[[Home|🏠]] <span style="color: LightSlateGray">></span> [[Interviews]] <span style="color: LightSlateGray">></span> June 4 2024 **Insider**: [[Adam Spice]] **Source**: [Stifel 2024 Cross Sector Insight Conference](https://www.youtube.com/watch?v=CyWKcnxHoN4) **Date**: June 4 2024  🔗 Backup Link: https://www.youtube.com/watch?v=CyWKcnxHoN4 ## 🎙️ Transcript >[!hint] Transcript may contain errors or inaccuracies. **[0:00]** **Interviewer:** Well Adam, thanks for coming, thanks for having us. Appreciate it. Maybe we just sort of start off with the recent results Q1. I think you had very good strong year-over-year growth, steady gross margins, but maybe just sort of unpack the quarter. Obviously, you're absorbing a lot of costs for the Neutron rocket, but maybe just provide some of the highlights for the quarter if you don't mind? **Adam Nelson:** Yeah, sure. I think Q1 is showing the strength that we have in the model where it's a diversified business. When people think of Rocket Lab, they think of rockets, which makes sense - it's our heritage. We do have the most frequently launched small dedicated rocket in the market. We've launched it 48 times. We actually have another launch scheduled for this evening where we're launching the second NASA payload in about less than two weeks. So it'll be our third launch in the quarter. In our guidance, we pointed to four launches in the quarter with potential for a fifth, but four was the baseline in our guide. Launch represents about about a third of our revenue, maybe a little bit less than that right now, with space systems making up the remaining element of our revenue. So if you think of our business in two segments, you've got the launch segment which is about a third, space systems which is about two-thirds. Within launch, we have the Electron launch vehicle that's launching today and that's driving all the revenue there, but we're deep in the development cycle of a new larger launch vehicle that'll compete directly with the Falcon 9 called Neutron. That's currently scheduled to launch its first test launch in the middle of next year. As you pointed out, that's driving our financials to a pretty significant degree because it's just a huge project. When we came public back in August of 2021, we said Neutron was going to be roughly a three-year development program and cost between $200 million and $300 million. Right now, we're still in that ballpark - we're still targeting an overall program cost of around a little under $300 million. It's a huge undertaking. It really does create a lot of distortions in the P&L because that first test rocket is all just flowing through R&D. The model will change quite a bit once we get our first paying customer on that vehicle. Then you get the benefit of absorbing those costs into COGS and then advertising a lot of the overhead that you've built to enable not only Electron but Neutron as well. So a lot of good things happen when we start to launch Neutron with paying customers, which right now is first test launch middle of next year, first paying customer likely within six months of that. ### Business Segments and Demand Environment **[2:53]** **Interviewer:** Great. Maybe just sticking with sort of like a general view of the business but the demand environment. You mentioned sort of the split - one-third Neutron, one-third Electron which is your current launch rocket today, and then two-thirds space systems. But maybe sort of break out where you're seeing demand? **Adam Nelson:** There's very strong demand for both. When you look at the Electron launch business, we've got a pretty deep backlog. We have about $200 million of Electron backlog as we speak. Of our billion dollars of backlog, roughly $200 million of that is launch, the remainder is on the space system side, which we'll talk about in a little more detail. You can think of launch as being generally a pretty lumpy business. It's dependent upon customers delivering their payloads to us on time in order for us to meet our targets for each quarter and for the year. The revenue recognition for launch - although you're collecting cash against milestones as you progress towards the launch, you actually don't recognize revenue until you actually hit the intentional ignition to launch the payload for the customer. On the space system side of the business, it's quite a bit more predictable. I think it'll become increasingly predictable as we get some of these larger programs really going in a meaningful way. For example, of the $800 million in backlog at the end of Q1, about 650 million of that $800 million is tied to large programs. The biggest piece of that is a $515 million contract that we won with the Pentagon to support the SDA program where we're the prime contractor. The demand drivers - there's a lot of demand and not a lot of people to compete with us on the Electron side of things because people that have tried to compete on the small dedicated launch side have largely failed. We've seen public examples of that with the Astros and the Emergent Orbits, and then there's similar situations in the private markets with small launchers that have tried to enter that market. On the space system side, I would say there's more competition. There we deal with building full spacecraft solutions like we are for SDA. You're competing against large existing primes like Lockheed, Northrop, L3, and so forth. You also have some smaller satellite manufacturers in there, the likes of Taran and so forth that are really subs to the larger government primes. So I would say demand is probably equally robust, it just has different characteristics - again, more lumpy versus predictable. The space system side really has a bigger TAM that you can tap into. Even within that space systems business, we have a combination of "ship and bill" type of subsystems, and then we have more of the overtime revenue recognition, large systems or subsystems plays like with our solar business. And then of course you've got the much larger programs when you're delivering an entire satellite. But demand is very strong across all of our segments right now. ### Space Systems and Order Momentum **[6:10]** **Interviewer:** Great. Maybe we'll stick within the space systems business. Maybe just talk about the order momentum. Obviously, you have right now - you're in the middle of the MDA Global Star program. But maybe just sort of talk about the types of deals you're working on, and then just if you can update us on the progress of where you stand right now with Global Star. **Adam Nelson:** Yeah, we continue to move up the food chain, going from being a subcontractor to provide the bus to MDA for the Global Star constellation. With the SDA with the Pentagon, we end up being the prime, so we provide not only the bus, which for us is our own bus with a lot of vertically integrated supply of subsystems, but we also procure the payload from third parties. We've announced who some of those parties are that are providing payload capabilities. On the MDA Global Star progress, this year is one of the bigger revenue contributors. We are anticipating about $100 million of revenue from that program, out of a total of $150 million award that was announced a couple years ago. Most of the revenue gets recognized as we start to put these satellites through their assembly, integration and test, and start to deliver hardware to the customers, in this case MDA Global Star. I would say that things have nicely come into focus. It was our first major constellation award, so there's been a little bit of fits and starts, and there were also some funding challenges of Global Star early on in that program. But we expect to continue to deliver under that program with the majority of the hardware being delivered either by the end of this year or early 2025. **Interviewer:** And that's that $100 million in reference of the $143 million of the contract, correct? And that'll be throughout the year and probably more second half weighted or towards the end of the year? **Adam Nelson:** It'll peak in either Q3 or Q4, this contribution, but it's significant. It was significant in Q1, it'll be significant every quarter this year, but yeah, it'll be growing as we progress through Q2, Q3, and then final delivery is expected. We're already in a position to start delivering hardware. I believe we may have already shipped a couple of the satellite buses or parts of those satellite buses to the customer. But I believe all of the hardware really should be delivered before the end of the first half in 2025. ### SDA Contract Progress **[8:33]** **Interviewer:** Okay, okay. And then that revenue stream will fall off and then obviously then you're going to have the SDA award which is $515 million where you're acting as the prime there. Maybe just talk about some of the milestones on that as we think of that award as it progresses through the year. **Adam Nelson:** Yeah, so these programs are pretty typical whether it's a large commercial or a government program. You make your proposal, you're awarded, and then you go through a series of engineering milestones. You go through your CDR, PDR, different ways where the customer is doing a final buy-off on the system level requirements and how you're solving the requirements to get hardware and software. We recognize revenue under large contracts like that under what's called EAC or estimated cost to completion. So essentially if you think about a program that has - let's make some rough numbers here - let's say it's a $500 million program with 30 points of forecasted non-GAAP gross margin. That would indicate you probably have around $350 million of cost. As you're realizing cost against that total estimated cost of $350 million, you're recognizing revenue and gross margin at that program level. It's all about getting through some of the key design reviews, but that's not where the majority of the money is spent. The money is really spent when you start procuring hardware, when you start assembling spacecraft. Typically, you'd see a program that would start off relatively modestly and then it would peak as you're going to start delivering hardware. That particular program will be delivering satellites by end of '26, early 2027. **Interviewer:** And those are supposed to launch sometime in the '27 timeframe, correct? **Adam Nelson:** Yeah, launch has not been awarded for those spacecraft yet. That's again where our whole model where we're bringing this larger vehicle to market - Neutron - ideally we'll be eligible to throw its hat in the ring to not only build the spacecraft but also potentially launching it as well. **Interviewer:** It sounded like from the call you're going to have some revenues this year from the SDA? **Adam Nelson:** Yeah, we had a tiny little sliver of revenue recognized in Q1 against that contract, but I'd say kind of insignificant. That'll grow as we progress through 2024 and become meaningful in '25 and obviously '26 is where you'll have the majority of that revenue recognized. I'd say '25, '26, and early '27. So really the model here is to continue building the backlog with those meaty big contracts. We moved from having some smaller contracts where we're building kind of one-off or maybe onesie-twosies for NASA and other customers. Then we basically got our first small constellation order for a company called Varda Space that was doing in-space pharmaceutical manufacturing. Then we transitioned up to our first major constellation, which was the MDA Global Star, which was $143 million. Then we followed up with more than three and a half times bigger with the SDA contract. We're continuing to put our ores in the water on similarly sized or larger program opportunities. The goal is to continue building that backlog, and we've been successful in more than doubling our backlog year-on-year for the last several years. So our goal would be the same - try to double backlog if we can in 2024 over 2023 and continue that momentum. As you do that, especially with these larger programs, that really starts to derisk your revenue forecast even two-three years out, which is a very nice place to be. ### Backlog and Future Opportunities **[12:38]** **Interviewer:** Maybe then if we could talk about the backlog. Sounds like there's a lot of opportunities you're tracking. You haven't announced anything yet, but it sounds like the team is working on a lot of opportunities. How does that - could it be sort of a same progression that we saw where MDA, you sort of put your toe in the water and it was a great opportunity, sort of validated yourselves more so than what you've already done, but then the SDA really got you as a prime contractor? Is that sort of the level of types of opportunities and even greater that you're looking at? **Adam Nelson:** Yeah, those are exactly the types of opportunities. Once you're in that club of government prime contractors, a lot of doors start to be open for you that weren't there before. So there's a lot of classified work that we're pursuing. And again, if you look at a program like SDA, there's lots of tranches to come. It's a very big program, many billions of dollars. So it's now just a matter of exceeding your customers' expectations on the first bite of the apple, and then hopefully good things come from that. On the commercial side, there are other large commercial constellation opportunities that we're also pursuing. So we're not just solely focused on US government business, but there are other commercial and foreign government opportunities outside of US government. It all starts to build on itself. We've been very fortunate. I just passed my six-year anniversary with the company, and we were pre-revenue then. Now to be looking at the programs that we've won and the very bold programs that we're undertaking like developing Neutron - the business has come much further than I expected only a few years ago. **Interviewer:** So it sounds like things have accelerated, and it's also accelerated because you've also demonstrated success. **Adam Nelson:** It's - look, space is hard, right? We got quite a bit of feedback when we slipped our Neutron schedule by a couple quarters when we did our Q1 call. We're as frustrated as anybody with that kind of a slip, but in the grand scheme of things, when you look at programs that are in some cases more than half a decade late and we start talking about a couple quarters on such a challenging program as building a Neutron launch vehicle, it's unfortunate but it's not completely out of school with what's in fact happening when executing a program like this. We're doing things that have never been done before. Building a 13-ton launch vehicle from scratch within three or four years for $300 million - that was never even contemplated as being possible. You look at the people that are trying to do similar things for orders of magnitude more capital. It goes to our whole capital efficient model where we do things differently because we have to. When you wake up every day and not only is your core business fighting physics to put stuff on orbit, but you're also competing with the likes of SpaceX and Blue Origin and ULA, and you're competing with people that have way deeper pockets than we do, we have to do things differently. It permeates everything that we do in the company to try to be capital efficient and just outmaneuver our competition versus out-capitalizing them, because we'll never do that. ### MDA Global Star vs. SDA Program Technology and Margins **[16:05]** **Interviewer:** Any commonalities between the Global Star MDA and sort of how you can apply that towards SDA, and you know, think about the leverage of the technology, but also then where do margins settle - MDA versus SDA? **Adam Nelson:** Actually, there's a lot of commonality. We had to establish a base of IP for this Global Star MDA opportunity, and we're leveraging a tremendous amount of that on the SDA program. As we put our proposals in for other rounds of SDA and others, we'll continue to leverage that IP portfolio. We've gone through, obviously better than anyone, how tough these equity markets have been. To have two really major R&D programs going on - one developing key fundamental space systems capabilities and also developing Neutron at the same time - it was and continues to be a very difficult thing to do in the capital markets that we face. But we believe it's the right thing to do to position the company to deliver what I think are going to be really attractive returns. We kind of got to get through this investment cycle. That also informed our convert that we raised in February this year - we raised $355 million. A lot of that capital is really earmarked to go do things to help drive the business to grow faster, a lot of inorganic things. We see a tremendous amount of opportunity out there and ways that we can grow the business faster and ultimately get to our end strategic goal of being a true end-to-end space provider. We can design spacecraft, we can manufacture those spacecraft in a very vertically integrated nature with all the subsystems that we build in-house, we can launch those satellites either on Electron or on Neutron, we can operate them on orbit because we do that today for customers, but then ultimately own our own assets on orbit and create a recurring revenue stream off of those assets. We've seen the power in that model as illustrated by SpaceX - what they've done with Starlink. Starlink wouldn't be what it is today if they didn't have a launch vehicle and specifically a reusable launch vehicle that really brings the economics into focus. We think having a launch capability is an imperative. It's an incredibly difficult thing to do - maybe there's two handfuls of organizations in history that have developed reliable launch vehicles, and we're now one of those. If you have that capability, you're in a very strong position to go exercise applications on orbit that you think are particularly attractive because you've got something that other people that you compete with don't have, which is access to space. **[18:51]** **Interviewer:** Margins - it's pretty similar? **Adam Nelson:** Margins on the programs are in the same ballpark. If you look at our space systems business, there's a components business where we sell components and subsystems into other spacecraft manufacturers - customers include Lockheed and Northrop and Airbus and others like that. We have a portfolio that can have anywhere between sub-30% gross margins to 70% gross margins. On the space system side of things, historically people that are priming satellite missions would be very happy with high single-digit, low double-digit gross profit margin. We're different than that - our aspirations are more towards the 30% or higher gross margin range. We're able to target those because we're so much more vertically integrated than a lot of our competition, so it eliminates a lot of the margin stacking that can drag down the margins for people that don't have those subsystem capabilities in-house. ### SolAero Solar Business Progress **[20:02]** **Interviewer:** Great. And then we haven't, I don't think you've talked about SolAero in any sort of detail in a little bit, but where do we stand with SolAero? Obviously that was an acquisition you made a couple of years ago, strategic in nature for the solar cells and panels. You talked about a 30% sort of margin - where are you at now and what's the timeframe on getting there? **Adam Nelson:** When we acquired that business in early 2022, it came with about I think around $150 million of backlog. Around a hundred of that $150 million came from one particularly margin-challenged program. I would say that we're significantly through that program, but there's still more revenue that we've got to flush through the system on that. It was a loss contract - that was something that was put in place before we acquired the company. There's been progress made on getting that gross margin up. When we acquired it, it was in the high single digits. Now it's more solidly in the mid-teens on a blended basis. But all the new business that we've closed in the last two years has all come in at or above our target 30% plus gross margin range. We've accomplished that through getting more efficiency by investing in new reactors that are more efficient than the ones that were in place prior to the acquisition. So we're rebuilding the fleet of reactors, we're putting more automation in place, we're bringing our cost down which is helping obviously on the margin side. But we've also exercised quite a bit of incremental discipline on pricing and how we enter these long-term strategic supply agreements with these large prime contractors. They're much more comfortable operating in the low-margin cost-plus regime. We're not that - we're a firm fixed price provider, and we have very set targets of what our gross margins should be to return reasonable returns for our shareholders. ### Electron Launch Progress and 2024 Outlook **[22:07]** **Interviewer:** Great. Maybe we just pivot over to launch. You have - you think you, you did 48 so far launches on the Electron rocket. You're the second most frequently launched provider. You created the separation, and we've seen a lot of these small launchers wash out in the industry. But you have so far - you'd launched two. Maybe just sort of break out the remainder of this quarter, which launches you have on the docket, and then sort of how the year shapes up. I know you had talked about potentially lowering the initial guidance. **Adam Nelson:** So we launched 10 missions last year. This year we came into the year with a manifest of 22. We have seen, like we always do, some manifest "whack-a-mole" going on where customers will be late showing up with their payloads. We can only launch a rocket when the customer shows up with a payload that's ready to go. All the customers unanimously want to get their assets on orbit as quickly as possible, but they really don't know until they go through their final acceptance testing. When you put the spacecraft in a TVAC and vibe environment and see if something bad happens during those final tests - when they do, it doesn't result in like a two-week shift, it results in months or quarters because they have to reintegrate the spacecraft, remediate the issue, and then reassemble and retest. So it creates quite a bit of volatility. You have some missions that slip to the right. Occasionally you get something that'll pull to the left, but for the most part there is some leakage that goes from period to period as customers underestimate the time it'll take for them to deliver their spacecraft to us, and that affects our manifest. Coming into the year at 22 launches confirmed on the manifest, that's going to be a number that's in all likelihood below 20 this year. It's really difficult to say with any precision even now whether that number ends up being 17, 18, 19, 20 launches, but it's kind of in that range where we currently see it. This quarter we have launched twice. Hopefully the third one goes off this evening, and then we've got another one teed up for I think another week or so from now. So it's a pretty busy manifest. Fortunately for us, we have three launch pads for Electron - we've got two in New Zealand, we've got one in Wallops Island, Virginia. So it gives us the ability to launch relatively quickly. We've done as quickly as eight days of separation, and I'm not sure that that even is a hard limit for us because we can pivot pretty quickly now that we have multiple launch mounts. **Interviewer:** And then you mentioned a possibility for a fifth, but at this point where we're at right now, is that sort of not likely? And that's obviously not in the guidance. **Adam Nelson:** As soon as we can get that payload in our hands, we'll try to get it off as quickly as we can. Out of experience now that we've been doing this a while, you can start to generate some pattern recognition. We just don't want to get too far over our skis on estimating launches in a quarter. So we feel very comfortable with the four that we gave with our guidance. The fifth kind of still remains on the bubble. ### Launch Pricing **[25:38]** **Interviewer:** Maybe just on launch pricing. I think it's bounced around a little bit, and that's just because of the mix that you have. But where is the pricing today, and how has it progressed, and how do you see that sort of in the next 12 or 24 months? **Adam Nelson:** We've got customers with a pretty wide range on pricing, and a lot of it is really dependent upon how much handholding the customer needs, how much mission assurance they require. When I say mission assurance, it means how much support does a customer require before they sign off on the launch. For example, a national security mission with a high-value payload - they want to make sure that everything's been checked and double-checked and triple-checked, and they require special security on the range and so forth. A lot of that influences price. Our average selling price is around $7.5 million for an Electron, but I would say you've got people that can be somewhat below that number, and then you can have customers that are significantly above that number. We've got launch customers where they're significantly north of $12-13 million for a launch, again based on those unique requirements. Of course, we're very much looking forward to getting Neutron to the pad where average selling prices we anticipate are more like $50 to $55 million per launch. So it becomes much more meaty and chunky additions to backlog, plus the revenue uplift that comes from that. I'd say the pricing environment for launch right now has been pretty firm. We've been increasing pricing every year. I would say that a couple of years ago when we were booking multi-launch deals, we had to go fairly deep on discount from our target $7.5 million. Now we're looking at multi-launch larger deals that are coming much closer to our single launch target pricing, so we're having to discount less. I think that's very comforting - pricing has been very supportive. I think what's helped that also is that we've introduced a new product into our portfolio called HASTE, which is using Electron as a hypersonic test platform. That's an example again where the mission requires a lot more mission assurance and a lot more additional service. A traditional commercial launch would be you're just launching a satellite. With HASTE, you're basically deploying a payload and doing a lot more for that mission than just launching somebody else's stuff on orbit. There's a lot more that goes into those missions, and so we charge accordingly for that. ### Neutron Development and Market Positioning **[28:22]** **Interviewer:** Great. Maybe just coming up on the time here - you mentioned HASTE, that was going to be one of my questions. But if we're thinking about Neutron and the delay you saw now - and I appreciate that you put it in perspective of the other rocket programs that we've seen multi-year delays, and even Starliner still hasn't gotten up there - but what has that done in terms of where you sit positioned for things like the NSSL, and also where you think you're going to be positioned to be bringing a rocket at a time when the market really needs that medium launcher? **Adam Nelson:** Well, look, I think if you talk to the customer base out there, they would say that Neutron's probably a few years late versus what they would like to see. Of course, we had to gain access to the capital and kind of earn our way into going from small dedicated launch to this medium launch category. But if you look right now, there's actually a very significant imbalance between supply and demand for launch. SpaceX has the vast majority of the market share today. To their credit - tremendous execution, and they're the vehicle that was needed for national security and everything else. I think when you look across a range of government customers, they need multiplicity - they need more than one supplier. The NSSL program is a path to do that. We were originally anticipating to be on-ramp this year, but with the delays to the schedule, that pushes out to next year. But we think when the vehicle's ready, there'll be a very receptive customer in the form of the US government, even to the point where they've invested significant money in helping us develop the vehicle to meet their needs. We had a $24 million investment from the Space Force to help develop the upper stage of that vehicle. So they're very motivated to bring more competition and more capacity to the market. Right now, if you look at the new vehicle coming from ULA, the Vulcan, it's late - it's not currently on its intended schedule. Northrop Grumman's Antares rocket was retired from the market because it had its dependence on the Russian/Ukrainian engines. So really, it's potentially a handful of providers into this market for both national security and commercial launch, and we're now one of that elite club of people that are able to deliver against the needs there. The commercial market might even be more constrained because if you think about programs that compete with Starlink, they're probably feeling a little bit nervous that they're having to rely on their competitor for access to space with Falcon 9. So I think that once Neutron comes into the market, there's going to be a lot of people that'll be able to breathe a little bit easier, including US government customers and commercial customers. **Interviewer:** Well, we've run out of time.