Virgin Galactic Holdings, Inc.

Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's first quarter 2022 earnings conference call. All lines will be placed on mute to prevent from 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 alt by one on your telephone keypad. If for any reason you'd like to remove that question, please press the pound key. Thank you. Hosting today's conference call will be Liz Calvillo of Investor Relations. As a reminder, today's call is being recorded. I would now like to turn the conference over to Ms. Calvillo. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to Virgin Galactic's first quarter 2022 earnings conference call. On the call with me today are Michael Colblazier, Chief Executive Officer, and Doug Aarons, 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 well as the slide presentations 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 risk and uncertainty. 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 in the company's filings with FTC files 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 listening statements that may be discussed during our call. Please also note that we will refer to certain non-GAAP financial information on today's call. With that, I would now like to turn the call over to Michael.

Thanks, Liz, and good afternoon, everyone. 2022 is an important and busy year for us. We've made good progress across our core priorities, which are the enhancement program for our current fleet, preparations for commercial service, and setting up the business to operate at scale. I look forward to sharing updates on all these priorities with you today. Moving to slide four in today's agenda. I'll start with an update on the enhancement program in our flight schedule, followed by an update on our future fleet, and then I'll turn to our commercial strategy. Finally, I'll hand the call over to Doug, who will provide a financial review of the quarter. Moving to slide five in our vehicle enhancement program. We continue to make good progress on the enhancements to our current fleet, including our mothership Eve and our spaceship Unity. As a reminder, these enhancements are designed to significantly improve the durability and reliability of these ships, enabling a higher frequency flight rate for commercial service. We've outlined the details of this work in previous earnings, but let me give you one example of what we've recently completed. Eve's enhancement program includes modifications to the center wing and launch pylon to enhance durability in a high-frequency commercial setting. A launch pylon is a mechanical attachment that holds the spaceship and passes air and electricity from the mothership to the spaceship until the spaceship is released. We are implementing a new pylon design that attaches to the mothership wing with a four-point construction rather than the three connection points we had previously. If you're following the presentation, on slide five, you'll see an image from when the launch pylon was installed in April. This was a major milestone for the program, and these various other enhancements continue to progress The work we are doing on BSS Unity is also moving ahead, and we continue to expect that Unity's enhancements will be completed in advance of the schedule for ETH. Last quarter, we shared that we are closely monitoring increased supply chain risk and are proactively working to mitigate issues. Like many companies around the world, we're experiencing elevated levels of supply chain disruption. We have an outstanding team dedicated to managing this increasingly complex environment, and they are actively working to address and mitigate these supply challenges as they rise. We are also growing our talent base amid a constrained labor market. While we are having much recruiting success, our talent growth rates have not kept pace with planned ramp-up. These combined labor and supply chain challenges are bringing out the best of Virgin Galactic's innovation and resourcefulness, and we've been able to mitigate most scheduled risks as they arise. At this point, though, our projections on hiring base and our forecast of certain long-leave material deliveries suggest we may need additional scheduled contingency. For this reason, we are shifting the expected commencement of commercial service from Q4 of 22 to Q1 of 23, turning to slide 6 in our flight update. While our commercial flights are expected to start at Bidley, we anticipate BSS Unity to return to space in Q4 of 22 as part of our planned post-enhancement period flight test procedures. We expect our second spaceship, VSS Imagine, will make its debut test flight to space in Q1 of 2023. Following several revenue-generating test flights, we expect VSS Imagine to commence private astronaut service midway through 2023. Flight testing will remain critically important as we design and build our new spaceships and motherships. In March, we announced the promotion of Kelly Latimer to Director of Flight Test. Kelly is a veteran pilot who's been with the company more than six years. She brings a wealth of experience to the role, having previously worked on system development and aircraft design at Boeing, following 20 years of service with the U.S. Air Force. As Director of Flight Test, she will oversee the conclusion of our test program for Unity and Imagine, while working in parallel to design our test program for the Delta Spaceships and Next Generation Motherships. We're excited to have Kelly in this important role. When Unity and Imagine achieved their planned cadence for commercial space flights in 2023, We expect to fly to space about three times per month, which will be an incredible achievement. But the market for human spaceflight is large and growing, and the real step change in our ability to meet the demand for experience will come with our future fleet. So let's turn to slide seven and our manufacturing and design update. As we shared previously, the Delta class is our production model spaceship, which we are designing to fly once per week. The Delta fleet and next-generation motherships are evolutions of our current vehicles, More than 17 years of research and development have enabled us to build space vehicles that are differentiated and elegant. We've proven both that our technology works and that our spaceship design delivers the one-of-a-kind consumer experience it was intended to. For our next generation fleet, we are adjusting the existing design of our ship to make it faster to produce and easier to maintain to support faster vehicle turn times. As we move towards scale, we are evolving from a primarily in-house vertically integrated manufacturing process to one that leverages Tier 1 and Tier 2 suppliers for major sub-assemblies such as the wing, fuselage, and feather. A key goal of our strategy is to utilize the nationwide aerospace ecosystem to access pre-existing innovation, new technology, and existing highly skilled labor tools. For example, by working with new Tier 1 suppliers, we are now able to incorporate a more efficient high-temperature composite that will reduce weight and improve production lead times. Establishing these third-party relationships is critical to how we scale our business. It will be long-term, high-dollar value contracts, and we are working through a methodical and competitive process to identify and onboard partners to conform to the backbone of our future supply chain. I'm pleased to share that we are making good progress on selecting these important partners. Turning to slide eight, in March, we hosted a supplier conference at our engineering and design headquarters in Orange County and our manufacturing facility in Mojave. It was well attended by Tier 1 and Tier 2 suppliers who expressed interest in working with us on the sub-assemblies for our Delta fleet. The caliber of available and interested suppliers is excellent and gives us great confidence in our path forward. We've now issued RFIs and are working through a meticulous process to identify the primary suppliers we will work with. Turning to slide nine. we are deploying a digital twin architecture that underpins our Delta-class next-generation mothership schedules. This approach enables a comprehensive digital database for each vehicle, which captures the vehicle's system requirements, physical design, as well as manufacturing and operations data to create a digital thread for all production activity across the supply chain. This digital thread enables seamless integration with our partners, allowing for real-time collaboration, strong governance, and an increase in production, efficiency, safety, and reliability. A key benefit of this approach is that it allows our in-house team to focus on the complex and critical elements that are core to our intellectual property around design and engineering and final assembly. We continue to progress design and location choice for the new final assembly facility for our Delta-class spaceships. We expect the facility to be operational in late 2023. We're planning for this facility to eventually employ hundreds of urgent galactic technicians and engineers with production capability of up to six spaceships a year. We look forward to sharing an update on this soon. In summary, we've made good progress this quarter towards establishing our long-term manufacturing model. We feel confident that our manufacturing approach will improve our speed of market, help us minimize supply chain disruption, and realize meaningful efficiencies. Our new slide 10 is our commercial strategy. In February, we announced Blair Rich as our President and Chief Business Officer of Commercial and Consumer Operations. In the near term, Blair and her team are focused on three top priorities, sales, the customer journey and experience, and building our global brand. I now take these in turn. Ticket sales continue to progress well, and we're seeing strong uptake across our product offering. This includes single seats, as well as multi-seat and full-flight vials. we remain on track to have our first 1,000 committed astronauts ready for the launch of commercial service. We currently have approximately 800 future astronauts in our community. Our approach to sales is high-tech and personalized, and is proving to be extremely successful at converting consumer interest into ticket sales. These early sales are also helping us build a valuable bank of customer data and insights that will help us refine and scale our sales process as our business expands. We shared before that one of our key differentiators is our end-to-end customer journey, which starts at the point of sale and extends far beyond the space flight experience as part of our astronaut alumni. The multi-year anticipation of our flight is intentional. Our customers place a high value on the enrichment and opportunities this membership provides. We build this community. We're expanding the membership experience around three core pillars, education and enrichment, astronaut development and training, and impact and inspiration. The training and space experience components may be familiar to you. I'd like to take a moment to explain the focus on education. Many future astronauts have a keen desire to use their time in the future astronaut community as an educational experience by deepening their understanding of space, engineering, technology, and the planet. Examples include multi-seat and full-flight miles for parents and families who emphasize the role that they would like the pre-flight astronaut experience to play for their now teenage children. during the run-up to the flight. Our customers are hungry for knowledge, and giving them a peek behind the hangar door and access to the experience and expertise within our team is something they highly value. It's also something that sets us apart. For our membership community, we have the opportunity to curate and personalize the customer journey, further enhance our product distinction, and leverage signature Virgin customer experiences, which will, in turn, attract potential customers. On building our brand, as we resume space flights following our enhancement period, we expect to see a spike in global engagement as we saw in previous flights. We've shown how effectively we can use these milestone flight events to capture the imagination of millions of people and the attention of global media, which in turn builds our global cultural relevance, engages our brand fans, and increases affinity towards Virgin Galactic. I'll now turn the call over to Doug for an update on our financials. Thanks, Michael, and good afternoon, everyone. Turning to slides 11 and 12, let's review our financial results for the first quarter. We generated revenue of $319,000 in the quarter, driven primarily by future AFSANAP membership fees associated with new ticket sales. Operating expenses for the first quarter were $92 million, compared to $81 million in the prior year period. The increase in expenses is primarily attributable to higher manufacturing labor spend as we're progressing through the fleet enhancement period. GAAP net loss for the first quarter was $93 million, compared to a loss of $130 million in the first quarter of 2021. The smaller net loss is primarily due to there no longer being any remaining warrants, and there being no associated change in fair value of those warrants flowing through the income statement. Adjusted EBITDA was a negative $77 million, compared to a negative $56 million in the prior year period. Free cash flow was negative $68 million compared to negative $50 million in the same period last year. The increased spending was primarily attributable to growth in manufacturing headcount during the fleet enhancement period, as well as an increase in marketing expenses. Regarding our guidance for the second quarter, we forecast free cash flow to be in the range of negative $80 million to $90 million. The projected growth in spending quarter over quarter is expected to be driven by the ongoing work during the fleet enhancement period, combined with the ramp and design effort for our future fleet, as well as investments to increase the scale of our flight operations leading up to commercial service. Our balance sheet remains strong, with over $1.2 billion in cash, cash equivalents, and marketable securities. Going forward, we'll 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. I'd like to now hand the call back over to Michael. Thanks, Doug. I'm pleased with our positive start to 2022 and the progress we've made so far. As the global backdrop of escalating supply chains and labor constraints, our teams are containing the majority of issues to minimize impact on schedules. We look forward to returning to space in Q4 and launching commercial service first quarter of next year. To recap, we expect to begin spaceflight later this year with commercial launch in the first quarter of 2023. We are seeing strong uptake across our product offerings, including multi-seas and full-flight buyouts, as well as interest in research flights. Our future astronaut community stands at approximately 800 reservations. The design work for the next generation of our spaceflight system is well underway, and we are making progress in establishing the infrastructure to scale our business. The coming months will continue to be very busy for us as we complete our enhancements and approach commercial service, and I'm looking forward to sharing updates on our progress. With that, we'll turn to questions.