term target of getting into the low 50% gross margin range on a non-GAAP basis. So, again, I wouldn't build in any increase to that based on this. I think just maybe it de-risks our ability to get there or what timeframe we get there.

Yeah, I'd agree 100% with that. This, you know, recovery is one element of the program here.

Okay. And then also just considering your catbird seat position within the launch market right now, just given the shortage of available launch vehicles, You see Amazon and a moon lander company all scrambling to get onto a ULA launch, even though it's a first launch for that vehicle. And do you expect to increase pricing at all for the Electron, just given the launch shortage and inflation pressures, or do you plan to keep prices where they're at?

I mean, electron pricing has never gone down.

It's only ever gone up. But yeah, maybe you want to take that in random.

Yeah, I think the, I think the, over time, you know, we, again, we see prices increasing. I think the greatest factor overall that will lead to increased pricing is that as we see, you know, more failures from aspirational launch companies and, you know, A lot of these folks just won't have the capital, in my opinion, to execute. And so I think it's just a matter of time before kind of the natural selection process really leads us down to a point where launch for Electron becomes more expensive, not less expensive. And I think that also might be a reason why we're starting to see more kind of bulk buys from Constellation customers, because I think they realize that. I think, you know, as difficult as it is to commit to one platform, with the potential of maybe cheaper and more plentiful opportunities coming on board for launch or coming out to the market, I think they're also realizing that, again, the difficulty of doing this and having a reliable launch platform is super important because time is money for a consolation operator. I think that my prediction would be that prices firm up again as we see continued challenges for some of these aspirational launch people, but there's still enough noise out there from people who are trying to enter the market where we don't have, I would say, a tremendous amount of pricing kind of leverage. But I think that's starting to change. I think we are starting to see, again, people realizing how difficult it is, and there's not going to be 100 successful launch companies. Maybe there's a handful or less than a handful of successful long-term players. And I think with that, you would normally see pricing firm up, and that's what I would expect to see happen over the course of the next several years.

Okay, thanks for framing that. I appreciate it.

Thank you. There are currently no additional questions registered at this time, so I will pass the conference back over to the management team for closing remarks.

Thanks very much. That's a wrap for today's presentation. Thank you, everyone, for joining us on the call. Adam and I will be speaking at these up-and-coming conferences and look forward to the opportunity to share more exciting news and updates with you. Thanks again, and we'll look forward to speaking with you again soon about the exciting progress being made here at Rocket Lab.

And with that, we will conclude today's conference call. Thank you for participating. You may now disconnect your line.