Virgin Galactic Holdings, Inc.

Good afternoon. My name is Nadia and I'll be your conference operator today. At this time, I would like to welcome everyone to the Virgin Galactic's second 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 would like to ask a question during this time, simply press star followed by one on your telephone keypads. If you would like to withdraw your question, please press star followed by two. Thank you. Hosting today's conference call will be Seth 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 to begin. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Virgin Galactic's second quarter 2021 earnings conference call. On the call with me today are Michael Colglazer, Chief Executive Officer, and Doug Ahrens, Chief Financial Officer. Following prepared remarks, we'll open the call for questions. Our press release was issued about an hour 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 the company's 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 would now like to turn the call over to Michael. Thanks, Seth, and good afternoon, everyone. It has been an extraordinarily active and successful three months for our company. Since our last earnings call, we've achieved significant milestones on our path towards technical and operational readiness for commercial launch. We've also gathered tangible evidence of the deep consumer interest in our service, which reaffirms confidence in our approach. Our Unity 22 flight in July was a landmark achievement. After 17 years, of research, engineering, and innovation, we executed a successful space flight with a full crew in the cabin. Unity 22 demonstrated further proof of our technical readiness, and we were able to share this event with the world as over 19 million viewers around the globe enjoyed the excitement and wonder of the space flight experience through our livestream and live television broadcast. Watching VSS Unity streak once again above the atmosphere arced back towards Earth into a perfect viewing position and feathered gracefully for return to Spaceport America, validated the inherent safety and design of our system. The feedback we got from Sirisha Bandala, Colin Bennett, Beth Moses, and Richard Branson gave us incredible validation of the customer experience we've created. And the extraordinary global response to the flight makes us even more confident in the significant untapped market of space enthusiasts and the power of our global human-centered brand to attract them. With the successful results from the Unity 21 test flight in May and Unity 22 in July, we stepped closer to completing our test flight program and launching commercial passenger service in 22. And as we advance towards that goal, we are excited to announce today that we will immediately open ticket sales to our significant list of early hand raisers, prioritizing our spacefare community who, as promised, will be given first opportunity to reserve their place to space. We have a purposeful range of product offerings in order to satisfy the different ways people will want to share this experience. For the private astronaut flights, our products will include a single seat, a multi-seat couples, families, and friends package, and a full flight buyout. Prices for this next phase of private astronaut sales will begin at $450,000 per seat. Our microgravity research and professional astronaut training flights remain priced at $600,000 on a per-seat equivalent basis. I will have more to say about our commercial plans later in my remarks. Turning to slide four and the agenda for today's call, I'm going to start with a recap of our flight test program and the momentum that it's created for our company and our commercial plans. I'll follow with an update on our fleet readiness, including efforts to reach moderate-rate commercial cadence as we parallel path the design of our production model spaceships and motherships. I'll then share an overview of our approach to the Virgin Galactic customer journey and how it will differentiate our product in the marketplace. Then I'll turn the call over to Doug, who will provide a financial update and discuss our strategy to expand our production capabilities to meet the high levels of anticipated demand. Turning to slide five, let's start with our flight test program and the enormous impact of our recent flight, Unity 22. Unity 22 flight was an important milestone for the company, but it did not stand alone. It was part of a methodical test flight program with each achievement building on the one before it. With our Unity 21 test flight in May, we successfully completed our third space flight, the first one from Spaceport America in New Mexico. Now, the focus of this flight was to validate our technical approach and flight profile, and it did exactly that. The flight tested and affirmed the spaceship's upgraded flight controls and horizontal stabilizers, and it also collected the data needed for our final two verification reports for the FAA. After the Unity 21 flight, we submitted that data to the FAA, and following a detailed review, the FAA announced in late June that it had approved the expansion of our commercial space transportation operator license to allow for the carriage of space flight participants. This marked the first time the FAA licensed a space line to fly customers. It was further validation of the inherent safety of our system. With those technical pieces in place, in July, we turned our focus to testing the cabin experience for our private astronauts and researchers. This was the 22nd flight for VSS Unity, the fourth test flight to reach space, and the first test flight with a full crew in the cabin. The crew of Unity 22 successfully fulfilled a host of test objectives related to the cabin and customer experience. But my favorite part happened when each of them stepped off the ship and they came into Spaceport America before they headed out to the stage to celebrate. As they each came up to me and gave me a hug, seriously, the first thing that popped out of their mouths was, I just want to go do that again. And then they stammered, and it was kind of stammering. They were very joyous in an attempt to find the words to describe the view that they had seen. I'm sure that all of our astronauts are still absorbing this moment and what it will mean for them personally. But I think those initial sentiments confirm the most important test points for us of all. Turning to slide six, the Unity 22 flight was an inflection point for our global brand. We created a cultural moment. We saw incredible global engagement with viewership coming from over 65 countries. Millions of space enthusiasts around the planet shared a glimpse into the journey that Virgin Galactic's future astronauts can expect. And they loved it. The interest in Unity 22 was expressed in several ways. Through total viewership, which we estimate was in excess of 19 million between our live stream and linear viewership. Through extensive media coverage, which we estimated generated billions of impressions. And through the incredible influx of traffic to our website. where potential space travelers and fans have been signing up to receive information on our products and to learn how to reserve a flight. We also announced an initiative with Omaze that raises funds for Space for Humanity, a nonprofit organization where individuals from any walk of life can apply for an opportunity to go to space. To date, over 125,000 people from 190 countries around the world have donated to this cause. and we're still in the early phase of the campaign, which is fantastic. Moving to slide seven. Our commercial focus now is to capitalize on this interest and enthusiasm. The data we gain from this consumer response will continue to feed us with meaningful insights, insights that will be used for our next phase of sales, as well as to broaden our future sales efforts and deepen our well of engaged brand fans and followers. We will build on this large base of potential customers and brand fans through curated content and engagement, including sharing exclusive content from our upcoming test flights. In combination with targeted performance marketing, sales, and partnership efforts, we see this new customer database as an important strategic asset for us to convert future business as we ramp up the size of our fleet. As I noted, we will initially focus our sales efforts on an established group of early hand raisers, prioritizing the approximately 1,000 spacefarers who've already expressed an interest in our product through our One Small Step program. For the private astronaut market, we will have three different consumer offerings, a full flight package where the buyer can purchase all of the availability for all the seats and all the availability on a flight, a multi-seat package for couples, friends, and family, and a single seat for individual astronauts. We expect many consumers will want to fly with friends or family, and we will customize the experience to meet their individual preferences. Leveraging the substantial demand we have seen to our website, I am pleased to announce that we will soon open a priority list for future space travelers who wish to be next in line. We will reach out first to this list with any available inventory following the conclusion of our spacefarer conversion process. Registration for this list will soon be made available on our website. Going forward, we expect to maintain priority lists to ensure a continuous demand overhang as we grow our supply. Moving to slide 8, following our Unity 22 flight, we conducted thorough inspections of both Eve and Unity. Both ships returned in excellent condition, and we were pleased with the performance of our new horizontal stabilizers and our new flight control system. We received amazing remarks on the flight experience and the views from our mission specialist, and they also gave us several notes as to how we can optimize the interior for our commercial customers. These notes included the request for additional handholds for when people are floating weightless in space for all the astronauts, and for researchers who are often busy with both hands, the request was for some footholds to be added to the cabin design. While all safety and flight-related elements of the ships performed as expected, the live video feed from the cabin to the ground experienced intermittent connection and we are reworking the video transmission system for our next flight. This is not a flight issue and it's not a safety issue, but it is relevant to our consumer experience and we want to have it resolved for our next flight, Unity 23. Since Unity 22 was incredibly successful in giving us the required feedback on the private astronaut experience, We are optimizing our schedule and will now have Unity 23 focus on the microgravity research and professional astronaut training experience. We're working schedules right now with the Italian Air Force, but we expect Unity 23 to take place in late September. Unity 23 will be our first full revenue flight. Following Unity 23, we will begin our planned enhancement period for our mothership, Eve, which I'll discuss in a moment. After completion of our modifications and enhancements to Eve, will conduct the first flight test of Spaceship 3 Imagine, a glide flight, as well as the Unity 24 mission, which will be a fully crewed flight to space that will validate the enhancements to EVE, as well as serving as the final confirmation of the Unity commercial cabin. Unity 25 will then mark the start of commercial service with our private astronauts. As we reopen sales and expand our book of future business, we remain focused on building a fleet of production spaceships, which we call our Delta-class vehicles. Our objective for the Delta-class is to build ships that are capable of turning on a one-week interval. We are also developing our next-generation mothership that is planned to frequently, reliably, and cost-effectively carry our spaceships to launch altitude. Our team of engineers is completing the design trade studies for both the next mothership platform as well as the Delta ships later this month. We look forward to sharing more about our progress on these important platforms in future updates. While the Delta class and the next mothership platform will constitute the bulk of our flight capacity over time, our near-term capacity is determined by flight rates of EVE, Unity, and Imagine. Currently, EVE and Unity have been flying on low-rate intervals, and this cadence is throttled by the amount and frequency of maintenance and inspection work that is performed after each flight. Finding a path to enable moderate flight rate intervals from our existing ships has been a key priority of our aerospace team. In late July, our team brought forth a recommendation to enhance even unity that could meaningfully improve flight rates. I want to take a moment to summarize the benefits of these enhancements with respect to each of our vehicles, as the improvements will expand both the scope and the duration of our upcoming enhancement period. For VSS Unity, The ship has been performing very well during these last space flights, requiring little work outside the normal inspections that we perform between test flights. With these additional enhancements, subject to testing and verification, we will be targeting a reduced turnaround flight between Unity flights of four to five weeks, and that's down from what is at best been seven to eight weeks. For VMS Eve, the recommended enhancements will allow us to increase durability After testing and confirmation, these enhancements could potentially allow EVE to fly 100 flights between major maintenance inspections. This is up from the current interval of 10 flights between major inspections today. This will be an incredibly important success factor during the early commercial service period while we are in process of manufacturing additional motherships. Although the designs for these improvements are still in progress, we estimate these enhancements will extend our planned vehicle enhancement period by approximately four months. The benefits of this extended work, however, are clear and advantageous to the business, and the results will enable greater commercial flight frequency and improved dispatch reliability that will favorably impact the business for years. The work on EVE drives the duration of the enhancement period, so to achieve the improvements in flight frequency as soon as possible, we will start the planned enhancement period immediately following our Unity 23 flight in late September. VSS Imagine will complete its flight testing in parallel with Unity's commercial service operations, and we expect the early rocket-powered flight tests for Imagine to be revenue-producing as we will provide access for microgravity research customers. Once in service, we expect Imagine's turnaround time between flights to be meaningfully shorter than the four to five weeks we have targeted for Unity. For those who are tracking, let me recap the integrated schedule that comes with our expanded enhancement effort. We expect Unity 23 to fly to space in late September with the Italian Air Force. This will be followed by an enhancement period for EVE that will enable substantially increased flight rates that will accrue benefits for years to come. We expect EVE to complete its enhancement program around mid-year 2022. In early Q3, Imagine is planned to begin flight testing, and Unity 24 will fly a full crew of mission specialists to confirm the cabin interior adjustments are functioning as planned. Unity 25, our first commercial private astronaut flight, is planned for late Q3. For clarity, the Delta class and the Next Generation Mothership programs are not impacted by the extended enhancement period, and they continue on independent paths. Turning to slide 9, I'd like to provide some insight into our customer experience journey. Virgin Galactic is creating a consumer business with incomparable experiential offerings. built around the heart of a world-class aerospace firm. Our commercial success will depend upon the quality of the experience we offer to our future astronauts, the word of mouth recommendations of that experience, and the impact of our consumer brand and marketing strategy. Our consumer offering is at its most fundamental essence, a lifelong memory. And so our focus is on curating the customer experience across the entire journey. From the moment someone reserves their place to space, to the time they reach apogee and graduate into the Virgin Galactic astronaut community, and beyond. This will create a memory so powerful and so deep that it will catalyze lifelong reflection, recommendation, and sharing. And based on the reactions that we are seeing from our early astronauts, we believe this experience is so unique and compelling that it will drive multiple repeat experiences with friends and family across multiple spaceports around the world. We are developing and bringing to life a one-of-a-kind consumer journey for our future astronauts and their guests. This will include building an immersive multi-day experience around the space flight. We plan to create a distinct and notable destination for our customers as a meaningful extension of the astronaut experience. This will include luxury accommodations, services, training facilities, and experiences. It will be a campus shared by future astronauts and guests which will serve to enhance, enrich, and heighten the astronaut experience. This is the place that will get you ready for space, and this is the place where you will come back to celebrate and commemorate having played a part in the next chapter of human progress. Our true product, though, goes far beyond the week of the space flight. It's about entrance into a community of people who are united by a singular aspirational experience. We've already built a thriving community of approximately 600 future astronauts with whom we regularly engage. We intend to take that much further, creating a membership community that will engage and prepare future astronauts before, during, and after the trip to space. This adds significant value that starts immediately with a commitment to reserve one's place in life. We will have more to share on our consumer experience as we move forward. We have some of the best minds in the business working on this, and we're incredibly excited about what we're building. I will now turn the call over to Doug for a financial update.

Thanks, Michael, and good afternoon, everyone. Before I review the financial results for the quarter, I'd like to begin with a few comments on our broader financial strategy. Turning to slide 10, as you heard from Michael, The incredible response to the Unity 22 flight reinforced the enormous interest and demand there is for our offering globally. To begin to address that demand, our long-term objective is to operate a near daily cadence of space flights, and not just from New Mexico, but from multiple locations around the world. As we've said previously, this is going to require a significant increase in manufacturing capacity, with each spaceport needing high single-digit to low double-digit numbers of spaceships, along with multiple motherships to carry the spacecraft to launch altitude. Of course, how many ships we need will depend on how quickly we can turn them around, which is why we are laser focused on refining our ships to make turnaround and maintenance even more streamlined. As we are building the design of our next generation of spacecraft, we are incorporating learnings as we go. Our current production facilities have been sufficient for the needs of the business so far, as they provide capabilities for developing, manufacturing, and testing spacecraft and related systems. These facilities will continue to play a valuable role in our future plans. But as we've said before, in order to scale our fleet to the level we require, we must significantly enhance our production capabilities over the next few years. We're evaluating how to build our fleet most effectively and efficiently, and in addition to planning improvements to our design and manufacturing capabilities, we're evaluating our supply chain and potential opportunities for strategic outsourcing to improve yield, quality, and speed. We expect to share more details on these plans in a future call. Turning to slide 11. Last month, we announced our intent to raise $500 million of capital through the sale of our common stock via an at-the-market, or ATM, equity offering. In connection with this offering, we issued approximately 13.7 million shares at an average price of $36.39. Going forward, we will continue to evaluate opportunities to raise capital as we grow and scale our business. We plan to use a combination of cash on hand, revenue from commercial space flights, as well as future inflows of capital to fund our strategic objectives. Our balance sheet remains an area of strength for us, and the step we took last month provides for our growth and further strengthens our position. We remain well capitalized with cash and cash equivalents of over $1 billion, which represents the balance as of the end of the second quarter adjusted for the proceeds from the July offerings. I also wanted to take a moment to discuss another topic that some investors have expressed an interest in, capitalization of our spaceflight system. To date, our policy has been to expense the development costs associated with our human spaceflight system as they are incurred. We will continue to expense these costs until the completion of the enhancement period for the Mothership Eve and Spaceship Unity, expected in mid-2022. As mentioned earlier, we anticipate that the planned improvements will significantly reduce the turn time between flights, which will enhance our economic model. Let's review our results for the second quarter. Free cash flow was the use of $66 million, compared to prior guidance of approximately $60 million, primarily due to the acceleration of marketing expenses for the Unity 22 flight, as well as working capital changes. Looking ahead, we anticipate third quarter free cash flow of approximately negative $65 million, plus or minus a few million dollars. Starting with slide 12 and the income statement, we generated revenue of $571,000 in the quarter related to payloads which were flown on Unity 21 in May, as well as revenue earned from the completion of certain technical milestones related to payload services. Total GAAP operating expenses for the quarter were $74 million compared to $63 million in the prior year period. The increase in expenses was primarily attributable to higher non-cash stock-based compensation expense. Total non-GAAP operating expenses were $57 million compared to $55 million in the prior year period. GAAP net loss for the second quarter was $94 million compared to a loss of $72 million in the second quarter of 2020. The increase in net loss was attributable to the change in the fair value of warrants, plus increases in stock-based compensation and other operating expenses. Adjusted EBITDA was negative $56 million compared to negative $54 million in the prior year period. I'd like to now hand the call back to Michael. Thanks, Doug.