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Greetings, and welcome to Virgin Orbit 1Q 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.
I’d now like to turn the conference over to your host, Stephen Zhang from Investor Relations. Please go ahead, sir.
Good afternoon. I’d like to welcome everyone to Virgin Orbit’s first quarter 2022 earnings call. Conducting the call today are Dan Hart, Chief Executive Officer; and Brita O’Rear, Chief Financial Officer.
During today’s call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements made on this call.
For more information about these risks and uncertainties, please refer to the risk factors in the company’s filings with the Securities and Exchange Commission which are made by Virgin Orbit from time-to-time. Readers are cautioned not to put any undue reliance on forward-looking statements and the company specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call.
Please also note on today’s call, we will refer to certain non-GAAP financial information that we view as important in assessing the performance of our business. You can find reconciliations of the non-GAAP financial measures with the most comparable GAAP measures in our earnings press release and presentation materials that are available on the Investors page of Virgin Orbit’s website.
With that, I’ll turn the call over to Dan.
Thank you, Steve. Good afternoon to everyone on the line and thank you for joining us the first quarter 2022 earnings conference call. Today, I would like to begin with our recent accomplishments followed by a look ahead at our key priorities and business initiatives this year. I’ll wrap things up with a brief overview of our differentiated technology and the benefits of air-launch technology before I turn the call over to Brita for a closer look at the numbers.
To kick things off, let’s start with our recent milestones. We started the year with our third consecutive successful mission. This launch carried seven satellites to orbit for the DoD, NASA and the commercial customer. The rocket was released from the aircraft by Flight Lieutenant, Matthew Stannard, who is currently succumbed [ph] Virgin Orbit from the Royal Air Force, illustrating our growing partnerships with allies.
The mission demonstrated the robustness of our air-launch technology. Despite heavy clouds that we believe would’ve violated the launch criteria for a ground launch rocket, our 747 took off and flew through the weather without a problem as 747s have done routinely for decades. We also achieved an orbit that to our knowledge has never been achieved from ground launch in California, demonstrating the ability to access orbits that are otherwise unreachable.
On this mission, we were able to integrate and launch a satellite within 22 days of notification. After a last minute request from commercial satellite maker Spire Global. We believe this rapid response capability will be vitally important with commercial and national security customers. On the business development side, we were selected by NASA to be one of the providers for the VADR, Venture Class acquisition of dedicated ride share program, a program with a total value of $300 million across all providers.
In January, we announced a multi-phase agreement with The Sultanate of Oman, which starts with the launch of Oman’s first satellite on our Cornwall launch later this year, which is expected to be the first orbital launch ever from Europe. The next phase of the collaboration focuses on a yet to be definitive deep space mission with a launch target as early as Q3 2024. Both missions will directly correspond with the Oman Vision 2040 being part of a broader education outreach initiative with the goal of stimulating long-term growth in the space economy.
The same agreement also lays the foundation for collaboration on delivering additional small satellites to low earth orbit, as well as evaluating the establishment of a dedicated launch capability in Oman. In total, the estimated work with Oman has a potential market value of $50 million with the possibility of significantly exceeding that if domestic launch and other opportunities are included.
In March in the midst of the Ukrainian crisis, we hosted a visit from the Polish Minister of Economic Development and the President of the Polish Space Agency. During this meeting, we signed an agreement to work towards establishing a sovereign launch from Poland using LauncherOne.
Air-launch is likely the only viable option for sovereign launch from Poland as commented by the President of the Polish Space Agency, given that the geography of the area would not allow a ground launch system to operate safely. We estimate the potential market opportunity for initial launch operations, space work development and planetary missions from Poland could be an excess of $150 million.
Growing geopolitical tensions have prompted a number of other government space agencies to approach us to provide sovereign launch capabilities for their countries and regions for civil, commercial and national security missions. And we’ll talk more about those opportunities on the upcoming slides.
Last month, we renamed our U.S. government subsidiary formally VOX Space to Virgin Orbit National Systems, rebranding highlights our focus and growing presence in the national security space market in particular responsive space, which is emerging as a growing military imperative. We also welcomed Craig Cooning and Kim Crider to the Virgin Orbit National Systems Board of Directors. They joined Sue Mashiko to create an experienced diverse board. Their combination as leaders in both the space industry and the national security space community will provide valuable insight into the critical needs of U.S. national security space and for our allies.
Yesterday, we announced an agreement to secure two additional 747 aircraft, expanding the fleet enhances our mission capabilities as we position ourselves to meet the growing needs of our U.S. national security and allied government customers across our responsive space, missile defense, hypersonic, and space port markets. This will also augment our ability to serve a rapidly growing commercial market. The first aircraft is targeted for delivery as early as 2023, and will be modified to Virgin Orbit specifications by L3Harris.
Now turning to our priorities this year. Our first mission is to continue to drive flawless launch execution so that we fulfill our commitments to our customers and demonstrate the unique capabilities of our air-launch system. In this vein, we kicked off the year by completing our third consecutive successful mission for national security civil and commercial customers. We’ll continue to deliver launch execution with our next rocket that was recently shipped to the Mojave Air and Space Port for final testing prior to our upcoming mission called Straight Up, which serves the United States Space Force and the DoD space test program. We look forward to welcoming our spacecraft customers and integrating their payloads in our processing facility. We are targeting our next launch for the end of June.
The next mission is planned to be the first orbital launch in history from Europe and is expected to launch from Cornwall, UK in quarter three. This mission will bring a domestic launch capability to the UK, a strategic ally that already has a thriving satellite manufacturing industry. This mission will demonstrate our unique and differentiated space port capability to provide launch services and equipment and enable access to space globally.
Following the launch from Cornwall, we are planning additional launches from our Mojave base as we continue to ramp our launch program to meet growing demand from customers across the market segments. Our next priority is to expand our production rate and efficiency. We’re making investments across the organization to ramp production to meet the growing demands of our increasing launch cadence in 2022 and beyond.
On the aircraft side, we’ve secured two additional 747s through our agreement mentioned earlier, these assets will enable increased launch frequency and global expansion. We continue to execute on our product development roadmap as we invest in the producibility and performance of our rocket in order to reduce our cost and to expand our capabilities. This includes pursuing engine enhancements, developing third stage variance and assessing reusability options.
Over the last year, we’ve upgraded our launch equipment to be more efficient and more mobile, which we believe will be a key enabler in the ability to deliver on our spaceport opportunities. As we drive to expand the backlog, we will be building on the growing momentum for responsive launch from the national security community. Also, in response to the geopolitical climate, we will support allied nations with our Space Port services.
Turning to business development. We see near-term opportunities in several areas. Starting with commercial launch. Analysts expect the market to grow at a 13% CAGR over the next 10 years. We have active campaigns across the small satellite market, both domestically and internationally. We see similar opportunities in the government launch side and in particular, responsive launch where we believe we have a distinct advantage over our competitors given our mobile unwarned launch capability.
Our ability to launch from anywhere at any time to any orbit with rapid call up, we believe is an enduring advantage, which we are actively pursuing. Congress recognizes the need for responsive launch and has recently approved a dedicated $50 million budget line to support tactically responsive space as part of the 2022 budget.
Several countries have engaged us an in depth discussions to provide launch capability from their sovereign territory. Our differentiated ability to transform airports into spaceports, uniquely addresses our customers desires for sovereign launch while capitalizing on existing infrastructure and simplifying regulatory requirements.
For some of these countries, our technology is the only option available to enable launch safely from their borders. Revenue streams from spaceports would include an upfront equipment sale for materials, such as grounded support equipment and a potential aircraft followed by ongoing launch support services.
Other revenue opportunities include O&M and licensing fees. We continue to see a growing demand for small satellite launch and services in our other business segments. We’re currently tracking over $4 billion in identified opportunities with customers of which we are actively pursuing over $1.5 billion worth of business. In addition, through the end of Q1 2022, we’ve accumulated a binding and non-binding backlog of over $0.5 of which $157 million is comprised of binding contracts. We are actively working to convert the non-binding backlog to definitive agreements.
In the emerging spaceport market, we have seen a natural progression starting with senior level discussions, leading to funded studies, the output of which we’ll provide the requisite information to provide definitive agreements.
Before Brita dives into the numbers, let me summarize how starting space launch with an aircraft provides several distinctive advantages. The first advantage comes from the form of economics. By the time, our rocket begins its portion of the flight it has already achieved a high velocity and traveled above two-thirds of the earth’s atmosphere.
Given that head start, the rocket design can be simplified, which increases reliability and efficiency, and as such reduces cost. These simplifications are most pronounced in our propulsion system and our flight termination system. From a recurring launch operations perspective, unlike land launch, which requires refurbishment after each launch, as soon as our 747 land is ready to be refueled and restart pre-launch operations for the next flight. Through our first four mission, LauncherOne has yet to scrubbed a launch, which we believe is a testament to our system’s flexibility and resilience.
As we have shown in slide, our carrier aircraft is capable of operating in a wide variety of weather conditions, adding robustness to our system while having little reliance on expensive and complex range infrastructure. Our two major competitors who use a traditional ground launch approach have scrubbed launches multiple times due to weather, range issues and launch tracking and flight termination systems. Considerations, which are significantly mitigated by our air launch system.
With our technology almost any 747 compatible airport could become a spaceport giving our customers a unique level of global access to space. And finally, air launch also gives us the important resilience and responsiveness capability that can serve the national security community, including the ability to start rocket flight from almost any location on earth.
This allows our national security customers to create an element of unpredictability around their launches, giving them a tactical advantage. Existing land launch systems are constantly monitored. And even if transported to another location will quickly be identified and understood by our adversaries. We believe that Virgin Orbit is well positioned for future growth as the space economy continues to develop rapidly across commercial national security and international spaceports.
Now I will turn the call over to Brita, who will take you through the numbers. Brita?
Thank you, Dan, and good afternoon, everyone. Moving to our financial results. Revenue for the first quarter of 2022 was $2.1 million driven by our January launch, which was contracted back in 2017 with introductory pricing commensurate with being in the early development phase. And I’ll touch on the revenue a bit more on the next slide.
Adjusted EBITDA for the first quarter of 2022 was a loss of $49.6 million driven by revenue associated with early launch contracts, as well as provisioning for low rate initial production phase contract costs. In addition, and as planned, the transition to a public company required additional SG&A expenditures. Adjusted EBITDA excludes the impact of depreciation and amortization, stock-based compensation and the change in fair value of equity adjustments.
We’ve included a reconciliation to adjusted EBITDA in our appendix. Free cash flow for the first quarter of 2022 was an outflow of $66.6 million. This includes $5 million of capital expenditures comprise mainly of test stand upgrades and the development and build of our next generation ground support equipment. For the year, Q1 cash outflow is expected to be the highest quarter due to increased public company costs, timing of annual incentive compensation and the calendarization of cash inflows.
Next, let me share with you some more insight into our revenue channels. Starting with launch, we see a progression of higher revenues per launch as our contracts now reflect increased customer confidence, given our proven technology and the transition into recurring operations. For example, our near-term launches are forecasted to be in the $6 million to $12 million range per launch.
By nature, revenue per launch will vary depending on the customer, spaceport and mission specific requirements. In addition to traditional launch activities are scope and breadth encompasses civil spaceports, missile defense, hypersonic, squadron services and space solutions. These have additional revenue streams beyond traditional launch to include licensing, O&M services and equipment sales.
On the cash side, we ended Q1 with a cash balance of $127 million. This cash balance combined with working capital from existing backlogs and capturing new orders is expected to provide sufficient liquidity through year-end. We continue to win new business and execute on our existing backlogs, which will generate cash. As we increase launch rate and drive cost reduction, we expect improving gross margin contribution.
In addition, we typically receive upfront deposits upon signing new contracts, which benefits us with favorable working capital. Our current $250 million Standby Equity Purchase Agreement, which we have yet to exercise will provide us additional financial flexibility.
And with that, I would like to thank you for your time. And we’ll now turn the call back over to Dan.
Thank you, Brita. At this point, we’d like to open the line up for questions.
Thank you very much. Ladies and gentlemen, we will be conducting a question-and-answer session. [Operator Instructions] We have a first question from the line of John Roy with Water Tower Research. Please go ahead.
Yes. I had actually two questions. One, are you seeing any pullback in demand for the current macro environment? And two, what is your biggest hindrance to a faster growth? Is it people manufacturing capacity, just, it takes time?
Sure. So for question number one, what we’re seeing expanding growth and I’ll say it this way, we – this year, we had our third successful space launch, so that’s a major milestone, part of this is us coming into our own and the market seeing us as a proven system to where not just initial high risk kind of operators are signing with us, but we have national security. We have the more established commercial companies as well as countries reaching out to us.
So part of it is our presence in the market. But we are seeing growth generally commercially, we’re seeing regional growth across the world where some of these smaller satellite companies are becoming more mature and getting going in launch. And then we have this – the whole Ukrainian crisis issue has really woken the world up at a certain amount on the importance and benefits, especially of imaging from space as well as certain communications.
And we’ve had certain amount of in reach associated with capabilities for countries as well as for that specific issue. As far as our ramp up, it’s really a lot of – it’s a lot of pieces. It’s not any significant single piece. Our production line is in place. There’s a learning curve that we’re on, which is both increasing the rate at which we’re doing the work, as well as pulling costs out through higher efficiency.
And so we’re sort of on the steep, climb inefficiency associated with doing rocket building over and over again. We – what that usually does is as you go through that, it illuminates where the bottlenecks are and you can have bottlenecks in your own feeder lines. Sometimes you have to ramp and adjust suppliers a bit, as well as we’ve been staffing up our factory. So it’s a little bit of each of those.
Great. Thank you.
Thank you. We have next question from the line Austin Moeller with Canaccord. Please go ahead.
Good afternoon, Dan and Brita.
Good afternoon.
Hi, Austin.
Hi. So my first question, I think, this might be a Brita question, but you guys are going to have essentially two motherships now as of next year, this factory supports a throughput of about 20 rockets a year. So what is the launch cadence that you guys need to break even here?
Let’s see. Well, I mean, the airplanes themselves are not a function of, I mean, there are – they are a function of launch cadence, but they’re also a function of geographic diversity. So the reason why the airplanes are beneficial for us is both to maintain cadence while we are launching, if Cosmic Girl needs a bit of maintenance or something that we don’t have an interruption, as well as if we’re launching in the UK or Japan that we don’t have to spend the fuel to move airplanes back and forth to cover launches.
And then the other part is, it does give us some whip in line so that as we are talking to countries, as well as our national security community about their launches that they have an opportunity or an option to procure an airplane for themselves. So those are the main motivations for the airplane. In theory space, given the availability we’ve had with Cosmic Girl, we could do a launch a day and with one airplane, but the second airplane helps a bit. We haven’t really been sharing – to your other question, we haven’t been sharing the number of launches to break even in that data and we’ll consider that as we go forward.
Okay. That’s helpful. And then just the – in the quarter, I understand there was a lot associated with the transaction, but there was a $67 million cash burn in the quarter, and there’s a current cash balance of about $127 million. So do you guys foresee doing a capital raise in the near-term or how should we think about that?
Well, right now, we see our cash burn improving through the year. And as we execute on our launches, we will continue to collect cash and we’ll also be securing new orders and addressing additional opportunities, which will bring additional cash inflow. And as Dan stated with that, third successful consecutive launch, it’s really attracted the market in a positive way. And we see our current net cash burn will carry us through the year that in addition with the flexibility of the [indiscernible] which we have yet to use gives us additional optionality.
Okay. That’s super helpful. And then just one last question here. So the cargo configuration work that’s being done by L3Harris on the new aircraft that lets you load the rocket through the nose like other 747 apps, right?
Well, actually the – there’s a couple of different options that we’re studying with L3. There are nose loading options and there are also side loading options in conversions. And so we’re in the middle of discussions with L3 right now to determine the technical and the configuration. And in general, what we’re looking at and trading is, we’ve talked about this before, but the ability to transport the entire system with rockets is a kind of a unique and very attractive characteristic that we have and we want to exploit that.
Okay, fantastic. Thank you both for all the details.
Thank you.
Thank you. We have next question from the line of Scott Deuschle from Credit Suisse. Please go ahead.
Hey, good afternoon, everyone. Thanks for taking my question. Brita, you’ve talked about revenue per launch, which was helpful. Just curious if you can speak anymore about cost per launch and how that might trend over the next few quarters.
And we’re continuing to see, as Dan was noticing that as we continued to ramp and scale, we see the team continuing to come down the learning curve and we’re gaining efficiencies. We have – I don’t think you’ve been out to the factory yet. If not, we invite you, we are really now starting to utilize the capital equipment that we have in place that will streamline how we process the build and also to bring higher quality and efficiency. So we’re steadily coming down that learning curve.
Got it. And within your cost of revenue, that’s $17 million for one launch. Is there a significant piece of that that’s fixed in nature just running the operations of launch as opposed to the launch vehicle itself? I’m just trying to think how cost of revenue scales with revenue itself.
Yes, very good question. So what you’re seeing in the first quarter and the cost of revenue, it has the cost associated with the rocket that we launched in January. But what we also did was we accounted for the cost of known launches in 2022. So you’re seeing a higher than typical cost of sales tied with that revenue.
Yes. And Scott, if I could maybe throw in a couple more thoughts, I would say there’s sort of four elements that we’re going to see going forward. One, a couple of these we’ve touched on, so we’ll see a learning curve. I mean the amount of touch labor on each rocket we’re seeing coming down, which is great, and that’ll come down a learning curve as we normally see in aerospace plus some innovation and tooling and improvements and things like that that will help bring that down. Number two, the fixed costs will be spread across more rockets.
Yes.
And then the other – another aspect is material as we buy larger lots we expect to gain benefits from there as well. So we’re pushing and we’re seeing some good progress in driving down on each front.
Got it. And I guess, are you able to give me any sort of numbers in terms of what those fixed costs are within cost of revenue?
Not on this call. We’ll consider as we go forward see if we can bake some insight into that.
Okay.
Yes. I think one thing to note that in those costs that you are seeing, as I mentioned earlier, it does include costs that are tied to future launches, so that we accounted for in the current period.
Got only a portion of future launch costs, I assume, right?
Correct.
Or like all of the COGS...
Correct.
Got it. And then just the other cost question on SG&A, there was a big step up from Q4 to Q1. Can you just talk through what drove that and how we should think about SG&A trending for Q2 to Q4?
Yes. So what you’re seeing is that we’re still in the initial low rate production. And as we’re transitioning to recurring production from development, there are sustaining activities that are included in the SG&A as well as we have public company costs. So in Q4, we were still a private company. Now we have entered into the public world and with that comes additional costs that are being captured within SG&A.
Okay. And then last question, just Dan quickly the capital outlay for the two 747s you’ve contracted for just how will those be funded and then what’s the timing of any payments you’re required to make on those. Thanks.
Let’s see. Yes. I don’t know that I can go into the details of that on this.
We’re still in discussions.
But yes, we’re – yeah, we’re in the middle of the discussions of those and we have a couple of attractive options.
Okay, great. Thanks, everyone.
Thank you.
Thank you. We have next question – [Operator Instructions] We have next question from the line of Josh Sullivan from The Benchmark Company. Please go ahead.
Good evening. Just as far as the run rate…
Good evening.
Just as far as the run rate launch prices of $6 million to 12 million, can you just tell us what types of launches are going to be at the higher end and what are going to be at the lower end? And then maybe as far as your backlog, is there any concentration between the upper and lower end?
Sure. On the higher end, there’s really about four different areas. One is national security launches and specifically tactically responsive space support, where we’re operating in a more of an operational or a new method if you will in space. Certainly, on both the national security and the NASA side, there are the higher revenue launches that require a higher level of certification, and we’re pursuing those right now. So this year we’ve made quite a bit of progress and we continue to strive for that and that’ll allow us to fly the more risk averse, higher value payloads for government in general.
International flights will garner a higher revenue. It’s a unique and differentiated capability. And then the other area is, there are some adjacencies associated with national security, whether it’s missile defense targets, hypersonics research, those kinds of activities are not run of the mill launches.
On the other end of that would be say a commercial launch to sun-synchronous is more competitive, where we’ll be in a group with others. And then in the middle are commercial flights to unique orbits, which actually can be in the other category of higher revenue. Does that answer your question?
Yes. That’s helpful. And then just kind of relatedly if we look at the total binding backlog, $157 million, the non-binding $490 million and the $1.5 billion you’re pursuing, what is the duration of that? Is it a 12 months outlook? Or how long should we think about that backlog conversion?
See…
It varies. Okay. If you look at the binding backlog, we do have some agreements there that extent or multiple launches. So they – there’s one customer in particular that I’m thinking of that has launches in 2023 and 2024 and I think one in 2025.
Yes, I would say that it’s more concentrated certainly in the near-term, but there are some tales in there that go out to 2023, 2024 and maybe a little bit beyond but it’s mostly concentrated in the near-term.
Got it. And then just if we look at the tactical space access funding the $50 million, what should we be looking for as far as milestones or testing through the year that we might see publicly?
Well, I think the government is formulating their acquisition plan for that. So it’ll be an award and I’m pretty sure those will be public.
Okay. Thank you for the time.
You bet.
Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I’d like to turn the call back to Dan Hart, CEO for closing remarks. Over to you, sir.
Well, I want to thank everybody for joining us for a review of this last quarter and recent events, as well as some discussion of our way forward. And I look forward to all of you to seeing you all on launch day. Everybody, have a great day.
Thank you very much. Ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.