[[Home|🏠]] <span style="color: LightSlateGray">></span> [[Interviews]] <span style="color: LightSlateGray">></span> January 8 2024 **Insider**: [[Peter Beck]],. [[Adam Spice]] **Source**: [Rocket Lab - SDA Beta Award Update](https://www.youtube.com/watch?v=p_4DzLsa6nA) **Date**: January 8 2024  🔗 Backup Link: https://www.youtube.com/watch?v=p_4DzLsa6nA ## 🎙️ Transcript >[!hint] Transcript may contain errors or inaccuracies. [0:01] **Operator:** Hello and welcome to the Rocket Lab discussion of government constellation award. 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. And if you would like to ask a question during this time, simply press star one on your telephone keypad. I will now turn the conference over to Colin Canfield, head of investor relations. Please go ahead. [0:26] **Colin Canfield:** Thank you. Hello everyone. We're glad to have you join us for today's conference call. Before we begin the call, I'd like to remind you that our remarks may contain forward-looking statements that relate to the future performance of the company. And these statements are intended to qualify for the safe harbor protection from liability established by the private securities litigation reform act. Any such statements are not guarantees of future performance, and factors that can influence our results are highlighted in today's press release and others are contained in our filings with the Securities and Exchange Commission. Such statements are based upon information available to the company at the date hereof and are subject to change or future developments except as required by law. The company does not undertake any obligations to update these statements. I'd also like to note that due to quiet period dynamics, we ask that analysts and members of the media limit their questions to today's announcement, as we will not be able to provide any views or updates related to our Q4 2023 results or Q1 2024 financial guidance at this time. This call is also being webcast with a supporting presentation, and a replay and copy of the presentation available on our website. And I'll turn the call over to our chief executive officer, Peter Beck. ### Contract Announcement and Details [1:38] **Peter Beck:** Thanks very much, Colin. I'm very pleased to confirm that we've been selected by the Space Development Agency to be the prime contractor to develop and operate 18 spacecraft in support of SDA's Tranche 2 Transport Layer, at over half a billion dollars in contract value. The award is our largest contract in the company's history. It affirms our vertical integration strategy across space systems and establishes Rocket Lab's position as a leading satellite prime contractor providing supply chain diversity to the Department of Defense and commercial constellations alike. Turning to the award specifics, the contract comprises a $489 million base plus $26 million of incentives and options. The bulk of the work is expected to be carried out through the next three years, with the satellites due to launch in 2027. Rocket Lab will then handle operations of the constellation on orbit through to 2030, with potential operations work carrying us through to 2033. As prime contractor, Rocket Lab will lead the design, development, production, test, and operations of the satellites, including procurement and integration of the payload subsystems and a demonstration of a vertical integration strategy at work. All 18 spacecraft will feature subsystems and components built in-house by Rocket Lab, including solar panels, structures, star trackers, reaction wheels, radios, flight software, avionics, and launch dispensers. The constellation will be built at our advanced spacecraft development and manufacturing complex in Long Beach, California. With the addition of the T2 Beta contract, we now have more than 40 spacecraft in backlog. We view the T2 Beta as a foundational win for Rocket Lab for several reasons: 1. It confirms Rocket Lab's ability to capture high quality, high value work thanks to our previous investments in the space systems business, both organic and inorganic. 2. It significantly derisks the growth and earnings outlook of our space systems businesses as well as the overall company. 3. The work scope confirms Rocket Lab's role as a disruptive, commercially developed new government prime. We will look forward to cementing our position as a prime with this win and ongoing new opportunities. ### Mission Overview Rocket Lab solves hard problems, and shedding a little bit more color on the mission itself, SDA's beta constellation will serve as the backbone for the joint all-domain command and control infrastructure, providing low latency data transport, encryption, and connectivity for a range of government mission sets including beyond line of sight targeting, missile warning and missile tracking, and advanced missile threat. These are the type of missions Rocket Lab is extremely good at - developing reliable technology that customers know they can rely on to deliver mission success for the nation. From leading humanity's push back to the moon with the CAPSTONE mission for NASA to powering James Webb telescope, to designing and delivering fast and affordable hypersonic launch capabilities, right through to building Global Star's communication constellations, Rocket Lab's launch and spacecraft solutions are key enablers for the global space market. We're honored that SDA has placed their trust in us to deliver a highly capable spacecraft for such a critically important constellation, and we look forward to working with the SDA team in the coming weeks, months, and years as we bring these spacecraft to life. With that, I'd like to turn over the call to Adam Spice, who can discuss our space system strategy and some of the dynamics to consider with respect to the budget outlook. ### Space Systems Strategy and Budget Outlook [5:20] **Adam Spice:** Thanks, Peter. This contract is the culmination of our thoughtful and deliberate investment in our space systems business, where we either acquired key space technologies or invested in them organically as a means to deliver industry-leading quality, performance, and schedule. In terms of these 18 satellites specifically, our constellation award includes all of the subcomponents we've previously acquired or developed internally, including solar, star trackers, reaction wheels, radios, launch dispensers, and other critical technologies. We view this as a fundamental proof point of our investment strategy as well as the government's pivot to commercially developed space programs that are able to deliver best value for the customer and for taxpayers. Now turning to some of the related budget dynamics to consider. We view not just this award but SDA's program portfolio as a whole as a generational growth opportunity for Rocket Lab. As you can see from US government budget forecasts that can be found in the Space Force's program acquisition materials, it's clear that government budgets cannot just grow quickly with billions of dollars of opportunities, but that the outlook is increasing year on year as US government continues to pivot to commercially developed satellite architectures. In addition to Beta, we view Rocket Lab as uniquely positioned to compete for and support other key programs beyond Transport. While we prefer to take on the role of prime contractor as a means to have more control over cost and schedule certainty, we'll also continue to be a critical partner to the broader space ecosystem as we alleviate key supply chain constraints, such as currently the case for space-grade solar capacity. And with that, I'd like to turn the call over to the operator for Q&A. ### Question and Answer Session [7:02] **Operator:** Thank you, ladies and gentlemen. If you have a question, please press star one on your telephone keypad. If you wish to withdraw your question, simply press star one again. ### SDA Business Strategy [7:15] **Operator:** Your first question comes from the line of Eric Resmucin of Stifel. Your line is open. **Eric Resmucin:** Yeah, thanks and congrats on the award. Adam, you may have sort of alluded to this, but how should we think about this award and the business with SDA in the context of your space systems business? Are you planning on targeting all the other remaining SDA tranches, or how selective are you planning on being for that? **Adam Spice:** Yeah Eric, we're always selective in the programs that we pursue. I think it's no different in the case of SDA. I think we believe that we've got some unique capabilities that can execute on specific elements of their overall program. And we really do see there are other opportunities where we can add value to SDA. So we're certainly not stopping at Beta. We'll be continuing to make proposals on other elements of their initiatives. And we also think there are similar opportunities outside of SDA within US government programs that we can bring similar kind of innovation and performance to. So yeah, we're definitely not stopping at Beta, but I think this is a huge validation of the fact that these opportunities are real for Rocket Lab and we can do meaningful capture against those. **Eric Resmucin:** Gotcha. And the gamma portion just went out for solicitation and I think responses are due in a couple of weeks. Can you confirm that you had put in a bid for that as well? **Adam Spice:** It's not our practice to comment on things that we've not proactively announced. So we're not going to respond to gamma at this point, but there'll be more to come on that in the future. **Eric Resmucin:** And can you comment on how big the satellites are? You're obviously providing the buses and there's a lot of integration of all the components and subsystems that you've built and acquired. But are you also supplying any of the payload? **Peter Beck:** Yeah, as prime contractor, we're activating a number of suppliers to support the mission. As I think everybody's aware, Rocket Lab currently doesn't necessarily provide payloads. So we have a good supplier for those as prime contractor. And the spacecraft in scale, it's not dissimilar in size to the SDA Global Star platform, though sort of few hundred kilograms, multi-meter wingspan for solar arrays. **Eric Resmucin:** My last one, Adam, just for you. What sort of gross margins are you targeting for this program, and then maybe as it relates to future business with SDA, what are the thresholds you need to preserve your internal targets? **Adam Spice:** We've set out what our longer-term non-GAAP gross margin targets are for launch and for space systems, and I would say that this contract fits within the overall modeling that we've done. Across our portfolio of space systems offerings, we've got some materially higher gross margin parts of our business which are more related to the merchant components that we sell into the market. Those usually come at pretty attractive gross margins. When we go to these larger total platform solution sales, we typically model a lower gross margin profile than the merchant component sales, but overall they come to a blended gross margin target that we've long talked about, which is north of 40 points. The overall model for space systems doesn't get changed by this—it's actually supportive of this. The overall gross margin is going to be highly dependent upon the mix of merchant component sales versus these more strategic large platform opportunities, which do come at a lower gross margin. **Eric Resmucin:** Great. Thanks. Congrats. ### Revenue Recognition and Manufacturing Capacity [11:45] **Operator:** Your next question comes from the line of Suji Desilva with Roth MKM. Your line is open. **Suji Desilva:** Hi Peter, Hi Adam. Congratulations on the win here. Maybe first on the revenue, the $489 million deal size. How is that going to flow through, Adam? Is that leaning toward when the satellites are delivered, or is it relatively even throughout the three-year lifespan of the work? **Adam Spice:** I wouldn't say it's even, but it will be recognized over the life of the work. It's basically going to be modeled on and recognized on a kind of cost of completion. Yes, there are milestones—milestones for the most part drive cash collection and invoicing. Revenue recognition is driven by the amount of effort expended towards completing the program. So it'll be more linear, we suspect, than what we've experienced to date on the Global Star MDA contract, but not entirely dissimilar. And this contract, like almost any other program like it, is more backend loaded. So again, more linear than the Global Star MDA, but still backend loaded. We do expect some revenue recognition from the program in 2024, but we'll speak more to that likely on our upcoming Q4 results call in February. **Suji Desilva:** Okay. And then the other question I have is on the capacity for satellite manufacturing. I'm just thinking you have two programs now, more in the pipeline potentially. How should we think about the kind of capacity you have for building x number of satellites per year, or is that not the right way to think about it? Is it more program specific? How should we think about your capacity building? **Peter Beck:** I can take that one, Adam. We've made pretty significant investments in our manufacturing capabilities. We recently moved all of the engine manufacturing over to the engine development center, the Virgin Orbit old building, and freed that whole Long Beach facility up for satellite manufacturing. There's some small capex investments required, but largely that's all in place. And we have two HALO missions, four VA missions, and of course all of the Global Star MDA. So we've really been scaling that over the last couple of years as it is. **Suji Desilva:** All right, thanks guys. ### Investment and Expense Ramp [14:18] **Operator:** Your next question comes from the line of Edison Yu with Deutsche Bank. Your line is open. **Edison Yu:** Hey, congrats on the win. Just a followup on the last question. Are we expecting the investment or expenses to have to ramp up a little bit before the rev picks up, or how do we think about that aspect? **Adam Spice:** Yeah Edison, I think they're largely going to be in concert with each other. So we're not expecting like a large upfront preloaded R&D element of this contract. It's pretty much going to go pretty much in tandem with the rev rec. So from that perspective, it should be pretty coupled and linear. **Edison Yu:** Gotcha. And then maybe can you provide a little color on the bidding process? What kind of key factors do you think gave you the win? I know you highlighted vertical integration, and maybe were there any learnings that you took away from Global Star that you sort of applied to this that gave you a better position, better edge? **Peter Beck:** I think there's a couple of key things here. One is supply chain diversity. SDA and the US government in general is looking for more and more supply chain diversity, especially in non-traditional commercial providers. Our execution history—of course the type of spacecraft that we build are not trivial, simple spacecraft. All of the spacecraft we build, whether it's going to Mars or any Global Star work, they're all very difficult spacecraft. So that's where we excel. And then our ability to partner with really discriminating payloads and bring payload partners along that provide solutions that at the end of the day, that's where the rubber hits the road. ### Development Scope and Prime Contractor Role [16:36] **Operator:** Your next question comes from the line of Jason Gerski with City. Your line is open. **Jason Gerski:** Hey, good afternoon guys. Could you talk a little bit about the scope of development that will need to be done on this relative to the overall program? And then maybe comment a little bit about where that development work has to happen. Is it software, hardware? Kind of just describe the scope of the problem that you're all going to be solving as you go through this work. **Peter Beck:** Jason, I'd probably describe it in the fact that this is kind of an iteration on a semi-standard bus platform for us. So from the bus perspective, we're able to leverage a lot of the learnings from similar kind of complexity programs like the SDA Global Star program. For us, we're starting to get good at combining these elements into—there's no such thing as a truly standardized bus—but as close as you can to a standardized platform. So as far as that kind of scope diversity or difference, that's not tremendous. Obviously, integrating the payload—that's where all of the magic sources, and making sure all those payload elements do as they should and the spacecraft operates as a complete system. But as you notice from the award, we're not just building a bus, we're providing the entire solution and even operating it. So that's where the scope's a little bit different for us in the past. **Adam Spice:** And Jason, it's probably important to notice that we're also exercising a lot of similar elements of the supply chain for this as with other programs. So there's a lot of synergies across what we've done on other programs, so we're not having to reinvent the wheel. A lot of standing IP that's been developed not only for our internal well-supplied subsystems but also from our subsystem vendors. And I think that helps derisk the program and really minimize the amount of upfront R&D that was kind of alluded to by maybe a question from Suji earlier. **Jason Gerski:** Right, right. Okay, great. And on the payload itself, have you named the supplier? Apologies if I missed that, and have you worked with this particular payload or this provider in the past? **Peter Beck:** We haven't named the payload provider yet, Jason. I'm sure that will come out in the fullness of time. And I think that that is one of the key fundamental elements of being a good prime is building those good relationships with those payload providers. And so out of all of this, this program, that's a thing that I think is probably significant and important here is Rocket Lab has moved into a prime position rather than, more typically at least, a bus provider or elements of a spacecraft. This is Rocket Lab from the very, very beginning to the very, very last bit of data that comes down from the spacecraft in many years time. **Jason Gerski:** Right, okay, great. That's helpful. And maybe Adam, last one from you since you brought it up, or maybe it was in response to a question, but the pipeline—can you talk a little bit more about maybe the size of the backlog that you guys—I mean the pipeline that you're all chasing? You emphasized in your prepared remarks a little bit more emphasis on government work, and we all look at the same budgets that you do, and it's pretty clear the SDA budgets are going up and to the right. So what is addressable to you all in those government budgets that you're talking about? How big's the pipeline there? And then on the commercial side, maybe just give us an update on what you're seeing in the commercial market. Are there opportunities there as well in addition to the government work? **Adam Spice:** Jason, as far as the pipeline, we normally don't talk too much about size of pipeline because we leave that to folks that haven't quite established the ability to close on programs, which just speak to size of opportunities. It is fair to say that we have proposals out on sizable programs that span the different agencies within US government and also some commercial opportunities as well. So our pipeline is large—we're chasing even larger opportunities than are represented by this specific contract. As far as what's actionable within that overall US government budget, I would say it just got a lot larger. This was our first time that we could close on as a prime, as Pete mentioned, and so at this point we believe that we're able to address the most complex, largest contracts that are available for bid. I think this firmly puts us in the same peer group as much larger, more established government primes. And again just highlights that the government believes we have the capabilities to execute on these very strategic programs. And on the commercial side, we are absolutely going after similarly sized, in some cases larger, opportunities to be prime for very complex missions. I would say that the government programs are a little bit easier to have a little bit more confidence in because all these commercial programs, for the most part, there's financing risk involved with those. One of the reasons why we focused a lot on landing this particular SDA program and other government programs is that even though there's never 100% budget certainty even within those US government programs, there's a lot more certainty. And we really want to focus on building a high quality backlog and pipeline that basically isn't subject to the financing volatilities that have been experienced in this market over the last couple of years. So we do have a diversity of opportunities we're chasing. They're large in scale. And I think this is just kind of a validation of the types of things that we can go pursue and actually close on. **Jason Gerski:** Absolutely. Thank you guys. ### Satellite Bus Details [23:24] **Operator:** Your next question comes from the line of Garrett Rim with Aviation Week. Your line is open. **Garrett Rim:** Hi. Yes, this is Garrett with Aviation Week. I just wanted some clarification. This satellite bus, it perhaps you said it, but excuse me. This is the same one as the Global Star satellite bus? And what's the satellite bus's name? I mean, trying to get some understanding of what product this is. **Peter Beck:** Hey Garrett. It's a derivative of the Global Star bus. It's not the same—it's a derivative of. And I think your confusion with a naming scheme is well understood, and I think we'll be able to resolve some of that shortly. **Garrett Rim:** So just to clarify, there's no name as of now for this product? No public name? **Peter Beck:** There is no publicly announced name for this product. That's correct. **Garrett Rim:** Okay, thanks. ### Neutron Launch Vehicle Prospects [24:31] **Operator:** Your next question comes from the line of Andre Madrid with Bank of America. Your line is open. **Andre Madrid:** Hey everyone, thanks for taking my question. You talked a lot about the importance of vertical integration in winning the award, and with that thought in mind, how should we think about the prospect of Neutron potentially winning work on the launch side of this SDA work? **Peter Beck:** Hey Andre. Well, obviously launch is yet to be bid. But it's certainly within a time frame that we hope that Neutron would be available and certified for launches. So we certainly will be putting Neutron forward as a potential launch provider for this program. **Andre Madrid:** Gotcha, gotcha. I'll leave it at one. I think everyone took care of everything else. So thanks guys. ### Balance Between Space Systems and Launch Business [25:38] **Operator:** Your next question comes from the line of Micah Maidenberg with WSJ. Your line is open. **Micah Maidenberg:** Hey, thank you very much. Hey Peter, just to step back a little—this is the biggest ever contract for Rocket Lab, the deal in space systems. You've already got a bigger backlog as of the third quarter than launch there. Could you just explain a little bit, having landed this, how you're thinking about balancing the space systems business with launch, given the work ahead for SDA and the other space systems opportunities you guys have talked about on the call? Thanks. **Peter Beck:** Thanks Michael, that's a great question. The two elements of the business run relatively independent to each other, although we do have some fungibility of resources that we'll push and pull across different programs. But space systems runs with a lot of different people, different facilities in general. So not really affecting, for example, the Neutron development program and the different facilities as well. But I think your question is actually important on a couple of other factors. We always said that the goal here is to ultimately provide services from space, and in order to do that, you need launch, you need to be able to build spacecraft at scale, and you need to be able to deploy and operate those. I think this win is great for a number of reasons, but one, I think it really proves the model as well. Not only does it prove the vertical integration model, it proves that if you have all these supply chain elements internally, you can have supply chain certainty and diversity. But it also proves that ultimately, if you can build spacecraft at scale—complex spacecraft at scale—and you have your own launch vehicle, then you can play in a much bigger pie. And the fact that we're not just building these spacecraft but we're going to be operating them further goes to what we've been saying all along, which is ultimately we're going to provide service infrastructure from orbit. And this is just the next methodical step along that journey. **Micah Maidenberg:** But just one quick followup, Peter. Do you think having Neutron in development helped you win this contract? I know you're going to put it forward, as you just said a moment ago, because that's not part of this deal right now. **Peter Beck:** No, I don't think that had a meaningful element to this contract. We're evaluated on the spacecraft elements, not launch elements. **Micah Maidenberg:** Okay. Thanks a lot. ### Future Acquisition Opportunities [28:52] **Operator:** Once again ladies and gentlemen, if you have a question, it is star one on your telephone keypad. Your next question comes from the line of Aria Alamal Hod with TechCrunch. Your line is open. **Aria Alamal Hod:** Hi. Congratulations on this contract. There's been much talk on the call about vertical integration. I'm curious, Peter, are there any other subsystem components that you think are sort of ripe for acquisition or that remain the biggest bottlenecks to building spacecraft at scale? Thanks. **Peter Beck:** Yes. And to answer your question, yes, I think there are, and we'll continue to be opportunistic in those potential acquisitions. But we also continue to invest heavily in developing some of our own capabilities in those areas. I think the large successful space companies in the future are going to be able to do a lot of that stuff in house at scale, and we continue to invest in those things. And I guess the following question that people ask is "what are they?" And I'm kind of hesitant to go into detail on this call, but there are some obvious elements that, if you pull apart a spacecraft, are still things Rocket Lab purchases from other folks and that are supply chain constrained. So we'll look to further derisk those either through acquisitions or organic development. ### Contract Value Per Satellite [30:39] **Operator:** Your next question is a followup from Andre Madrid of Bank of America. Your line is open. **Andre Madrid:** Hey yes. One followup if I may. If you look at the contract value per satellite relative to the other awardees for Tranche 2, it looks like it's actually higher on a per-sat basis. Is there something unique to the platform or to what you're offering that's driving that discrepancy? I think I did the math and it's about like $28 million per sat for you guys versus the others which are probably high teens, low 20s. **Peter Beck:** The kind of way to think about this is what's the best value for the government. It's a very complex payload in the spacecraft, and of course you see economies at scale when we're talking dozens and dozens of satellites. So there is some economy of scale that kicks in when you get to 25+ spacecraft. Down at the number that we're building, you lose some economy of scale. But I would say it's a cross between that and also this is a deeply capable spacecraft. **Adam Spice:** I think Andre, each bidder and each person that goes after this has different things they bring to the table. I think the fact that clearly the government customer in this case valued some of the uniquenesses that we brought to the table. What we strive for is not just to be cost competitive but also to derisk program timelines and deliverables. Everyone's in a different position to kind of realize value based on what they bring to the table. And in this case, we brought sufficient value to the table in areas that the customer really valued in order for us to win the award. We're always looking at ways to bring down cost, and as Pete mentioned, scale is one of those things. As we continue to go after larger and more awards from these types of customers, I think we'll be able to bring more of those synergies to our bids and hopefully let the customer realize the lowest total cost and highest quality platform. **Andre Madrid:** Gotcha, gotcha. That's all very helpful. Thanks guys. [33:11] **Operator:** There are no further questions at this time. This will conclude today's conference call. We thank you for joining. You may now disconnect your lines.