[[Home|🏠]] <span style="color: LightSlateGray">></span> [[Interviews]] <span style="color: LightSlateGray">></span> September 12 2024 **Insider**: [[Adam Spice]] **Source**: [Morgan Stanley 12th Annual Laguna Conference](https://www.youtube.com/watch?v=DJfOqUBYZSY) **Date**: September 12 2024  🔗 Backup Link: https://www.youtube.com/watch?v=DJfOqUBYZSY ## 🎙️ Transcript >[!hint] Transcript may contain errors or inaccuracies. **Christine Leog (Morgan Stanley):** [1:12] Good afternoon everyone and thank you for joining our 3:45 PM session with Rocket Lab. I'm Christine Leog, Morgan Stanley's Aerospace Defense analyst, and I'm excited to have Adam Spice, CFO of Rocket Lab with us today. Welcome Adam. **Adam Spice (Rocket Lab):** Thanks for having me. **Christine Leog:** Before we kick off, the standard disclosures - for important disclosures please see the Morgan Stanley research disclosure website at www.morganstanley.com/research-disclosures. If you have any questions, please reach out to your Morgan Stanley representative. ### Launch Business Overview **Christine Leog:** [1:52] Maybe Adam, kicking off - let's start with launch. Launch has been pretty topical in the industry lately, mostly because of the shortage of rocket launch capability. At this point, Electron is the second most used launch vehicle in the US, and you're developing a new medium class rocket, Neutron, which you're planning to launch towards the middle of next year. Can you talk about the demand environment? What makes customers choose Electron? And when you look at Neutron, why go with a medium rocket and how do you think the demand environment shifts over time? And frankly, the question is really related also to the white elephant not in the room - SpaceX. Investors are asking: is there room for small launch, medium launch alongside what SpaceX is doing, which is really more on the heavy and the super heavy? **Adam Spice:** [2:49] It's a great way to start the conversation. As you can imagine, the CFO of a rocket company has lots of things to keep them up at night, but demand really isn't one of them. The demand environment right now - we have greatest visibility in the small dedicated launch side of the market where Electron is the leading small dedicated launcher. We've launched it 52 times, we've got another launch coming up on the 17th, so they seem to be coming at a pretty good clip now. Electron's a phenomenal vehicle. It allowed affordable small dedicated launch, whereas before Electron came along, probably the closest analog to Electron would have been a Minotaur or Pegasus launch from Northrop Grumman which would run you 40 to $50 million and didn't fly very often. Now you can get an Electron launch for around $8 million depending on your needs. Our backlog right now is priced around $8.2 million. If you wanted to do something on a Falcon 9, you'd pay close to $70 million for a dedicated launch. When you're putting a classified payload or a payload that's going to a very unique orbital insertion location, you need dedicated launch. We offered a very efficient, almost an order of magnitude cheaper option than what was out there. We continue to see that demand growing. We've got more than 36 Electrons in backlog at this point. This year we'll launch between 15 and 18 times. Last year we launched 10 times. The demand keeps growing and we don't see that stopping. What Electron is great for is doing small constellation deployments or pathfinder missions where you're testing to see if the technology is going to work on orbit - you're not really quite ready yet to go full-scale operational where you need a larger launch vehicle to deploy a constellation. Electron has been very useful for that. We've now found applications for it in hypersonic test campaigns as well, so now it's moved from just being a satellite deployer to also a hypersonic test bed platform, and that's actually growing - that's probably the fastest growing part of the Electron portfolio right now. ### The Case for Neutron When you think about medium launch and the driver for Neutron, there are really a couple of drivers. We do all this great work to do the pathfinder missions on Electron, we actually design and build full satellite systems for customers, and then we hand those off to a larger launcher like SpaceX. If you look at our long-term strategic vision of being an end-to-end space company, we want to own everything. In order for us to really take full advantage of that growing space market, we don't want to be pinned down to just a small subset on the launch side. If you do the satellite design and build, you have a greater chance of optimizing things for your own launch vehicle, so we can really offer customers that advantage of that full solution. I think probably, you mentioned what's not in the room - SpaceX essentially has a monopoly right now on medium class launch, and that's a very uncomfortable place for the market to be. It's very uncomfortable for government customers, it's very uncomfortable for commercial customers, particularly commercial customers that have competing offerings to Starlink. As you can imagine how uncomfortable that would be if you're a direct competitor to Starlink and all of a sudden now you're handing over your baby to your competitor. When you do a launch, you're handing over your spacecraft, you're very exposed. The market just needs alternatives, and right now there is no alternative to medium launch. We think that Neutron is not just going to be another solution - we think it's going to be the most optimized, most cost-effective vehicle out there because Neutron has been designed from the ground up in the last four years, whereas Falcon 9 was designed 20 years ago. It's been iterated, it's a great vehicle, but we think we can bring something new and innovative to the market in addition to more capacity and choice. ### Neutron vs. Falcon 9 **Christine Leog:** [6:54] That's really helpful. Looking back at Electron with 300 kgs of payload, Neutron at 8,000 kilogram, and you're looking at Falcon 9 at 22,800 kg - there's still a fairly big size difference between Neutron and Falcon 9. When you think about the marketplace, you made an obvious case for Electron where it's truly for pathfinding or when you're not ready for full scale and it's cheap for that access point. But why would customers want to choose Neutron over Falcon 9? Is that the real comparison? And if Neutron costs come down enough, could we see a cannibalization from Electron? Can you describe the relationship between the customer decision to use one over the other? You do make a great point that a monopolistic offering is not necessarily desired - you want to have options. It sucks to be the stranded astronauts on the ISS - wish they had another option to come back home. But understanding the differences would be helpful - how are your customers thinking about that? **Adam Spice:** [8:01] Just to clarify, Neutron has several different modes. If we're going for a downrange landing comparable to a Falcon 9, it'll actually deploy 13 tons. So 8 tons is reusable back to the pad. You can think about it as: - 15 tons expendable - 13 tons return downrange landing - 8 tons return directly to the pad When you get to 13 tons reusable, that's really more the comparison to the Falcon 9. When you think about how customers are making their decisions, a lot of it's just - right now from what we're hearing back from customers, if you want to get on a Falcon 9 launch, you're looking at a two-year waiting list. The capacity is very constrained. People have been looking for more capacity to come on the market. You can look at Amazon Kuiper, one of the biggest new constellations coming along. They basically entered into launch agreements with three vendors: Blue Origin, Ariane 6, and ULA. For all three operators, they're launching on new vehicles. Vulcan launched once, Ariane 6 has launched once, and Blue's yet to launch New Glenn. It tells you the state of the market when the choices being made are for things that don't have a lot of heritage or in some cases, no heritage. Heritage is super important. I think that's one of the huge advantages that Electron has - we've launched it 52 times, we've got a great success rate. We're taking a lot of that technology and embedding it into Neutron. Things we're carrying forward to de-risk the program are our tremendous experience with carbon composite structures - tanks, structures, fairings - that's being leveraged from what we've done with Electron. On the avionics side, that's just scaling from Electron because the electronics don't really care whether it's a 300 kg payload capable rocket or a 15 ton capable rocket. We've managed to find ways to leverage what we've done very successfully in the past and extend that heritage to a new vehicle. A lot of customers that we're talking to now that are considering Neutron for launch - they don't really look at us as unproven or question "will this work?" Everyone takes for granted that Neutron is going to work. The question is the timeframe for getting their payloads on orbit. It's a little bit of a game where the customer doesn't want to commit to a rocket that might be late. And in our industry, late doesn't mean a few months late - it means years normally. So they've got satellites ready to go and they committed to a rocket that ultimately got to the pad too late. Alternatively, we've had issues where we've had rockets ready to go and customers don't show up with their payloads because they've had an issue with their spacecraft. It's a really interesting dance that launch providers and satellite manufacturers and constellation operators have to do - it all has to come together. I think we get a lot of credit for the heritage we bring from Electron. That's going to help us build a really healthy backlog for Neutron faster than you might see with other newcomers or even established players that haven't scaled before in the same way. If you look at ULA, for example - never had a failure, great success rate, 150+ launches, no failures, but it's historically been an expensive vehicle and hasn't launched all that frequently between Atlas and Delta. What we bring is the promise to be another SpaceX alternative where you launch very effectively and cost-effectively at a very high cadence. That's really what the market needs right now - it needs cadence because there's just not enough capacity out there. ### Electron Capacity and Cadence **Christine Leog:** [11:47] For cadence, how high in volume could Electron go? **Adam Spice:** [11:52] We originally scaled our factories to do a launch per week, so we have the footprint to be able to do 50 launches per year. We can launch 128 times out of New Zealand alone. We have launch facilities in New Zealand plus we have launch facilities in Wallops Island, Virginia. I don't think that we're going to be the limiting factor right now. We see demand where it's not hard to envision 20+ or 30+ launches per year, but we really don't see the demand for 50 launches yet. So we're not facilities-limited, it's really market demand. Everyone's been waiting for this big hockey stick in the LEO market. There has been a hockey stick, but to date the biggest hockey stick has come from SpaceX Starlink, which nobody else gets to participate in. There's been this huge industry-changing step up in volume, but it's been basically walled off to one provider. They make their own subsystems for their satellites, they make their own rocket and launch capabilities, so it's not been actionable for a lot of people in the ecosystem. When you start talking about other platforms like the SDA platforms for the government or things like Kuiper - those represent the real opportunity to grow the ecosystem in a much more meaningful way where more people can play. **Christine Leog:** [13:24] What you said is real. I don't think people realize more than half the satellites orbiting around Earth are Starlink satellites today - 6,000 of 9,000 are the numbers that I'm familiar with. So the majority of satellites out there are by one company who's built them and launched them. It's really kind of stunning. ### The Business Case Beyond SpaceX **Christine Leog:** [13:43] I think that's why the question from investors really is: is there room for companies outside of SpaceX? You're making the good argument that government customers don't want a monopoly - they want diversity of product, and that's what you're offering. Maybe going back towards profitability of Electron, because it is an established alternative and you do have a customer book. The revenue recognition can be pretty lumpy for launch, but I don't think most investors understand that you actually receive most of the cash up front before launch. Can you talk about the sales cycle of Electron, revenue recognition method and cash, and also at what point, what is the mature profitability or cash profitability of an Electron launch? ### Launch Business Economics **Adam Spice:** [14:39] The launch business is very fixed cost intensive. You've got a lot of standing cost because whether you're making one rocket a month or four rockets a month, you could probably make four rockets a month with - the staffing part of it is maybe the most variable, but at the same time you need a certain amount of baseline staff whether you're making one or making four. You want to put your labor to its most effective use with scale. But you have standing costs like your launch ranges - whether you launch once or never, you still have those standing fixed costs. You've got health and safety teams, you've got all your quality teams. The rocket business is very fixed cost intensive, so cadence is really probably the most important driver to your margin profile. We've been fortunate - our selling price has gone up. ASPs have increased pretty steadily over the last several years. When I joined the company back in 2018, we were selling Electrons for about $5 million. Now our backlog is priced around $8.2 million - some higher, some lower depending on the mission requirements. That's been a nice increase. Our production costs have gone way down. We've gotten quite a bit of efficiencies on the BOM side - we've gotten better with things like yield, bringing the labor hours down. But probably the biggest thing is just amortizing the cost of the buildings and the machinery and all the different things that we can utilize over a greater number of units. In the last quarter, I believe our non-GAAP and GAAP gross margins were pretty close, around the low 30s. We see a path which is consistent with what we talked about when we became public - we could see that being a 45 to 50 point gross margin business. For us, cash margin is pretty similar - the only things we really have in our model that are a little bit different are reasonable depreciation and amortization and a little bit of stock-based comp in the mix. I think that's a product line that, once we get to two launches per month, that's the sweet spot where we really can focus on north of 40 points of gross margin contribution from that product line. There's not a lot of R&D going to that anymore, so a lot of that just flows to the bottom line. ### Reusability Considerations **Christine Leog:** [16:53] Adam, do you need reusability on the first stage to be a factor to get to that higher gross margin, or is this just volume and cost efficiency of manufacturing? **Adam Spice:** [17:06] I think we can get there without reusability. I had my doubts before, but I think now if we were to get to a consistent cadence where we're launching - if we're in the 30 launches per year range, I think pretty safely we could get there without reusability. Reusability just gives you an extra buffer. What does that translate into? I think reusability probably adds maybe around 5 basis points of margin improvement once we get that dialed in, because you can't do reusability on every launch. It depends on trajectories - how far offshore are you going, what's the payload requirement for the rocket. The recovery equipment actually consumes some of the mass throw capability of the rocket, about 40 kgs worth. So if you've got a 300 kg payload that's going to take up the full capacity of the rocket, you can't really use a reusable version because you wouldn't have the capacity. It's a mix, and we've kind of always been modeling around 50% of our Electron launches to be reusable. That gets you into that 50% gross margin category, maybe a little bit above. **Christine Leog:** [18:11] Last year you switched from the helicopter recovery, which was pretty cool to see when you catch the rocket with the helicopters, to an ocean recovery. Can you talk about the decision in hindsight - why you moved over to ocean recovery, how that's progressing, and is 50% a realistic run rate with what you've experienced so far? ### Ocean Recovery Strategy **Adam Spice:** [18:39] I'm confident that we're going to get to margins north of 40 points once we get the cadence up to at least two rockets per month. The recovery was interesting because nothing involving helicopters is straightforward or cheap. Helicopters are very expensive. We figured out that we'll have a higher percentage of launches that can be recovered if we're using marine recovery because you can go further offshore. You have limitations with the helicopter - how far you can go before you run out of fuel and come back. So it just seemed like that was the better way to do it. We had to make some further investments in waterproofing the stage and so forth, but that seemed to be a pretty common-sense approach for us to increase the percentage of missions that we could actually go after recovery on - just ease of use, if you will. To come back to your question on revenue recognition - Rev on launch is challenging because it's basically point in time. Even though you're collecting cash against milestones as you're building the rocket for the customer and executing on the mission, you don't get to recognize the revenue until you actually push the intentional ignition button. But at that point, you've collected 90% of the cash - there's typically only 10% to go. The way it works is by the time we actually start bolting a rocket together, we've collected about 60% of the mission cash. It's a pretty positive working capital model. Things are going to get even more lumpy with Neutron because now you're talking about an ASP that's around $55 million, and you're still going to have that same lumpy revenue recognition model - still collecting the cash in advance, but launch is always going to be lumpy. It's going to be lumpy because of the way that you recognize the revenue, but it's also going to be lumpy because you're dependent upon your customer showing up with their payload. Every customer we work with wants to get their stuff on orbit as fast as possible, so it's not like they're dragging their feet to deliver us a payload. But they'll have a project plan that would say they can deliver the spacecraft in October, but then when it's going through final testing in August/September, an issue comes up with a subsystem on the satellite. They've got to take it out, demate it, fix it, and then get it back to you. All the best intentions in giving you schedule dates often disappoint because space is hard and with satellites, you just never know if a radio is going to fail in testing or some other issue. All we can do is really be ready with a rocket ready to go, and fortunately we've never had a customer waiting on a rocket - we've always had rockets ready waiting for satellites. ### Pricing Strategy **Christine Leog:** [21:24] Thank you for that color. Maybe going back to pricing - a few years ago you said it's a $5 million rocket, now it's $8.2 million. Also in that time period, the market had anticipated there would be more small launch providers in the market that aren't in existence anymore. In terms of pricing, is $8.2 million the peak? Could you see further upside especially since we haven't really seen any other successful, consistent small rocket providers out there? **Adam Spice:** [21:55] We are pushing the envelope - we want to push price to the edge as far as we can. At some point you start running into limitations - there are no free lunches in space. When you think about competition, people say we compete with Transporter for example, ride-share missions, which is kind of true. At the end of the day, if we price Electron too high, at some point customers will say it's worth making the investment in putting more propulsion on their spacecraft so they can do orbit raises. Maybe if they spend more on the spacecraft, they don't have to spend as much on getting a precise orbital insertion from the launch provider. Everything is a trade-off. We're always trying to find the limits of where we can price, and I think it feels right. Given where our margins are getting to - would we love to have 70 points of gross margin on Electron? Yeah, that'd be great, but given the fixed cost nature of launch, volume probably is more important than trying to eke out the next few hundred thousand dollars on launch ASP. ### Neutron Strategy and Backlog **Christine Leog:** [23:06] With Electron at the run rate of two per month, a 40-50% gross margin with a similar cash margin - that's an attractive place for that program. Maybe shifting gears towards Neutron - your sales approach had been different. You and Peter had been very clear that when you approach Neutron, you don't want to do it the same way you did Electron in terms of getting low dollar value in the backlog. How is this strategy going? At what point, how close to entry to service or launch service do you anticipate Neutron backlog to start building, and how have conversations been with your potential customers? **Adam Spice:** [23:48] The dynamics with Neutron are quite different than the dynamics with Electron. As you pointed out earlier, when Electron was coming to market, there were like 140 aspirational small launch companies - the PowerPoint space companies. Most of them didn't really influence pricing, but what did influence pricing for a while were people like Astra and Virgin who were teetering on the brink of failure. They were doing Hail Mary things - that was uncomfortable, but they're gone now. The great thing about this business is you can make all kinds of promises all day long, but at some point, you've got to deliver a working rocket and you're fighting physics - it's tough. With Neutron, what we're finding is there aren't 140 medium launch vehicles coming to market. There are very few. We talked about Falcon 9 really being the only real operational high-cadence vehicle today. There are a few others trying to put together programs, but we don't see the pricing pressure at all like we saw with Electron. The launch providers I mentioned earlier that are supporting Kuiper, they're not necessarily known as being low-cost providers or high-cadence providers. In a lot of ways, SpaceX sets the market. A Falcon 9 has recently gone for an off-the-shelf launch of $67-70 million. So we feel pretty good about the pricing dynamic - we don't really have any kamikaze pricing out there at this point. ### Space Systems Business **Christine Leog:** [25:18] Moving from launch, you've talked about being a full provider, space solutions business, and actually the Space Systems business is a larger portion of the company now. Can you talk about the opportunities you're seeing there? What are your core competencies, and you've built out this capability through acquisitions in the past few years - where are you in the portfolio and where does this need to go to be the truly end-to-end solution that you highlighted earlier? **Adam Spice:** [25:49] That's one part of the business - I always knew we were going to be successful in small launch, I don't have a lot of doubt that we'll be successful in medium launch. The space systems stuff really came out as a bit of a surprise to me - how quickly that's grown and not only how quickly but the level of capabilities that we've put together. Some of it's organic, some of it's through acquisition, but the fact that now we're a prime contractor for US Government missions - we just won earlier this year the half-billion dollar SDA program. I remember when you guys were building your SCIF and your facility in California. It's amazing what's come along. We're now priming really meaningful missions with very sophisticated spacecraft. We just shipped a couple weeks ago our ESCAPADE spacecraft that are going to go to Mars. One thing we've done - Pete's very consistent, and when he has a vision of how to put that vision into action, it's a lot of very practical steps along the way. He's very disciplined in that way. He said look, every program that I take on with a customer, not only do I want to make money for the company, but it has to teach us something along the way that ultimately we're going to put to use for ourselves in putting our own assets on orbit and creating recurring revenue streams from that. Ultimately, our vision for Rocket Lab doesn't look all that dissimilar to the SpaceX vision - a super capable reusable launch vehicle with an application that you support with it. Certainly Neutron is going to be used to deploy other people's payloads, but a big piece of that vision is to deploy our own payloads. Everything that we've done - the reason we took on some of the early satellite missions we built for NASA - kind of paved the way and gave us capabilities for doing very high delta-V to deliver spacecraft into unique orbits like the Moon and Mars. Then we took on programs that were unusual in that they were operating in a very high LEO environment with harsh radiation conditions, long on-orbit life requirements, and high uptime requirements. We took those capabilities and now we're leveraging them for the SDA platforms. All of these things breed into creating an IP portfolio that, when we have Neutron, is the key to unlocking a constellation opportunity for us. We'll be able to build the most sophisticated spacecraft in a very vertically integrated way and deploy those spacecraft super efficiently on our own vehicle. That sounds a lot like SpaceX's model, right? It is essentially that model. At some point in time, we believe that value is going to be recognized because if you look at the value delta right now between ourselves and SpaceX, it's like 100x. Not too far from now, people are going to look and say, "What's fundamentally different about these companies? What can SpaceX do that Rocket Lab really can't do?" I think that's going to be increasingly less distinguishable over time. ### Constellation Ambitions **Christine Leog:** [28:57] SpaceX has 6,000 of the 9,000 satellites - how big could Rocket Lab's constellation be? **Adam Spice:** [29:04] I think it really depends. Right now, talking about constellations is difficult to do before you have the launch vehicle because you can't do it without having that. That's why if people ask why everyone is so focused on Neutron when Space Systems is a bigger business, shouldn't we be focused on the next big SDA contract or commercial satellite build contract? When you really dig down into it, they recognize that Neutron is the enabler for the much bigger picture. Starlink wouldn't be what it is today if they didn't have a reusable Falcon 9. So all eyes are on Neutron, which is the appropriate place for them to be. Once that vehicle is in place, then the aperture of opportunities from a constellation perspective becomes much more clear. **Christine Leog:** [29:54] So it seems like mid next year once Neutron's launching, we should hear from you more about what that constellation vision could look like? ### Future Constellation Vision **Adam Spice:** [30:01] I think it's not necessarily that it has to be a completely organic greenfield opportunity. As a public company, we have a currency, we have the ability to bring value to constellations out there. If you can imagine - if you're a constellation operator, you've got a lot of things to do. You've got to have somebody design a spacecraft for you, or you design it and then have somebody make it. They have to worry about all the supply chain complexity. Then you have to go procure launch, operate the satellite in orbit with all the ground station needs, and then you've got to manage and analyze the data and deliver that to the customer. At the end of the day, what we can provide is we can say, "We can design a spacecraft, we can build a spacecraft, we can provide unfettered launch for those spacecraft, we can operate them on orbit" - which allows the constellation to really do what they do best, which is manage the data and the customer. So I think when people think everything we do might necessarily have to be organic, I don't think that's the case. There could be ample opportunities for inorganic growth and expansion into the applications market through inorganic ways. ### Conclusion **Christine Leog:** [31:14] Thanks Adam. We have time for one or two questions from the audience if there are any? Just raise your hand. Okay, with that - Adam, thank you for coming. We really appreciate all your answers. Good luck with Neutron, looking forward to seeing that launch next year. This concludes the Rocket Lab presentation.