[[Home|🏠]] <span style="color: LightSlateGray">></span> [[Interviews]] <span style="color: LightSlateGray">></span> May 8 2024 **Insider**: [[Peter Beck]], [[Adam Spice]] **Source**: [Dave G Investing](https://www.youtube.com/watch?v=kldLGQHMU98) **Date**: May 8 2024 ![](https://www.youtube.com/watch?v=kldLGQHMU98) 🔗 Backup Link: https://www.youtube.com/watch?v=kldLGQHMU98 ## 🎙️ Transcript >[!hint] Transcript may contain errors or inaccuracies. **Dave:** Hello everybody, thank you so much for tuning in today. I am incredibly excited to share with you an interview I had with Rocket Lab's CEO Peter Beck and CFO Adam Spice. Before I dive into that, I just wanted to thank all you guys for watching over the past couple years because without you there's definitely no way this conversation would have happened. Special shout out goes to the channel members for their support. I don't know if I would have continued without you guys supporting me along the way, so big thanks to you. If you're not already a subscriber, please do consider subscribing because the more reach this channel has, the more likely I will be able to bring you conversations like this one and with other amazing people down the line. Also, I just wanted to apologize in advance - there was a slight issue with the recording software so the video layout is not quite what I would have wanted it to be, but that's totally on me and I'll be sure to do better on my next interviews. By the way, if you're in the market for a new phone case or holster, New Zealand-based small business Nutshell is offering a 10% off discount exclusively to channel members with a discount code "Dave G". So if you're a Kiwi who likes to support local business or just someone looking for a high-quality phone case, I'd encourage you to check out the link down below. I can also confirm that the owner-operator happens to watch this channel and is an all-around nice guy, so that's always a perk as well. Okay, now that we've got that out of the way, it's time for my conversation about the future of Rocket Lab with Peter Beck and Adam Spice. **Dave:** Thank you guys so much for coming to talk to me. It is very much appreciated, and congratulations on another record quarter. Before I dove into the questions, I did just want to say for whatever it might be worth that I talked to a ton of Rocket Lab retail shareholders and they have tons of different opinions, but they all seem to agree that they have a ton of confidence in management, so hopefully you can take that as maybe a little bit of feedback. ### Building Neutron Rocket **Dave:** So I really got to start with Neutron, a very exciting time. We saw some of those pictures in the earnings call of Archimedes and the large structures looked amazing. How does it feel to see it taking shape after all the hard work you've put in? **Peter Beck:** I think building a rocket is kind of like climbing a mountain. It doesn't feel wonderful as you're going through the process, but once you get to the top, it feels great. But it's just a tremendous amount of work, and I think the best way to describe a rocket development program is like a floating iceberg in the sea. It's like you see the rocket, and that's kind of the bit that's sticking out of the ocean, but all of the infrastructure and the factories and Test Facilities and production lines are like the bit below the water line that's not that obvious for everybody to see, but actually it's the majority of the work. Adam and I joke that we raised money to pour concrete, because there's just so much infrastructure that goes in place when you build a launch vehicle that the actual launch vehicle bit is relatively small part of the program. It's all of the other stuff you have to put together to make it work is where all the effort actually goes. ### Neutron Priorities and Design Choices **Dave:** Okay, makes a lot of sense. So I did want to start off with kind of a few high-level questions on Neutron. I've heard you talk before about how with rockets, everything's a compromise, there's a lot of tradeoffs. I just wanted to know if you could tell us a little bit about where your priorities were and what you were willing to compromise on. Maybe for instance, like did you always know you wanted to keep those fairings on the first stage? **Peter Beck:** Yeah, that's a great question. At the end of the day, the design envelope for Neutron is really about how do we make the most affordable launch vehicle, and that quickly kind of dissolves into reusability. Then you start making a bunch of trades for reusability, and every one of those reusability trades impacts performance. The original design of Neutron started off literally looking like a traffic cone because if you kind of divulge everything down to the most elemental physics, then you end up with a traffic cone, and it kind of moved from there. Going fishing fairings out of the ocean is no good - you've got to go and reservice them. But carrying the fairings all the way up to staging is quite challenging as well from a performance perspective. So you'll notice when you look at Neutron, the first stage relative to the second stage is actually really quite large. If we stripped off all the reusability elements of the first stage, then the first stage would shrink quite remarkably. But there were just so many trades, like the diameter of the rocket of stage one - the base diameter is really large for that stage. The tanks are really short and squat, and that's helpful because when you get to a vehicle that size, the coefficient of drag doesn't matter so much, but what really matters is base stability and re-entry stability. So having a big blunt area, you can control the heating much better, and once again it all kind of converges to a traffic cone. The upper stage is actually the most challenging part of that whole vehicle because the upper stage is disposable. A reusable upper stage makes tremendous compromise, and there's certain scales that works at and certain scales that doesn't. Then there's a whole bunch of re-entry dynamics and logistics that you have to deal with. So we opted for a disposable upper stage. You really are putting together conflicting priorities because an upper stage has to be the highest performance element of a rocket, and because you're disposing of it, it has to be the cheapest. Generally in this game, the highest performance and the lowest cost do not go together, it's like oil and water. So encapsulating that upper stage into the first stage, removing all of the launch loads out of it, it's just kind of a hanging sack of propellant with an engine on the bottom. That just gives it awesome performance and incredibly low cost. So that's quite frankly why we did the second stage tank development first out of the gate - that was the biggest risk to the program and we needed to do that as quickly as we can. ### Carbon Composites and Water Recovery **Dave:** Great, ton of detail there. Maybe just a quick follow-up - sounds like it has been surprising how well Electron and their Carbon Composites have handled the water. That hasn't kind of changed your cost benefit on the fairing at all? **Peter Beck:** No, it's just logistically going and picking that up and then putting it back through a recertification and getting it back on the vehicle - you just don't want to go there. The more you can bring back to the launch pad or the launch barge, the better. The least amount of work, the better, and the least amount of recertification and preparation for the next flight, the better. ### Neutron Economics and Margins **Dave:** Fair enough, makes sense. So then I just wanted to ask maybe for Adam - I've heard that we're aiming for, or I should say you're aiming for around 50% gross margin on Neutron similar to Electron. Do you think you'll be able to accomplish that with a lower cadence than Electron has, and if so, like maybe a ballpark of what you think that might be? **Adam Spice:** I think that look, ultimately the margins are going to look similar between Electron and Neutron, but we will have gotten there very differently. I think with the fact that Electron was never designed initially to be at all reusable or recoverable, I think we're backing our way into that, kind of much like the Falcon 9 backed its way into reusability. Neutron was designed from day one to be a reusable vehicle, so the economic curve of the margin improvement should be much sharper on Neutron than it was for Electron. But the first stage of a rocket - you're always kind of the first few flight articles are the most expensive ones because you haven't dialed in your automation on the production side, you're still learning things, yield on subsystems maybe aren't where they ultimately need to be. So it usually takes two or three years before you really start to kind of get the margin profile dialed in on a new launch vehicle, and I don't think that Neutron will really be any different than that. We're just kind of taking the learnings from Electron and carrying them forward to how we model Neutron based on our Electron experience. ### CEO's Time Allocation **Dave:** Great, yeah that's helpful. Then maybe for Peter just a quick question. So a lot of us are curious about how much time you can spend personally on Neutron and Archimedes, or if you have a lot of time that you have devoted to like CEO work. Can you kind of share what your day looks like? **Peter Beck:** Yeah, so the great thing is that I'm never short of excitement. Whether it be Neutron or Space Systems, there's a lot going on in the company. So I haven't probably sat down and done a full derivation of my time allocation, because I don't think it's that organized. It's just really running from one thing to the other. I guess if I had my dream, I would get more time to be the chief engineer than I get. But at this point the team is super mature and super aligned, so there was a time where we would have five different views and somebody has to arbitrate the view in the room and make engineering decisions, but I'd say that happens extremely rarely these days. So the demand for those kind of decisions is less. But I can't really give you a statistical accurate derivation of amount of time I spend everywhere, but it's spread pretty widely for sure. ### Future Block Upgrades for Neutron **Dave:** Okay. And I realized this is probably way too early for you to comment on it all, but I just felt like I had to ask - do you have any thoughts on potential block upgrades down the line? Does the taper at all make it more challenging to stretch the tanks or anything like that, or any thoughts on that? **Peter Beck:** Yeah, I mean, look, there will be block upgrades down the road, but much like Electron, we don't expect to see the vehicle changing really significantly. Certainly from someone standing outside the launch vehicle - I mean, if you look at the first Electron we launched to the one we launched today, we changed some stickers, but the tank was about a meter longer. That's visually really about it, but behind the scenes, lots of improvements. I would say that a lot of those improvements and a lot of even some of the hardware from Electron has flowed directly over to Neutron. So we've had a chance to correct some of those things that we don't particularly like. So yes, there will be block upgrades. If we need to actually stretch tanks, the tank section is actually parallel. The end stage is tapered at the end, so that wouldn't be much of a challenge. But we'll certainly design for it, but I think you'll see Neutron following a very similar path to Electron. That's really important because this is not a science project. We need to get this vehicle to the pad and get customers launching on it. You don't want to have a minimum viable product that you have to then go back and completely redesign after flight one. ### Space Systems and Composite Structures **Dave:** I do need to move on to Space Systems then. I often say I'm a fan of the company because of the rockets, but I'm an investor because of Space Systems and the end-to-end vision, so very important. Recently you announced a new composite structures business line to Space Systems. Can you give us any idea of how impactful you think that that might be, like how large it would grow compared to some of your other businesses? **Peter Beck:** The idea behind that is we just do so many large composite structures and we do them super well. I mean, if you look at all of our programs, if there's a pressure vessel to be made, we just naturally build it out of carbon and it's like half the weight of anything metallic or more. So I would say that one of our really core key strengths is composite structures and super lightweight composite structures. All of the spacecraft, like the Capstone spacecraft was a great example - if I handed you one of the pressure vessels or fuel tanks for that, it's a large spherical thing and you can literally pick it up with your pinky. It just feels weird. So we're really good at that kind of stuff, and we always have lots of folks coming to us asking us for either capabilities or technologies. So we thought we would be a bit more organized and put that into a business unit and move forward as a separate business unit. But I'd say it's early days yet because the demand on our composite team is just extreme right now across all of our programs. So it's something that we think we can definitely be very disruptive on in the future, but the focus right now is definitely on delivering the programs we've signed up to deliver, internal programs. **Adam Spice:** I'd add to that, Dave, that there could be a lot of synergy there because if you look at the investment that we're making to support Neutron in Middle River, Maryland, we stood up a new composites manufacturing facility there. We're facilitizing that with some pretty sophisticated and expensive equipment that you would love to be able to amortize over other opportunities, and I think we will find those opportunities as Pete was mentioning. So I think there's a lot of - we try to do things here that are very fungible so that they benefit all parts of the business, and I think this Composites line of business can draft off of what we have to do anyway for Neutron, for example. So I think there could be a lot of goodness there. **Dave:** Yeah, that makes a ton of sense to me. It still blows my mind - I think I heard you say in a previous interview that that second stage is like the weight of a motorcycle or something, so I can't picture that. ### Large Reaction Wheels and Mega Constellation Customer **Dave:** Anyway, on the topic of the large reaction wheels and the mega constellation customer, I know pretty limited what we can talk about there. Is there anything you can tell me about what kind of production capacity you have on those or like what kind of volume discount you think we're looking at on that contract? **Peter Beck:** Yes, we can't really talk too much about that, but I would say that - correct me if I'm wrong, Adam - I think we're on track for like 2,000 wheels this year, something like that? **Adam Spice:** A little north of that, yeah. **Peter Beck:** So we certainly have good capacity in that production line, and that certainly flows on to internal projects and we find that manufacturing capability really useful. **Adam Spice:** What's great about that to Dave is the fact that it took a lot of work, a lot of engineering ingenuity to basically put together a production flow that could support these kind of volumes. When we acquired the Sinclair and Planetary business in your hometown, they were manufacturing about 150 reaction wheels a year, and Pete just mentioned volumes that were thousands of volumes per year. The benefit of now doing it at that scale is we can apply that scale manufacturing to those other smaller volume kind of orders and get the cost reductions that go along with that. So it could be a material margin enhancer to all the rest of the business that we do as well. It's not just helpful that we're getting that mega constellation customer, but the production synergies and values that got created there, we can translate to the rest of our business. So just an uplift to the overall margins for that part of the business. **Dave:** Sure, and you may have answered this previously, but is there revenue being recognized from that deal like this year? **Adam Spice:** Yes. ### Long-Term Growth for Space Systems **Dave:** Great, okay. So in terms of looking at the overall trajectory of the business long term, for me just trying to value it, I feel like I've got great visibility on the launch side, less sure about long-term growth on Space Systems. Is there any color you can kind of give me on how to think about that? Like has the previous few years been a pretty good benchmark? **Peter Beck:** If you look at what we're trying to achieve here and ultimately trying to get to and the way we're getting there, it's very methodical step after step. If you look at the very early programs that we took on - the Capstones and VAST and whatnot, and then we kind of stepped up as being a major sub and a major program for the MDA Global Star, and then now we're the prime contractor for a large SDA Mission. So you can see the trajectory in an extraordinarily short time frame of where we're trying to take that Space Systems business. But I think the bigger thing to really think about is - and I think one of the analysts on the earnings actually asked a really great question. Kai, he was like, "Well, you're seeing Northrop Grumman back out of these large SDA programs and some of these programs as being Prime and focusing on component supply." And you can name a number of primes that have sort of been doing that. I would say what we're witnessing here is a total inflection point of the space industry. The large - it's - you go back just a few years ago, it would be absolutely unheard of for one of those large primes to be backing out of being a prime and wanting to be a sub on some of these things. And the era of Cost Plus Fixed Fee is dying. That is when you have another company that comes along and says, "Yeah, we'll do this for a firm fixed price. We'll absolutely deliver it on time. We're incentivized to deliver it on time, and we can guarantee that schedule because we have all these components internally, we're not relying on being an integrator of everybody else's stuff. We have them internally so we can actually meet this delivery," especially in an environment where delivery is more important than anything else right now. So what you're seeing is just a total inflection point in the space industry in the way it's all happening. And look, I'm on the record of saying I think the large space companies of the future are going to be the companies that are vertically integrated. They have their own rocket, they have the keys to space, and literally customers come to them and just ask for "I want this service" or "I want this capability on orbit." We're really starting to see that model happen, like with the Victor's Hayes Mission. The customer came to us, they bought a service essentially. We build the satellite, it's full of our components, we're launching it, we even operate it on orbit. They've just bought a capability. And then you see all the big primes kind of stepping out of these Cost Plus programs, and you see folks like us stepping in. So the large space companies of the future are going to be SpaceX, Rocket Lab, in my opinion, because when you have the keys to space and you have all of that vertically integrated capability, who's going to sign a Cost Plus deal with ambiguous delivery time frames and no idea of cost? It's just - we're in a different world now. So as you think about Space Systems and you think about Rocket Lab, think about it in that context as we, one foot after the other, methodically building all the foundations. We laid a satellite down on the table and we said, "Right, these are all the bits that suck that we need to own," and went out and methodically acquired those. And what you're seeing is that model start to actually play out. **Dave:** I found it fascinating when I saw the news on that Northrop Grumman and just the kind of divergence in the strategies. It was very interesting. ### Manufacturing Capacity for Spacecraft **Dave:** I'm wondering just about, again obviously a shorter term question, in terms of capacity right now for your spacecraft manufacturing. Do you say it's kind of pretty maxed out with these Global Star and SDA constellations, or are you still kind of looking to grow that right now? **Peter Beck:** We continue to look for growth opportunities. I would say that we're scaling the business alongside the opportunities. We're careful to make sure that we keep hungry and keep ahead of the ball, but also, if there's one thing that the company is recognized for, is that we deliver. So it's balancing making sure that we don't get too far over our skis that we can't deliver. And that to me and for everybody in the company is super important. We are known as the guys that, when we say we're going to do something, we do it. So scaling the company alongside of that is kind of the balancing act. **Adam Spice:** I would add to that that the space system side of the business isn't the crazy capital-intensive part. That's the rocket part - the rocket part is crazy on infrastructure. Fortunately, what we've done is we've kind of leaned forward over the last several years and we've built out our footprint from a manufacturing perspective to be able to take on more. For example, here at our headquarters building in Long Beach, we've got about a 10,000 square foot clean room that we're building current satellites in, but we have capacity - we could quadruple the amount of work that we do in this building just by adding more clean room, which isn't really that expensive in the grand scheme of things. So I think we've got the ability to scale pretty quickly, and we've invested in ERP systems and all the different things that allow you to scale in a controlled and efficient way. So we've done a lot of heavy lifting. I don't think our ability to support more top-line growth, particularly around Space Systems, is one that we spend a lot of time worried about because we're capitalized to do it, we've got the footprint to do it, and it's just a matter of committing to it when the opportunities present themselves. **Peter Beck:** And I think it's fair to say that we're very selective about the opportunities that we go after as well. They need to obviously be good for the business but align to the strategic end goal which we talked about previously. ### Interest in Future SDA Tranches **Dave:** Sure. Maybe just about that - are you at all interested in perhaps future SDA tranches down the line? **Peter Beck:** I think the US government has changed their space National Security model, and that is away from large, one or two large exquisite birds to proliferated LEO architecture, which requires constant replenishment. So the SDA work is here to stay. Like every 5 years, there's going to be new constellations and new projects. So yeah, we see the SDA Mission as being a complete change in the business model that provides a really strong demand signal and a long-term base requirement of supply of vehicles. And I would say that the folks that can execute those programs really, really well are going to be in great position for the future. **Adam Spice:** I would add to that, say that if - just quickly, if you think about the fact that most oftentimes government business is not seen as a hockey stick opportunity, they're seen as kind of solid predictable thing you can build a base on. And I think that's still very much the case, but I think right now, particularly when it comes to opportunities like the SDA platform, I mean that represents one of the bigger hockey sticks in the industry. And so when you have that hockey stick combined with the type of customer that's coming from the government, that's hugely encouraging. **Dave:** Yeah, it seems like it's great for the whole space industry, to be honest. ### Electron Reusability Progress **Dave:** On the Electron front now, seems like you're starting to get closer to reusing a booster. I assume once you get that done, it'll be a while before you can kind of ramp up to reusing them regularly. Do you have any thoughts on what that might look like after you get that first one under the belt? **Peter Beck:** I think it'll settle in. I mean, we're kind of largely there right now. It's really a question of resources. So we can have the recovery team working on Electron recovery, or we can have them working on Neutron. And the far bigger bang for the buck for the company right now is for them to be working on Neutron because just looking at the sticker price between the two launch vehicles, it's very obvious. So our focus for Electron this year has really been making sure we scale production, keep them rolling off the line. When you introduce new kind of things into the production line, it's kind of like a destabilizing factor. There's new work instructions and new processes and whatnot. So things that are going good, we just try and leave them alone and get the team focusing on Neutron where it's the biggest deal. So we've dialed back the Electron reusability program because of those reasons, but still not to the point of it being stopped, hence the reasons why we are continuing to flow that in. But I would say the emphasis is kind of elsewhere. But like I mentioned, I think the work there is largely done. The last vehicle we brought in was in fantastic condition. Prior to that last vehicle, we weren't too worried about the full handling operations - getting it out of the water into the boat, from the boat to the factory, the factory onto the line. Which is where this last one - if we bang it up against the side of the boat, then the whole point is wasted at that point. Or likewise, bang it in a truck on the way home. So we're really focused on those kind of elements to deliver a stage that is fully tracked and the environment is known at all times. So that was kind of the last really big bit. And then like I say, it's just reinserted into the production line and we'll just start flowing them through the production line. But as I mentioned, the focus is really on not disrupting that production line in the least and making sure those resources are pointed at the thing that has the biggest bang for the company, which is Neutron recovery. ### Launch Schedule Challenges and Customer Readiness **Dave:** Sure, yeah, makes sense. On the topic of the cadence, it seems like the customer readiness piece has been a little bit an issue this year. I'm just curious, is there any kind of financial penalties on the contracts if they end up causing you to have to push out a launch? **Peter Beck:** I mean, look, this is just a reality of a rocket company, especially a dedicated rocket where the customer is buying the flexibility of the service. Otherwise, if they didn't care what orbit they were going to and when, they'd just go to rideshare. So that's kind of the value proposition for the vehicle. So in that respect, that is just the realities of running a rocket business. And I would say this year is no different, probably better than other years. Other years we've been impacted by this even more. But at the end of the day, a customer is working to a schedule, they put their spacecraft in a thermal-vac chamber and something might fail, and they could be six months fixing it. And that's just the reality of the space industry. We try and keep as many opportunities as we can to be able to backfill and move those things around. But I can't remember a single manifest meeting that we've all arrived to - and these happen sort of weekly or bi-weekly - where there hasn't been someone who's either had an issue in a chamber and might want to move, or wants to move. And it literally feels like every week you just throw the marbles up in the air and where they land again, you have to organize them back. One of the things I think we can do better is condition the street to just understand that that is the rocket business. That is just it. And the good news is that these launches never go away, they just either move around and move in between quarters. I would say where the business is at the moment, with so much diversification across it, if a launch moves out of quarter, financially it just doesn't matter anymore. If you go back a couple of years, we didn't have all of that other revenue and scale. Then if a launch moved out a quarter, it would impact the quarter. But you can see a launch move out in a quarter and I still hit our numbers, no problems at all. So I guess my message there is don't worry. The launches never go away, they just move around, and that's the reality of the business that we're in. And we can probably do a better job at messaging that and making sure people understand that. From a financial standpoint, we collect 90% of all of the launch contract just prior to ignition, so there's generally only 10% of the contract left when we ignite the rocket. As the rocket is being built, we're collecting against milestones along the way. So there's never any rocket sitting there that owes us a heap of money. We structure it in such a way that the rocket has paid for as it's going down the line. So financially, Adam should be answering this question, but it really doesn't have that big of an impact. It's just we get to recognize the revenue upon launch. **Dave:** Okay, that was super helpful actually. I didn't know that. ### Final Message to Retail Shareholders **Dave:** I think we're pretty much out of time here, so maybe I'll just leave it with one final question. Is there any last message you'd like to share with your retail shareholders specifically? **Peter Beck:** I think we'll try and do some of these a bit more frequently. Thanks for everybody's support. It means a lot, and we're working hard to try and build this into a big platform. So we'll continue to scale the business and grow. And look, I think as I mentioned here before, Dave, you need to think about this industry differently, and I think it is at this inflection point. For me, it's just super crystal clear what is happening and what needed to happen. I just come back to the fact that the large space companies in the future are going to look very different to the space primes of today. Vertical integration, keys to space - these things are going to be the massive differentiators. **Adam Spice:** And I would add to that, I think we bring something very unique to the retail investment community. I was talking to an analyst this morning who's been around this industry a really long time, and I asked, "Hey, when was the last time that a Pure Play Space company basically developed and delivered a rocket as a public company?" And he paused for a second and goes, "Never." He goes, "And when people do develop rockets, they're like years late." He goes, "You know what you guys are doing is pretty amazing." I think that if you look at the growth that we're delivering, I mean, we're one of the very few space companies, new space companies, that are delivering on the revenue promises that we committed to. We do our best to make as accurate predictions as we can. We don't want to become known as sandbaggers or people that lean too far over their skis, but this is a tremendously difficult business to predict. There's a lot of volatility to it, there's a lot of balls in the air. What we really want to do is provide as much transparency to investors to make informed investment decisions. So I think platforms like this are awesome. I think the more information we can get out there and have people make informed decisions, the better off we are and the better off the retail investor is. **Dave:** Great. Well, thank you both so much for taking the time. It's been extremely interesting, and I guess I'll let you go for now. Maybe I'll run into you in Virginia in a year. **Peter Beck:** Sounds good. **Dave:** All right, see you guys. Thanks. Take care. ### Conclusion **Dave:** I hope you guys found this discussion valuable, and thank you to everyone on the Discord server or the channel members who submitted questions for the interview, much appreciated. Obviously, I owe a big thanks to Peter and Adam for taking the time out of their busy day to chat with me, and I just want to thank you if you watched the video. So hope you guys have a great day. I hope you found that interesting. If so, please do consider hitting that subscribe button, and I'll see you in the next one. Bye for now.