Rocket Lab USA, Inc.

Hello and thank you for standing by. My name is Jessica and I will be your conference operator today. At this time, I would like to welcome everyone to the Rocket Lab first quarter 2003 financial results update and conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. I would now like to turn the conference over to Colin Canfield, Investor Relations Manager. Please go ahead, sir.

Hey, thank you. Hello, everyone. We're glad to have you join us today for today's conference call to discuss Rocket Lab's first quarter 2023 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 harbor 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 are contained in our filings with the Security and Exchange Commission. Such statements are based upon information available to the company as of the date 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 also contain non-GAAP financial measures within the meaning of Regulation G enacted by the SEC. Included in such release are supplemental materials or reconciliations of these historical non-GAAP financial measures to comparable financial measures calculated in accordance with GAAP. This call is also being webcast with a supporting presentation and 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 Colin and welcome everybody and thank you for joining us. Today's presentation will go over our key business accomplishments for the first quarter of 2023, as well as further achievements we've made since the end of the quarter. Adam will then take us through our financial results for the first quarter before covering the financial outlook for Q2 2023. After that, we'll take some questions and finish today's call with the near-term conferences we'll be attending. All right, on to what we achieved for the first quarter of the year. We started the year strong with three successful Electron launches, matching our expectations for the quarter. Each of these missions achieved an important company milestone. In January we launched our first mission from US soil. We quickly followed that up by a second US launch from NASA Wallops in March, and then just seven days later we had a successful launch from our LC1 launch site in New Zealand. Not only was this our fastest turnaround for launch to date, but by doing it from two different launch sites and countries really demonstrated the level of flexibility and responsiveness that we're delivering to customers now. Achieving this high launch cadence early in the year sets us up well to hit our 15 Electron missions for 2023 as planned. At a time when we're seeing many small launch companies fail to service the market, we're continuing to deliver successful missions for our customers. We're experiencing a correlated increase in launch bookings for Electron in 2023 and beyond from our new and returning customers across government and commercial sectors. Our progress with Neutron is strong as well. We started off the year with a payment from the US Space Force as part of a formal programme milestone we met. This was recognised revenue in the first quarter, which is great. Later in the presentation, I'll delve into some of the key launch vehicle and programme development updates for Neutron. Our space systems business also ticked some really big wins this quarter, with Rocket Lab satellite components, or software, featuring on 18 spacecraft across eight missions. We're seeing continued booking strength in our solar power division, and we also hit some major program milestones in two of the most significant satellite builds that I'll take you through as well. As mentioned, a strong first quarter for Electron launches. Two missions from Launch Complex 2 in Virginia and a third from Launch Complex 1 in New Zealand, including that rapid seven-day turnaround between the two launch sites. All of these missions were for commercial Constellation operators, all of whom have signed bulk dedicated launch contracts. Across more than 36 Electron launches, it has proven itself as a reliable workhorse for commercial and government providers alike. Commercial satellite operators need dependable rides to unique orbits, and Electron remains the only small launch vehicle delivering this consistently. In fact, even today, Electron is the only US small launch vehicle to successfully deliver satellites in orbit in all of 2023. One of the latest multi-launch deals was signed in February with Capella Space, The deal will see us fly four more dedicated Electron missions for Capella from Launch Complex 1. With Launch Complex now operational, we have the flexibility to move any of those missions to the US if we need to meet our customer or mission requirements. On to big rockets now. Development of Neutron continues at pace, with the team hitting some key development milestones in Q1. We're working steadily towards our first full-scale Neutron booster at our US facilities, while at the same time closing in on a full-scale neutron second stage, including all composite parts ahead of flight hardware tank test in Q2. These latest photos from the factory show the size of those tanks. In Q1, we also reached a US Space Force payment milestone for completing successful development phases of neutron. This payment is part of a $24 million contract awarded to us by the Space Force to develop neutrons up a stage to maximize mass to orbit capability, orbit insertion accuracy, and responsive dedicated launch. These are all capabilities that position Neutron well to launch the highest priority national defense and security missions awarded through Lane 1 of the National Security Space Launch Phase 3 Program, or NSSL Phase 3. Meanwhile, we're progressing well with Neutron's reusable engines, the Archimedes. Full-scale Archimedes engine components are coming off the 3D printers, including injectors, combustion chambers, This is a great progression in the Archimedes development and it proves out the advanced additive manufacturing techniques that we have planned for these engines. But as I've always said, a rocket is only one third of the puzzle when developing an orbital launch capability at scale. You also need advanced launch, test and manufacturing facilities and systems. So while the vehicle team advances Neutron's development, our ground systems and manufacturing teams have made significant progress developing test infrastructure progressing the construction of Launch Complex 3 for Neutron and commissioning several new large-scale 3D printing machines and vehicle assembly facilities to enable rapid production. Last but not least, we're well into flight software simulations now that the vehicle design is advanced and production is underway. Software has always been a key differentiator for Rocket Lab, whether it's Electron or a Photon spacecraft, We develop, test, and fly our own tailored software, enabling us to drive peak performance out of our vehicles. I'm pleased to report that we're flying successful orbital mission simulations to a range of orbits and mission profiles with our GNC, or Guidance Navigation Control, and flight codes to the current vehicle's design and configuration. We fly thousands of these flight simulations for every single Electron mission, and this has been a key factor in delivering reliable, successful missions for years. So it's important to be achieving this for Neutron this early. Onto our space systems now. This part of our business just keeps going from strength to strength. 2022 was the year that we cemented Rocket Lab's position as a leading spacecraft and spacecraft component manufacturer. And now we've truly moved into large-scale manufacturing and execution. There have been more milestones and achievements than we can probably, we won't have time to cover in this presentation, so I'll just hit some highlights. Eight launches in Q1 deployed more than 18 spacecraft featuring Rocket Lab software or hardware, including missions for commercial constellation customers like Black Sky, Capella and OneWeb. We have more than 25 spacecraft in development for various customers, including a NASA mission to Mars, a communications constellation for Global Star, in-space manufacturing satellites and an on-orbit fueling depot. To achieve this, we've scaled our space systems teams, expanded our manufacturing and development facilities, and of course vertically integrated all of our four space systems acquisitions into our photon spacecraft manufacturing programs. As part of that growth, we're seeing continued booking strength in our solar solutions division in particular, and several major production milestones hit for our up-and-coming missions. Production is now well underway for a twin spacecraft that we're building for the NASA Escapade mission to Mars. A 2024 launch date has now been set, allowing us to move forward with the assembly integration and testing at our satellite production facility in Long Beach. Now on to our key achievements since the end of Q1. Just two days ago, we successfully launched the first of two dedicated missions for NASA to deploy the Tropics Constellation. This is a really critical constellation that will monitor tropical storms with higher revisit times than typical weather satellites. providing forecasters with more accurate storm data and to provide advance warnings and ultimately to save lives. With this first mission now complete, we'll be following up with a second one in about 12 days, and that will complete the constellation in time for the North American hurricane season. Speaking of NASA, we've been awarded another mission by the agency. Electron will launch NASA's Starling mission, a multi-cubesat mission to test and demonstrate autonomous swarm technologies. We're set to deploy these four satellites to orbit within just three months of contract signing. They were previously manifested on a different launch vehicle, but due to long delays and continued uncertainty, they have been re-manifested on Electron for Q3 this year. We recently signed multiple dedicated and rideshare launch contracts on Electron, including many with new customers who were previously manifested on other small launch vehicles but have moved to Electron after facing lengthy delays and uncertainty with other providers. This migration is a testament to Electron's demonstrated position as the reliable, dependable ride to orbit for small SAS. Hypersonics. So hypersonic and suborbital test capabilities are key priorities for the nation. Despite how critical these capabilities are, the supply of sustainable and suitable vehicles and wind tunnels is severely constrained. and this has proven this is a problem that we can actually solve right now. This quarter we formally introduced HAST, the Hypersonic Accelerator Suborbital Test Electron. A suborbital test launch vehicle that is derived from the electron, HAST provides reliable, high-cadence flight test opportunities needed to advance hypersonic systems. This isn't the promise of a future capability. In fact, the first rocket is at LC2 Virginia, undergoing its final preparations for launch right now. HAST has been selected for a range of government programs, including the Navy Crane's Mark TB Project, DIU's HICAP Program, and Missile Defence Agency's Targets and Countermeasures Study. For more on HAST, I encourage you and refer you to the press release issued on April 17th, available on our website. This quarter, we also completed extensive final qualification and testing on the first Rutherford engine that will be flown into space for a second time. This is an engine that we launched last year as part of our reusability program and now we've brought it back to the factory, run it through a gauntlet of tests and have put it back into the production flow to join a rocket for launch in Q3 later this year. This is a big step forward in our reusability program and one of the few remaining milestones before moving into full stage reuse. Last week we shipped our first of four photon spacecraft for Varda Space Industries. an in-space manufacturing company planning to manufacture high-value products and pharmaceuticals in space. This is a big milestone for our space systems team and a great way to start a busy year of satellite production that will see us work on NASA and ETA space's LOCSAT, Photon, and also spacecraft bus to support fueling depots in space. Photon spacecraft mission for Mars also is in development and plus 17 spacecraft satellite buses for Global Star. And last but not least this quarter, we introduced a new star tracker designed specifically for constellations. The latest star tracker is a new version of our existing high-performance star tracker, but is evolved for mass manufacturing and can be used as a responsive small satellite solution. It joins a growing list of spacecraft components that we've recently developed and released, including reaction wheels, satellite radios, to make best-in-class, off-the-shelf space systems hardware available for commercially and also at scale. So with that, I'll hand over to Adam to present the financial highlights and outlook.

Thanks, Pete. First quarter 2023 revenue was $54.9 million, which was above the high end of our prior guidance of $51 to $54 million. First quarter 2023 revenue reflects sequential growth of 6% and the result of three successful launches and continued strong contribution from our space systems business. Our launch services business delivered revenue of $19.6 million in the quarter off of three launches, which was modestly above our prior guidance of $19 million. The resulting average revenue per launch came in below our standard pricing due to a partially filled rideshare mission where we prioritized getting our first LC2 launch off versus opting to delay the launch to fill out the remaining rideshare capacity. As we progressed through the year, including what is embedded in the current Q2 guide to be discussed later, Our manifest indicates a trend towards higher-priced missions. Our space systems business delivered $35.3 million in the quarter, which exceeded the high end of our prior guidance range of $32 to $35 million, with strength in key programs across defense, civil, and commercial customers, and despite delayed revenue recognition impacts from vertically integrated supply of components for photon satellite build programs. Now turn to gross margin. Gap gross margin for the first quarter was 11.6%, well above the high end of our guidance range of negative 5 to negative 3%. Non-gap gross margin for the first quarter was 17.9%, which was also well above our guidance range of 7 to 9%. Gap and non-gap gross margin improvements relative to our Q4 22 results reflect a combination of increased launch cadence, an increase in average launch price, and a favorable mix within our Solero and PSE businesses, as well as improved mix between components and services at the segment level. Additionally, gross margins benefited from greater electron production efficiency, which has allowed us to shift or redirect production resources to support neutron and photon R&D programs, thereby moderating incremental R&D headcount hiring. Relatedly, we ended Q1 with production-related headcount of 757, down 61 from the prior quarter. Turning to operating expenses. GAAP operating expenses for the first quarter of 2023 were $52.4 million, above the high end of our guidance range of $44 to $46 million. Non-GAAP operating expenses for the first quarter were $40.2 million, which was also above our guidance range of $33 to $35 million. The increase in both GAAP and non-GAAP total operating expenses versus the fourth quarter of 2022 was primarily driven by a step up in staff costs and material purchases supporting neutron and photon development, partially offset by a $1.7 million employee retention credit recorded in Q1. In R&D specifically, GAAP and non-GAAP expenses were up $8.9 million quarter on quarter as we continue to aggressively ramp up our neutron development efforts. through both new hires and redeployment of existing production resources. Q1 ending R&D headcount was 456, representing an increase of 90 from 348 in the prior quarter. In SG&A, GAAP expenses increased $4.4 million quarter-on-quarter, driven primarily by staff costs, including stock-based compensation, and outside services, in particular our year-end audit and SOX-related costs. Non-GAAP SG&A expenses increased by $3.9 million, driven by the same items, excluding stock-based compensation. Q1 ending SG&A headcount was 219, representing an increase of 22 from the prior quarter. In summary, total headcount was 1,432 as of March 31, 2023, up 51 heads from the prior quarter. Cash consumed from operations was $25.4 million in the first quarter of 2023 compared to $18.9 million in the fourth quarter of 2022. The sequential increase of $6.4 million was driven primarily by an increase in GAAP loss as working capital was flattish during Q1. Purchases of property, equipment, and capitalized software licenses decreased from $15 million in Q4 of 2022 to $12.7 million in Q1 of 2023. This sequential decline is largely related to the timing of goods received and payment terms as we continue our investments in neutron and photon production equipment and facilities enhancements. Overall, non-GAAP free cash flow, defined as GAAP operating cash flow reduced by purchases of property, equipment, and capitalized software in the first quarter of 2023 was $38.1 million, compared to $33.9 million in the fourth quarter of 2022. The ending balance of cash, cash equivalents, restricted cash, and market of securities was $450 million as of the first quarter of 2023. And with that, 2023. We expect revenue in the second quarter to range between $60 and $63 million, which reflects $37 to $40 million of contribution from Space Systems and $23 million from Launch Services, which assumes three launches or two launches the quarter. One of the three launches forecasted in Q2 was Sunday's successful NASA Tropics mission out of LC1 in New Zealand. As referenced earlier, based on our manifested launch backlog, we continue to expect 15 launches in 2023 and our average selling price to trend to our standard pricing as we progress through the remainder of 2023. We expect second quarter GAAP gross margin to range between 14% to 16%, and non-GAAP gross margin to range between 22% to 24%. These forecasted GAAP and non-GAAP gross margin improvements reflect continued efficiency of improvements, launch average selling price improvement, and a modest improvement in mix within our space system segment. We expect second quarter GAAP operating expenses to range between $55 and $57 million, and non-GAAP operating expenses to range between $41 and $43 million. The quarter-on-quarter increases are driven primarily by continued step-up in staff costs and prototyping and materials spend, supporting neutron and photon development programs. We expect second quarter GAAP and non-GAAP net interest expense to be $1 million. We expect second quarter adjusted EBITDA loss to range between $22 and $24 million, and basic shares outstanding to be approximately 480 million shares. And with that, We'll hand over the call to the operator for questions.

And at this time, if you would like to ask a question, please press star and the number one on your telephone keypad. Your first question comes from the line of Rasmussen. Eric?

Yeah, thanks, and congratulations on a good Q1. I wanted to talk about launch. It looked like there was a lot of positives in the quarter, and obviously there's some washout, if you will, with some of the other smaller players that were obviously having challenges. You mentioned an increase in the launch bookings given strong demand. What would be the limiting factor to maybe not achieving a higher launch cadence than the 15 that you're currently targeting?

Yeah, hi Eric. It'll be customer readiness as usual. We continue to see customers moving around and we're fully booked for the year and that will be the determining factor. The factory continues to produce rockets at the rate that's required. Like I say, that's the usual factor.

Great. And maybe just staying with launch, your NSSL opportunity, any updates that you can share on how things are progressing with the RFP process and maybe how big of an opportunity could this be for Rocket Lab?

Yeah, we're naturally very happy with the approach that the NSSL folks have taken. The two-lane approach ensures a good balance of ensuring the nation has assured access to space through the two incumbents. But the additional Lane 1 gives us the opportunity to onboard and provide extra services. We're really happy with the overall constraints of the programme. We're advocating to keep the bar high, which is what's happened, and the mass class is squarely suited for Neutron. we think Neutron is very well positioned to play in that lane one amongst a very small group of vehicles that will be ready in time to do so.

Great. And then maybe just my last question. You know, you talked and you introduced the HAST rocket. How should we think about these in sort of the context of launch overall and what you've sort of guided for 2023 and the 15 total launches?

Yeah, so the hypersonic flights will be included in that 15 number.

Very good. Thank you.

And your next question comes from the line of Roth Capital.

Hi, Peter, Adam. It's . So, congrats on the progress. So the seven-day turnaround you just had was pretty impressive. Just curious, generally, what are some of the proprietary elements that allow you to turn around that quickly? I know your competitors are having trouble just launching at all, but what allows you to kind of be able to turn around that quickly and will reuse further improve that?

Yeah, it's a good question, Sajud. I mean, the rocket is only one-third as a part of the equation here. having both the facilities in order to do that and also cross-trained teams that can do that. So we can support launch out of multiple different sites and also having the rockets coming off the production line at a rate that enables that kind of launch frequency. So it's not trivial to do. It requires a lot of coordination and planning. but that's kind of where we've got to. We built a factory that was capable of a really high production cadence, and that's delivering, and the launch teams are very well tuned and honed now, and the launch vehicle is very well bid in, so those are things that all enable us to achieve that.

Yeah, Suji, I would add to that, too, that Pete talked about the infrastructure. I mean, it really is a key piece. The fact that we have, you know, two operational launch locations and one of those where it's in private control, right? We control the manifest entirely. So, you know, it gives us a tremendous amount of flexibility. I think it would probably be impossible to do this if you didn't own one of the two ranges, right? So I think that level of flexibility really allows us to do things that really nobody else could really do.

Okay, great. And then my other question is on space systems on the – Upcoming the MDA Global Start program, which I imagine would start ramping more aggressively in the second half and into calendar 24. Is that still timing unchanged and is the when the initial revenue contribution there expected things?

Yeah, so you will start to see meaningful revenue contribution from that in in Q3, so it will be a fairly significant step up in Q3 from Q2 and then continue on from that into Q4 and obviously into the into the first half of 2024. So yeah, everything is on schedule, everything looks good, consistent with everything that we've kind of articulated in the past.

Okay, great. Thanks, guys.

Your next question comes from the line of Morgan Stanley.

Hey, good afternoon, everyone. You know, following up on Hayes, Right looking at the payload for electron your previous guidance was for 15 launches for the full year, but that was, you know, with electron about 300 kilograms per payload. So, with having case included, and you now have some of these launches having 700 kilograms of payload. Can you talk about the economics of it? Are they at the same. Total price, or are you getting paid the same price per kilogram? How do we think about overall? economics of electron versus haste in terms of revenue and margin?

Yeah, sure. So, I mean, when someone comes to us, they buy the entire launch vehicle. When you buy a dedicated rocket, you buy the whole rocket. So it's not priced out as a cost per kilogram. In fact, the whole cost per kilogram metric is really only applicable to kind of rideshare missions where you may actually pay a cost per kilogram. So whether it's an orbital mission or a suborbital mission, someone's coming to us and buying the complete launch vehicle. And the missions like HACE that have an element of mission assurance, extra mission assurance, and obviously more complex trajectories typically will demand a higher ASP than a very standard electron orbital mission.

Yeah, and Christine, there's also a launch premium for launches out of LC2 in Virginia because, again, that's a range that's operated by NASA versus our range in New Zealand. So there's a variety of things that drive, and right now all the hypersonics opportunities are going to be flying out of LC2. So for all the reasons Pete mentioned around mission assurance, but also kind of locational premium drives kind of an upward bias to the ASP.

I see. And in terms of margin economics between an electron launch versus a HACE launch, how do we differentiate between the two?

Well, I mean, I would say probably the biggest difference would again be launching out of LC2. We pay range fees to NASA. But again, largely those are kind of factored in. So from a margin contribution perspective, they should be kind of equal to, you know, kind of your ordinary kind of rocket lab launch.

I see. And then following up on the reused Rutherford engine in the third quarter, do you have an idea of how quickly you can turn around these engines for reflight down the line? And also, how many times can a single engine be used?

Yeah, that's a great question. So answering your question kind of backwards, the qualification tests we did on the recovered engines, we put a number of them through a total of 16 full-duration hot fires. That's like going to orbit 16 times and saw no degradation in their performance or in the engine at all. So, you know, the Rutherford engine is a mighty wee, you know, nuggety engine with very good margins. So, you know, the kind of limit to reuse would be in excess of probably 10 times. But the caveat to that is, you know, we need to slowly step our way through this and, you know, we're being very conservative here. You notice that we've taken the most difficult and critical element and are we flying that kind of independently of a whole new stage first? Because we believe once we build confidence in the reflowing engines, then that's kind of the hardest piece of the whole puzzle complete.

Great. Thank you for the color.

My pleasure.

And your next question comes from Lada Madrid A.

Hello?

Hello, Andre, we can hear you.

Hey, hey, how are you guys? Sorry about that. Andre. Could you just provide a little bit of color? So it looks like production had come down. Could you give a little reasoning as to why that happened?

Yeah, so again, I was trying to convey earlier that we've been fortunate that we've been able to repurpose our production resources to support the Neutron and photon R&D initiatives. So it's really a case where, you know, we've gotten to be much more efficient building electrons that we have these resources. So rather than hire incremental R&D heads to support those programs, we can now just basically move or reclass those resources from production to support R&D. So that kind of just speaks to the kind of the fungibility and flexibility of the types of resources that we have, where, you know, again, our production folks are equally capable, you know, performing very complex R&D tasks. And so it's super helpful for us to be able to have a really fungible workforce that we can kind of move around as need be. So that's really what's driving it. As I mentioned earlier, total headcount increased. It's just kind of the mix within changed quite a bit as, again, we kind of hit that new stride in production efficiency on Electron.

Gotcha, gotcha. Yeah, that makes sense. And then I kind of want to touch on maybe just the – if you could just quantify the order momentum at space systems and Maybe give a little update on some of that low margin solar backlog where you guys are at burning that down.

Yeah, so on the space system side, you know, we are getting a lot of increased kind of high value opportunities for not only on the component side, but also on the full spacecraft side of things. You know, this is, you know, the way that we've constructed the space systems business is that, you know, we're not going after kind of, you know, small onesie-twosie opportunities. We're going after large, chunky programs. then when they do close will be meaningful movers to overall backlog. So I would say that, you know, we continue to see momentum and kind of progress towards, but those deals are taking a little bit longer to close, I would say, than smaller deals, which kind of makes sense. And then when you look at the margin profile Solero business, I can tell you, you know, Pete and I have been incredibly impressed with the way, over the last couple of quarters, all the new business that we're closing you know, and putting into backlog is significantly higher gross margin than what came with the deal acquisition and really kind of supports this transition to get the business to be, you know, north of a 30-point gross margin business. You know, we talked about this on a prior call. It's probably going to take us about a year longer than we originally anticipated to burn through that lower margin backlog and have it be replaced with all this new business that's being placed. And at the same time, too, there's a dynamic of fulfilling demand for internal programs. So we're not only obviously continuing to sell the solar solutions out to the merchant market at higher margins, but obviously we're vertically integrated into our photon builds. So we have goodness there as well.

I don't know, Pete, if you want to add anything. Yeah, just as Adam mentioned, we've been very selective on which waters we take on. To Adam's point, we're not looking to do little things here and there. We're looking for pretty serious needle-moving things And naturally, they take longer to close than smaller things. And then I would say that we've been harping on for a while now that space solar is a constrained supply. And you only need to look across all the spacecraft that are in development or manufacture right now, and it's fairly clear that a solar crunch has started to occur. And we're investing in more capacity, but obviously solar constraint is helping to drive some of those margins.

That's all very helpful. Thanks, guys.

And as a reminder, at this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Jason Gursky.

Hello, everybody. Hey, Peter, I wanted to give you an opportunity maybe to talk about the competitive landscape as you see it today, how things are evolving, and maybe talk about the next four or five years and get a sense from you on how you see the competitive landscape shaking out here over the next several years. And kind of tied to that, and maybe, Adam, you can type in here on this particular question, just kind of the pricing environment that you're seeing on the new orders and whether we're beginning to see some upward lift in the backlog that you're building relative to the backlog that you're chewing through.

Yeah, thanks, Jason. I'll get out my crystal ball here for you. But I would say on... On small launch, I think my personal view is it's pretty tough to enter that market at this point. Electron has demonstrated just such great reliability and a good service that it becomes harder and harder to break into that. Not being as arrogant as to think that nobody can't do that, but certainly it'll be difficult. We've seen a failure of a lot of lot of small launch vehicles or a failure to deliver over the years and even more recently in more dramatic ways. So I think on the small launch side it's a great market, it's a nice little niche market and Electron will probably continue to do well there and I'm not sure if I really see too many small launch vehicles coming online in the future. Now, on kind of the medium to large, I think that's a very different environment in the fact that, look, there's a launch crunch coming in that sort of 25 to 20, maybe even up to 30 timeframe. You don't need to be a rocket scientist to figure that out. Like, if you look at all of the spacecraft that are in development and are looking for manifests, you look at... you know, the likes of Kuiper, who brought up most of the launch available globally, kind of Ariane 6 delayed and other launch vehicles delayed as well. You know, that's going to be a really, really interesting time. And, of course, our whole approach here in philosophy is to bring Neutron online right at the peak of that crunch. So we think that vehicle will do well. If you look at things like the NSSLP phase three programme, Neutron's ideally situated to play a good role in that. I think in a new capital-constrained environment where real kind of products and real businesses have to survive, I think there's going to be somewhat of a whittling of the wood and really strong executors are going to be the ones that are left over to supply it. And then on the really heavy stuff, I think that's an interesting market. That's more of the creation of a market rather than the servicing of a market. So I think that will be super interesting over the next four to five years. So over to you, Adam.

Yeah, with regards to pricing dynamics, I would say certainly things like you're seeing with, you know, missions being remanifested from other providers to us has been very supportive to pricing. I think it's going to continue to do so. I think, you know, as Pete mentioned, there's just been a lack of execution on delivering payloads from others. So I think people are starting to realize that this is a really difficult thing to do. You know, program delays are incredibly costly to customers, and so the ability to basically, you know, have a high degree of confidence that you're going to deliver their satellite on orbit on time, you know, again, is something that we're seeing customers are willing to pay a premium for. So again, I think that's all very supportive towards launch pricing. And then on the space system side, it's really, we're starting to see some very significant benefits to kind of the end-to-end strategy that we put in place. So unlike some other satellite manufacturers who have the issue of, you know, multiple levels and degrees of margin stacking, we really control so many of the key subsystems within our platforms that we have a lot of different knobs that we can turn. And oftentimes we do that in ways that can deliver very good, very attractive margin profiles for the programs. And again, I don't think that would be doable without the level of vertical integration that we've pulled together here. So right now, I'm as optimistic on pricing for both launch and space systems as I've been. We just continue to see all the pieces move in the right direction. And, you know, I think we don't see any kind of change in trend on that front.

Okay, great. Okay, if I speak in one more. Yeah. Yeah, okay, great. So just going back to Global Star, it sounds like, you know, the revenue ramp begins in the second half of the year. Can you maybe just talk a little bit about you know, technical milestones, any risk retirement that you'll be working on either, you know, now or, you know, as you get going here that we should all be kind of aware of and kind of appreciate as you retire that risk. And, you know, are there any risk to your expectations on margins for that program to the extent that the risk retirement doesn't kind of go as planned?

I can talk briefly to the technical milestones, and I have to say that I'm just incredibly impressed with the team. It's a very difficult spacecraft. It operates in a very difficult environment, and of course it needs incredible uptime. But the team continues to knock down major milestones like PDRs, and the supply chain team continue to work their magic to make sure everything that's not Rocket Lab produced is arriving on time. I think we're all very happy with the way that project is coming together. We've got a big team working super hard to make sure it does. But certainly on my horizon, there's nothing that I can foresee that's likely to cause issues. But I can let Adam talk to more of the less technical issues.

Yeah, so on the margin profile, I would say that we were very aggressive early on in this program to do to get a lot of the long lead procured items in hand. So long lead purchase contracts that were done like a year or so ago. So we have very good visibility as to what the input costs are for the program for third party source elements. And then obviously, we have a tremendous amount of vertical integration on this platform in particular. And we absolutely know kind of what our costs are there because we've been selling the same solutions in large part into the merchant market for many years. So I would say that the margin risk on the program is actually quite low. There's always things that can come up and bite you on a program, whether it's a rocket or a satellite. But right now, as more time gets behind us, as we get much closer to actually starting to deliver these platforms, we're seeing a lot of the risk get retired and start to be in the rear view mirror. So yeah, I think we feel pretty good about where we're at as far as, again, de-risking the program from a margin perspective. and no huge technical obstacles have kind of surfaced that would cause kind of programmed delays either. So I think we're in good shape on both timeline and on margin.

Okay, great. Appreciate the time, guys.

And your final question comes from one of Daya Yu.

Hey, it's Edison Yu from Deutsche Bank. I think the name goofed a little bit. First question, I want to come back to the gross margin. I don't think you broke it out yet, but where did you see more upside relative to the expectations in the quarter? Was it more on a launch or space systems?

Well, you know, there was a bunch of things that were moving around. Obviously, exceeding the former guidance on gross margin was, again, really go into the quarter, you know, with as much, I would say, optimism on being able to kind of reposition the resources from production into R&D. So a lot of that came into focus kind of at a late stage as we were kind of in the quarter and we were able to manage to get a bunch of that realized. I would say if you look at margin improvements, certainly I think the biggest area for upside is gonna be on the launch side of things. Because if you look at the fact right now, we're still dealing with the fact that we've got a cadence kind of dynamic that's driving overhead absorption. So now we have two launch ranges that we have to kind of support. One we obviously own. So if you look at LC1 in New Zealand, it's a relatively high fixed cost, so very dependent upon cadence out of that site. And with the NASA range in Virginia, we have kind of variable costs that drive that, plus a little bit of fixed costs that go along with it. So, you know, it really, really, again, our business on the launch side is very, very leveraged to the number of launches per quarter, and even now increasingly where those launches are coming in. So theoretically, you know, like in Q1 where you had, you know, two of our three launches came out of Virginia, I think that left a lot of unallocated cost to be absorbed over the one mission that did come out of LC1 in New Zealand. Now in Q2, the mix is going to be different where the launches are coming out of. You'll have you know, two out of LC1 in New Zealand, one out of LC2. So you'll be able to absorb more of those fixed costs over the two launches coming out of New Zealand, and you'll have one variable cost intensive mission coming out of Wallops. So, you know, I really do think as we scale to the 15 launches this year, and as we've talked, you know, in the past, you know, shooting for 20 launches next year with, you know, six in the fourth quarter, kind of establishing that exit rate out of 2024 to get to our target model for margin, you know, Cadence is an overwhelming driver of getting to those margin targets. And again, there's a tremendous amount of room to go from where we're at right now to where we're going to get to. And then the other piece, of course, is recovery of the first stage booster. So Pete mentioned the progress that we've been making on that, particularly with the engine that's going to fly a little bit later this year. But, you know, space systems is, you know, it's got, there are pockets of that business that have very nice gross margins. There's others, like we talked about in the past, that suffer from a little bit lower gross margins that are kind of being upgraded as we churn through that lower kind of historical backlog. But really, if you look at where the raw biggest increase can come from, it really can come from electron scaling through the cadence and recovery.

Appreciate the color. And just one follow-up on, I guess, space systems more specifically. I know it outperformed in the quarter. Any specific product lines you would call out? And I think also you announced a new win on Solero. So just curious, kind of the trajectory going forward, is there some products that are sort of outperforming?

Well, yeah. So, I mean, the big grower really from a percentage perspective has really been the photon business, right? So the satellite manufacturing piece. And so as Pete mentioned earlier, we were able to ship the first Varda spacecraft, And really, it's Q3 where you're going to start to see a very meaningful uptick in revenue recognition on the MDA Global Star satellites. So that is, you know, by far going to be kind of the biggest kind of percentage grower in the second half of the year, again, continued, again, from programs that we've identified previously.

Great. Thank you.

And you do have a final question from the line of . Hello?

Hello?

Yes.

Yeah. Okay. Yeah, just one more to follow up. Given that you guys are pretty certain of the manifest going through 2023, I mean, when can we start to see some more long-term targets being outlined

Well, I think of the manifest, you know, we've been pretty clear this year, you know, growing to 15 launches. Next year, we've set a target for 20, but exiting the year at a rate of 24. And that's very consistent with the long-term model that we've had. You know, we think there's, you know, enough market opportunity to drive, you know, up to, you know, in our model, we had over 30 launches per year. And that remains pretty consistent. You know, that's, of course, separate and distinct from Neutron's opportunity. But I think that, you know, there's, again, there's, I would say, nothing that's kind of caused us to revisit what the kind of volume opportunity is for Electron. The small dedicated launch market continues to be pretty strong. We continue to be outperforming relative to our peer group. So, yeah, I don't think we're going to give kind of longer term kind of outlook for launches beyond kind of what we've already articulated, which I think is pretty far out. We're basically telling you kind of what you can expect for launches through the end of next year. Once we get into 2025, it's kind of anybody's guess at this point. We do have some booking and some visibility, obviously, into 2025, and in some cases even longer than that. But we're also, we've kind of rectified the pattern here where we've got great visibility within 12 months. Once you get outside of 12 months, it starts to get a little bit more kind of unclear. We kind of track what all the opportunities are out there, and it just becomes a question of what percentage capture do we have in the market or what our market share is going to be. And obviously, right now, we have a tremendously high market share. We believe that we'll be able to maintain pretty high market share. But I would say, again, we're on track to 15 this year, 20 next year, easing at a rate of 24. And then we'll see where it goes from there.

Gotcha. Thanks.

And there are no further questions at this time.

Okay, well that wraps up today's presentation then and 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 then. Thanks again and we look forward to seeing you and speaking to you about the exciting progress being made at Rocket Lab.

This does conclude today's conference call. You may now disconnect.