[[Home|🏠]] <span style="color: LightSlateGray">></span> [[Interviews]] <span style="color: LightSlateGray">></span> March 19 2024 **Insider**: [[Adam Spice]] **Source**: [36th Annual Roth Conference](https://www.youtube.com/watch?v=qHHv7QPe5Fg) **Date**: March 19 2024 >[!warning] Official Webcast Unavailable  🔗 Backup Link: https://www.youtube.com/watch?v=qHHv7QPe5Fg ## 🎙️ Transcript >[!hint] Transcript may contain errors or inaccuracies. [0:00] **Host (Narrator):** Hello guys and welcome back to take two of this video. The first version, I don't know what happened, it wasn't starting. So let's try this again. In this video, Adam Spice spoke at the 36th annual Roth conference. He spoke to investors and said some very good things. He disclosed that there might be a Neutron delay - you can make your mind up about it based on what he says. He disclosed about the future of Neutron's sellability and what the demand is in the market - very interesting data that I have never heard before. He discloses data about future acquisitions, why they got in this $300 million in convertibles, and most importantly, he gives some very interesting clues about the space assets that they are building. ### Conference Q&A Session [1:24] **Suji Da Silva (Analyst):** Morning, welcome back to day two of the Roth conference. My name is Suji Da Silva. I'm the semiconductor and intelligence systems analyst here, which means I get to cover cool space companies like Rocket Lab. We have today the CFO of Rocket Lab, Adam Spice, here calling in from the company. ### Launch Business Overview [2:22] **Suji Da Silva:** Feel free to talk to them afterward. Appreciate you guys being here and we're going to do a Q&A format, so we're going to go right into it. There's a couple of elements of Rocket Lab that the business has broken up into launch and Space Systems. Perhaps we can start with the launch business - clearly out there. You've done very well with the Electron launches, three to date, a fourth one imminent. Can you talk about the likelihood of the 22 launches forecast for this coming year happening, whether there could be upside there, thoughts on the launch cadence? **Adam Spice:** First of all, launch is hard, as I think we've all figured out now as we've seen some of the competition kind of fall away over the last few years. Last year we launched 10 times. We were on path and track to do 15 launches last year until we had an anomaly in September, where we failed to put a customer payload in the proper orbit. As a result of that, it set us back three to four months. We had to do the FAA investigations, get cleared to return to flight, and put in the remediations to make sure that particular anomaly couldn't happen again. We've been building our capabilities around several years. Electron had its first launch in 2017. We've had 45 launches to date, and as you mentioned, we'll have another one early tomorrow morning out of our Virginia range. I think we're confident that we have the ability to produce the vehicles to launch at that rate. Everything's on track for that. The caveat is that it's not always in our control. We have to have spacecraft to launch. Customers oftentimes can incur an issue late in their test campaign and have to take the satellite back apart to make fixes. Unfortunately, if there's going to be an issue where a customer doesn't show up with their payload in time to launch, you really don't know that till about 90 days before. Launch is a lumpy business. It can be difficult to predict. If you step back and look at it on a yearly basis, you have a little bit more confidence. Quarters are particularly hard to call because any weather could come in and push a launch into the next quarter. That's why we really like the mix of roughly 70% coming from Space Systems, 30% coming from launch, because it gives you the growth from launch but also protects you from the volatility that comes from the lumpiness of launch. ### Neutron Development [4:56] **Suji Da Silva:** In terms of your roadmap, you have Neutron coming. We just saw your competitor SpaceX put a Starship up for a test. Can you talk about the thought process behind Neutron and the milestones for the larger vehicle you're planning? **Adam Spice:** Neutron is super important for a couple of reasons. Number one, it unlocks a much larger TAM for us, puts us very much head-to-head with SpaceX in that medium launch class. We think we're going to be well positioned given that Neutron is a brand new vehicle designed for reusability from day one. We think the efficiency is going to be there, and the capabilities are going to be unique and advanced. If you look at a rocket development program, there are four different work streams going on at any given time, all concurrently: 1. Propulsion - always the longest lead, most complex, and riskiest part 2. Structures - tanks and fairings 3. Avionics - guidance capabilities 4. Infrastructure - manufacturing and pad Propulsion is the trickiest and longest pole in the tent. We'll have the engine on the stand here in the April-May time frame, and that'll really let us know where we're at. Everything is going according to plan to get us to a launch by the end of the year, but propulsion really will be the gating item if there is one. ### Launch Market Competition [6:26] **Suji Da Silva:** There's been some high-profile competitors who've had challenges with launch businesses. What's the supply-demand situation like in the industry for you guys? **Adam Spice:** On the small dedicated launch side, we are largely the market. A lot of folks have fallen out, whether that's Virgin Orbit bankruptcy, Astra going private and abandoning their launch vehicle, or Firefly having flown four times and failed through the four. There's a host of people who tried, but it's a very difficult thing to do. On the medium side, that's where there's a real lack of supply. Right now SpaceX has a large monopoly - they represent over 80% of the launch volume. A lot of that launch volume is servicing their own Starlink needs. But there are new constellations coming to market, whether commercial or government, that are going to require significant incremental launch capacity. We know there's a shortage of launch capacity in the medium class category today. We think Neutron is coming to market at the right time because, other than Falcon 9, there are really no medium-lift launch vehicles that have any heritage servicing the market. ### Government and Commercial Customers [7:44] **Suji Da Silva:** What are the opportunities with the Department of Defense, the budget coming up in '25, and their indications? And maybe commercial customers - where is the demand coming from? **Adam Spice:** Just like we strive for a 70/30 mix between Space Systems and launch, within either business you want to have a mix of government and commercial. Commercial historically has represented the real hockey stick growth opportunity but also comes with other risks like execution or financing risk. Government has become a hockey stick, particularly with the SDA program where they're deploying this proliferated LEO architecture. That has been one of the biggest growth drivers for the industry overall, which is unusual. Government's usually predictable and steady, but now they've really provided a hockey stick. We like having a lot of government in our mix. One exciting thing about the new SDA Beta contract that we announced a month or so ago for $55 million to build 18 spacecraft was that we're now the prime. We're now a government DOD prime contractor, which opens up a lot of opportunities for us. Getting that Good Housekeeping seal of approval and being anointed as a prime is a huge enabler to continue to grow that government exposure. If you look across hypersonics capabilities or the capabilities for various departments of the government, there's no question that investment in space continues to grow. [9:20] **Suji Da Silva:** On the commercial side, which verticals or segments are showing the most launch demand growth in 2024? **Adam Spice:** Historically, we've had more launch related to Earth sensing/observation - whether that's optical imagery, SAR (like SPIre does), or RF detection like Hawkeye 360. There are lots of different verticals within Earth observation, and I'd say overall that's probably represented about 60-70% of our launch volume. But we're starting to see more of a shift towards the communication side of things. We think there are a lot of opportunities to grow the business, especially when Neutron comes to market, to deploy constellations that address the communications market. ### Space Systems Business [10:16] **Suji Da Silva:** Why don't we talk about Space Systems? I think maybe you could just give a thumbnail of the business - it's less obvious than launch. **Adam Spice:** Space Systems is a pretty diversified business. We've acquired several companies over the last few years, and those companies brought capabilities that were servicing the merchant market for the small satellite market. We've vertically integrated that with our Space Systems platform offerings like SDA and MDA Global Star. We're using those subsystems in our platforms, and we also sell the subsystems and capabilities into the broader merchant market. So we've got: - The components or subsystems merchant business - Satellite design and manufacturing business - On-orbit servicing business - Aspirations to get into the application side of the market (though we've been holding our cards closer to the vest on that one) Ultimately, if you have a launch platform, much like SpaceX has proven, you can build a really impressive moat around your business. Nothing in space is easy - satellites are difficult, applications from space are difficult - but launch is by far the hardest thing to execute on. It's hard not just because of the mechanics and physics, but also the cost of capital. There was a period over the last three to five years where there was significant capital flowing into launch companies. I think those days are passed, and the people who have those capabilities have them. You can increment what you have, but I think the days of dozens of new potential competitors in the launch business are in the rearview mirror. ### SDA Contract Opportunities [12:08] **Suji Da Silva:** You just recently won this large contract with the DOD, the SDA satellites. Can you talk about what further opportunity there might be for you? Was that a one-off, or is there a pipeline forming there? **Adam Spice:** I think this is just the very beginning of the adoption of this lower orbit proliferated architecture that's going to create real enduring platform opportunities for us. What was most exciting about this one is being the prime - versus just providing the bus or just providing a payload, we're doing the full program priming. Absolutely there's incremental tranches of this SDA program. It's a multi-billion dollar funded program. People may have seen an announcement last week about Star Shield, basically how SpaceX is building over a thousand satellites for the NRO, who clearly are now adopting this low Earth orbit architecture as well. The days when the market was focused on GEO, where satellites would sit 20,000+ kilometers above Earth with a handful of exquisite birds costing billions to make and hundreds of millions to launch, has transitioned to this LEO architecture. It's really helpful for a company like us where the demand is going to be consistent. You deploy these constellations initially, then you have to replenish them. So it's goodness if you're manufacturing the satellites, launching the satellites, or operating the satellites - it's this continuous flow of rejuvenating the assets on orbit. ### LEO Constellations and Launch Opportunities [13:44] **Suji Da Silva:** On the commercial side, there's an interesting competition forming right now with SpaceX putting Starlink up there, Jeff Bezos and Amazon wanting to put Kuiper up there, but they don't have a matching launch facility. How is that going to play out, and how might you guys come into that with Neutron over the next few years? **Adam Spice:** We think there's an opportunity across all of these emerging LEO constellations. Kuiper is interesting because of the connection between Amazon and Blue Origin, which is Jeff Bezos's launch company. They haven't brought their New Glenn vehicle to market yet, but it's believed to be imminent. If you look at the numbers of satellites that have to be launched over the next five years or so, not just for Amazon but across all the different applications - government, commercial - it's tens of thousands of satellites, even if you exclude Starlink from that mix. There's a huge opportunity and very few vehicles to service that demand. Amazon awarded the first batch of launch contracts across three providers: Arianespace (European launch provider), ULA with their new Vulcan vehicle, and Blue Origin's New Glenn rocket. They spread roughly 85 launches over those three providers, and those are either all new vehicles that have never flown. We think that Neutron is going to build heritage quickly. We're leveraging Electron heritage with 45 launches to date, so we think we're going to get in the mix pretty quickly and be able to fight for some market share in that segment. ### Space Asset Ownership Strategy [15:32] **Suji Da Silva:** You're being a little bit discreet on what you're trying to do in space. When I see the space industry, I break it out as: launch, Space Systems (what you put in space), and owning the assets in space (which many of your customers are doing). But you have aspirations there, so maybe you can talk about your crawl-walk-run approach to that market? **Adam Spice:** Crawl-walk-run is the right way to look at how we approach these opportunities. We're not a swing-for-the-fences bet on any one particular thing. We don't typically like to go in and take risk on a new market; rather, we go into an existing market and take share through execution. The applications approach will be somewhat similar. What we've done to build the company - acquiring a few companies - we first started selling merchant components, then we started offering design services, then we won manufacturing contracts, and then we won contracts to operate those satellites in orbit. Everything we've done along the way has been teaching us how to do things. We've been fortunate to have customers that have paid us to build up our own IP trove of capabilities. For example, when you look at the MDA Global Star platform, that was a very difficult platform to design and execute on because it was operating in a very harsh radiation environment given the altitude and expected useful life. From that, we learned how to build high-duration, very sophisticated rad-hardened hardware. We leveraged that into what we won for the SDA Beta contract by adding more capabilities. Everything we do is about getting us to a position where we can build our own satellites, operate our own satellites in orbit, and have that recurring revenue stream. It takes time. The same thing happened with SpaceX - they were launching other people's stuff for a long time, and then they figured out which application they wanted to target. The broadband from space application that SpaceX targeted with Starlink is probably not what we'd go for, given the amount of capital required and our different access to capital. But there are lots of very interesting applications that require dozens or hundreds of satellites, not 40,000 satellites. Once we have Neutron, we'll have all the pieces to do everything we would ultimately do to have a successful application business on orbit. [18:10] **Suji Da Silva:** I'd be remiss if I didn't mention that the MDA Global Star contract you won was to put Apple's emergency SOS functionality in space, and that was something Apple must have vetted you along with others. I imagine in a year or two we'll be talking about what Microsoft tried to do in space, what Google's tried to do in space, and you guys could very likely be in those conversations. ### Company Valuation and Strategy [18:29] **Suji Da Silva:** SpaceX's private rounds are being valued at $160-180 billion, let's just call it $200 billion because it's going to be there in a blink of an eye. You guys are around $2 billion. What's the disparity there from your perspective? They obviously have Starlink and SpaceX in there. **Adam Spice:** I think SpaceX has established a pretty dominant position in a market that used to be controlled by slow-moving prime-type companies. What they've done is brought the cost of launch down materially. If you look back 10 years ago, ULA would charge in some cases $300-500 million to launch a satellite. Now SpaceX comes along and the sticker price for a Falcon 9 is roughly $67 million. They've brought down the cost of launch significantly and in the process created a very interesting platform. Everything they've done with Falcon 9, Starship, and everything else is about enabling Starlink, which is the predicted cash cow for that business. We believe we're one of the few that will actually be able to compete with SpaceX, being a high-cadence, commercially oriented operator that can work on both the commercial and government side. I'm particularly excited about what we're able to do to help enable the national defense interests of the US with these capabilities. We need more SpaceXs and Rocket Labs and probably fewer legacy primes operating on cost-plus models that don't move particularly quickly or innovate. Innovation is the enabler. Nobody thought you could do a reusable, landable launch vehicle, and SpaceX did it. You'll see a lot of new innovation come to market with Neutron, some novelty around the propulsion system that we're developing that'll drive efficiency and ability to get to a high cadence. I think ultimately that valuation disparity will have to get dissolved. Once we have Neutron, which will go head-to-head with Falcon 9, our valuation proposition is going to be very clear to investors. [21:08] **Suji Da Silva:** I should make sure though - unlike Electron, Neutron will be fully reusable? It will go off and come back and be reused? **Adam Spice:** [Confirms with a nod that Neutron will be fully reusable] ### Recent Funding and Strategic Opportunities [21:21] **Suji Da Silva:** You recently did a fairly large convert offering. You have the funding to make it to break even, but you also have room for flexibility for financial moves. What was the thought process behind the funding, and what are some of the strategic opportunities? **Adam Spice:** We exited last year with almost $330 million of liquidity, so we've been fortunate that we haven't been hamstrung to do strategic things along our journey. But we were starting to feel constrained, particularly when it came to exercising inorganic growth options. To raise $355 million as a new space company in this market is no small feat. There are lots of peers out there who are struggling to gain access to any incremental capital, so we think there are buying opportunities that will accelerate as we move forward. There are a few key strategic capabilities that would nest well with what we have in our portfolio today. The money we raised had nothing to do with Neutron or executing on our existing Space Systems business - it's really to drive inorganic growth. We've seen some compelling opportunities. Last year, we bought some Virgin Orbit assets out of bankruptcy for 16 cents on the dollar and essentially got a fully operational rocket factory turnkey two blocks down the street. When you have capital, you find opportunities to effectively put it to work. ### Audience Q&A [23:15] **Audience Question:** [Inaudible question about acquisition targets] **Adam Spice:** Our deals have typically been for key capabilities or subsystems on the satellite bus. I think we've largely fleshed that out. There are a couple of things within that satellite bus architecture that we could further vertically integrate into. There's always different forms of propulsion - chemical, electrical. There are different flavors of radios, incremental capabilities around structures like tanks and so forth. In some cases, acquisitions will be because they represent really good growth opportunities in a growing market. In some cases, it'll be because we want to de-risk our programs - there are certain things that aren't necessarily great growth drivers but really de-risk execution on these larger multi-hundred million programs. We're also starting to work our way towards payload capabilities. That's the one thing where we've got great bus capabilities, but right now we have to rely on third parties for payload. You'll probably start to see us doing things that will position us to have more capabilities on payload hardware. Payloads are all very application-specific - Earth observation (SAR, optics), communications capabilities. There are fundamental subsystems or building block capabilities that we need, and you'll start to see us pick those up. Those will provide a little breadcrumbing towards the ultimate end applications that we're going to service because we're only doing things that ultimately prepare us longer-term to own those assets in orbit. [24:57] **Audience Question:** [Inaudible question about financials] **Adam Spice:** The average selling price of Electron right now is about $8 million. When we're launching one a month, which has been the rate we were at last year, you get into the mid-20s non-GAAP gross margin on that and trending toward neutrality on contribution margin at that cadence. As we step up to this year's cadence of 22 launches, and add a few more launches next year, we really start to increment towards our long-term target model of roughly 50 points of non-GAAP gross margin and mid-20s contribution margin from that line of business. Neutron is going to have a significantly higher launch price, targeting around the $55 million range, which prices it on a per-kilo basis competitively with a Falcon 9. Cost per kilo can be misleading because if you need a dedicated rocket, you don't pay for the capacity you use - you pay for the whole rocket. Theoretically, that gives us room to price up to where Falcon 9 is, more into the high $60s and maybe toward $70 million. With that higher ASP comes a lot of goodness in the P&L. 2023 was a heavy investment year in Space Systems and Neutron. 2024 is really a heavy investment year in Neutron again to get that first launch off. Once we get that first launch off, a lot of good things happen to the P&L because you pass that R&D bubble and start getting revenue contribution from Neutron kicking in. We'll be well into the revenue recognition under this big government SDA contract as well as at the tail end of the Global Star MDA contract. We think a lot of things are pointing in the right direction for mid-2025 onward from a P&L perspective. The launch business is a relatively fixed cost-intensive business, so it's all about cadence and absorbing those fixed costs. It'll scale nicely. [26:55] **Suji Da Silva:** We're out of time, so I'd like to thank Adam and Colin from Rocket Lab for coming, and thanks everybody. **Adam Spice:** Thanks, Suji. Have a good day.