Rocket Lab USA, Inc.

Thank you for standing by. My name is Adam and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Rocket Lab Q2 2023 earnings 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 the star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I'd now like to turn the call over to Colin Canfield, Investor Relations Manager. Please go ahead.

Thank you, Adam. Hello, everyone. We're glad to have you join us today for today's conference call to discuss Rocket Lab second 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 guaranteed 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 may also contain non-GAAP financial measures with the meaning of Regulation G enacted by the SEC. Included in such release and our supplemented materials are reconciliations of these historical non-GAAP financial measures to the comparable financial measures calculated in accordance with GAAP. This call is also being webcast, although due to technical difficulties with our conference call provider, we will post a copy of the presentation on our website at a later time. Our presenters today our 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, and welcome, everybody, and thank you for joining us. Today's presentation will go over our key business accomplishments for the second 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 second quarter before covering the financial outlook for Q3 2023. After that, we'll take questions and finish today's call with the nearer-term conferences we'll be attending. All right, on to what we achieved in the second quarter for the year. Starting with our launch business, in May, we successfully launched both NASA Tropics missions, and in June, we launched our inaugural hypersonics mission from NASA Wallops. NASA selected us to launch Tropics in November late last year after the initial launch provider was unable to meet the mission and schedule requirements. Within six months of contract award, we had successfully launched both missions, enabling these critical storm monitoring satellites to get onto orbit in time for the hurricane season. We're incredibly proud to deliver mission success for NASA once again and further demonstrate the reliability and proven capability that Electron delivers to our civil and defense customers. We also followed up the two tropics missions with a successful HAST mission. HAST is a hypersonic suborbital testbed variant electron, and it fills a very real and urgent need for our government customers. The acceleration of hypersonic system technology development is a significant national priority, but testing opportunities remain limited, particularly in real flight scenarios beyond wind tunnels. With the HAST launch completed in June from LC2 in Wallops, Virginia, we unlocked a new critical national capability, enabling rapid and cost-effective hypersonic testing. We're incredibly excited about what that brings for our customers, as well as additional total addressable market that looks to grow rapidly ahead of strategic and civil needs. All this while leveraging our existing Electron architecture and continued R&D investment in our kick-stage capabilities. Expanded propulsion manufacturing capability. So we're also excited about our acquisition of Virgin Orbit's 144,000 square foot Long Beach facility lease and production equipment, which we're already hard at work configuring for our Archimedes and Rutherford production. Overall, we estimate that the $16.1 million price paid for this would have represented around $100 million of value versus having to purchase new. while approximately 80 million derived from acquired machinery and equipment and the remaining 20 million from the tenant leasehold improvements. We believe this asset purchase enables significant savings for Neutron and supports future scaling as we work towards first launch. Neutron testing. Speaking of Neutron, we want to highlight some of the major development testing and construction milestones we've reached for Neutron and its infrastructure. You may have noticed we recently released some updated renders for Neutron, which created some online buzz around design changes. These include adapted landing legs for optimized for barge landings to increase launch availability, as well as the adaption of Neutron's Hungry Hippo fairing from four sections to two, allowing for simpler mechanisms. These design changes were actually made some months ago as part of our iterative testing analysis program. and some direct customer feedback, but the artwork really just hadn't kept up with pace with the real vehicle. So we've recently updated these for everybody to see. We've hit some significant milestones in neutron production and testing in this quarter, including completion of the second stage qualification tank and test stand in preparation for the cryogenic test campaign in the third quarter. This work is progressing at pace. thanks to our extensive experience with carbon composites throughout the Electron program, so we have a strong head start on structures. In parallel, Earthworks at Launch Complex 3 in Wallops, Virginia, have commenced, enabling pad construction to commence in Q3. Once complete, Neutron should enjoy all the benefits that come with launching from a pad that benefits from a clear line of sight to future launches, has significantly less congestion relative to the Cape, and close proximity to key government customers. The propulsion team is also on schedule to deliver the first full-scale print of Archimedes' thrust chamber, and we're running a successful campaign of pre-burner tests at Purdue University. These milestones keep us on track for delivering the first complete qualification engine by the end of this year. In parallel, we're building avionics hardware and successfully testing it in hardware-in-the-loop simulations. All of these achievements puts us in a good position to meet some key milestones by the second half of this year, including completion of the second stage qualification test campaign. We're also targeting the completion of the first stage qualification tank and test stand, as well as the first Archimedes development engine and test campaign at our propulsion complex within NASA Stennis. We're still working towards getting something on the pad by 2024, and we'll continue to provide updates as we progress through the year and the next. Our space systems team also recently delivered a really significant milestone in the second quarter in the form of successfully operating the latest rocket lab design and built spacecraft on orbit. This is one of our newest spacecraft platforms, a high payload volume spacecraft designed for short to mid-duration missions in low Earth orbit. This was the first of four spacecraft that we're on contract to build and operate for VataSpace. to enable in-space manufacturing, a highly bespoke and complex spacecraft designed for reentry, which is a rare capability and something we're really proud to bring to market. The spacecraft hosts a mini pharmaceutical lab that successfully grew crystals commonly used in drug treatments for HIV. With the in-space manufacturing now complete, the capsule is anticipated to return to Earth in the coming weeks. Meanwhile, the next two spacecraft of VADA are in advanced production and test ready for the follow-up mission soon. All of these spacecraft feature components and software from across our space system businesses, including solar panels, star trackers, radios, enabling us to produce them affordably at pace. It's also a demonstration of our business model as an end-to-end space company to both build and operate satellites on orbit. And finally, development is progressing well for our twin spacecraft mission to Mars for NASA. The ESCAPADE mission, we're developing two bespoke spacecraft to study Mars' magnetosphere next year, and this quarter we completed the qualification spacecraft ahead of an extensive test and qualification campaign. We now want to take the time to highlight some of our accomplishments so far in Q3. Successful launch for NASA, Telesat, and Spire. We've started the quarter strong with successful rideshare mission from Launch Complex 1, deploying satellites for NASA, Spire, and Telesat. We're on the brink now of our 40th electron launch and on track to complete three more this quarter and 15 overall this year. Now, regarding our Capella launch, we love the nightlife. We continue to take an abundance of caution as we continue our track record of the most reliable small rocket. At present, the team is working through some unusual data from one of the engine sensors for that mission. But of course, these things happen with launch vehicles from time to time. We have a very straightforward path to resolution, and we'll reschedule the launch later this month. So no big deal there. One of those missions, of course, was a recovery mission. This launch was an important one as we used it to prove out a new waterproofing technologies and a new marine retrieval system for extracting electrons from the ocean. I'm pleased to report that the new system works exceptionally well and electrons splashed down in the best condition we've seen it yet. We continue to operationalize electron reusability with the first reflight of a recovered engine scheduled for the second half of this year. from where we'll schedule the first reflight of a full-stage booster. Signed 10 new Electron launches. So Electron continues to be the preferred dedicated small launch option, demonstrated by continued and growing demand for launches. Since we reported earnings in May, we've signed deals for a total of 10 new dedicated launches, including block buys from returned government and commercial customers. This really is a testament to Electron's reliability, frequent launch cadence, and in particular, the high degree of control over orbit that we can give to constellation operators, which is something they just cannot get on a large rideshare mission. And with that, I'd like to turn the call over to our Chief Financial Officer, Adam Spice. Adam.

Thanks, Pete. Second quarter 2023 revenue was $62 million, which was above the midpoint of our prior guidance of $60 to $63 million. Second quarter 2023 revenue reflects sequential growth of 13% and the result of three successful launches and a return to growth for our space systems business. Our launch services segment delivered revenue of $22.5 million in the quarter from three launches, which was consistent with our prior guidance of $23 million. The resulting average revenue per launch stepped up nearly $1 million to $7.5 million, consistent with our target average selling price for 2023. Our space system segment delivered $39.6 million in the quarter, which was up 12% sequentially and near the high end of our prior guidance range of $37 million to $40 million. driven by healthy growth in our satellite bus, solar, and separation systems businesses. Our backlog increased by $40.1 million to $534.3 million in the second quarter. We continue to see strength in our launch business, driven by returning launch customers with multi-launch requirements, haste-related missions, and re-manifesting launches from other failed or struggling launch providers. Additionally, our space systems backlog increased with the addition of a new satellite design and build program and strong component bookings, particularly for our software and solar businesses. Now, turn to gross margin. GAAP gross margin for the first quarter was 23.5%, above the high end of our guidance range of 14 to 16%. Non-GAAP gross margin for the second quarter was 31.8%, which was also well above our guidance range of 22 to 24%. Gap and non-gap gross margin improvements relative to our Q1 2023 results and Q2 2023 guidance reflect the release of a $4.1 million loss reserve associated with the expiration of a legacy launch contract, an increase in average launch selling price, and favorable mix within our solar and software businesses. Adjusting for this, non-gap gross margin would have been 25.2%, modestly above the high end of our previous guidance range. We ended Q2 with production-related headcount of 767, or up 10 from the prior quarter. Turning to operating expenses, GAAP operating expenses for the second quarter of 2023 were $59.8 million, above the high end of our guidance range of $55 to $57 million. Non-GAAP operating expenses for the second quarter were $43.4 million, which was modestly above our guidance range of $41 to $43 million. The increases in both GAAP and non-GAAP operating expenses versus the first quarter of 2023 were primarily driven by higher staff costs related to new hires and our annual merit review and related compensation step-ups, material purchases supporting neutron and space systems developments, and facilities and other ongoing expenses related to the Virgin Orbit asset acquisition. In R&D specifically, Gap expenses were up $7.1 million quarter-on-quarter as we continue to aggressively ramp our neutron development efforts through new hires, large materials purchases, and outside professional services related to our space systems development programs. In addition to these areas contributing to the sequential increases, we also recognized increases in stock-based compensation and were impacted by the absence of ERC tax credits that were recognized in the prior quarter. Non-GAAP expenses were up $4.9 million quarter on quarter, driven similarly as GAAP expenses by staff costs, outside professional services, and materials-related purchases. Q2 ending R&D headcount was 518, representing an increase of 62 from 456 heads from the prior quarter. In SG&A, GAAP expenses increased slightly by $200,000 quarter on quarter, due to changes in contingent consideration related to our PSC acquisition attributable to a higher average stock price in the quarter, higher M&A costs associated with the Virgin Orbit asset acquisition, and non-recurring ERC tax credits that were recorded in Q1, all of which were partially offset by a reduction in outside service expenses associated with year-end audit and compliance work. Non-GAAP SG&A expenses decreased by $1.7 million, owing primarily to the decrease in audit and compliance related expenses. Q2 ending SG&A headcount was 228, representing an increase of nine from the prior quarter. In summary, total second quarter ending headcount was 1,513, up 81 heads from the prior quarter. Cash consumed from operations was $6.1 million in the second quarter of 2023, compared to $25.4 million in the first quarter of 2023. The sequential improvement of $19.3 million was driven primarily by strength in cash collections. Purchases of property, equipment, and capitalized software licenses decreased from $12.7 million in Q1 of 2023 to $10.6 million in Q2 of 2023. The sequential decline was due to the timing of receipts for Neutron and Photon capital purchases. Overall, non-GAAP free cash flow, defined as GAAP operating cash flow reduced by purchases of property, equipment, and capitalized software, in the second quarter of 2023 was a use of $16.6 million, compared to $38.1 million in the first quarter of 2023. When including our $16.1 million acquisition of select Virgin Orbit assets, which were primarily PP&E, non-GAAP free cash flow was a use of $37.8 million. The ending balance of cash, cash equivalents, restricted cash, and marketable securities was $419 million at the end of the second quarter of 2023. And with that, let's turn to our guidance for the third quarter of 2023. We expect revenue in the third quarter to range between $73 million and $77 million, which reflects $43 to $47 million of contribution from space systems and $30 million from launch services, which assumes four launches. As referenced earlier, based on our manifested launch backlog, we continue to expect 15 launches in 2023 and our average selling price to support our current target pricing as we progress through the remainder of 2023. We expect third quarter GAAP gross margin to range between 21 to 23% and non-GAAP gross margin to range between 28 to 30%. These forecasted GAAP and non-GAAP gross margin improvements reflect continued efficiency improvements and greater fixed cost absorption, and average launch selling price improvements. We expect third quarter GAAP operating expenses to range between $51 million and $53 million, and non-GAAP operating expenses to range between $38 million and $40 million. The quarter-on-quarter decreases are driven primarily by the expected realization of a final $14 million Contra R&D credit related to our Neutron Upper Stage Development Agreement with the U.S. Space Force, partially offset by continued step-up in staff costs, prototyping, and material spend supporting neutron and photon development programs. We expect third quarter GAAP and non-GAAP net interest expense to be half a million dollars. We expect third quarter adjusted EBITDA loss to range between $10 million and $14 million, and basic shares outstanding to be approximately 484 million shares. And with that, we'll hand the call over to the operator for questions.

At this time, I'd like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. Your first question comes from the line of Eric Rasmussen with Stifel. Your line is open.

Yeah, thanks for taking the questions, and nice job on the margins. I just wanted to dig into the guidance a little bit. You got into 73 to 77 million. Launch seems to be in line. You got four launches there. But space systems at 43 to 47 seems a little bit light versus what we were expecting. you know, sort of what we were expecting out of the second half. You know, can you maybe just break down where the sort of the disconnect is? You know, how should we be thinking about the second half overall versus the first half? And is this related to the NBA, you know, ramping maybe slower than expected?

Yeah, I'll take a shot at that. And then, Pete, you can weigh in if you want to. So Eric, yeah, like you point out, launch is pretty much on target. With regards to contribution from space systems, there is a bit of a timing issue with regards to being able to recognize revenue over certain programs on the satellite manufacturer side of the house. I don't think it's all that unusual given the early stage of these contracts that we're executing on. So we have a very stringent process for how we are able to recognize revenue over over the period of the contracts. So there's nothing that's changed as far as the magnitude of the size of the opportunity or really that much of a time shift. But, you know, it's probably about kind of a half-quarter light of what we were expecting as far as contribution from those programs that we're ramping. But we expect to make up a lot of that ground in the fourth quarter.

Okay. So you feel sort of pretty comfortable, a little bit steeper ramp even further in Q4 versus Q3 in terms of the space systems business? Yeah, you know, absolutely. Great. And then I saw some of the new, some of the announcements after the close, the haste. Maybe just digging into that, you signed a new deal to launch a mission that starts, I guess, for sometime in 24. Do you have, though, a specific award, a contract behind this, or are these deals going to sort of be one-offs?

Yeah, Eric. So we kind of have multiple relationships with multiple customers on this front. And, you know, the way these contracts are sort of – developed, it's fairly classified kind of work. So it's difficult to give too much kind of insight into some of those. But suffice to say, we see a healthy pipeline of these kind of missions sitting there.

Maybe just

Your next question comes from the line of Suji Da Silva with Roth MKM. Your line is open.

Hi, Peter. Hi. So just to understand how the recovery effort is going, I know you're going to do some more milestones. And I read, I think, launches 41 and 45. Can you just describe the next steps and when this can become operational in terms of helping with the cost structure for the launches?

Yes, sure. Hey, Sujit. So what we're balancing here is incrementally kind of adding learnings but not interrupting production. So instead of doing like one big block change as vehicles, as you point out, 41 and 45 come down the line, you know, each of them have kind of the learnings and changes incorporated into them. So I would say that the last vehicle we brought down, we added a whole bunch of waterproofing technologies. The next vehicle goes the next step down at the power pack. We've changed a whole bunch of things like umbilical hatches and things like that. And we learned a lot from this last mission. I would say we probably validated more than we learned. But it's rolling into... to a fairly operational sense, I would say, right now. And if you look on our production line, about every third rocket is a silver one with a red stripe for recovery. So it's pretty much been operationalized from a production standpoint. I'd say there's still some more to go from the marine recovery, but that last mission, we splashed it down within 400 meters of the target. So, you know, the guys had it within sort of 15 to 20 minutes. They had it by the boat, so that kind of worked well. So, yeah, look, but I think the last kind of major upgrade is on 45, and then hopefully at that point it is just, you know, business as usual.

And, Suji, when it comes to your question with regards to what that's doing for our cost, I mean, we've definitely taken an incremental view of, let's validate our assumptions each step of the way with these recovery tests. So as we mentioned before, we'll do a reflown engine, and then we'll do more reflown engines, then we'll look to eventually, obviously, refly an entire booster. And when we get to that point, then we believe the savings that we articulated, even if you've got to go back to our investor day, which is now almost two years ago, we think are still very valid as far as what we can bring as far as cost reduction and margin improvement for this Electron program.

All right. Thanks, guys. And then my other question is on Neutron. It sounds like you're making good progress toward 24 here, obviously the Virgin Orbit acquisition. Can you talk about the OPEX and the shape of it in support of Neutron? Is there sort of a kind of a peak quarter? Are we getting close to it, or is that going to be a continued kind of steady spend to bring Neutron up? Just curious how that shapes out. Thanks.

Yeah, it's, you know, like anything with a rock development program, it's very hard to be too precise with when certain expenses are going to hit and certain milestones are going to be achieved. But as you said, you know, we definitely are making, you know, steady progress against, you know, an anticipated launch at the end of 2024. And I would say that, you know, we will continue to see a kind of a march up in expenses related to Neutron, with the exception of the Q3, which we talked about in our guide, where we have this $14 million contra R&D credit that's certainly helping the P&L. But once you get through Q3, there'll be, again, a significant step up that will start to look like more of a sequential kind of increasing trend on spend for Neutron. And we don't see the spend peaking on Neutron till probably either, I'd say, as we certainly get much, much closer to the inaugural launch So think about kind of the Q3 timeframe next year where you'll probably see spending peak. And, of course, there's going to be a difference between kind of what hits your P&L versus your CapEx because, you know, those are all things that kind of move at different times. So I think you'll just see, you know, a continued progression of investment in Neutron that shouldn't be too out of school, but I think it's hard to say that, you know, try to pick which quarter that spend is going to peak at from both a P&L spend and also from a CapEx perspective.

All right. Thanks, Adam. Thanks, Peter.

Your next question comes from the line of Christine Loag with Morgan Stanley. Your line is open.

Hey. Good afternoon, everyone. Maybe talking about pricing. You know, in the past few years, we've seen so many aspirational space companies try their hand at launch, and, you know, a few of them have closed doors already. So with the environment still pretty tight regarding launch capacity, can you talk about the pricing difference for these bookings that you have for 2024 with the new BlackSide contract that you announced and how that compares to previous launch costs? And then also when you put that together and as launch costs are coming down, as you get economies of scale, when should we expect to see gross margin break even at launch? It seems like that should be coming up pretty soon.

Pete, do you want to speak to the overall pricing environment and I can talk to the margin question?

Yeah, sure, sure. Yeah, thanks, Christine. Yeah, look, I mean, it's, you know, you've read the tea leaves exactly right. I mean, as many launch companies kind of aspirationally, you know, don't achieve, then it's certainly created a tightness in the market. I will say that we've been pretty consistent with our pricing all the time. We've never done kind of unnatural things where we just drop the pricing to take the oxygen out of the room. And we've seen a number of providers try that approach. And of course, you can't build a successful business. So our pricing has been fairly steady with respect to that. And we feel it represents really wonderful value for what you get. People always compare us to a rideshare mission, but really the only accurate comparison is to a small dedicated launch. And currently the only other small dedicated launcher that's available is probably a Minotaur at some $30 or $40 million. So an Electron at 7.5, it represents good value, and we've never needed to erode our pricing on that product and still maintain really good sales traction.

Hey, Christine. When it comes to your questions on the profitability kind of benchmark for Electron, so we've been pretty consistent in when we see two launches per month, That's where we really get to the economies of scale and the fixed cost absorption that we need to kind of increment our way towards our target of the 50% non-GAAP gross margin for Electron. It requires a few things to happen. Of course, you need the cadence that I mentioned, so two launches per month. We need our annual cost reductions on BOM and production efficiency. We need also the savings from the recovery program that we were talking about earlier. And all of those kind of things are still very much in focus. Nothing has really shifted from that. I would say the one thing is we've already turned GAAP gross margin positive on the Electron launch platform. We don't report below the gross margin line, so it's hard to give a lot of clarity on, for example, what the contribution margin looks like now that we're in positive gross margin territory on Electron. But needless to say, everything seems to be you know, progressing in a way that is very much consistent with what we thought profitability should look like for this platform. And we really are starting to see a lot of efficiency in the business. And I think probably the most encouraging is the way that we've been able to pivot a lot of the previously dedicated production resources over to support, you know, Neutron and Space Systems. So, again, I think the learning curve is definitely one that we've got well in hand. I think really the next big step for the margin enhancement really remains to be the recovery program. which, as Pete mentioned earlier, is well in hand as well. So hopefully that answers your question on margin.

Thanks, Peter, and thanks, Adam. Maybe I could ask a technology question. You know, late last month NASA and DARPA announced an award to Lockheed and BWXT to test nuclear propulsion in space. I mean, Peter, you know, maybe it's still very early stage, but I was curious to get your thoughts on how much of a game changer nuclear propulsion could be in terms of increased speed, efficiency, and how viable is that to the Rocket Lab story? Where do you see its role for the company, if any?

Yeah, look, I'm a great fan of nuclear propulsion, in-space nuclear propulsion, because, you know, it's really, if you think about it historically, chemical propulsion is We haven't really improved a whole lot since the early 60s. So we reached chemical equilibrium quite some time ago. So there needs to be a major advancement if we truly want to kind of be citizens of the solar system. So I think nuclear propulsion is one of those things that can really transform that. So I'm very bullish on it. Now, it's deeply complex, and of course the most challenging bit is getting it to orbit in the first place. There's a significant challenge with that. But once on orbit, it's a really great technique. We don't have any active programs internally developing any of that technology, but I do think it's a technology to watch, and we'll certainly be watching it.

Great. Thank you for the color. Thanks, guys.

Your next question comes from the line of Kai Von Rumer with Cowan. Your line is open.

Yes. Thanks so much. So, you know, you talk of cost cuts to the bonds, but basically we're in an inflationary environment. Folks are seeing supply chain disruptions. Talk to us a little bit about what are you seeing in terms of inflation? And regarding pricing, I mean, it looks like the pricing average price of your launch in the third quarter is going to be pretty much the same as the second. So are you in a period of stability, or is that just a mix of related issues?

Yeah, I can take that. Yeah, thanks, guys.

Okay, go ahead, Pete.

No, you go ahead, Adam.

So I would say, Kai, on the inflation side of things and pricing, the pricing that you're seeing in 2023 is a function of agreements that were put in place for the most part a year or even greater than that in the rearview mirror. We talked about, we've been pretty consistent about where we see our pricing in 2023. And we have an annual escalation in our pricing assumptions going forward. So obviously we weren't able to predict inflation two years ago when some of these contracts were being entered into or even a year ago. But fortunately for us, we've been able to get a lot of efficiencies on the production side of things. On the supply chain side, we're very vertically integrated. So we're not as exposed as maybe some other companies where they buy so much of their vehicle and subsystems from other providers. And when I say vehicle, obviously it applies to our space systems business as well, particularly when you look at our photon platforms and you look at how much of the content is internally sourced, I think we've been pretty, I would say, well-insulated compared to others from supply chain shock and inflation-related events. Not to say we're completely immune from it. We certainly see it on the labor side of things. We see it on other kind of things that we purchase from third parties with regards to rent and utilities and everything else that goes along with it, gases and so forth. But for the most part, just the nature of our kind of vertically integrated business kind of inflates us a bit from that. Going forward on pricing, again, knowing now where inflation is and where kind of it's expected to be, we're certainly taking that in consideration on pricing our launch contracts going forward. So I think we cover the bases there as well. But I'll let Pete comment as he sees it.

No, you said exactly what I was going to say, Adam. the way we've kind of typically done stuff in the past, Kai, is we'll take a product and we'll put it into production and we'll spend kind of the minimum required to put that in production. We don't go out and build a giant factory and fill it full of gear and then go and build a product. What we'll generally do is build a product and then kind of iteratively phase in automation and those kind of production games. So you know, a LOX valve, for example, you know, would have been the very first few are entirely built by hand and then we'll add a little bit more automation until, you know, we get to where we are today where, you know, a lot of that process is entirely automated. So that's where we can kind of realize some of these bomb savings even in this kind of hideously inflationary environment.

So if your realized prices are basically what you priced a year ago, what should we look for for next year? Because it looks like you've done a pretty good job in offsetting whatever cost hikes there have been.

I can take that. So, Kai, I would say that when we, you know, obviously at this point we've got quite a bit of our 2024 significant portions of 25, and in some cases beyond that, kind of already in backlog, right? So we've done some anticipatory pricing, again, with what views of inflation were at the time that we entered those agreements, also where we thought our costs were going to trend. Our focus is really on getting to our long-term gross margin targets, and we've not been shy about that for either our launch business or our space systems businesses. You know, I would say that... you know, what we've seen historically, though, is a continual upward march in our price. If you go back even, you know, say three or four years ago, we were, you know, we had a sticker price of a little under $5 million per launch. And now you can see what we've printed for Q2 and where we see the rest of the year falling out. So again, I think we see that trend increase. And I think also, as maybe Christine mentioned earlier on the call, there's been a lot of dropouts from aspirational launch providers. And that just kind of really If you also think about the pricing that you're seeing now coming through, probably didn't reflect the reality of today where there are fewer people delivering the service than was kind of anticipated. A lot of people were selling on Slideware and so forth back when some of these contracts were being negotiated. So as you get a more, I would say, a smaller group of people who've actually been able to deliver frequent, reliable access to space, You know, we believe that's supportive of firming up pricing. And, you know, so I think hopefully we see that trend continue going forward based on execution alone.

And then the last one is, what's the split between adjusted gross profit between launch and space systems in the third quarter?

I don't believe we provide that in our guide. We're not getting down to that level of detail information at this time, Kai.

Okay, great. Thanks so much.

Thank you.

Your next question comes from the line of Jason Gursky with Citi. Your line is open.

Good afternoon, everybody. I'm going to start with a question on space systems and the Global Star project and some of the REVREC that you talked about there, Adam. Can you talk kind of what the status of that program is from a milestone perspective, CDR or preliminary design review, just kind of where you are in that process so we can get a sense of what the shape of the curve looks like in the ramp for revenue and space systems over the next few quarters.

Yeah, I'll let Pete talk to the status of the engineering program.

Yeah, sure. Hey, Jason. So look, we remain solidly on track for that program. We've obviously gone through PDR and CDR, so that program is marching on track and, yeah, it's as intended.

That's on your side. Is your customer as well there kind of staying on track?

I mean, it's a joint project, so we all kind of – rely on each other. Obviously, there's the NDA piece and our piece as well as Global Star's piece. By kind of definition, for us to successfully deliver our milestones, the other partners have to be as well.

But this quarter of revenue that you're not going to get this quarter, is it tied to any particular milestones ahead of us that we might see some announcements on in the future?

Yeah, I can jump in there. So, Jason, I think one of the challenges with the rev rec under ASC 606 with these programs, there's a lot of different hurdles that you've got to get over and satisfy. And we're, as a company, we're just as conservative on our accounting as we are on making sure that the launch vehicle is ready to go off. And we've recognized very little revenue historically under the contract with MDA and even not, you know, the little bit that's embedded in our Q3. And it's a function of, you know, certain parts of the program basically get allocated to R&D, and then other elements get allocated to, obviously, the cost of producing the spacecraft themselves. So we are still up to this point have been, you know, very much in the R&D portion, and the real heavy kind of phase where you move into actually assembling spacecraft and pulling inventory and all those things that are required under that, which also tie into your RevRec, those have really kind of been always back-end loaded. And so I think to Pete's point, I mean, I think all of the technical things are on track and on schedule. And so now it's just a matter of really kind of getting to the point where we're able to recognize the revenue once we get the R&D portion largely behind us, which is kind of where we're at right now. We're kind of right on that cusp as we start to convert from kind of hitting the P&L on the OpEx line versus now transitioning to RevRack and seeing the cost of sales come through as well. Okay, that's great.

The second question is around capacity for Electron and Neutron. I'm just kind of curious if you've got kind of an update on that. If the demand was there, how many annual launches do you think you were capacitized to do on the Electron? And then, Pete, I think you – maybe I heard this wrong, but I thought I heard you mention that some of the inventory and equipment that you picked up from Virgin might accelerate the capacitization, for lack of a better word, on Neutron. So I'd be kind of curious – You get that first launch done on Neutron, everything goes swimmingly well. How much annual capacity would you have on the tail end of successfully certifying that launch vehicle?

That's a great question. On Electron, we've facilitated to be able to ultimately produce one Electron a week. the factory's kind of capacity is stated at that. Now, in order for us to increase the capacity over today, there's no major piece of capex that we need to produce something. We have three pads operational. And it's really a headcount adjustment on that sense. So there's plenty of capacity there for electron growth. And we just kind of manage that capacity with the launches we have scheduled during the year just so that we don't over-capacitize ourselves on that. And then with Neutron, we'll be following a pretty consistent path that's proven to work well with Neutron as we did with Electron where we start off with one vehicle and it's not it's not produced in a full production sense. And then as we produce more, we kind of bootstrap and add more facilities and more automation as we go through. So, you know, obviously being a reusable launch vehicle, the only thing that we have to really produce in volume is a second stage, which is a much smaller and remarkably simple, comparatively speaking, to the first stage device. So, you know, the cadence for that can move up pretty quickly. The Virgin Orbit acquisition is really a scaling enabler. So knowing that the way we kind of work here at Rocket Lab is we don't go out and just build giant factories and fill them full of gear and then start building one rocket. We kind of build one rocket and then iteratively add those things along the way. We found that to be the most capital efficient way of doing it. The beauty with the Virgin Orbit facility is that we walked in there and it's just capitalized to the roof with equipment. So where that really, really is going to help us, especially from an engine development perspective or engine production perspective, is that a lot of the long-lead, really expensive capital equipment, like very bespoke CNC machines and measuring systems and whatnot, We just all picked up for $16.1 million. So where Virgin Orbit for us is really, really going to shine is on the backside of the project where we need to start producing larger volumes of engines and even composite components and such.

Right. And then, thank you. And Adam, one last one, if you don't mind. The balance sheet, can you talk a little bit about the debt and the plan for that?

Yeah, so the balance sheet is from the $100 million Hercules loan that we took out before going through our D-SPAC transaction to really, again, de-risk that transaction itself. We've been pretty active in looking at ways to access, I would say, more cost-effective forms of capital. I think the capital that we have in the form of that loan has been incredibly flexible. They've been a great partner to us. But that was also taken out of the time when the company was in a very different stage of its development versus where we are now, which we think opens up other options for us. Now, that said, when we came public, we raised the amount of capital that we thought we would need to execute our vision on the space system side of the house, plus get Neutron to the pad. We still feel very comfortable that we're in that position. we can always choose to go faster or go slower depending on kind of where our capital resources, kind of what they look like. But right now, again, like we have a long-term roadmap that we can execute with the capital that we have. But, you know, we, again, I think there will be opportunities to put more, replace that piece of capital with more efficient capital because now we're much more mature and established. It has gone current. The loan is... is payable within 12 months now. I think it comes due on January, sorry, June 1st, I believe, of 2024. So obviously we've got some time, but we're very comfortable with where we're at from a liquidity perspective, and we have a lot more options now at our disposal than we had, you know, again, two, three years ago when that was taken out.

Okay, great. Thanks, everybody.

Your next question comes from the line of Andre Madrid with Bank of America Securities. Your line is open.

Yeah. Hey, guys. How are you? Wanted to follow up on Suji's question, actually. Would you guys be able to maybe provide a percent cost reduction that you're targeting through electron recovery and maybe talk a bit more about how this can drive margins on the platform moving forward?

Yeah. So if you look at the total cost of an electron launch vehicle, about Two-thirds of the costs are in the first stage, which is obviously where we're focused on our recovery efforts. And if you look at some, you know, we've made some assumptions about how much rework we require to the stage. You know, fortunately, you know, each one of these recovery missions that we've done have provided a lot of data for us to kind of confirm those assumptions. The fact that we're going to be flying, you know, an engine, a reflown engine later this year, and a lot of other components have already gone kind of similar analysis, and even some of them have gone through flight, is very helpful. So if you look at the total cost that we've been targeting to get an electron launch, including a reused booster on a certain percentage of our missions, which is also a factor that goes into the calculus, the second stage where we look at bomb reductions because that's not recoverable, and then the kick stage as well, we've targeted getting the total cost of an electron launch down into the, call it, $3 to $3.5 million per launch. And again, that's all, a lot of it's tied to launch cadence of at least two launches per month, getting our normal cost reductions realized, and then of course the benefits from recovering the first stage boosters. So hopefully that provides you a little bit more color and it addresses your question.

Yeah, no, definitely. That is very helpful. And then maybe one more, if I may, on neutron, given that we just talked about electron. I understand the platform is expected to be reusable, land back on the pad, whatnot, but how should we be thinking about the cost structure there?

Pretty similar to electron in a reusable sense, really. I think the The economics pretty much remain the same. It's just an extra zero probably. But the actual fundamental economics of reuse pretty much pencil out the same. And the target margins are the same. The added advantage, of course, with Neutron is that the more reuses we get out of the first stage, the better those economics obviously look until you completely amortize the cost of that first stage over and over from the repeated uses.

Great, great. That's super helpful. I'll leave it at that. Thanks, guys. Thank you. Thanks.

Your final question comes from the line of Edison Yu with Deutsche Bank. Your line is open.

Hey, thanks, guys. A couple quick ones from me. I think we talked about 20 launches next year. Is that still the right way to think about the manifest? And given all the activity, negative activity for the competition, do we think there's some maybe upside to that?

Yeah, I think that's certainly what we're planning for internally for production since Edison. And, you know, we're kind of, you know, on target there. And the thing is with a lot of the kind of aspirational launch providers that it wasn't always clear how many launches they actually had under contract. And there's very few of them now left. So, yeah, I mean, maybe there is. But I think most people have kind of realized who's going to be successful and who's not by now. So I think the majority of the defection has probably occurred.

Understood. And then one on space systems. I know there were some difficulties, I think, initially with Solero. What's the latest update on that business? Is that kind of recovering to the trajectory that you guys are expecting?

Yeah, I think we're very happy with where that business is going. So I think the team there have done a a really great job. And I think that is a good example of kind of a very traditional historic space company coming under the wing of Rocket Lab and us kind of, you know, reculturalising them. And the team also very much supports being up for that and enjoying that. And I think, you know, that the result is, you know, Adam, you can say more, but personally, I'm very happy with the way that it's tracking.

Yeah, I would say, Edison, that, you know, when we close that deal, it will be two years in January, we set a target for 30% gross margin within that timeframe. And on an on-gap basis. And I would say that we're absolutely still tracking towards that. I think if you'd asked me that question six months ago, I think I probably would have said that maybe there's some little bit of schedule risk. It might have taken maybe two and a half years out of two years to get there. But it feels like we're in the right place to kind of achieve that in the original timeframe that we contemplated. So As Pete said, we've been very, very excited. I mean, it's a great team. We love what that brings to the platform as far as the level of vertical integration for a very key and high percentage total cost of BOM to our platforms. Again, just gives us more control over delivering our solutions to our customers in a timeframe and a cost and performance that we need to have. So it's been a very big differentiator, and fortunately the financials are following along with that.

Great. Thanks.

I will now turn the call back over to Colin Canfield for closing remarks.

Okay, thanks so much. And just a reminder for everyone on the call today, we actually were able to resolve the technical issue from our call provider to get the slides posted onto today's website. We also want to take the opportunity to flag that we'll be presenting at upcoming conferences for Bank of America, Jefferies, Citi, and Morgan Stanley during the upcoming months. So, look forward to seeing you guys on the road, and thank you all for coming to today's call.

Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.