Virgin Galactic Holdings, Inc.

Good afternoon. My name is Irene, and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's second quarter 2022 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 the number one on your telephone keypad. If you would like to withdraw your question, please press star, then two. Thank you. I would now like to turn the conference call over to Eric Cerny, Vice President of Investor Relations. Eric, please go ahead.

Thank you. Good afternoon, everyone. Welcome to Virgin Galactic's second quarter 2022 earnings conference call. On the call with me today are Michael Colglazier, Chief Executive Officer, and Doug Ahrens, Chief Financial Officer. Following the report, prepared remarks, from Michael and Doug, who will open the call for questions. Our press release and slide presentation that will accompany today's remarks are available on our investor relations website. Please see slide two of the presentation for our safe harbor disclaimer. During today's call, we may make 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 in the company's filings with the SEC. 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, With that, I would now like to turn the call over to Michael.

Good afternoon, everyone. First off, I'd like to welcome Eric Cerny to Virgin Galactic. As many of you know, Eric joined us a couple months ago to lead our investor relations function. We're excited to have him on the team, and I'm confident you will all enjoy working with him as well. We're more than halfway through the transformational year for Virgin Galactic. Over the last few months, we've put in place significant pieces of our strategic roadmap for our medium and our long-term operations. We have in the past talked about what we intend to do, but these recent steps lay out the specifics as to how we will ramp the production of our future fleet and deliver hundreds of space flights each year at our spaceports. We're progressing through the enhancement program in our initial fleet. However, important work on our mothership Eve has taken us longer to complete than we planned, and we now anticipate private astronaut service commencing in Q2 of 2023. While the short-term schedule slide is unfortunate, our team in Mojave is working diligently to complete the work We continue to take a long-term approach to managing the business. Initiatives we've set in motion are powerful. I look forward to sharing more detail about them on today's call. Today's agenda on slide three will start with advancements in our future fleet, followed by a commercial strategy update. We'll then get into the enhancement program and update a flight schedule for our initial fleet. Before handing the call over to Doug, we'll provide a financial review of the quarter. Let's turn to slide four and production of our future fleet. Increasing the frequency of flight for each of our spaceships is how we unlock the true economic impact of commercial space flight. We are scaling our business, our space line, very intentionally around a space plane architecture, which enables us to collaborate with outstanding firms in the aerospace industry, companies that have the knowledge, technology, and capacity to help us produce vehicles with high-frequency turn-time characteristics at volumes that can quickly meet our needs. Our next-generation motherships and spaceships are production versions of our existing vehicle rather than so-called clean sheet designs. This means that the fundamental aerodynamics and core engineering are the same, allowing us to move through the development process with our partners at a much faster pace than if we were starting a new vehicle design process from scratch. A major part of our production approach is evidenced in our recently executed strategic agreement with Aurora Flight Sciences to design and manufacture our next-generation motherships. These vehicles are planned for final assembly at our facility in Mojave. Aurora's business is built around agility, innovation, and creativity, which is exactly the type of company that we want to be working with. As a subsidiary of Boeing, the largest aerospace company in the world, and a long-term supporter and partner of Virgin Galactic, Aurora also has access to the industry's top engineers and manufacturing facilities, as well as an existing base of supply and strategic partnerships. I've spent time with senior leaders from both Aurora and Boeing, and I've watched our teams collaborate. There is genuine excitement from both sides. about what we are going to achieve together. We began working with Aurora several months ago to develop design specifications, as well as workforce and research requirements. With the long-term agreement now in place, we are full steam ahead on development. Under the agreement, Aurora will deliver two new motherships, the first of which we expect to enter service in 2025, and time to begin carrying the first of the completed Delta-class spaceships as they begin test flights and research payload flights. These two motherships will support our planned 400 flights a year of Spaceport America in New Mexico. The agreement also enables us to realize cost and speed benefits for additional motherships as we expand to other spaceports. Turning to slide five, our production model spaceships, the Delta Class. Last quarter, we shared that we had issued RFIs to Tier 1 and Tier 2 suppliers who expressed interest in working with us to deliver major sub-accessories for our Delta Class spaceships. We were very encouraged by the response. RFPs have been released, and while we aren't ready to share which specific firms will be joining our supplier base, the approach is generally consistent with our approach to motor ships, with major sub-assemblies tasked out to premier aerospace firms and final assembly and tests taking place at Virgin Galactic facilities. Important to the design and integration efforts of our Delta ships is the digital twin technology we are utilizing, which allows us to work quickly and efficiently with our partners, utilizing a single digital thread database for all production activity across the supply chain. In July, we executed a long-term lease for a new final sibling facility for the Delta-class spaceships. Facilities plan to have capability to produce up to six spaceships per year, providing scalability needed to support our business model. Construction has already started, and we anticipate the facility will be fully operational by late 2023, supporting our goal of rolling out the first Delta ships in 2025. The location of the Phoenix Mesa Gateway Airport is highly advantageous to our plans. The greater Phoenix area is an innovation hub with outstanding engineering and technical talent, driven by a long history of aerospace development in the region. There are excellent aerospace technician schools in the area, and the facility's location on the airport ramp allows for new spaceships to be picked up and flown by our motherships to New Mexico for flight testing and commercial operations. With Aurora, our new final assembly facility in Phoenix, and our soon-to-be-selected Delta Cloud Spaceship collaborators, we will have in place most of the core pieces of a supply chain manufacturing program that leverages the best in the aerospace industry. We are confident this manufacturing approach will be able to deliver the quality and speed to market that we desire to scale quickly. Turning to slide six, a major part of delivering the astronaut experience sits with technical operations, a team of maintenance, ground services, support engineering, and quality assurance personnel that ensures our spaceflight system fit and ready to fly on the intervals that we expect. We have a terrific tech ops team at Spaceport America who have carried us through our flight test program, and we will be expanding the capabilities of this group as we enter commercial service. To lead this expansion and to architect both the operations model and the technical infrastructure and processes needed for weekly turn times on our ships, I am very excited to share that Mike Moore has signed on to Virgin Galactic as Executive Vice President, Spaceline Technical Operations, reporting to me. Mike has a 37-plus year career in aerospace, starting as an Air Force mechanic and most recently serving as Senior Vice President, Maintenance Operations and MRO Services Group for Delta Airlines, where he led global technical operations for one of the nation's premier air carriers. I'm thrilled to bring a leader of Mike's caliber in the Virgin Galactic to chart our course as we position this critical part of our business for high-rate service and operations. Turning to our customer experience on slide seven. For the first years of commercial operations, Our astronauts will spend several days before their space flight training together at Spaceport America, which has facilities that can support several flight groups per month. However, as our Delta class ships come off the line in Phoenix and flight volume increases materially, Spaceport America will transition from a multi-purpose facility to a high-volume spaceport, a technical and flight operations facility where groups of people arrive on a near daily basis to embark on a life-changing trip to space with Virgin Galactic. At this stage, we will need separate facilities to accommodate, train, and engage larger volumes of astronauts and their guests during the multi-day lead-up to the flight experience, while still providing a personalized, high-touch, and truly distinctive experience that is signature of the Virgin. This location, or as we refer to it, the Astronaut Campus, is where the elements of the consumer experience come together. As we shared earlier this week, we've acquired land in Sierra County, New Mexico, which will be home to our first Astronaut Campus. Our intention for each astronaut campus is to create a distinct, one-of-a-kind destination that enhances an astronaut's journey by taking design and programming inspiration from the location on Earth above which we fly. Our first campus in New Mexico will do just that. As you can see from this aerial view of the land, which is located in driving proximity to Spaceport America, our astronauts will be training for their flight from the perfect location. The master plan for the campus will include training facilities, purposeful accommodations, and tailored experiences, as well as an observatory, wellness center, recreation activities, and unique dining options, all underpinned by Virgin's signature hospitality. Campus will be built amidst a stunning, picturesque landscape with a focus on sustainability and minimal impact to the surrounding environment. Campus will be designed to work in synergy with New Mexico's spectacular natural surroundings, and the build-out will be timed to match the expansion of our future place. We have a team of best-in-class experience creators working through systematic designs to create an immersive environment, and we all look forward to sharing more about the astronaut campus experience in future updates. On slide eight, I'd like to spend a moment on our astronaut membership experience. As a reminder, when customers join our future astronaut community at the point of sale, they gain access to one-of-a-kind experiences, events, trips, and activities around the world, all curated to enhance the astronaut journey and delivered with trademark origin style. This time in the community is essential to deepening the understanding and appreciation of space and preparing our customers, emotionally and physically, for the transformative experience that awaits. We are developing this membership experience around three core pillars, education and enrichment, astronaut development and training, and impact and inspiration. An example of our approach will be our marquee membership event, Space for the Curious. The inaugural event is scheduled for early fall. and we intend for it to become an annual or twice-yearly event that we can export to markets around the world as we continue to grow our global footprint. This upcoming event will be a three-day program for future astronauts set against the rugged backdrop and dark night sky of Wyoming. It's been curated to enhance our customers' understanding of why space exploration matters and to give them access to world-class insight, expertise, and skills to help optimize their own spaceflight experience. The event includes thoughtful discussion outdoor activities, music, and hospitality experiences designed to support those three core pillars. At a high level, the programming will include guest speakers to facilitate education and enrichment and help prepare and develop our future astronauts ahead of flight, discussions on the importance of space to science, research, and the planet, activities focused on health, wellness, and preparation for the journey to space, and a wide range of social activities that will inspire and excite, including stargazing with professional astronomers. Events and activations like these are all purposely designed to ensure our customers' two- to three-year journey, a journey that culminates with a trip to space on board our distinctive spaceships, is even more enjoyable, transformative, and fun than expected. While the first of these future astronauts will begin flying to space next year, the limited capacity of our initial fleet means our later booking customers will have a waiting period beyond the two- to three-year journey we prefer. We expect that the extended wait period will resolve as we near completion of our Delta class shifts and enhance our flight capacity. Turning to slide nine for growth markets. As we look ahead to higher volumes, we are using the limited availability remaining in our initial tranche of 1,000 reservations to purposefully develop two market segments that we expect will contribute meaningfully to our future demand. The first of these market segments is scientific and government research. We have a long stated goal of building a meaningful research By offering routine and reliable access to space, with a flight profile that can be tailored to the payloads on board, we are able to offer something entirely new and highly valuable to the private and government research market. This is a strategically helpful market for our business model, as it commands a significant price premium to our current commercial passenger price blank, and it also provides a positive brand benefit to the company by contributing to scientific advancement. Market interest and feedback around our research product has been very positive. We continue to get inquiries for research missions from across the world, including from governments and scientific researchers. And we plan to seed this market now to develop its volume in advance of our future capacity increases. We have learned the nature of research and, often, the research funding life cycle means these customers require a shorter and more clearly defined time frame between sale and flight. In order for us to continue cultivating this market, we need to allocate near-term availability of research to match funding cycles and logistics for research projects. To strategically pursue and seed this market, we are reserving 10% of our first 1,000 seats for science and technology research missions. We will manage these through a separate flight manifest that runs alongside the private astronaut manifest. This limited allocation will allow us to meaningfully engage and grow the research marketplace over the next one to three years without having a material impact on the flight timing of our private astronaut customers. The second market we wish to develop is the luxury travel sector. As commercial spaceflight becomes more normalized during the next few years, we expect the high-end luxury and adventure travel markets to comprise a material percentage of our demand. We expect to ramp our internal sales team to capture much of this business, and we've recently hired a dedicated vice president of sales to begin the buildup of this team. We've also received interest from travel industry experts, some who have deep connections within specific geographic markets to augment our internal sales efforts. to assess the potential of a travel industry partner. As previously announced, we're very pleased to provide exclusive access to a limited number of our remaining seats to Virtuoso, the world leader in experience-driven luxury travel. Similar to how we are aligning with the aerospace industry to scale our fleet, when we look at ranking customer acquisition at scale, this alliance with Virtuoso is a natural extension for us in a strategic, cost-efficient way to access new customers. Partnering with Virtuoso gives us immediate access deep relationships with customers around the world who are looking for a one-of-a-kind journey who may not yet have considered space travel. We will continue to manage our own sales process and plan to continue selling our product directly. At the same time, it makes sense to explore a superb quality partner that opens the door to an untapped, established, and diverse clientele as we expand interest and increase access to space. As a referral arrangement, Virtuoso will leverage their network and expertise to identify and refer potential leads to Virgin Galactic, and will maintain control of our high-touch end-to-end customer sales journey and the powerful data and insights that come with that. Allowing for the research and Virtuoso allocations that will help prime these future growth markets, we're reaching the end of our first round to 1,000 seats. We intend to reserve the remainder of the seats that are available at the current $450,000 price point for referrals from our existing customers. we plan to open our next tranche of spaceflight reservations after we begin flying our current customers. On the topic of flying our current customers, let's move to slide 10 and the enhancement program associated with our actual fleet. The enhancements to Eden Unity are designed to significantly improve the durability and reliability of these ships, enabling a higher frequency flight rate for commercial service. Last quarter, we shared that like many companies around the world, we were experiencing elevated levels of supply chain disruption as well as labor constraints. Many of these conditions have persisted through Q2, and our teams have put forth incredible efforts to navigate the many challenges presented. I want to thank everyone at Virgin Galactic who's been part of that ongoing effort. However, despite our best efforts, progress on our enhancement program in Mojave, particularly the complex work to prepare Eve for commercial service, is taking longer than we planned. Our customers, our investors, and indeed our entire team are all desiring to see EVE and Unity back in the skies and taking astronauts to space. The work on EVE, of course, must be completed before we fly, and we have shifted resources within the Mojave team to bring additional support and help bring EVE's enhancement program to a successful and expeditious conclusion. Given where we are in EVE's enhancement program and factoring in appropriate contingency, we are shifting the expected launch of commercial service from Q1 to Q2 of 2023. we anticipate conducting space flights with VSS Unity in Q1 of 2023. The work specific to Unity's enhancement program, which we can report is nearly completed, should allow a monthly turnaround time. The image you see here is a peek at Unity's new livery being installed at Spaceport America. As we have concentrated our Mojave-based talent to support the work on our mothership Eve, the planned timeline for VSS Imagine will be extended due to this reallocation of resources. As it stands today, Imagine is scheduled to commence test flights in mid-2023 and private astronaut service as soon as Q4 of 2023. Imagine is a new vehicle and will require a sequence of planned test flights before it carries private astronauts. The variability inherent in flight tests makes it prudent for us to allow for appropriate schedule flexibility, which could potentially extend Imagine's window for private astronaut service into early 2024. Work on EVE needs to complete, and we are very excited to see her come out of the hangar this fall Even more exciting are the building blocks that we've put in place for the development of our future fleet and our astronaut experience. We continue to manage the company for long-term growth and value, and we are very pleased with progress being made in that regard. I'll now turn the call over to Doug for an update on our finances. Thanks, Michael, and good afternoon, everyone. Turning to slide 11 and our financial results for the second quarter. We generated revenue of $357,000 in the second quarter. driven by future astronaut membership fees. Operating expenses were $110 million compared to $74 million in the prior year period. The increase of $36 million is primarily attributable to higher R&D costs tied to our fleet enhancement activity and the ramp of development work on our future motherships and spaceships. We reported a gap net loss of $111 million compared to $94 million in the prior year period. Adjusted EBITDA was negative $93 million in the second quarter, compared to negative $56 million in the prior year period, primarily driven by an increase in operating expenses. Free cash flow was negative $91 million, at the high end of our guidance for the quarter, compared to negative $66 million in the same period last year. The increased spending is largely due to higher operating costs tied to our fleet enhancement activity and the ramp of development work on our future mother system spaceships. Our balance sheet remains strong, with over $1.1 billion in cash, cash equivalents, and marketable securities. The details Michael shared with you around our manufacturing approach for the motherships and spaceships and the investments we are making in our future astronaut experience are all consistent with the long-term commentary we have shared with you in prior quarters regarding our approach to the business model. Leveraging aerospace industry supply chains, those major sub-assemblies, allows our team to focus on design, engineering, final assembly, and ongoing operations and maintenance. Collaboration with companies such as Aurora allows us to minimize our capital expenditures for infrastructure required to scale the fleet, and it significantly accelerates our time to market. As you can see, we are rapidly moving ahead on our plans to scale the business. Many of the building blocks that Michael and I have talked about over the last several quarters are now in place. We are making strategic investments from a position of financial strength with momentum of the business and a healthy balance sheet. Furthermore, we believe it is appropriate to take steps to give us financial flexibility going forward. To that end, today we filed a prospective supplement and established an at-the-market program to sell up to $300 million of additional talent stock. We are excited about the investments we've outlined, the spaceships, motherships, and infrastructure surrounding the astronaut experience. We therefore plan to always maintain a strong balance sheet, enabling us to fulfill our strategic plan of becoming a scaled commercial space line. Moving to guidance on slide 12. For the third quarter, we forecast free cash flow to be in the range of negative $110 million to $120 million. As we continue to ramp up our efforts to scale the business, we anticipate this number will continue to grow over the next several quarters. With that, I'll hand it back to Michael for some closing comments. Thanks, Doug. 2022 is the year we set ourselves up for scale and for the long term. We're moving into a building phase for our future, building out the factories, cultivating partnerships, and growing the campuses, teams, and networks that will take us into the future. Shifting our commercial service launch to Q2 2023 is a short-term challenge that does not carry over to our longer-term objectives. We are taking an intentional, value-driven approach to this business, and we now have several core elements in place for us to scale the world's first commercial space line in a meaningful way. These include development of our next-generation motherships with Aurora, leveraging the aerospace supply chain to provide major sub-assemblies for our Delta-class spaceships at our new spaceship factory in Phoenix, and bringing together an unforgettable and truly unique consumer experience in New Mexico. Heavy months will continue to be very busy for us, and looking forward to sharing updates on our progress. And with that, we'll turn to questions.