Virgin Galactic Holdings, Inc.

Good afternoon. My name is Tania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Virgin Galactic's third quarter 2021 earnings conference call. Our 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 the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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 will now turn the conference over to Mr. Zaslow. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Virgin Galactic's third quarter 2021 earnings conference call. On the call with me today are Michael Koglazer, Chief Executive Officer, and Doug Ahrens, Chief Financial Officer. Following prepared remarks from Michael and Doug, we will 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 for 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. Good afternoon, everyone. It has been an incredibly busy and important quarter for us. In July, we flew our first spaceflight with a full crew in the cabin. It was a great achievement for Virgin Galactic and a global cultural moment with tens of millions tuning in from around the world. In August, we began selling spaceflights exclusively to our spacefare community, a group of early hand-raisers who reserved the right to be first in line. The response from this group has been fantastic. And in October, we began our fleet enhancement period to meaningfully improve the durability, reliability, and predictability of our vehicles and enable high cadence commercial service. Before I walk you through the details on these updates and other important developments during the past three months, I'd like to take a step back. I've been CEO for a little over a year now and have spent that time listening, analyzing, and identifying the adjustments needed for us to progress against our long-term goals. We've made several changes over the last nine months in this regard. We've aligned people and processes to focus our efforts on long-term scale and profitability, and this new focus is enabling our transition from a prototyping space innovator to the global, scaled, commercial operation we are becoming. I've made key strategic hires, including a new CFO, a new president of aerospace, and new heads of engineering, people, and IT, all to ensure we have the right leaders and systems in place to realize our vision. And over the past year, we've strengthened our balance sheet with two capital raises, giving us approximately $1 billion on hand to design and execute our long-term plans. I'm confident that these changes, and those I'll talk about today, have placed us on the correct path to launch commercial operations and achieve our long-term vision. We are building a new industry from the ground up. All of you on the call who follow this sector know that aerospace is a complex endeavor, and to grow to 400 flights per year and multiple spaceports, we must manufacture and operate efficiently and predictably. And while unexpected setbacks are a normal part of aerospace, we can and will do more to anticipate them and lessen their impact on our timelines. I focused the company on three primary work efforts, and they all ladder up to commercial service at scale. Fleet readiness, fleet expansion, and commercial strategy and execution. On fleet readiness, we are beginning our vehicle enhancement program. This will be a game changer in terms of predictability, durability, and flight rate capability. More on that in a moment. At the same time, we are planning for the expansion of our fleet with our Delta-class spaceships and next-generation motherships to meet known demand for our product to support our global ambitions. And we're developing our customer base for commercial service, maintaining a strong and engaged pipeline of future astronauts while continuing to refine our consumer experience. We are executing on all three strategic pillars simultaneously. The work that's been done to align our organization, strengthen our balance sheet, and ensure we have the right leaders in place will enable us to execute successfully. The coming months will continue to be busy for our company and for commercial space more broadly. Our peers, like us, continue to pass important milestones. And as I've said before, this is good for us. It fuels demand and it normalizes the concept of space travel. At the same time, we are building something very different. We fly spaceships. They are visually amazing. They are purpose-designed for safety and experience, and they are distinctly different. Our experience is different. We focus on the journey and the memory, not just on the ride. Our future astronaut community is different, and all of these differences enable us to build a business for the long term. Turning to slide four, I'm going to start with an update on commercial sales. I will follow with an overview of our enhancement program and near-term timelines and close with our fleet expansion plans. And then I'll turn the call over to Doug, who will provide a financial update. Moving to slide five and our commercial sales efforts. We have opened sales to our early hand raisers and we are selling tickets ahead of the pace we had planned. The pricing strategy we announced last quarter has been well received. Our private astronaut sales process is effective and efficient, and it is architected to be scaled. Given the newness of our product, we start by broadly showcasing the awe-inspiring aspirational value of our experience, and we capture top-of-the-funnel interest with leading CRM tools. Unity 22 accomplished this in brilliant fashion and brought tens of thousands of requests for information on our product. After filtering this large demand into highly qualified sales leads, We convert these into signed contracts via one-on-one sales discussions. We then onboard our new customers into our unique future astronaut community. With regard to sales pace, we plan to onboard new future astronauts ahead of, but in conjunction with, the growth of our fleet. For the current sales cycle, we are targeting to have our first 1,000 future astronauts confirmed by the start of commercial service. We've tested our sales process over the last two and a half months with our Space Fare community. As a reminder, this is a group of early hand raisers who, in 2020, placed a modest, fully refundable deposit of $1,000 to reserve the right to be offered reservations when they first became available. It's worth noting that these deposits were made before we announced our updated ticket price. The early sales indicators from this Space Fare group have been strong. Since September, Spacefarers have purchased approximately 100 seats at our new pricing of $450,000 per seat. Each contract includes a $150,000 deposit, $25,000 of which is non-refundable. We believe these results from a relatively small group that had little pre-qualification show the incredible strength and appeal of our flight and our membership community. They also indicate the significant value that people recognize in our product at current price points. We plan to close out sales efforts with our initial space fair group and other early hand raisers before the holidays. Beginning in early Q1, using a similar filtering process with the more than 60,000 people who have recently inquired about flight information, we will offer the remaining slots to become one of our first 1,000 astronauts. The overflow demand from this group will be channeled into a new Space Fair program whose members will be given first access to the next tranche of space flights when they are made available. As we've said many times, we know that traveling to space is perhaps the most meaningful journey that can be experienced. Preparation and anticipation substantially deepen the impact of transformational experiences, which is why Virgin Galactic focuses on the entirety of the journey, not just the space flight. This distinctly Virgin approach offers future astronauts a community with access to unique and exclusive experiences that start at the moment of sale, continue during the build-up to the flight, and then extend long after. Our intention is to always have a committed group of future astronauts that exceeds our near-term capacity with a vetted list of spacefares at the ready to convert ahead of new tranches of tickets becoming available. Our private astronaut market, while the most visible, is one of three markets we are built to serve, the others being microgravity research and suborbital training for professional astronauts. The pricing strategy we announced last quarter reflects this diverse offering and has proven effective across all markets. We continue to field inquiries for reservations across the world, including from governments and scientific researchers. Shifting now to our flight test and ship enhancement programs on Flight 6. The Unity 22 flight was important for testing our customer experience. It was important for jump-starting our commercial sales process, and perhaps most importantly, it allowed us all to dream. The photos of Serisha, Colin, Beth, and Richard peering down at Earth with that look of awe on their faces said it all. It was clear that it was a transformative experience for them, and it proved to me that the product we are offering is unmatched. The flight was watched by tens of millions of people around the world who wanted to share in the experience through our live stream. That's the power of what we're doing. Following the flight, there was a significant amount of media coverage on an FAA investigation into an airspace deviation that we failed to communicate in real time. We were in a flight test program, and TestFlight is designed for constant learnings and improvements. We learn, we address the learnings, and we move forward, as we've done in this case. Since much of the coverage of this topic had the potential to be misconstrued, I want to address it as clearly and concisely as I can. Our pilots anticipate, plan, and train for arranged flight conditions and acceptable flight paths to take our ships to space and back safely. Flight conditions during Unity 22 led to a flight path in line with our training and procedures that reached space as planned, but with a less steep climb to space. On a glide back to the runway, This is a scenario that requires notification to the FAA. While the FAA is always in our control room during flights, our flight test procedures did not have a specific protocol for mission control to communicate the situation to air traffic control in real time, and this required rectification. We worked diligently and in full partnership with the FAA to identify a solution that was approved by the FAA in September and which concluded the investigation. As depicted on slide 7, the solution included the expansion of the protected airspace for future flights, providing room for a variety of future flight trajectories, including the trajectory that was flown by Unity 22. We also implemented enhanced communication protocols specific to our space flights to ensure mission control relays notifications to FAA air traffic control in real time. These updates to our airspace and notification protocols have strengthened our preparations for the commercial launch of our spaceflight experience. Moving to slide eight and our planned modifications for EVE and Unity. These enhancements are designed primarily to meaningfully increase the flight rate capability of our original ships. These changes will favorably impact the business for years as they allow us to work through our backlog of demand, and unlock the routine access to space as part of our value proposition and business model. I want to take a moment to talk through the enhancements being made to each vehicle. The majority of modifications will be performed on our mothership Eve. We recently flew Eve from Spaceport America in New Mexico to our manufacturing facility in Mojave, where work has already begun. And just as an aside, the picture you see here on slide eight is a real shot that was taken with a long lens by a company fan watching EVE's recent flight from New Mexico back to Mojave. It's a beautiful reminder of just how elegant and aspirational our space flight system is. As shown on slide nine, EVE's enhancements will focus on three areas. First, we're modifying the center wing and launch pilot. This area is challenging to inspect. and we are changing the design to a more robust structure that will greatly reduce the frequency of required inspections. Second, we plan to replace the horizontal stabilizers, or H-stabs, located at the back of the vehicle. Third is the body of work to upgrade our avionics and mechanical systems and strengthen various areas across the ship to reduce the volume of regular inspections and increase flight case. These modifications will increase the service life for the vehicle overall. The culmination of these efforts, subject to testing and verification, will see us target EVE to complete 100 flights between major maintenance inspections, up from the current interval of 10 flights between inspections. While EVE is not flying, we're taking the opportunity to enhance VSS unity with those same goals in mind. The program of work is designed to reduce the amount of unplanned maintenance by reinforcing, upgrading, and replacing various joints and components located throughout the ship, and by reducing how often we need to inspect these parts. As with EVE, the culmination of these efforts will be improved flight frequency, less maintenance, and longer service life. Subject to testing and verification, our goal is a four- to five-week turnaround for Unity. Once our enhancement program is complete, we will validate the upgraded vehicles through appropriate testing and begin commercial service. Slide 10 depicts our expected flight schedule following the enhancement program. We'll first fly Eve solo to validate the enhancements made to the ship. In the second half of 22, Eve will then carry the SS Imagine to its permanent home at Spaceport America. This is going to be an exciting milestone that will mark the first time we have two active spaceships in service. Unity should begin revenue flights, starting with research flights and adding private astronaut flights in the fourth quarter. BSS Imagine will begin its flight test program in 2022 with live flights, and we expect Imagine to begin revenue space flights in the first quarter of 2023. Imagine will start with research payloads and then proceed to join Unity with private astronaut flights. As previously announced, we recently reordered our schedule and moved our research flight with the Italian Air Force to follow the enhancement program. Although this change does not have a material impact on the revenues or timing of commercial service, I'd like to touch on the reasons for the schedule shift. Our preparations for the enhancement program include durability testing on materials used within our vehicles to better understand and enhance their service life and readiness for commercial service. As part of this, we've been conducting lab-based tests to expand our database on material properties. These tests help assess how certain structures could behave over their lifetime with an aim to improve flight rates by increasing the time between major inspections. One particular test flagged a possible reduction in the strength margin of materials used to modify some specific joints. For clarity, we have not observed any damage on our ships. However, the test did flag the need to further analyze these joints to determine what, if any, enhancements would be needed to further increase their strength and enable the flight interval objectives we are targeting. Given the time needed to complete this work, it was logical and beneficial to avoid delay of the enhancement program by choosing to complete this work in parallel. We expect the required analysis and, if necessary, any follow-on modifications will be completed within the schedule of the overall enhancement program. turning to slide 11 and fleet expansion. As we said, we are targeting a flight cadence of 400 flights per year per spaceport. To get there, we need to efficiently expand our fleet, and that means growing both our talent base and our footprint. To start, we're investing in a new engineering design and collaboration center. Our design and engineering team has been located at our facilities in Mojave. We have strong roots in Mojave. It has been a great facility for us, and we will continue to maintain our presence there. But we also recognize that growing the business requires us to be in locations where we can access additional talent at scale. We've made the decision to locate our Center for Design and Engineering in the Southern LA Basin, where there's a strong aerospace corridor that ranges from El Segundo all the way to San Diego. Just recently, we leased a location in the heart of this aerospace corridor that will serve as the primary hub for R&D and the design and engineering of our new vehicles. specifically the Delta-class spaceship and our next-generation motherships. We expect to ramp up engineering and support team talent against these programs over the coming three quarters. I want to take a moment to talk about these next-generation vehicles, starting with the Delta-class. This is our production model spaceship, which is being designed to fly once per week. Over time, we anticipate Delta-class vehicles will constitute the bulk of our flight capacity. We are in the concept design phase of this work, which is the most critical from an investment standpoint. While the concept phase is typically only 10% to 15% of the program's overall effort, the work in this phase usually determines around 70% of the total cost base. Getting key design and manufacturing efficiencies built in now is absolutely critical for the success of the program over the long term. These decisions are being made by a cross-functional team of leaders, including engineers, manufacturing and maintenance experts, and pilots. In addition to the conceptual design work, we've been exploring options to house our Delta-class spaceship facilities, as we will need more space than is available at our Mojave factory. We've been in contact with multiple municipalities about locations and have received interest from at least three states. We expect interest to grow, as we estimate we'll be creating more than 1,000 new jobs. We're looking forward to the new opportunities and community relationships that our expanded footprint will bring. As we add new spaceships, we will need additional motherships beyond ease. Since the mothership relies primarily on airplane technology, which is industry standard, there's opportunity for us to benefit from third-party expertise for the majority of parts and fabrications. This will allow us to increase our speed to market and realize meaningful cost efficiencies without sacrificing quality or performance. We're in advanced negotiations on a strategic relationship for the production of our new motherships, and we will provide updates on our progress on both the Delta-class and next-gen motherships on future calls. Regarding our second Spaceship 3 vehicle, BSS Inspire, we're continuing to evaluate the most efficient path forward. Our priority is commercial service and scale, And in the immediate term, we are directing our resources towards EVE, Unity, and Imagine, while simultaneously expanding our engineering team for the development of the Delta class and next-gen motherships. We'll update you on Inspire in future earnings calls. I will now turn the call over to Doug for a financial update. Thanks, Michael, and good afternoon, everyone. Starting to slide 12. Before I review the financial results for the quarter, I'd like to begin with a few comments on our broader financial strategy. As you heard from Michael, we continue to see enormous demand for our spaceflight services. To begin to address that demand, our objective is to expand our fleet efficiently. In the short term, the enhancement period is a critical element of that strategy. Increasing the flight rates and extending the service life of our current fleet will provide meaningful benefits for years to come. We are pleased to be embarking on this essential phase of work as it brings us closer to the start of commercial service next year. In addition, during this phase, we are completing the preparation of VSS Imagine, thereby adding a second spaceship to our fleet. In connection with the enhancement period, you'll see a noticeable increase in the company's expenditures next quarter as we will be actively working on multiple ships concurrently. Looking further out, we expect that the elevated activity level will extend into 2022 as we complete our planned enhancements. An elevated level of spending is also expected to continue in the second half of 2022 as we focus on expansion of our fleet, namely the development of the Delta-class and next-generation mothership. We plan to scale our engineering teams, engage the supply chain, and develop tooling for these new vehicles. We are excited to be transitioning to this important phase in our company's overall journey to scale up our capacity to meet the tremendous demand for our spaceflight services. We expect to share more details on these programs on future calls. Our balance sheet remains an area of strength for us. We are well capitalized with cash, cash equivalents, and marketable securities of approximately $1 billion as of the end of the third quarter. 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. Let's review our results for the third quarter. Free cash flow was negative $53 million compared to negative $59 million in the prior year period and our guidance of approximately negative $65 million for the third quarter. The variance to guidance was primarily due to a shift in the timing of the Unity 23 flight as well as the start of the enhancement program, both of which resulted in lower spending than previously forecasted. We also received higher than expected cash inflows from the sale of private astronaut reservations following the reopening of ticket sales. Looking ahead, we anticipate fourth quarter free cash flow in the range of negative $85 to $95 million. The increase in spending relative to the third quarter is expected to be driven primarily by the increased activity I mentioned related to the enhancement period, as well as the work we're performing on the Delta class and mothership programs. Consistent with prior years, we also expect to incur certain public company costs in the quarter. Turning to slide 13 and the income statement. The generated revenue of $2.6 million in the quarter related to sponsorship activity from the Unity 22 spaceflight in July, as well as revenue earned under government contracts from progress on the completion of certain technical milestones related to payload services. Total GAAP operating expenses for the third quarter were $85 million, compared to $77 million in the prior year period. The increase in expenses was primarily due to marketing-related costs attributable to the Unity 22 spaceflight and the reopening of ticket sales, as well as an increase in employee costs and non-cash stock-based compensation expenses. These increases were partially offset by a decrease in contract labor and material costs associated with the development of our spaceflight system. Total non-GAAP operating expenses were $70 million compared to $66 million in the prior year period. GAAP net loss for the third quarter was $48 million compared to a loss of $92 million in the third quarter of 2020. The decrease in net loss was attributable to the change in the fair value of warrants, partially offset by an increase in stock-based compensation expense. Adjusted EBITDA was negative $68 million, compared to negative $66 million in the prior year period. I'd like to now hand the call back to Michael. Thanks, Doug. Before moving to Q&A, I want to leave you with a few observations about our industry that reinforce why I'm so confident on our future. First, demand for space travel will outstrip supply for the foreseeable future. Second, we are truly differentiated in the sector. What others are doing is helpful, and their success is good for the industry overall. But we have a different approach, not just to spaceflight, but to the entire consumer experience, right from the moment of sale. And finally, we are selling much more than a chance to see Earth from space, although that alone is remarkable. We've created a meaningful community, and we continue to find that there is strong desire to join this community, as evidenced by our ability to convert our followers into future astronauts. It's an exciting time for the company. Our long-term vision is strong. Our goals are clear. We're making meaningful progress. So that will turn to questions. Operator, we're ready to begin the question and answer portion of the call.

Certainly. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your touchstone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate in queue. The first question is from the line of Oliver Chin with Cowan. You may proceed.