[[Home|🏠]] <span style="color: LightSlateGray">></span> [[Interviews]] <span style="color: LightSlateGray">></span> February 14 2024 **Insider**: [[Adam Spice]] **Source**: TD Cowan 45th Annual Aerospace & Defense Conference **Date**: February 14 2024  🔗 Backup Link: https://www.youtube.com/watch?v=vtsljmAn8Hw ## 🎙️ Transcript >[!hint] Transcript may contain errors or inaccuracies. [0:00] **Moderator:** Okay, we're on up on the start time and we are delighted to have with us Rocket Lab and Rocket Lab CFO to my right, Adam Spice, and Colin Kwell, the head of IR. Colin's going to read a little interesting statement to start us off. [0:15] **Colin Kwell:** That's right. So today's discussion may contain forward-looking statements. All statements are based on Rocket Lab's current expectations and beliefs and may involve risks and uncertainties which are beyond Rocket Lab's control. Actual results may differ from those expressed by today's statements. Factors could cause actual future events to differ materially from the forward-looking statements in today's presentation. ### Vertical Integration Strategy [0:45] **Moderator:** So anyway, Adam, thanks for being here. You're the only space company that's both a vertically integrated satellite and launch provider and a merchant supplier to satellite builders with whom you may compete. Is that a viable strategy over the longer term? **Adam Spice:** We actually think that's the only strategy that's viable longer term. The vision that we have is to be that end-to-end provider for a customer. We've gotten very strong signals from our customers, particularly on the government side, where they've said, "Look, for years and years we've tried to enable partners that could provide that kind of turnkey solution, but it's very difficult because the skill sets and capabilities to run a rocket company might be a bit different traditionally than for building spacecraft and then selling components in the merchant market." We're getting tantalizingly close to being able to do that. If you look today, we have on the launch side, we've got Electron—the most frequently launched small rocket. We've got a very strong position in that market. But Electron has a 300 kg orbit lift limit to LEO, which doesn't lift a lot of the satellites that we're actually building for folks. Ultimately, if we want to get to the point where we're an end-to-end provider, we have to have a launch vehicle that can support those larger spacecraft, which Neutron, which comes to the pad later this year as the target, will enable us to do. So you'll have the ability to design the satellite, build the satellite, and in that build be very vertically integrated in all the key subsystems. We're largely there for integrating the supply chain on the key subsystems. We also have the ability and currently operate satellites on orbit for the customers. If you look at the two last big space systems contracts that we were awarded—one a few weeks ago from the SDA, which was a $515 million contract that includes an operational element on the back end to operate the satellites on orbit. We can do that because a lot of the ground station and other capabilities required to launch a payload into orbit are also similar to operating the satellite once it's on orbit from a tasking perspective. We acquired a company called ASI back in 2021 that gave us that on-orbit command and control software capability, and they've been doing that for lots of commercial and government programs for years. So we're really close. I think the only piece that we're really missing right now to be that end-to-end provider is a larger lift capacity, which Neutron will bring a little bit later. **Moderator:** Actually, the point of the question is, I get that offering being a turnkey supplier is attractive to the potential customer, but I mean like the customer who buys the satellite from you where maybe they know they're going to be competing with you, or buys a component—is that at all a drawback? **Adam Spice:** I'm relatively new to aerospace, spending the prior 25 years in semiconductors, so this whole dynamic of coopetition feels a little strange. But if you were to look at our backlog and our funnel, there's a lot of revenue there that's tied to people that compete with us in other areas, to your point. So I guess the question really comes down to: what are their options? There are only three space-grade solar manufacturers in the world—there's ourselves, there's Boeing Spectrolab, and then there's a German company called Azure. So people really don't have a lot of choice. They may not like it, it may be uncomfortable for them, but they don't have a lot of choice. With other components, heritage in the space market is incredibly important. So they have to ask themselves the question of how much risk do they want to take for moving to a part that's got less heritage than the one that they've been procuring from Rocket Lab. That used to be standalone. So I think it's yet to be seen. There certainly could be some revenue disynergy risk longer term, but I think it's also not a trivial thing to get new space heritage solutions on the market. ### Launch Business Outlook [4:57] **Moderator:** Absolutely. So turning to the core launch business, what are the—you've got an ambition, I can't remember whether the manifest was 20 or 22... **Adam Spice:** 22. **Moderator:** 22. What are the risks and opportunities around doing—I think we're estimating 19-20 because things tend to move to the right—but how should we think about all of that? **Adam Spice:** We've not been in a situation historically where we've had a satellite delivered to us from a customer for launch and we've not had a rocket ready to launch that satellite. Typically, customers are late in delivering their spacecraft, and that's the biggest risk to our manifest—a customer pushing out. So every year, to your point, things have pushed out to the right. Last year was a bit of a unique situation because we had an anomaly where we weren't able to deliver one of our customers' payloads to the proper orbit in September, which kind of put us behind. Then we had to go through the whole FAA return to flight reviews and mitigate the issue to limit risk on future flights. But this year we feel very good, and it's a fully sold-out manifest. We also every year, and it's becoming a little bit more predictable, have quick-turn missions that come our way. So as a customer mission that we've had on the books pushes into maybe another quarter or the next year because of their readiness, we can book kind of new stuff. I think some of that is a function of the fact that Transporter now from SpaceX—if you want to get on Transporter, what we're hearing is it's a two-year wait. Especially when you look at these proof-of-concept satellites that are getting launched in these rideshare missions, once they miss their slot, they don't want to wait two more years, or they don't want to wait or get pushed out even three or four months. So they can come to us and get on orbit relatively quickly. We feel pretty good about our ability to deliver on the manifest that we've published, but to your point, there's always risk that the customer can create more lumpiness than you plan on. ### Electron Reusability Progress [7:04] **Moderator:** So you recently recovered another engine. Discuss the next steps toward greater reusability of the Electron platform, and maybe remind us how many 2024 missions are going to be reusable candidates. **Adam Spice:** If anyone's had a chance to look at the video from the launch that we had, I think, three weeks ago, we published some pictures and also some video, and you can see the stage as we recovered it—the stage looks phenomenal. We've done, I think, this is our seventh recovery of a booster, and this mission was really important for us because it represented what we plan to be the last block upgrade of reusability for Electron. So more sealing of the stage to prevent water intrusion, really dialing in the amount of parachute requirements because that goes to mass and so forth. So the stage looked really, really good. We've reflown engines before—now the next step is to refly an entire booster. I've put my hands on these recovered boosters over in New Zealand, and they've looked pretty good. With each one, you can see the improvement, and from what I've seen and from what I've talked to folks inside, this most recent one just looks really, really good. The plan is to do at least one more recovery mission this year. And then it's all about how do we get to a full power pack—so nine engines. We've reflown one engine in the nine-engine mix as a reflown engine. We're ultimately building our way into reflying an entire power pack of nine reused engines. The engines look great. I don't think there's a lot of concern that the engines aren't reusable—it was really more about can we control the re-entry of the vehicle to the point where you can avoid putting too much stress on the tanks and so forth. That we've been able to dial in as well. So we feel very good. I think if you think about a reflight of a full booster, the plan a year ago was to do that this year. But I think now with all of the focus that we have on bringing Neutron to the pad, that probably is not really in focus for 2024 at this point. We're really much more focused on supporting the higher launch cadence, getting Neutron to the pad, and then the incremental value of reusability is something that we probably put a little bit off to the side while we execute those two more important things. ### Competitive Landscape and Pricing [9:36] **Moderator:** Several of your launch competitors are no longer with us. What has this done to demand—I guess it doesn't do anything to demand—but I guess it could do something to pricing. What impact on pricing might we see in the event of any of these other guys kind of leaving the field? **Adam Spice:** I think we've seen it. Because there's really, if you look at the folks that are out there, obviously Virgin Orbit went bankrupt. Astra, from what they talked about, looks like they've abandoned their launch program and are focused more on the in-space propulsion opportunity. So on the small launch side, you really have Firefly and ABL. ABL's flown once, blew up their pad. Firefly has flown four times with one successful mission out of those four. So there's not—I'd say that if you were to rewind the clock three or four years ago, the pricing pressure was pretty intense from these people who were trying to get where we already were. That's really not the case anymore. We're not seeing that kind of pricing pressure because the folks that are kind of still in the game, they've got a little bit of a different perspective. You take the small launch side where we're at 300 kgs, them aspiring to be able to deliver a ton, and then you've got the larger vehicles like Falcon 9 and ultimately Neutron. So we've seen actual pricing firm up, and the firming up of pricing has come from a couple things: the fact that there's less capacity out there, also the fact that Transporter is full as we talked about. I think those are all things that have been conducive. The fact that we've expanded now into hypersonics as part of our product mix, and those hypersonics missions come with higher ASPs than commercial launches just because of mission assurance and all the special things that the government customer requires. **Moderator:** And so one of the disappointments I had—I think I asked you this question at some point a couple quarters ago—and it didn't look like we really see that much of a step up in the ASPs in '24. So basically, when does this better pricing manifest itself in terms of your results? **Adam Spice:** We factor in some relatively modest increases in ASPs. Our model says we go up 3% a year-ish as far as price escalation for existing customers. I think it's really going to be more of a question of mix. For example, this year we'll have two of these HASTE missions on the manifest, and they come with higher ASPs. So it's a matter of how many more of those can you get in the mix relative to your more price-sensitive commercial launch opportunities. So it's how much of the mix skews more towards your higher mission assurance, higher value opportunities. And of course, the big needle mover for us is really Neutron, because Neutron comes with a Falcon 9-ish type of revenue per launch. That's really the real uplift for us in our launch systems segment—it's Neutron where, if you look at a Neutron launch at nominally north of $50 million per launch, that becomes much more meaningful obviously than at $8 million a launch for Electron. ### Margin Potential and Cost Structure [12:58] **Moderator:** So they're really high fixed costs, I think you mentioned that several times, of maintaining a launchpad, keeping the launch staff there. Help us understand the incremental margin potential in '24 if you really do get to 22 or 23. Is that the way to model it, incremental margins, or how should we think about that gross margins? **Adam Spice:** I think the way to look at it is, if you look at the current cost to support a mission today, it's about one-third bill of materials, it's about one-third direct and indirect manufacturing labor, and it's one-third overheads, which covers all the various non-production overheads but includes things like launch and fuels and all those kinds of things. If you look at where a lot of the leverage comes from, it's amortizing those fixed costs over a greater number of units. We can double production of vehicles by adding maybe 40% incremental direct labor and no incremental indirect labor—the supervision staff stays relatively flat. So the savings here or the margin expansion comes from the absorption of those overheads over a greater number of units. It really doesn't come from BOM savings because we experience maybe like a 6% BOM reduction annually, which is not trivial but it's not going to move the needle that much. So really, the way to think about it is for a comparable mix of product, because obviously it depends on better or leaner pricing for a comparable mix, the incremental adjusted gross margin should be what, 35 to 40%. **Moderator:** That's exactly right. ### Medium and Large Launch Market Outlook [14:58] **Moderator:** How would you characterize demand in the medium and large launch market? I mean, yes, you're going to have an additional product, but we got SpaceX, we have Blue Origin, Vulcan. Are we going to have too many players there? **Adam Spice:** I think we're a ways away from being at the risk of having too much capacity. Right now, there's an absolute lack of capacity. You can see that with the way that Amazon procured their initial batch of launches for Kuiper, where they basically awarded a portion of it to Blue Origin, they awarded a portion of it to ULA's Vulcan, which is a vehicle that now has just recently flown for the first time, and then they awarded a significant chunk to Ariane 6, which has not flown. SpaceX is clearly the 800-pound gorilla that's providing most of the capacity to the market in that segment today. If you go pre-Ukraine conflict, you had the Russian vehicles that were able to do missions—they're sanctioned now and can't do it anymore. US payloads obviously can't fly on Chinese vehicles. So I think you have a significant shortage in launch capacity for quite some time because there's a lot of constellations that have yet even to really start launching. We think that if you look at those competitors you talked about—SpaceX on one side at the top, then you've got ULA and Blue Origin—Rocket Lab is a very different breed of company. We view ourselves as the most aggressive, out-of-the-box solution provider. We have no concerns at all about how competitive we'll be able to be versus a ULA, for example, or even a Blue Origin. It really comes back to, we see our bogey as SpaceX. SpaceX is our clear bogey. When you don't have the capital that Jeff Bezos and Elon Musk have, you've got to do things differently, and we do things very differently. When we came public 2½ years ago and said we were going to deliver Neutron by the end of 2024 for $250 to $300 million, I think a lot of people might have thought that's impossible, just knowing what it takes to deliver a rocket of that size and complexity. We're doing it, and I think it's because we're doing things in a very, very different way. For example, we acquired a composites company in New Zealand that was building America's Cup yachts, and that allows us to accelerate the development of the structures for the vehicle and have that more under our control versus outsourced. We were able to acquire an entire rocket factory when Virgin Orbit went bankrupt for 16 cents on the dollar, which gave us dozens of CNC and 3D printing machines that were already in place, calibrated, ready to go, but very lightly used because they didn't fly very often. So it's those kind of things that allow us to do what we're doing. But we go about things in a completely different way because we know we can't compete in the same way with Jeff and Elon—we just don't have the same access to capital. ### Neutron Development Progress [18:02] **Moderator:** Switching to Neutron, what are the milestones we should be watching for? And is it on budget? What's the number to kind of get it to first launch? **Adam Spice:** If you look at investment to date, we said it was going to be roughly a $250 to $300 million program across R&D and capex. Keep in mind too, when we talk about Neutron, we think in terms of minimal viable product. Just like Electron is continuing to evolve, Neutron will as well. The pad infrastructure at Wallops will not be the final pad infrastructure—it'll be just what's required to get that first launch off. We've invested roughly $100 million to date in Neutron of the $300. This year is going to be a pretty sizable investment year for Neutron with around that again. So by the time we get the vehicle to the pad, it's around $200 million between R&D and capex. But we've also had co-investments from state and local governments that probably add another $50 million to that. So we'll be at about $250 million to get minimum viable product to the pad—pretty much on time and pretty much on budget. **Moderator:** And what are the milestones we should look for? **Adam Spice:** We've had a few key milestones. We had a successful pre-burner test. One of the architectural differences of Neutron versus other vehicles is that our Archimedes engine is really designed to operate at very low chamber pressures and very low temperatures. The whole purpose for that is the lower pressure, lower temps allow for much greater reuse—so less refurb before the next flight. Essentially, we want these engines to essentially get to orbit at idle, more than really maxing out the engine that requires a lot of rework and refurb. The next big thing there would be a hot fire test. We're targeting hot fire tests down at our Stennis engine test cell at the end of the quarter, early Q2 is where we're at. We're pretty close to that, so we're pretty comfortable with those dates. We've already passed some significant tests on the upper stage tank, which is the most technically challenging piece of composite structures for the vehicle given the performance requirements of that second stage. So really the next would be the first stage tanks and then more of the rest of the structures, but really propulsion is the main hurdle to get over. We're also reusing a lot of the avionics that we've flown 43 times on Electron, because the avionics don't really care whether you're dealing with a 15-ton rocket or a 300 kg rocket. **Moderator:** So in terms of things we would see, the hot fire test is key. Do we see the first stage test? Do you make an announcement after that? **Adam Spice:** There'll be more. Once we get through that hot fire test, that'll give us a lot more confidence to lay out the remaining development stages. I think Pete will be pretty disclosive about that on upcoming calls. **Moderator:** And then you will—the plan still is, hopefully, the target is to launch by about year end? **Adam Spice:** The goal is to have an integrated Neutron on the pad by the end of this year. **Moderator:** Probably the third leg of the milestones is around infrastructure as well. **Adam Spice:** We are launching out of Wallops. We have infrastructure already there launching Electrons, but there's significant infrastructure investment required that's progressing. We've built infrastructure at that location before, but none of these elements of the program are easy or without risk. But everything right now—we've got a green light schedule that gets us to the pad by the end of the year. **Moderator:** There's a reason they call it rocket science. **Adam Spice:** Absolutely there is. And it's not just the rocket pad and everything else that goes with it. ### Neutron Marketing and Customers [22:12] **Moderator:** So where are you in terms of marketing Neutron and sort of signing up your first customer? What are you looking for in that first customer? When's that happen? **Adam Spice:** We've been actively marketing Neutron for quite some time. The challenge you have with a new rocket is that it's a really bad situation when a customer commits their payloads to you and you're late, just as it's bad when a customer is late on delivering a payload and you don't have a rocket ready. So you really got to line things up. I think that once you get through the engine hot fire, then the customers can go, "Okay, now we can"—typically when you look at how you can go from hot fire to the rest of the rocket being assembled and put together, we know that we're within 6-12 months, whatever that is. Then they can start to assume some confidence in a launch schedule. We've had lots of discussions, there's a lot of opportunities, but I think until you get past a few more of these near-term milestones, it's difficult to secure a commitment that's meaningful. We don't want to just take no-deposit, easy-to-cancel contracts. We're also not going to sell launch at a discount. We've got customers that are expressing a desire to even be on the first flight of Neutron, which of course entails a little bit more risk, and there might be some pricing reflected in that. But I think we feel very good about the demand signal for the vehicle, but you probably won't see signed launch contracts until we get the hot fire test behind us, which hopefully is not too far off. I would like to see something in the next couple quarters that would show a commitment to the first launch. **Moderator:** You mentioned contracts plural. Is the idea—what, so if you launch at year end this year, you would do what, two or three launches in '25? **Adam Spice:** Three in '25. **Moderator:** So then you basically would not necessarily—well, would it be one customer for three launches, or would the strategy be to try to get three individual customers for '25? **Adam Spice:** We're in discussions with customers that want to take multiple vehicles, but it's better for us to build a more diversified book of customers. So I think it probably not going to go to one specific customer. **Moderator:** And what's pricing look like given we have Vulcan, we have all these other folks? **Adam Spice:** Vulcan's a great pricing comp for us. I think it's super supportive. But our real pricing bogey is SpaceX. If you buy an off-the-shelf Falcon 9 today, it's going to run you about $67 million. If you look at our Neutron in its reusable form, it can deliver 13 tons to LEO versus SpaceX's 16 tons to LEO. You do that comparison of price per kilo—that's really the bogey. The bogey's been around $5,000 a kilo for a fully utilized rocket. The nuance here is that unless you're doing a large constellation deployment, you're not going to fill your rocket completely. Elon does it because he's just loading them up with Starlinks. So if you have, for example, a more exquisite satellite from the government customer that, say, is a 7-ton payload, and SpaceX is going to charge $70 million for that, we can charge the same amount as they can. Because if the customer needs a dedicated launch, they're paying for a full rocket and it no longer comes down to price per kilo—it just comes down to can you deliver the mission. ### Space Systems Contracts and Revenue Recognition [26:00] **Moderator:** Interesting. So turning to space systems, how much commonality is there between the Global Star contract and the recent SDA Tranche Transport win? **Adam Spice:** There's a lot of commonality. I think there's a lot of commonality on the technology front. If you look at our 2023, there's a lot of incremental R&D in our P&L related to developing those core capabilities and building out that portfolio. The SDA Beta program leverages a lot of that technology that we invested in for the Global Star MDA. There's certainly some incremental R&D, but I would say there's a lot of commonality there. Contractually, they're quite different. Commercial contracts and government contracts look different even though they're both firm fixed price. There's differences when it comes to liquidated damages for delay—all that kind of stuff. Typically, the government contracts are a little bit more favorable than the commercial contract, particularly if you dig into who the end customer is on the Global Star side of things. "Commercially challenging" is a good way to describe them. But if you look at the way they're structured, there are milestones that drive payments, and then our revenue recognition against those contracts are not driven by milestones, they're driven by program execution and cost to completion. So for example, once we will have completed, call it 20% of the work to deliver the SDA contract, we will have recognized 20% of the revenue and 20% of the margin dollars on those, despite the fact that we may not have deployed all the equivalent amount of cash. So we invoice the customer, that allows us to procure long lead items, and a lot of that's happening this year. But then the building of the satellites really won't take place until more like later 2025, '26, and then they fly in '27. **Moderator:** So of the $515 million, how much is this year, how much is in '25, what's in '26? **Adam Spice:** We'll have more color on our earnings call on the 27th with regard to that. But I would say it's not a front-end loaded contract because, under ASC 606, the way that we recognize revenue is really based on effort, on resources to complete the project. So there's certainly engineering cost to completion work that's going to drive revenue in 2024 from that contract, but the majority of the revenue doesn't come from the engineering phase—it comes from the build phase, and that's more in the '25, '26, and even '27. **Moderator:** And refresh my memory, does the contract call for an in-place satellite, or is launch separate? **Adam Spice:** Launch is separate. Launch will be procured separately under the NSSL program. **Moderator:** And so are you going for launch? **Adam Spice:** It goes in '27, so Neutron will absolutely be ready. **Moderator:** Yeah, we want the whole thing. And so that's an incremental potential business. Do you have a competitive advantage having as a satellite builder and also a potential launch provider? **Adam Spice:** They're bid separately. I'm assuming that the government customer has good reasons for separating the two pieces. But I would think that we'd be at an advantage just because we'll have a much greater familiarity with ambient conditions within our own vehicle versus third party ones. We'll be able to pitch that as a value proposition. I think we'll also be able to, since we own the launch vehicle, guarantee flexibility around getting those off. If there's a delay in the program for whatever reason, we've got the ability to accommodate for that. So I think we're going to be in a very strong position, which again comes all the way back to that end-to-end model. Even though they may be bid out separately, the real value here that we bring to the table is the end solution. ### Industry Trends and Strategic Plans [30:03] **Moderator:** Are you seeing any signs that others might want to enter as a fully integrated launch? I mean, like, is Elon moving toward doing that? He's got his play full, but... **Adam Spice:** He's there. I think if you look to where we ultimately want to go, in a lot of ways we want to emulate what they've successfully done, which is work their way towards the applications market. SpaceX has chosen the consumer broadband and other applications on Starlink for their anchor application in space. We're evaluating a lot of different constellation application opportunities, but ultimately we view end-to-end as not just build and launch, but build, launch, operate, and generate a recurring revenue stream off of the end customer relationship. Elon certainly has—SpaceX has done on every front what we want and desire to do. What they do differently is they don't sell their components necessarily or their satellite buses into the merchant market, which is what we do. So we approach the broader market opportunity—SpaceX is very focused on their walled garden ecosystem. But they have every capability to do all of it. **Moderator:** So what's the longer-term potential of becoming an SDA Tranche 2 Transport supplier? Is it basically that you're there, and when we go to Tranche 3 and when we go to Tranche 4, you basically have a competitive advantage? **Adam Spice:** Now we will be a qualified prime contractor to SDA. There's a lot of folks out there who are subs to primes like Lockheed and Northrop and so forth, but we are the prime. There's not only the next waves of satellite build contracts that will come out, but there's also going to be reconstitution, because this is a long-term architecture. You get your foot in the door—it just makes sense that people will procure more of what you've already delivered to them as long as it works and it's a high-quality solution, which it is. We think this is an enduring, long-term, sticky growth opportunity for us. So it was very, very strategically important for us to get this contract. And we didn't do it based on being the lowest price bidder either, because we went in there with our target margins in focus. We weren't going to torpedo the model for one opportunity. So we think we've come out of this in a good position for future contract wins and creating that stable base of business. **Moderator:** Any thoughts, now that you're in Transport, of trying to bid into Tracking? **Adam Spice:** Absolutely, it's all on the table. One thing that we don't have—we have all the most critical portions of the bus, we obviously have launch—it's the payload side that we have our greatest reliance on third-party partners. So that's strategically longer term, that's an area that we're going to look to do more incremental investments. As you're aware, we did a $355 million convertible bond raise a couple weeks ago, and what that really allows us to do is go and inorganically work our way more into payload capabilities so that we can bring more and more of that under one roof. That's key for us. **Moderator:** As you look at the competitive landscape, Sierra came—I guess I'd heard of them, but I never saw—like, who are these people? So all of a sudden they're there too. Are there other folks that are sort of coming after you? **Adam Spice:** All the known characters. We were surprised by Sierra as well—no disrespect there. But I think that, for example, under their proposal, they've actually got to go, to my knowledge (which is not perfect), they have to go out and secure a bus provider, they have to go out and secure a payload provider. So it's very different than what we're doing, where we're the prime, we're the bus provider, we partner with a sub for the payload. But I think that really what that points to is the SDA's strategic focus on further developing the supply chain providers for their solutions, and so they're stretching. Whenever they give a contract to a Lockheed or a Northrop, that's not really stretching—that's exercising a known capability. But bringing in folks like ourselves, like Sierra—hard to say who else they'll want to bring into their ecosystem—but it's all about creating a more robust and resilient supply chain for national security. I think that's a great thing, and it's a great thing for us. ### Growth of Components Business [34:57] **Moderator:** So what about the rest of space systems? How should we think about the growth trajectory of the components, the solar—which of those have the greatest potential? **Adam Spice:** The four acquisitions that we've done, and we also have merchant solutions that we've developed organically, but of our components businesses, they're all growing very nicely. Every one of them is solid double-digit growth. Probably the most encouraging thing is the expansion of the gross margin on solar that we're seeing develop in our backlog, and then also the fact that solar has been a real problem for programs. As a program gets announced, the capacity takes a long time to add in solar. If you want to add a new germanium reactor to build more capacity, that takes like two years. So it's one of those things where you don't want to be, as a prime on a contract or building something for yourself, going to order solar and they say, "Sorry, we're out, can't talk to us for 30 months." Now that we've taken that, we can prioritize supply to our strategic programs. To be honest, that's a lot of what got us in the position to win that Beta contract with the SDA—the fact that they're like, "Okay, you guys have a tremendous amount of control over your ability to deliver these platforms because you control things like solar, like reaction wheels, like software," all those different things. So that's an incredibly important strategic thing, and that's why we view the successful space company of the future has to be a much more vertically integrated, one-stop shop. But it's not an easy thing to do because it takes capital, it takes a very broad set of engineering capabilities and engineering culture to do that. So we think there's going to be very few people that'll be able to get there. Again, I think we've seen SpaceX has already gotten there. We think that we're the closest to that and making closing that gap pretty quickly, especially with Neutron. ### Margin Progression and Financial Outlook [36:52] **Moderator:** So how should we think about the margin progression of space systems going forward? **Adam Spice:** We'll see a continued expansion in the gross margins for space systems, and that's a function of the scale of the opportunities that we're doing and how we're finding operating leverage in the business. Again, a lot of the Global Star MDA commonality on the platform level is being shared across this SDA program as well. And I would say that as there's more capacity constraints out there, we're like anybody else—if it's a tight market, we're going to ratchet up our pricing, and we're seeing that across the board on our space system solutions into the merchant market. **Moderator:** So how should we think about your cash burn given the impact of the Neutron spend? **Adam Spice:** Neutron is a very intense project in 2024. I would say as we see growth in the rest of the business in 2024 on the top line and the margin expansion, most of that, if not all, will be consumed by Neutron. So if you look at the EBITDA profile, it's not going to look all that different in 2024 than was experienced in 2023. Where we really turn the corner is getting that minimum viable product to the pad at the end of the year, and then we really will have crested the majority of that initial R&D spend and also, from a cash flow perspective, the investment in infrastructure. So 2024 is an investment year—that term gets old and tired, and we say it—but it really is truly an investment year for us in Neutron. But we think that we start to reap the rewards from that in 2025 and beyond. **Moderator:** So you think you really should get a good turn in '25? **Adam Spice:** Absolutely. We think the middle of 2025 is the real turning point from a cash flow generation perspective. ### Recent Financing and Future Strategy [38:51] **Moderator:** So you recently did a convert. Why'd you do that? Why'd you do that financing at this point? You had some cash still. **Adam Spice:** We exited the year with north of $300 million liquidity. The issue for us really was we were finding ourselves constrained from being able to exercise some of those strategic inorganic acquisition opportunities that we've done before. We've executed on four of those. We think there's a significant number, and we always have a few deals that we're working in our process. So this raise was really all about being able to take advantage of those. And right now is a great time to be shopping because the ability to raise capital for most companies is very, very challenging. So we're seeing some real opportunities, just like we saw 16 cents on the dollar for the Virgin assets last year. We see other distressed assets that are quality technologies that we can add to our portfolio. We had plenty of capital to get Neutron to the pad and do everything we said we were going to do when we came public. What this does is allow us to do things that are off-nominal and incremental to drive longer-term strength in the business. There's also the old adage: you raise money when you don't need it. **Moderator:** I agree with that. **Adam Spice:** And it was the most shareholder-friendly way to raise a significant quantum of cash. As large equity holders between Pete and myself and others of the senior management team, we're very focused on making sure we're doing equity-friendly things. So if you look at the terms that we were able to garner and the size of the capital and the flexibility of the capital, we thought it was the best solution for us. And we did run a process that compared other alternatives—both your traditional debt facilities, an equity raise, strategic equity partners, all those kinds of things—and this was the best path for us from a cost of capital. **Moderator:** Great, terrific. Thank you very much. That was very interesting. **Adam Spice:** Great.