This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Thank you for your patience we are due to begin shortly. © transcript Emily Beynon Thank you. Hello all, thank you all for your patience and a warm welcome to the James Terrell Alton Law Second Quarter 2022 Earnings Call. My name is Louisa and I'll be your moderator for today. You will have an opportunity to ask the management team a question at the end of the presentation. Please press star followed by one on your telephone keypad if you wish to ask a question. And I have the pleasure of handing over to your host today, John Sigmund, Senior Vice President of Corporate Development. John, please go ahead.
spk01: Thank you, Louisa. Good morning, everyone. And thank you for joining Taron Orbital's second quarter 2022 earnings call. With me this morning are Mark Bell, co-founder, chairman, and chief executive officer of Terran Orbital Corporation, and Gary Hobart, chief financial officer of Terran Orbital Corporation. Mark will provide a business update and highlights for the quarter, and then Gary will review the quarterly results. Terran Orbital's executive team will then be available to answer your questions. During today's call, we may be making certain forward-looking statements. These statements are based on our current expectations and assumptions, and as a result, are subject to risks and uncertainties Many factors could cause actual events to differ materially from forward-looking statements made on this call. For more information about these risks and uncertainties, please refer to the company's filing for the Securities and Exchange Commission, each of which can be found on our website, www.terranorbital.com. Readers are cautioned not to put any undue reliance on forward-looking statements, and the company specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call. Please also note that we will refer to certain non-GAAP financial information on today's call. You can find reconciliations of the non-GAAP financial measures with the most comparable GAAP measures in our earnings press release. With that, I will turn it over to Mark.
spk06: Thank you, John, and good morning. And thank you to everyone for joining our second quarter 2022 earnings conference call. I am excited to share with you our results and operational highlights from the quarter as well as observations on the macro environment, and then look at the year ahead. Gary will provide more detail on our financial results, and then we're happy to take your questions. First, a quick introduction to those of you who are new to us. Terran Orbital has helped pioneer the space industry's small satellite revolution by delivering highly efficient satellite platforms to a broad mix of customers over the past decade. Our customers include NASA, Lockheed Martin, the Department of Defense, the intelligence community, and the European Space Agency, as well as numerous commercial customers. New technologies and the new economics of small satellites have revolutionized our industry. Terran Orbital delivers to its customers in months for millions of dollars solutions that used to take years and carry a price tag in the billions. Our satellites provide higher functionality, persistence, and faster product delivery at a lower price point. Terran Orbital is taking an industrial approach to building satellites at a massive scale. We serve an industry that the U.S. government forecasts will launch approximately 50,000 satellites over the next decade, creating an enormous opportunity for companies with advanced, scalable, vertically integrated satellite and design and production capabilities like us. Let's take a look at our accomplishments for the quarter. We are delighted with our team's performance this quarter and we are happy to report that our business is rapidly expanding. Here are a few highlights on our progress. First, we saw a significant increase in business momentum during the second quarter. Revenues rose 120% of the quarter compared with the prior year period, primarily due to the continued and increased level of progress made in satisfying our customer contracts, including the ongoing and favorable impact from significant contract wins and modifications in recent periods. We continue to increase our intellectual capital, and our headcount rose approximately 20% of the quarter to more than 400 people as of June 30th. And in June, representatives from Lockheed Martin and the Space Development Agency joined us for a tour of our new expanded state-of-the-art facilities in Irvine, California. We are thrilled that with our backlog, which is up 200% to the end of 2021 to $224 million, and our pipeline is comprised of more than 140 identified opportunities representing a value of approximately 16 billion of potential customer revenues as of June 30th, 2022. Second, Our manufacturing execution is on track and we are very proud of the performance of our growing team. We continue to develop and deliver satellites on schedule and operate exciting groundbreaking missions on behalf of our diverse mix of customers. Difficult supply chain conditions persist, but I'm proud of how our vertical integration strategy is proving its merits and we continue to make investments in infrastructure and equipment to expand production capacity and decrease our reliance on outside suppliers. Within the defense sector, we are pleased to have delivered in May the first of 10 satellite buses to Lockheed Martin in support of the Space Development Agency's Tronch Zero for the transport layer. The transport layer is the foundation layer for the national defense space architecture and a secure mesh communications network in space, which will enhance U.S. global defense capabilities. And Terran Orbital remains fully committed and expects to deliver the remaining nine satellites for tranche zero in 2022 and has already commenced work on the next 42 satellites for the SDA for tranche one. Our reliable execution on these tranches enhances our competitiveness for future awards and related to this critical defense constellation, which will consist of hundreds of satellites and low-Earth orbits, and we expect these to be replaced every five years. This showing how the change going from where there used to be geosynchronous satellites that would last 25 to 35 years now goes to satellites that last five to seven years, and our business becomes a recurring revenue business as the business model has changed. As previously announced, we subsequently won a contract to provide an additional 42 buses for Tranche 1, and we expect to begin delivering in 2023. Within civil government sector this quarter, we are also exceptionally proud to have delivered NASA's Capstone satellite to NASA in June as a critical part of the Artemis program to return humans to the moon. Since NASA's launch of Capstone on July 7th, Terran Orbital's mission operations team successfully established communications with the satellite and is now utilizing groundbreaking low-energy navigation technologies to guide the satellite as far as 1.5 million kilometers from Earth before returning it to a near-rectilinear halo orbit. which is basically an elliptical orbit around the moon. This very exciting mission not only verifies the dynamics of the orbit, but also proves Ternorbitals reliability and speed in delivering technological breaking satellite solutions for our customers. Additionally, within the civil and commercial sectors, we supported the launch of six customer satellites on a single SpaceX launch in Q2, all of which are successfully operating for a diverse mix of satisfied customers. The diverse missions of these satellites demonstrate the expanding end markets and use cases enabled by the technologies and economics of small satellites. Turning to the macro environment, small satellite demand remains positive. In the defense community, for example, we are seeing increased urgency in demand for space solutions in response to a variety of factors, including Russian and Chinese development of new military technologies and capabilities. We also saw the real-time utility of satellite imagery, coverage, and resilience in the midst of geopolitical crises demonstrated in Ukraine. In Congress, there continues to be broad bipartisan support for the National Defense Authorization Act, which has been passed every year since 1961, and it's one of the few programs to have such bipartisan support. In July, both houses advanced the bills, proposing a significant increase in the 2023 defense budget and prioritizing research and development for space programs. Two weeks ago, the Senate advanced the bill with a $63.6 billion increase in DOD spending versus fiscal year 2022, versus fiscal year 2021. The Senate a marked $2.2 billion for development of resilient space capabilities, including low earth orbiting satellite systems. Early in July, the House of Representatives provided an even bigger year increase in funding, including for tactically responsive space programs and a mandate to integrate commercial-based capabilities related to space situational awareness, imagery, and communication. Such solutions are right in Terran Orbital's warehouse, right wheelhouse. Outside of the U.S., other countries are responding similarly to military and environmental threats by increasing budgets for space systems and seeking to harmonize and integrate their space requirements with those of the United States. For example, both the UK and Australia have recently announced new military space investments and expanded cooperation with the United States. Finally, looking ahead, we expect the second half of this year to be very exciting. Firstly, we look forward to delivering the rest of Tron Zero. Second, we have over 20 programs in-house and we are ramping production capacity to execute on our backlog and future opportunities. We continue to be on track to open our new Irvine California production facility in the fall of 2022. We continue to vertically integrate our production in order to provide the highest value proposition to our customers. And finally, we continue to be excited about our pipeline and achieve engagement we have with our customers. We continue to see increasing customer demand for constellations and satellites. And this, as I said before, is the future of space, which is a recurring revenue business. In sum, our results from the quarter demonstrate the strong growth in our business, and I could not be prouder of our team's execution or validation of our market opportunity and business strategy. With that, I now turn it over to Gary for an overview of our financials for the quarter. Gary.
spk10: Thank you, Mark, and good morning, everyone. I'm happy to report another strong quarter for Terran Orbital as we continue to build momentum in our business. Revenue for the second quarter was $21.4 million, a 127% increase over the same period last year, reflecting our continued execution on our programs. As a reminder, we recognize revenue on most of our programs on a percentage of completion basis, and changes have a cumulative catch-up impact in the period in which we make the adjustments. In the second quarter, adjustments to our estimates at completion, or EAC, reduced revenues by approximately $1.3 million. Adjusted gross profit for the quarter was $2.1 million, down from $4.5 million in the same period in the prior year, and up from negative $0.2 million in the first quarter of this year. EAT adjustments during the second quarter reduced adjusted gross profit by an estimated $3.8 million, comprised of the $1.3 million I mentioned previously, plus $2.5 million from EAC adjustments to cost of sales. Adjusted EBITDA was negative $14.8 million for the quarter, compared with negative $2.5 million in the same period in the prior year, and essentially flat compared to the negative $14.7 million in the first quarter of 2022. The decrease in adjusted EBITDA year over year was primarily due to the decrease in gross profit and increases in selling, general and administrative expenses related to salaries and wages, research and development, facility expenses, and other operating costs as a result of our growth initiatives. Finally, at June 30th, we had approximately $62 million of cash on hand and approximately $203 million in gross debt obligations. And since quarter end, we entered into a common stock purchase agreement with an affiliate of B. Riley. This committed equity facility gives us the right, but not the obligation, to sell to B. Riley over a 24-month period up to the lesser of $100 million of newly issued shares, or 27.5 million newly issued shares at a 3% discount to market, subject to certain conditions and limitations. We are pleased to have entered into this arrangement, which provides us with a flexible option for access to incremental liquidity as needed. I will now turn the call back over to Mark.
spk06: Thank you, Gary. And thank you, everyone, on the call for your continued support of Terran Orbital. I now look forward to taking your questions, and I'll turn it over to the operator.
spk03: Thank you, team, for your presentation. If you'd like to ask a question, please press star followed by one on your telephone keypad. Should you wish to remove your question, please press star followed by two. Please ensure when preparing to ask a question to unmute your line locally. And there'll be a brief pause while questions are now being registered. Our first telephone question today comes from Austin of Concord. Austin, please go ahead. Your line is open.
spk07: Good morning, Mark and Gary. Good morning. My first question here, so in the release it says that the Predasaur launch or the first two satellites has been moved to 2023. Is this, as you said in the previous earnings call, due to the focus on delivering those Tron Zero buses to Lockheed as the priority?
spk06: Yes. We've made it a priority to get the Tron Zero buses done first before finishing the Predasar. That said, we are well along on the antennas for the Predasar bus, and the buses will come after Tron Zero.
spk07: Okay, and then just to follow up there, do you expect that if we think about the timing for the first two Predastar satellites, do you think that's more of a first quarter 23 item or a second quarter 23 item?
spk06: It's really a question of a SpaceX launch schedule at this point. It has our desire to get one up in the first quarter and possibly both, but we're going to take it as a schedule and we have secondary payloads on both of the satellites that are different So part of that is up to the people providing the secondary payloads. But it's our goal to get it up in the first quarter.
spk07: Okay, great. Thanks for the details.
spk03: Thank you for your question, Austin. Our next telephone question comes from Robin Springard of Millers Research. Robert, please go ahead. Your line is open.
spk11: Hi, good morning. Mark, just... On Predisar, are you still looking at a 96 satellite constellation, or has that plan evolved?
spk06: The plan is evolving. We are looking at getting the first two up. There's been a lot of communications with our potential clients for this, and so the satellites continue to evolve.
spk11: Okay. And then, Gary, just with regard to cash burn, it was much higher in Q1 than Q2, and so what Well, I understand you're not guiding. How do we think about cash burn for the next several quarters? What's the cadence?
spk10: I think the cadence is a good mix of the two. If you look at the year-to-date number and kind of see that it's kind of in the 20 to 25, a lot of it depends on our working capital. And with the business of designing and manufacturing satellites, a lot of the payments are coming up and paid to us ahead of the labor and spend. So we tend to be, as we have new awards, we tend to be fairly... generated a fair amount of cash from our working capital. So that could have quite a big swing, and that's what you saw between the first and second quarter. So it could be anywhere from $20 million to $25 million, but this quarter was only $15 million to burn.
spk11: Got it. And then just last thing, Mark, you talked about adding people. I think you said you were at 400. So it sounds like you had a decent intake just in this last quarter, but what is the hiring environment like? Is it getting better? Is it getting worse? And how is attrition?
spk06: I think we've been very lucky. Being public has helped a lot. We're increasing our headcount by about 10% a month. We're having very little attrition. You know, we are having a lot of people who, the more visible we get, things like the NASA Capstone Program got a lot of people excited and a lot of resumes in the door. The SDH Tranche 0 and Tranche 1 got a lot of resumes in the door. So as we get on these bigger, more exciting programs, We're getting a lot of people who want to leave the big prime and come work for an exciting startup like us. So for us, it's a very exciting time. We have an office now in Melbourne, Florida, and that office is growing by leaps and bounds. That also has a very large tech community there. And as we look forward to continue to expand in Florida and in California, but Florida has been a very rich ground for us for hiring some pretty amazing talent.
spk11: Great. Thank you very much.
spk03: Thank you very much for your question. Our next question comes from Elizabeth Grenfell of Bank of America. Elizabeth, your line is open.
spk02: Hi. Good morning. A couple of follow-on questions. The first being you said the PREDASAR plans are evolving. Can you give us some sort of indication of how you're defining evolving, whether that's up, down, and how much to the right things are potentially shifting? And then In line with that, how should we think about CapEx for this year and beyond?
spk06: So I'll tackle the first part. As far as evolving goes, you know, we're looking at the Tranche 1 bus, which is a much larger bus. We're seeing the benefits of going to having a bigger bus with more batteries and having a bigger, which allows us all to do additional secondary payloads. So we're liking that strategy a lot. And with the amount of Secondary payloads, what they do is they open up opportunities for us to connect to other networks. So, for example, we're putting an OISL link to connect into DARPA's blackjack on one of our satellites. We have another customer on the first or the second satellite, and we have another customer with another program connecting to something else. And so we are seeing a lot of activity. So we take a larger bus with additional secondary payloads gives us more connectivity into more existing government programs and increasing potential for revenues. So we view this very much as a positive. You know, we always think, we always remember, you know, MySpace was the first, but they weren't the winner. And we keep telling ourselves, we keep reminding ourselves, it's all about the end game. It's not about being the first. And Gary, do you want to talk about CAPEX? Sure.
spk10: And on CAPEX, for the first six months of the year, we're at 9.4 million. During the first quarter, we guided to about 15 to 20 million of CAPEX for the year. We're not updating guidance, but as you can tell from the cadence, we're right kind of in the middle of what we've guided to. CAPEX is going to be a function of various things, including the launch of Predasar satellites and other things. Also, with with the addition of the B. Reilly facility and the access to additional liquidity, it really allows us to have a lot more flexibility on when and what we're spending money on, even as we look at our resources and are mindful of our capital resources.
spk02: Okay, thank you. And then have you guys seen any, what kind of supply chain headwinds have you seen and any implications of that in the quarter and going forward?
spk06: You know, we've been pretty lucky. You know, we continue to vertically integrate. And, you know, we've seen, you know, minor issues on chips, but not a lot. Mostly with, you know, third-party vendors. You know, they're having some issues, but everyone's delivering on time and on budget. So we've been pretty pleased overall. We've been very lucky. We have a great team managing our supply chain, and we have some very long-term relationships with our vendors. And, you know, we're in good shape.
spk02: Great. Thank you very much.
spk06: Okay. Thank you.
spk03: Thank you, Elizabeth. Our next question today comes from John Sullivan of the Bunch Work Company. Josh, please go ahead.
spk06: Good morning.
spk08: Good morning. Just a follow-up on the larger bus for the Predasar. Are you seeing any larger needs for power for the SAR? Anything come out of the operational environment in Ukraine to suggest any suggested needed changes for the SAR technology?
spk06: So it's interesting you ask that. So, you know, power, what makes us different than a lot of our competitors out there in the SAR market that are using much, much smaller buses is we're able to have a longer time imaging and we can image when we're not facing the sun. So we get, we get, we get more time imaging and downloading than other people. And that's one of the, one of the, that's one of the huge advantages of being a much larger bus. We have much more batteries. So, and that also gives us the ability as we go to a larger bus is to have more space and more power for secondary payloads that allows us to interconnect with other government systems. And, you know, and so we're literally, we're working with our customers, figuring out what is the best solution and, you know, and continuing to, you know, develop other technologies with them that allows us for greater connectivity. And forgive me, what was the second part of your question? It was like a two-part question, I forgot.
spk08: Is there anything that's come out of the operational environment where we've seen some SAR use that has changed your positioning on SAR?
spk06: You know, the Ukraine, which is an incredible tragedy, has really proven to the government and to customers the value of SAR. And there's just not enough SAR satellites in orbit today. And the SAR satellites were credited for stopping the Russians on their advance to Kiev because they were only attacking at night. And being able to see at night and find those missile launchers made a huge difference in the war. So SAR, now you see people going out, NRO is looking at SAR, commercial SAR, and other people looking at commercial SAR, whereas a year ago, those conversations were all classified. So now they're looking at commercially adopting SAR. It's a very, just like ElectroOptical was classified and became a commercial product, you're seeing SAR quickly moving down the road of becoming a commercial product, meaning they're much more willing to buy from people like us than they were a few years ago, which is great.
spk08: And then just a question on, you know, as you move, You know, to challenge one from the first challenge, you know, is there a learning curve improvement on your end, you know, or, you know, challenge one, you know, the bus is any more complicated? Just any thoughts on the changeovers as you begin that early work?
spk06: Yeah. I mean, there's always a learning curve. You know, every satellite we build, we learn something. That being said, you know, we're building, I think our large, we're building satellites now as large as 800 kilograms. So we're really stepping up what we're able to do because while we invented the CubeSat and we created this industry, it's a great demonstrator. You could do something in a small package, but now there's a happy medium between where you need to be. 450 seems to be the sweet spot size-wise. You want to make sure you can fit on a Nesforink on SpaceX, but the more batteries and the more processing power that you can put into these things within reason, because you don't want to get too big because then you won't fit on a transporter launch. But it's exciting how these things have transformed and very quickly because we manufacture a lot of our components ourselves, we're able to do a lot of this transformation in-house without relying on third-party suppliers. Thank you for the time. Thank you.
spk03: Thank you for your question. Our next question today comes from Eric Ruffmussen of Stifel. Eric, please go ahead.
spk09: Yeah, thanks, and congrats on all the progress.
spk07: Thank you.
spk09: You're welcome. As it relates to the SDA program and Trots Zero, it seems like you are on schedule to deliver all 10 buses by year end. But what hurdles do you see at this point that can prevent you from staying on schedule? I know you just talked about supply chain issues. You have some personnel there. The capacity is obviously coming up, but there's still a lot of work between now and the end of the year.
spk06: You know, we're in pretty good shape on TransZero. We have all the frames done, and we have a lot of the components already done. Now it's really just about assembly. And so we are very busily assembling the satellite. We delivered one already to Lockheed Martin, and the rest of them are just, you know, following along schedule. So we don't see any real hiccups coming down the road for Tron Zero. And so much so to add, and I'll add to that, not only have we done that, but we've already begun work on Tron One, just to give you an idea of schedule. So we're doing an excellent, our staff is doing an excellent job of not only keeping on schedule, but moving it along, already progressing to Trunch 1.
spk09: Great. And then maybe just, we haven't heard about it on the prepared remarks, but as it relates to your plan announcement on the Florida facility, you know, where are you at on, you know, timing of this? Any, you know, any updates that you can give us?
spk06: We are working feverishly. I spoke to the Lieutenant Governor's office yesterday, and we are working feverishly to get it done. It is, unfortunately, working with government does take time, as I've learned. Patience is a virtue. And they are very eager to see us have a shovel in the ground. We're very eager to have a shovel in the ground. And we just need everybody else in between our two shovels to get it done. And they are working. I don't have a calendar timeline yet. I hope to have one soon. But all I can tell you is everyone is very busily working on it daily to get this thing moving.
spk09: Great. And then maybe just last, on the Irvine facility, that's going to – it looks like that's going to open in the fall timeframe. How do you see capacity sort of ramping, and when does that start to have an impact on, you know, some of these programs that you mentioned, Torch 1, because, you know, you're already starting on that?
spk06: Yeah, I mean, we are adding a phenomenal amount of space to the new facility. I mean, we're going from – we're going to add 40,000 square feet of clean room We've already completed 20,000 square feet. It's already completed and in moving condition, and we already started moving people in. That's for production. So that facility will be completed by the fall, and it gives us 40,000 square feet, mostly high bay. So we could do all of Trunch, one in there, plus a lot more. We have room for a couple more constellations to fit in there. Great.
spk05: Thank you. Thank you.
spk03: Thank you for your question, Eric. As a reminder all, if you would like to ask a question or a follow-up question, please press star followed by one on your telephone keypad now. Our next telephone question comes from Griffin Boss of Bee Riley Securities. Griffin, your line is open.
spk04: Hi, good morning. Thanks for taking my questions. So can we just get some more color on the 140-plus opportunities in your pipeline that you mentioned, I think, representing over $16 billion in value? Is that satellite solutions, or does that incorporate the overall business with prospects for Predasar?
spk06: That is satellite solutions. Our manufacturing business is booming. We're seeing incredible demand from not only the government, but the commercial and civil sectors. We're seeing everybody really – people are finally getting it, for lack of a better term, and seeing the opportunity to make money from space. And so we're seeing – there are lots of people out there who are trying to build constellations that are working on it. You have a lot of very well-funded players that are entering the marketplace. And, you know, it's just a land grab. And, you know, we have a finite amount of facilities, and we're adding more. And, you know, we look to continue to add more facilities at a rapid pace in order to keep up with demand.
spk04: Got it. Yeah, that's helpful. So that sort of leads into my next question then in terms of adding capacity and facilities. You know, I don't want to beat a dead horse on Predisar, but just curious to get your thoughts on how you're thinking about the overall strategy there going forward with regards to, you know, pulling in or pushing out investment for Predisar and how you're balancing that out with additional manufacturing capacity investments, you know, places like Florida.
spk06: It's really about the customer at the end of the day. you know, what the customer wants and the things the customers want Predisar to do. And as Predisar, you know, as we continue to get these secondary payloads and this thing evolves with it, it's not about, you know, our manufacturing capacity after the new facility opens, we are in fabulous shape to get Tronch One out, to get Predisar out, and a few other people to boot. So it's not a capacity issue. It's really, you know, an evolutionary process as we will be the first major commercially-owned constellation of SAR satellites. We want to do it the way our customer wants it to be done, and our customers are becoming the customer base that we're talking to is increasing in size, and they have more things that they want, and we're listening to our customer because we want to be successful from day one, and that's very important to us. So it has nothing to do with cap spend. It has to do with delivering what the customer wants and how they want it. Because we're in this for the long term. Without the constellation, it'll be around for decades once it gets going.
spk04: Got it. Thanks, Mark. That's helpful. And then just last one for me. Can you elaborate a little on the manufacturing timeline for the satellite buses you're delivering to Lockheed for SDA's Trunch Zero? I'm just trying to get a sense of when we should be expecting the next nine buses could feasibly be delivered over the next four months.
spk06: They'll be delivered over the next four months. They would be delivered yesterday. But the reality is I had dinner with people from Space Force not long ago, and their dream is to order a satellite on Monday and get it on Friday. And they were only half joking as they said that. And that's the future of this industry is being responsive states, is having your components sitting there on a rack and really being able to assemble satellites on demand. And I see a time, three or four years from now, where that isn't going to be too far from reality, that you'll be able to order a satellite and get it in very quick fashion. I hear people joking about it now, that they can deliver a satellite in 30 days, but that's not reality. You have to test it, and a lot of testing goes into these things. Because remember, it's not like your car, if it breaks and leaves a dealership, you can go pull it back and fix it. It has to work every time. where failure is not an option. But that being said, you'll see things going much, much, timelines getting more and more compressed over the next few years.
spk04: Okay. All right. Fair enough. Leah, that's it for me. Thanks, guys. Appreciate the time.
spk06: No, thank you very much.
spk03: Thank you. On behalf of our listeners, thank you, Mark and team, for answering the following questions. I would now like to hand the call back to Mark Bell for any closing remarks today.
spk06: Well, I just want to thank everybody for attending today's earnings call. We appreciate your support, and we look forward to talking to everybody soon. Have a great day, everybody. Thank you.
spk03: Thank you all for joining today's call.
Disclaimer