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spk12: Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's first quarter 2021 earnings 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'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Hosting today's conference call will be Jeff Zaslow, Vice President of Investor Relations. As a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. Zaslow. Please go ahead.
spk13: Thank you, and good afternoon, everyone. Welcome to Virgin Galactic's first quarter 2021 earnings conference call. On the call with me today are Michael Colglazer, Chief Executive Officer Mike Moses, President of Space Missions and Safety, Swami Iyer, President of Aerospace Systems, and Doug Ahrens, Chief Financial Officer. Following our prepared remarks, we will open the call for questions. Our press release was issued about 45 minutes ago and is available on our investor relations website, as is the slide presentation that will accompany today's remarks. Let me refer you to slide two of the presentation, which contains our safe harbor disclaimer. During today's call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements made on this call. For more information about these risks and uncertainties, please refer to the Risk Factors section of Virgin Galactic's second amendment to its annual report on Form 10-K. filed with the Securities and Exchange Commission, and other documents filed by Virgin Galactic from time to time. Readers are cautioned not to put 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 to the most comparable GAAP measures in our earnings press release. With that, I'd now like to turn the call over to Michael.
spk02: Thanks, Seth, and good afternoon, everyone. I hope you are all doing well. As part of my plan to execute on our strategy to grow and scale the business, I've brought in some exceptional talent in key areas. Doug Ahrens is our new CFO, and Swami Iyer is our new head of aerospace systems. Doug has extensive experience as a public company CFO with companies in complex technology and manufacturing environments. Doug's leadership and relational skills and his expertise in capital markets and M&A will be incredibly valuable as we expand and monetize the business. Swami joined Virgin Galactic in March to lead the team responsible for building and designing our current and future fleet of vehicles. SWAMI brings great depth and expertise in business expansion, while also having the deep process and production orientation necessary to lead our aerospace teams as we build out commercial operations. We're incredibly pleased to have them both on board. Moving to the agenda for today's call, I will start with an update on the business and our key areas of focus. I'll then ask Mike Moses to provide an update on our upcoming flight. SWAMI will talk about his initial impressions and how he's viewing our fleet expansion strategy. And following Swami's remarks, I'll provide some comments on our commercial plans and how we are positioning the organization for scale and success. After that, Doug will provide a financial update. So with that, let's get started. Turning to slide four. Our focus remains on the following three areas. Number one, fleet readiness. Completing our test flight program and preparing for commercial service. Number two, fleet expansion. adding new spaceships and motherships to our fleet and pivoting the organization from an R&D phase to a manufacturing phase. And number three, developing our customer experience and commercial strategy to create expanded revenue opportunities. We set an ambitious schedule for 2021 and beyond. It's a dynamic time for both our company and the space industry as a whole, and we are entering what we believe is going to be a long period of growth and expansion. Turning to slide five. Let's start with fleet readiness. Our planned flight test schedule consists of four flights. These flights are intended to demonstrate our capabilities for the three markets that we plan to serve with our suborbital spaceflight system. Those are private astronauts, microgravity research, and suborbital training for professional astronauts. We are committed to delivering one of the world's most unique and transformational customer experiences with safety at the core of everything we do. Safety is designed into our vehicles, our policies and procedures, and our decision-making. And safety is the foundation of our culture. Typically, we don't use an earnings call as a forum for a detailed discussion of the specifics of our engineering systems and processes. However, given the level of interest around our space flight program, today we will share a more granular look into the steps that we've taken to prepare for our next flight. I'll now turn the call over to Mike Moses.
spk08: Thanks, Michael. Moving to slide six. Before I discuss the steps we've taken over the past two months, it would be helpful to provide background on the testing program and modifications we have made to the spaceship over the past year. As you know, our testing program is designed to be a process of continuous improvement. We have test objectives that we target with every flight, and each one of them is an opportunity to gather data to improve performance and move our space flight program forward. Last summer, we upgraded the flight control computer in VSS Unity. That is the system that controls the horizontal stabilizers, which are the main flight control surfaces used on the spaceship during the boost phase of a rocket-powered flight. The upgrade allowed for improved performance of the current system and provided an architecture for enhancements for future spaceships. The change consisted of two new control computers and some changes to the wiring harnesses in Unity. As you can see in the graphic on slide six, the control computers are located within the cabin, and there are electric motor-driven actuators in the tailbooms right next to the horizontal stabilizers themselves. These upgrades were tested on the ground and during glide flights at Spaceport America last year with great results. Our flight in December 2020 would have tested that new system during a rocket-powered boost, the final step of our testing program on that hardware. But as you know, a failsafe abort was triggered when the rocket motor computer lost connection. The cause of the rocket motor computer issue was electromagnetic interference, or EMI. The source of that elevated EMI was the new flight control computer. The system is designed to translate pilot inputs into commands to move an electric motor, and it was the unintended feedback of those motor commands that generated EMI. While this prevented us from reaching space, it was not a safety issue. Our pilots and systems returned to the runway safely, as designed. EMI is not uncommon in aerospace systems, and our approach to managing it has been measured and methodical, given that the actual flight conditions can be difficult to replicate on the ground. Over the past quarter, we've been working diligently to resolve the issue, focusing on two major elements within our spaceships. First, we addressed the EMI being generated by the new flight control computer. We added hardware filters to suppress the EMI that is being generated within the computer itself. This change drastically reduces the amount of EMI at the source, stopping it from ever entering into the larger system in the first place. Second, we improved the wire harness shielding and added components to suppress conductive EMI. These changes were made to the wires that carry power as well as the signal wires that transmit measurement data back to the flight control computer. Our approach has been systematic, focused on eliminating as much of the EMI as possible. We were able to troubleshoot and test both in the lab as well as on our spaceship and work to rapidly develop prototype solutions to refine our approach. As of today, the final installation of the flight hardware is complete. And in end-to-end checkouts, we were able to compare the current EMI to previous levels. And we can see that we've significantly reduced the EMI on the order of 10 to 20 decibels. Now, if you're not familiar with the terminology, decibels are a measurement of noise intensity measured on a logarithmic scale. So a reduction of 10 to 20 decibels means that we've reduced the EMI intensity to a level that is over 90% lower than it was before. Our reviews have concluded that we have sufficiently addressed the MI issue and that Unity is ready for flight and the start of its pre-flight launch check. I want to take a moment to thank an incredible team of engineers, mechanics, and support staff for their diligence and hard work that led to this fantastic result. Now, as part of our readiness program for the next spaceflight, we also conducted three flights with our mothership, VMS-E, over the past two weeks from Spaceport America in New Mexico. For our standard protocols, we perform a meticulous post-flight inspection after each flight to identify, among other things, any maintenance that we may need to perform on the aircraft. Following Eve's last post-flight inspection, we tagged a potential wear and tear issue as requiring further evaluation and analysis to see if any additional action is necessary. For background, Like everyone in the aerospace industry, we have a schedule of modifications and upgrades that we plan for each of our vehicles, and these post flight inspections are used to validate the timing of this schedule. Our next maintenance cycle is planned for later this fall, and prior to each last flight, all inspections confirmed our schedule was on track. However. Following this last inspection, we identified an item on our maintenance calendar that needs further study to determine whether we need to take action now instead of the fall as planned. Because this issue just emerged at the end of last week, we are still determining what steps may be necessary to address it. While this may impact our flight test schedule, I want to emphasize that this is the nature of a test flight program, and we are going to take the time we need before moving forward. Michael, I'll turn it back to you to provide some more information on our flight schedule.
spk02: Thanks, Mike. Our spaceship Unity is currently in pre-flight procedures following the successful resolution of the EMI Challenge. Unity requires our mothership to carry it on the first stage of our spaceflight, and with this late-breaking maintenance evaluation, we will report back to the market next week with an update on schedule implications to our next flight. Moving to slide seven. Upon the successful completion of this first test flight, we expect to fly a second flight, which will include two pilots with a full cabin of internal spaceflight participants. Our third flight will include two pilots, as well as Sir Richard Branson in the cabin. And our fourth flight is in partnership with the Italian Air Force. It will include three spaceflight participants and multiple payloads, and they will conduct astronaut training in addition to experiments during the flight. We expect this flight will demonstrate our capabilities for both microgravity research and professional astronaut training. And just to remind everyone of where we are in our journey, we expect the successful completion of this fourth flight will mark the conclusion of our test flight program. After that, we look forward to moving to commercial service. In terms of fleet expansion, I'd like to ask Swami to share some comments about this area of our business. Swami? Thanks, Michael. Turning to slide eight.
spk04: I'm excited about the opportunity to join Virgin Galactic and lead the expansion of the fleet. I've been on board for about 45 days. During that time, I've gone and seen all the facilities. I spent significant time walking the production floor and engaging with members of the team at every level. And I've been impressed with the talent and technical expertise in the organization. One of the things that drew me to the company was that the requisite development and scale of efforts the company is entering into are ones that are a natural fit with my experience as a test pilot and in leading aerospace manufacturing companies. So for me personally, Virgin Galactic provides me the unique opportunity to truly exercise all of my operations experience and tools to support the business and the team. Additionally, the safety, flight tests, manufacturing, and engineering cultures I've observed at this company are an aggregation of the best practices from across the leading companies in the global aerospace ecosystem. That is due in no small part to the DNA of our aircraft-based spaceflight solution, which draws from a deep and broad base of 120 years of aircraft development. which in my mind provides significant safety, engineering, and manufacturing advantage in scaling up into a robust, repeatable, and reliable space line. At Virgin Galactic, the elegance of the design, the experience of the team, and the evolution of the technology provide the right conditions at the right time to scale into humankind's first true space line, and I'm honored to be a part of it. Our focus going forward will be to scale the fleet and structure our processes precisely and accurately with an emphasis on rigorous testing and safety standards. That would mean getting our final space flight solution configuration locked down by optimizing our spaceship, mothership, and rocket motors performance, manufacturing methods, and supply chain. Again, leveraging off the larger aircraft industry ecosystem, we have the luxury of choosing the best of the supply base to ensure a high-quality and predictable fleet expansion effort using the engineering and manufacturing excellence of our future partners. I look forward to keeping all of you in the investment community updated on the progress that we're making in this area and on future calls. Michael, back to you.
spk02: Thanks, Swami. All right, turning to slide nine. As we progress towards commercialization, we plan to create a comprehensive multi-day consumer journey on the shoulders of our 90-minute spaceflight experience. Our goal is to ensure that the memory of this spaceflight lasts a lifetime. We believe our experience and approach will be distinct in the marketplace. We are also developing our customer brand architecture and marketing strategy. We intend to leverage the unique strength of the Virgin brand to create a bespoke experience. We'll have more to share on this area of our business as we move forward. I'd now like to turn the call over to Doug for a financial update.
spk03: Thanks, Michael, and good afternoon, everyone. I'm pleased to be here with all of you today for my first Virgin Galactic earnings call. It's now been two months since I joined the company. Having had some time to observe and listen, I'm even more excited about the opportunity and the team of talented individuals within the organization. I'm also looking forward to working with all of you in the investment community. Turning to slide 10. Before I review the financial results for the quarter, I wanted to begin with a few comments on our broader financial strategy. As we look to prepare and subsequently scale our fleet for commercial service, we're also positioning the organization for the launch of our consumer brand and experience. We're using these operational objectives to inform our financial planning. We're pleased that our total number of future private astronauts remain steady at approximately 600 as of the end of Q1. As we've disclosed, we plan to reopen sales for our private astronaut market around the time of the flight with Richard Branson. By reopening sales, we intend to satisfy a portion of the consumer demand with our expanding fleet size. We currently expect to have the sales funnel open for a limited period of time and plan to add a finite number of incremental members to our private astronaut community. With this approach, we'll look to build an appropriate backlog relative to the pace of our overall fleet expansion. Our goal is to address some of the consumer demand for our service while maintaining an appealing price point for the experience and an appropriate time horizon for flight for our private astronauts. We have not yet released updated pricing for our private astronaut market. We have, however, established current pricing for our microgravity research and private astronaut training markets. As we've previously discussed, we have a flight planned in partnership with the Italian Air Force that will demonstrate our capabilities for these markets. We expect this flight to generate $2 million of revenue, or the equivalent of $500,000 per seat. On a per seat equivalent, we're now entering into agreement at $600,000 per seat. We think these are excellent results for our introduction to the market. We're quite excited about this market and the pricing dynamics we're seeing for this portion of our business. Let's review our results for the first quarter on slide 11. Since there were no flights in the quarter, we didn't generate any revenue. As we previously disclosed, in response to recent guidance issued by the SEC, we revised our accounting treatment for warrants issued in connection with the company going public in 2019. In the first quarter of this year, the new treatment resulted in a $49 million non-cash expense related to the change in fair value of warrants compared to a non-cash expense of $317 million in the prior year period. Net loss for the first quarter was $130 million, compared to a loss of $377 million in the first quarter of 2020. The decrease in net loss was attributable to the change in the fair value of warrants. Notably, less than 10% of the originally issued warrants currently remain outstanding. Adjusted EBITDA was negative $56 million, compared to negative $53 million in the prior year period. Total operating expenses were $81 million compared to $61 million in the prior year period. The increase in GAAP expenses was attributable to an increase in non-cash stock-based compensation expenses. Adjusted to exclude stock-based compensation, expenses were $59 million compared to $56 million in the prior year period. Turning to capital allocation on slide 12. In the first quarter, free cash flow was a use of $50 million compared to a use of $60 million in the first quarter of 2020. The decrease was primarily due to lower capital expenditures and favorable working capital dynamics. CapEx was $1 million in the quarter compared to $4 million in the prior year period. Looking ahead, we anticipate second quarter free cash flow of approximately negative $60 million. Importantly, our balance sheet remains strong. We remain well capitalized with cash and cash equivalents of $617 million as of the end of the first quarter. As we've discussed, our business plan calls for the expansion of our fleet as well as the build-out of our consumer experience. We plan to use a combination of cash on hand as well as future inflows of capital to fund our strategic objectives. Historically, we've looked to take advantage of favorable market conditions to raise capital for the business. Going forward, we'll continue to evaluate opportunities to access the capital markets to grow and scale our business. I'd like to now hand the call back to Michael.
spk02: Thanks, Doug. All right, turning to slide 13. Before moving to Q&A, I want to take a moment to thank our entire team who have been working diligently on our strategic objections. And just to restate, our focus remains on the following three areas, fleet readiness, fleet expansion, and the development of the customer experience. Operator, I think we are now ready to begin the Q&A portion of the call.
spk12: Thank you. As a reminder, to ask a question, you'll need to press star one in your telephone. To withdraw your question, press the pound key. And your first question comes from the line of Robert Spingarn from Credit Suisse. Your line is open.
spk10: Hi, good afternoon. Hi, Rob. Michael. Hey, Michael. Just a question about the market. uh and the two players so both galactic and blue origin are now approaching commercial service and they may send up a passenger as soon as july if they stay on target and it sounds like you'll update us on your schedule next week how important are your relative schedules especially from a future order capture perspective sure one as i've shared before we're really excited to have multiple people uh basically
spk02: paving new territory for human space flight and being able to take private citizens into space. This is something that I think most of us in the world would not have guessed, you know, even a few years ago that this was going to happen in our lifetimes, and yet here it is upon us. So I think it's really important that Blue have great success, that we will have great success, because it will normalize the idea of human spaceflight to the market. And I think the more people that are able to go up and get this perspective back on the planet, the more their voices are going to come back and just inspire and engage other people and add more pressure into the market overall. So we're very excited for them. To your question on does the timing matter, I think we have a company that's been built over years and decades, as does Blue. And so while I think there will be great media attention around both moments when we are going up into space, I don't think it matters to our business overall.
spk10: Okay. And then just a quick one for Doug. On the cash burn that you just talked about, how does it progress beyond Q2? So how do we see $60 million evolving beyond Q2 from a quarterly burn perspective? And is there a minimum cash balance at which point you'd want to return to the capital markets?
spk03: Thanks for the question. So we haven't given specific guidance, you know, on a long-term cash burn. But there are multiple dynamics in play to think about. The first one is cash inflows. As we reopen ticket sales, we'll get those cash inflows coming in. Plus, as we approach commercial service, we'll collect the remainder of that revenue for those flights. And on the other side, as we expand our manufacturing capacity, you would see an increase in CapEx as we expand. scale the business and build out our fleet. So you have those two things working together. And then as we ramp up to high volume production, you get a nice economic model with a good flow through because we have what we expect to be a low variable cost strategy. So you would have nice flow through the revenue to the bottom line. So with all of that, we haven't put a minimum cash amount out there, but certainly want to have all the flexibility to grow and scale the business as needed.
spk10: Okay. Thanks, Doug.
spk12: Thanks, Michael.
spk02: Thanks, Rob.
spk12: Your next question comes from the line of Miles Walton from UBS. Your line is open.
spk11: Hey, T. I was wondering if I could ask Mike Moses to maybe elaborate a little bit more on the maintenance issue discovered on Eve last week. If that was an issue that was preexisting on the checklist to do during the downtime of fall, and was it one of the larger items to do or one of the smaller items to do? And then maybe for Michael, on the back of that, with this as sort of a single point, you know, clearly a single point in the critical path to flight, How does it make you think about maybe having to pull forward CapEx on the White Knight to a second one?
spk08: Thanks, Myles. So the item we found on Eve, maybe let me just give some context of how those protocols and that maintenance program is established, which is actually very common in aerospace systems. We have a series of inspections and preventative maintenance tasks that are designed to kind of track and maintain the vehicles and look at them not only in the instance of the next flight or the next several, but also looking at their lifetime and their ongoing health. And as with all complex systems, we have scheduled periods to allow for those modifications and upgrades that we deem necessary. And as we previously said, and as you're alluding to, we had one planned for this fall with Eve and our other vehicles. So those inspections let us determine whether those modifications and the schedule for that is on track and valid and react to anything unexpected. So after the pair of last flights that we did last week for pilot training, we did flag an issue that was on our calendar to be addressed later in the fall, but that required some further assessment to just basically double check, is that still a valid plan or do we need to potentially accelerate and address that item sooner than later? So that's the type of thing we're looking at. And I guess I'll just say that the difference between this as a flight test program and issues where we fly, we inspect, we monitor, we adapt, versus the regular cadence that you would head to in a commercial service program, that is one of those things that that upcoming modification period was specifically meant to address is move the vehicles into that footing.
spk02: All right. And, Miles, you're talking about the potential to pull forward CapEx on a second ship. What I'd say is we are very excited to grow the fleet. And as we've mentioned, we have started the programs both for Spaceship Three. We had our first unveiling of our first unit of Spaceship Three, VSS Imagine, back in March. But also we've initiated the program, what we're calling the Delta class of spaceships, which would be more of a production model, I would say, going forward. At the same time, we have initiated the program development for a new mothership, because as we scale up to the volumes we need, we'll definitely need more motherships. So this kind of maintenance topic that we kind of had pop up on us at the end of last week and that we're going to sort through and come back to you all with, you know, update on the market, we'll do that next week. This maintenance piece isn't going to really impact the timing of our second mothership program. That's off and going. It is in the early design stage, which is relatively low financial expenditures, as you're aware. And I think it will stay in that design phase for a little while until we settle on where we're going. So I don't think it changes our plan going forward, Miles. But it does, just to kind of reemphasize, we have programs kicked off both on new motherships as well as spaceships going forward.
spk11: Okay. And Mike, sorry, just to come back for a second. Just to clarify, you don't know if you'll have to do the issue. You're still evaluating whether or not that will have to be done. Is that correct?
spk08: Yeah, correct, Miles. So pretty late breaking in that we found the inspections we were doing after our last flight, which was Tuesday of last week. And so the team brought that up. We've done some extra inspections, and we're kind of in the middle of analysis now. We'll be able to make a determination here pretty soon, and we'll get back to you all next week with a market update, as Michael said. Thanks so much.
spk02: Thanks, Miles.
spk12: Your next question comes from the line of Adam Jonas from Morgan Stanley. Your line is open.
spk09: Hey, everybody. Just one simple clarification on the deposits. Can you remind us how large the deposit is as a percentage of the seats on the spaceflight? I didn't know if there was prior disclosure on that or one we could kind of think about within a range for when you reopen the funnel.
spk02: I don't believe we put prior disclosure on the size of the deposits. We have put prior disclosure out that the price varied a little from moment to moment. Generally, our last price point out was $250,000 per seat, I guess, if you will. And we have shared that we do expect that price will be going higher when we are able to reopen sales up. So that, I think, has been a close. I don't think we've talked about the scale of the deposits yet.
spk09: Okay. Okay, that's fine, Michael. And just a second one for me. You mentioned that once you – do the third flight, the two pilots and Richard Branson, that you would then make the move towards commercial service. Can you help us? Because that moment seems very important, I would imagine, for both OPEC's and CapEx. Can you help dimension that for us and what one could think about at this preliminary stage of modeling that point between the third flight and then that path to commercial? Also, in terms of what kind of gap or what order of magnitude of gap are we talking months, quarters between the Richard flight and the first non-Richard commercial flight? Thanks.
spk02: Sure. Let me take a shot at it and feel free to come back if I didn't quite catch the question perfectly. So let me go back to what we'd shared kind of at our last quarterly update, which is we planned to be having our next flight going in May. And we had then two more flights following, kind of one with an internal crew and one with Sir Richard Branson. We'd shared we expected those to go in the summer. and then we have a fourth test flight that we talked about that will be a revenue producing flight with the italian air force and we thought that would be in late summer early fall and that's what we talked about on the last earnings call and we're looking forward to coming back here next week and giving an update to that as mike moses just shared uh you know we're in flight test we flagged a maintenance topic and so we'll sort that out and come back to the market with an update more specifically for you all there. Now, as to your question of, well, what happens as you then move into commercial service? As we shared on the last call, following the flight that we planned with the Italian Air Force, kind of our fourth test flight, we have a period of time. We estimated, I think at that point, at about four months is what our estimates are. And we will be lining up basically upgrades and modifications to each of the three ships that we have active right now. So EVE, which we've talked about a little bit today, has some upgrades and modifications that have been planned, as well as Unity. And both EVE and Unity's upgrades and modifications are to help give them, I'll call it, more reliability of predicting flight cadence as we shift those ships into commercial service. We also will be then doing updates on the first of our spaceship three vehicles, VSS Imagine, and making the modifications there as we go from fly flight testing and then begin preparing for power flight testing following these modification periods. So following that, kind of period of modification and upgrade, Adam, is when we would move into commercial service, and we'll start commercial service with Spaceship Unity and EVE. So that will start, I'd say, on a managed basis as we move through those, kind of one flight at a time. So I don't think you'll see a giant uptick in OPEX at that standpoint, right? That's going to come more as we scale the fleet over time. But you will see different categories of OPEX because we'll be bringing in our astronauts into the area around Spaceport America and actually flying them and hosting them. So I think it will be a – more modest uptick in OpEx at that point relative to revenues that you would be seeing, though.
spk09: Appreciate the extra color, Michael. Thanks.
spk02: Thanks, Adam.
spk12: Your next question comes from the line of Ron Epstein from Bank of America. Your line is open. Again, Ron Epstein from Bank of America. Your line is open.
spk00: Yeah. Hello. Sorry about that. I was on mute.
spk12: Hi, Ron.
spk00: Back in February, you guys gave us an indicator that there was maybe a hair under the prospect pool got to a hair under 8,000 potential folks. Do you have any sense on, is there any incremental, any measure on incremental? It was just February of 2020, actually. Any sense? incremental interest? I mean, how can you share with us any incremental demand, anything like that? Because, again, in the release, you said there's 600 astronauts. It's been 600 for a while. Just trying to get a sense for growth in demand for you guys.
spk02: Sure. And one thing I kind of flagged there, it has been 600 for a while, and we think that's because there's great excitement for this. So we haven't shared guidance on where demand will go. What Doug was talking about today is we want to continue to keep an overhang, basically kind of build a book of demand that runs in advance of our spaceship fleet capacity. Obviously, we have 600, and we haven't entered commercial service yet, so that overhang of demand has been going for a while. But as we begin commercial service, as we then move our second spaceship, Imagine, into commercial service as it completes its flight test program and so forth with further ships, we plan to basically continue to build that overhang going forward, so there's always demand pressure against it. We believe there is going to be really great demand. I think you look at the excitement all around the human spaceflight concept, and you see it in multiple players in the market. I think you're going to see it, as we mentioned, with Blue's launch coming up. We think this is going to be fantastic and that the initial people that come back from these spaceflights will be just so raving that that will continue to further demand going forward. What we also talked about and what Doug was mentioning today is we're very excited about the demand for also microgravity research as well as training for professional astronauts. And what we did share today is some price points that we've been seeing on the initial flights of those that we are encouraged by, because that's going to be an important slice of our capacity and a slice of our market. So we are very confident and robust feeling on the demand, but we haven't released any specifics for you here.
spk00: Got it. And then the pricing question is sort of the next one, the next direction I want to go a little bit. Do you have a sense for your pricing vis-a-vis your competitors? So, you know, if I'm going to fly on a trip on blue versus a trip on you guys, is it comfortably priced? Are they more expensive? Are you more expensive? Do you guys have any sense of that?
spk02: Well, so to my knowledge, Blue Origin has not released pricing either. I think what they're doing is, as I understand, putting out effectively an auction for one seat on their first flight. And I think that's exciting. I honestly bet it will be a pretty high price if I had to guess. And I think that will add excitement. I'm sure Blue will take advantage of it. And I think that's really great because it will show just how amazing this opportunity is going to be. I'm not sure where Blue will settle their prices out. We'll see how that plays out over time. What I know we will do is ensure that the value that we deliver to the people who come fly with us and the value we deliver to the researchers that fly with us and the astronauts who train with us is going to be so outstanding. I don't think the price points that we charge as we launch our commercial business will be the topic. It will be, how can I get a seat? And so that's really the goal for our company is ensuring the value is there, and we feel really strong about that.
spk00: And then maybe just one last more technical question, if I may. With the EMI issue that's popped up and then the post-flight inspection issue that might be an issue, it raises the question just around fleet reliability. How are you thinking about that as you ramp up commercial labs? Because as the cadence of launches goes quicker, the utilization of the assets will be more. And maybe one of the things I worry about is just, will the assets be robust enough to execute the plan that you want them to the way you want them to?
spk02: Thanks for asking that question. It's an important one. And I'd like to call out what is a difference between a flight test program and commercial operations. In a flight test program, one, every time we fly, we are looking to gain new data take that data, analyze it, compare it against our models, and kind of confirm that we are on the right path and ready for the next flight test. Or, oh, we're going to make some modifications based upon the data analysis that we have. And the essence of that flight test program, which is not a unique piece for Virgin Galactic, that's all flight test programs, has variability in its schedule along the way. And we are making adjustments after each of these tests going forward. Now, what we talked about today with Eve, our mothership, is really a question of planned maintenance schedules. And we're trying to come back to you and confirm, are we going to maintain doing this on our planned maintenance schedule, which we said was going to be in October, or are we going to go forward or pull that forward? We're going to come back and talk to you about that next week. But then, if I could shift the concept from flight test, which is what we're doing now, into commercial operations, commercial operations require much more robustness and predictability in how we fly our ships. So one of the reasons we have this down period with Eve, our mothership, and Unity in the fall is to make some modifications that will let the flight rates on those be more predictable. As you've heard us discuss, our Spaceship 3 class with BSS Imagine is the first of those. The very purpose modular design, the very purposeful inclusion of all the learnings that we've had from Unity have gone into the design and manufacturing of those spaceships intentionally to allow for greater predictability and kind of return time, right? Once we fly, how quickly do we fly again? And what we're talking about with the Delta class of spaceships is when we basically locked all that profile down, and now you're basically building a production model, and you've got kind of ongoing consistency and repetition in the way our operations work. So you're accurately calling out commercial operations will be more reliable and repeatable. I'd just like to emphasize we're in flight test, and this is what you should expect to see in flight test. I think it's somewhat unique that flight test is happening in a pre-revenue, you know, public company. And so that's why we often have these calls, which is good. But that's important information to share, and I appreciate you bringing that topic up. Thank you.
spk12: Your next question comes from a line of Doug Harnett from Bernstein. Your line is open.
spk06: Thank you. Good evening. When you think about going through these four flights, the three upcoming and then the test one with the Italian one, so you go to that next one in, say, four months. What things are you looking for to be confident you're where you want to be? I mean, if we go back to kind of that 2017-19 timeframe, some of those flights, they were completed. They had some issues. What do you need to see here? In other words, how kind of issue-free do you need to be to be confident you're ready to go?
spk02: Sure. Hi, Doug, by the way. Excellent question. So let's talk about this upcoming flight, the next one we do. As Mike talked about, we have new controllers in that will give more precise handling on the flight control surfaces as we go. We've tested those in glide flight with great results. meaning we kind of test them, we do kind of some high-speed runs and pullback, but we do need to test those out under a powered flight. And so the next flight we have with just the two pilots is really to prove that out. We have great confidence from what we've seen in the system, but we want to see it operate under a powered flight. That is a, I'll call it a technical test that we're looking for. And as always we do on all of our powered flights, we will continue to evaluate just the overall performance of the ships and how the experience looks across it. So then let's go to the next flight with a full crew of mission specialists in the back. The new piece of information for that flight is We've got a full crew of people in the back. And how is the experience for those folks in the back? How are their movements around the cabin? How do they want to kind of find where the views are and the great pieces there? What are the kind of pressures that all the people experience? Are they what we expect them to be? We will also kind of confirm that what we saw on the prior flight, the first one with the two pilots, is repeating, right? Because you want to see kind of repetition and consistency there. But, you know, the first one has a technical piece we're looking for. The second one is kind of consistency of that same technical piece as well as now the four cabins and back. The next two are rinse and repeat isn't necessarily what an aerospace term would be, but that's generally what we're doing. Okay, let's do it again. And this time we wanted Richard to come in as our founder and kind of chief adventurer and say, okay, is this what I've been envisioning all the way along here and add, you know, kind of that flavor and that feedback into the overall experience. And we think that will be an excellent way to demonstrate what the private astronaut flight will be. And we intend to kind of make some noise about that as we go forward. And then the fourth flight, again, we're still basically repeating the same test objectives on the others, just getting repetition under our belt. The fourth flight will then be purposely to do testing around our other two markets, microgravity research and professional astronaut training. There are some things that we'll adapt on our ground operations. There are some things that we'll adapt about how the ship performs in space to focus on what the researchers need. So we'll adapt that and also use that as our demonstration flight. So that's kind of what we're looking at each stage. And at each one of those stages, we will look for generally consistency in what we saw there, but we won't be looking necessarily for something new.
spk06: Yeah, I guess two things. I'm just trying to picture, there have been a few questions that have gone around this, but for instance, Eve is, I believe, about 13 years old at this stage. You've now got the Spaceship Three coming out, which is great. So you've got these assets. How long-lived do you expect them to be? Because I'm thinking both just in terms of what anomalies you might be looking for on the test flights, as well as just the aging of these aircraft in very different environments than we've seen for most other types of aircraft.
spk02: Sure. I'll start out, and gentlemen, feel free to kick in. So, Eve, and I don't recall the exact age, but let's go with 13 years, as you said, is not flown yet. It's not like it's a commercial airliner flying back and forth every day putting flight hours on it at that time. So its number of flight hours, I'd say, are reasonably modest as far as airframes go. EVE is important to make sure that as we move into commercial service that it has gone through some updates and modifications that will allow it to fly with consistent cadence. That's really what we're looking to do there so that we're not kind of looking on a flight-by-flight basis and making sure we're ready, that we've got good predictability. We need people to be able to plan their trips to us and things like that. So I think that's kind of a normal evolution for Eve from a flight test program there. I'll let Mike or Swami comment on age, but I would kind of highlight from an hours basis, it's still fairly...
spk08: low use, I guess, compared to a normal airframe. Yeah, that's correct. Its first flight was in 2008, and the last flight we just flew was number 293. So from an airframe perspective, you know, from an airliner or anything like that, we'd still kind of be probably in the break-in period. So we don't put a lot of timer cycles, even though the profile we fly is certainly a unique one. And I think in terms of its life expectancy, right, a composite aircraft uh by definition really has some advantages over an aluminum framed aircraft when it comes to lifetime but it's certainly something that still needs to be monitored and addressed which is what we're talking about when we talk about these ongoing maintenance inspection cycles here we have a an engineering-based assessment as to what that life would be how parts will wear and fatigue over time and the wear and tear that they'll see and we're monitoring along the way to see if that is on schedule ahead of schedule behind schedule so we can adjust uh our program so that we we don't want to do too much maintenance or you can cause problems if you if you over correct and over examine the plane you don't want to be on the side either where you're doing it too little and so this is this ongoing uh continuous feedback uh improvement maintenance monitoring program and we'll have the same on our spaceships as well as the motherships. But in terms of lifetime, you know, while we put them through a unique environment, we don't really put that many actual hours on them. And that's all part of the design basis. And then as we talk about the next class, the Delta class, and next mothership, we'll be able to bake those lessons learned up front, and you hit the ground running even faster with those new models that come on the line. Okay, great. Thank you. Thanks, Doug.
spk12: Your next question comes from a line of Nipapanax from Goldman Sachs. Your line is open.
spk01: Hello. Good evening, everybody.
spk11: Hey, how are you?
spk01: I'm doing well. How are you?
spk11: Good, thanks.
spk01: Can you just specify what the maintenance issue is, what specifically needs to be addressed?
spk08: Yeah, so specifically we're looking at what we call basically a fatigue or stress item. So like we were just talking about in terms of lifetime and health, there's a couple of issues that we want to track and make sure that we see how the vehicle ages over time. uh and how how we address that and basically it's pretty common to all aircraft systems we monitor these items and we regularly evaluate the updates so we have plans in place to track these issues follow these items along and and in some cases like we've already identified here uh do some modifications this fall but what we what we flagged right now recently is we want to go double check that maintenance schedule based on the recent observations to make sure we don't need to do something earlier than that So that's basically, we're looking at a family of items that relate to fatigue and long-term stress.
spk01: So in simple terms, you just want to make sure it's not fatigued or stressed enough that it doesn't need to be addressed before flying again.
spk08: Yeah, exactly. That's a great way to simplify, right? So, you know, fatigue and wear and tear is a natural thing, right? Every item, whether it's an airplane or a spaceship or whatever it is, follows that. And you have a predicted model of when those things reach a place where you need to either refurbish, repair, upgrade, and do preventative maintenance. And so this is a check to see that the schedule that we have predicted is still valid and that we don't need to do it in an accelerated manner. If we determine we will, that's exactly what we're going to go do. Obviously, At the end of the day, safe dispatch and safe flight is our number one priority, but that's the purpose of taking this extra time right now before we set up flight date.
spk01: What's a reasonable amount of time it would normally take to address any similar fatigue or stress issues such as this one?
spk08: well in terms of analyzing and assessing it i think we're probably on a very short time scale just given that we flew on tuesday of last week um and and the inspections that we did uh involve a combination so let me talk just a little bit about those inspections they're a combination of of visual inspections using video whether it's a camera or a borescope into small places and then scan techniques, non-destructive inspection techniques using pulse echo, ultrasound, resonance scans, things like that that allow you to kind of non-destructively look through the skin like you would go to the doctor and get an MRI or an x-ray. And so we use a combination of those two techniques. Those results give you an image map that you then have to kind of not only look at the absolute value, but do a relative comparison to the last time you scanned and you're looking for comparison. So that takes on the order of a week or so to gather the data, analyze it, plug it back into our model, turn it around and get an answer. So that's why, you know, unfortunately the timing of this flight last week and the earnings call today didn't give us quite enough time to get to that final answer, which is why we'll come and give an update next week.
spk01: And what about performing the actual maintenance?
spk08: For that, I think a little too early in the path to decide what that is. We know what we were planning to do this fall, and part of this will be assessing how much of that either needs to be done early or do we partially do part of that upgrade. It's a little too early to tell. Okay.
spk12: Your next question comes from the line of Oliver Chen from Cowan. Your line is open.
spk11: Hi, thank you. Good afternoon. Regarding FAA approvals, How do the ones that you need intersect with the flight test program? Also, regarding your brand and the brand architecture that you're innovating towards, what are your thoughts on what might be important from an architecture point of view and how, from a consumer point of view, you'll set yourself apart? Thank you.
spk02: So I'll take the FA one, and Mike kind of kick in because I missed something, but we have – two remaining provisos on our commercial license with the FAA. And as we said before, fundamentally, we will look to this next flight we do. We need to have just a nice complete flight that goes to space, and we gather all the data around that, as well as kind of some of the data that happens in the cabin itself that's there. And we'll turn that data set into the FAA. They know the data set that they need. We know what it is. They know we're going to turn it in. And then it will be in the FAA's hands, you know, to turn it back around. But we expect to get that data on the next flight. We do need to get to space to complete that data set. And so that's really the only thing in front of us right now. So we expect to do that after this next flight. Now, as to the kind of consumer brand and brand architecture, we will come back. with a very robust overview of how we are going to establish our place in space because I think it will be very unique to Virgin Galactic and what we're doing here. But in broad strokes, we are focused on the experience that we will be providing to our astronauts. This is going to be incredibly transformational. And the moments that will be spent weightless, even though we have kind of a 90-minute flight profile, even though we've got this kind of great way of taking off with our horizontal takeoff and horizontal landing, and the flight to space up will be exhilarating, the moments in weightlessness, the moments looking back to the Earth across the course of a lifetime are relatively fleeting. And so we will be taking a point of view that says, how do we prepare these astronauts such that they are so ready to take in the emotion of that moment that the memory becomes so strong and so core that they can't help but share that for the rest of their lives. There is a lot of art and science that will go behind the work that we do in this, both at our consumer brand positioning, the way we talk about ourselves, the way we market ourselves, and the actual experience that we will deliver. And we're looking forward to kind of bringing that forward. I think you'll see us talk most about that in the area around the Richard Branson flight. We think that's the appropriate time to bring that to the market. But it will be very unique. Other people will go to space and we're excited for them, but we're very confident in our place in space and how we will deliver it. We think it will be sustainably differentiated.
spk11: Thank you. Very helpful. And I know we'll get an update next week, but as As you articulate reevaluating the launch timing of that first test flight, Aston, another way, what are some of the parameters like within your control and some of the parameters, you know, not as well within your control that you're analyzing right now for the launch timing of the first flight?
spk02: Sure. I'll take a shot at this. It might, you know, kick in here. I'd say we went off the facts. So that's generally what's going on. So we, as Mike said, we have planned maintenance cycles, planned enhancement cycles. We've announced one that will be in October. We also then do routine maintenance inspections and routine daily maintenance on ships after they fly. And the way we evaluate these things is based upon basically the data analysis of what we see on the various components of the ships. So we have a whole team of quality assurance technicians. They're fantastic. And they look over the ship. That data rolls into our engineering team that compares that data against our expectations. If the data matches our expectations, you know, we move forward. If the data says, oh, you need to make kind of a maintenance repair piece here, then we do that. And so I don't mean to not answer the what's in your control or not. It's all in our control based upon the facts that we see. And then we go forward with safety as our guiding principle. And then just practical business of maintaining aircraft and airframes and spaceships over time. Mike, anything you'd want to add there?
spk08: Michael, I think you hit that well. We definitely follow a rationale and a decision process that is very factual-based, and the data leads us to where we go. So things like double-checking, what if those assumptions are wrong? Is the problem bounded? Do we have a good physics-based understanding of the model we're using to make these predictions? Is it grounded in test? All of that comes to play. So along there, we have some variability in the rigor of standard which we apply against, and we can choose to put in a fix that we know is going to last us a lifetime versus one that says just get us to the mod cycle we have planned. So there's a little bit of variability there, but really at the end of the day, the safe and reliable and repeatable flights is where we're really going to head. So, yeah, I don't think I have much to say that what's in our control and not in our control from short and long-term choices, but the facts will be what they are, and that will drive our decision pretty straightforwardly.
spk13: Rob, why don't we take one last question, please?
spk12: Certainly. Our final question comes from the line of Pete Skibiski from Ellenbeck Global. Your line is open.
spk07: Yeah, good afternoon, everyone. Hi, how are you? Just one question for me, guys. You know, we've talked a lot about the kind of the spaceship manufacturing and upgrade cadence on the call here, but I'm wondering if you could maybe take it down a level for us to kind of think about in 2022, 2023, as you're ramping in your flights, you know, the spaceship gets used a certain amount of time, but I think the plan is to basically reload the rocket every time with new propellant. And so it seems like that's going to be kind of a high volume, maybe the highest volume kind of aspect to the manufacturing and flight process. So can you talk about how you're kind of retiring risk on that aspect of the program, just because it seems like there's not that many people out there that are going to, you know, go through that many rocket cases and propellant as you guys plan to. So I just love your thoughts on that part of the program.
spk02: Sure. As I often do, I will – uh start this one and and look over mike and swami feel free to kick in the propulsion system i'll use that that we have is a hybrid rocket motor propulsion system that has been evaluated extremely thoroughly and we are very confident in its robustness the it includes a tank where liquid nitrous oxygen is used as an oxidizer against a basically a solid motor And that's how we do our burn. The part that is replaced after each flight is the motor itself. And we have really great quality and confirmation that we like the configuration that we're using. What the real opportunity for us is, is as we move from going through flight test and move and scale up to commercial operations, we can shift our manufacturing environment because we know what this looks like. We've got our configuration settled. and basically move that into a factory setting and bring the cost down. So our go-forward basis on this, while we will always continue to kind of evaluate and improve our propulsion systems, fundamentally we are looking, in this case, to shift more to a factory mode to drive down the cost of that particular item that we use. Mike or Swami, anything you'd like to add into that?
spk04: So since I've come in, I've sat down with the team and gone through the each of the different components, particularly the rocket motor strategy for scale, look at the bill of materials and the supply base, and where we're going to have conversations about how we bring that together from an outsourcing strategy and from a construction and management strategy. So what that really means is that we're fairly vertically integrated in the way we build these things. Now we're looking at what kind of position in the factory we want for scale and match it to the curve of commercial flights we intend to have over the next few years. And I'm putting a high emphasis on supplier quality supplier roll throughput yield and first pass yield on those products that are going to come to us, assembly techniques, and then driving out the per unit cogs of each of the rocket motors. Once we get into that position, I'll get a sense of how I would optimize that. But that strategy is prepared fairly well. I'm just diving in to make sure that it's appropriate to the industry and we're picking the right partners. And so it's actually probably the most mature going forward that I would have expected to come here. So I'm quite impressed with what I've seen. Now it's just making sure we get the right suppliers, the right deals to make the OPEX going forward something we want.
spk07: Okay. Thanks for the call, guys.
spk12: And this concludes our Q&A session. Mr. Michael Colglazer, I turn the call back over to you for some closing comments.
spk02: Hey, thank you all for joining today's call. Thanks for the questions we had and for those who joined in to listen. We appreciate your continued interest and support, and we look forward to updating you on our flight status next week. So for today, thanks very much. Come back to you shortly.
spk12: And this does conclude today's conference call. Thank you for participating. You may now disconnect.
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