Adam Spice speaks at TD Cowan 45th Annual Aerospace & Defense Conference (02/14/2024)

We actually think that's the only strategy that's viable longer term. So 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 kind of 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 and so forth. So 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 lift limit to LEO which doesn't lift a lot of the satellites that we're actually building for folks. So 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 that. So you'll have the ability to design the satellite, build the satellite, and in that build be very vertically integrated all the key subsystems, and we're largely there for kind of integrating the supply chain on the key subsystems. We also have the ability and currently operate satellites on orbit for the customers. So 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 of that to operate the satellites on orbit. And we can do that because a lot of the ground station and other capabilities required to launch a payload into orbit are similar to operating the satellite once it's on orbit from a tasking perspective. And 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 I think we're really, 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.

You know, I would say that I'm relatively new to aerospace, spending the prior 25 years in semiconductors, so this whole dynamic of coopetition feels a little familiar. 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, for example, 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. When it comes to other components, heritage in the space market is incredibly important. So if 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, say, that used to be standalone, right, that's a consideration. I think it's yet to be seen. There certainly, I think it's fair to say that there could be some revenue dis-synergy risk longer term, but I think it's also not a trivial thing to get new space heritage solutions on the market.

Yeah, so 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 is 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 then mitigate the issue to limit risk on future flights. But this year we feel very good, it's a fully sold-out manifest. We also every year, and it's becoming a little bit more predictable I would say, that we have quick turn missions that come our way. So as a customer mission that we've had on the books pushes into maybe the other quarter or the next year because of their readiness, we can book kind of new stuff. And 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 to get on Transporter. And 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, four months. So they can come to us and get on orbit relatively quickly. So we see those opportunities. So 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.

Yeah. So if anyone's had a chance to look at the video from the launch that we had a few weeks ago, 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. So 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 parachute requirements because that goes to mass and so forth. So the stage looked really, really, really good. Really good. So we've re-flown engines before. Now the next step is to re-fly an entire booster. I've put my hands on these recovered boosters over in New Zealand and they've looked pretty good. At each one you can see the improvement, and from what I've seen and what I've talked to from folks inside, this most recent one looks really, really good. So the plan is to do at least one more recovery mission this year, and then it's all about how do we get a next step, which would be fly a full power pack. So nine engines. So we've re-flown one engine, in the nine-engine mix is a re-flown engine. Now we're ultimately building our way into re-flying 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 when kind of a re-flight of a full booster, the plan a year ago was to do that this year. I think now with all of the focus that we have on bringing Neutron to the pad, I think 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.

I think we've seen it, right? Because there's really, if you look at the folks that are out there, so 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 you really on the small launch side you 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 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 to 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 our the small launch side where we're at 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, and 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.

Well, we kind of factor in some relatively modest increases in ASPs. We're talking like our model says we go up 3% a year-ish, right? As far as price escalation for existing customers, I think it's really going to be more of a question of mix. So, for example, this year we'll have two of these HASTE missions on the manifest, and so 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 yeah, 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 kind of a Falcon 9-ish type of revenue per launch. That's really kind of what, when you look at kind of the impacts to our launch systems segment, that's the real uplift for us is kind of Neutron, where if you look at a Neutron launch at nominally kind of north of $50 million per launch, it becomes much more meaningful obviously than at $8 million a launch for Electron.

Yeah, 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 the things like launch fuels and all those kinds of things. So if you look at where a lot of the leverage comes from, advertising 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 kind of staff stays relatively flat. So 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% kind of 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, better or leaner pricing for a comparable mix, the adjusted gross margin should be what, 35 to 40%.

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 has just recently flown for the first time, and then they awarded a significant chunk to Ariane 6, which has not flown. So I think it's one of those things where 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 and so forth, you had the Russian vehicles that were able to do missions. They obviously are sanctioned and can't do it anymore. US payloads obviously can't fly on Chinese vehicles. So I think you're going to have a significant shortage in launch capacity for quite some time because there's a lot of constellations that have yet to even really start launching. So we think that if you look at those competitors you talked about, so you got SpaceX on one side, then you've got ULA and Blue Origin, Rocket Lab is a very different breed of company. We view ourselves as kind of 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. And 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. If you think of the fact that when we came public two and a half years ago and we 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, right? 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.

Yeah. So if you look at investment to date, again, we said it was going to be roughly a $250 to $300 million program across R&D and capex. And keep in mind too when we talk about Neutron, we think in terms of minimal viable product. So 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. And then we because we often employ the walk, run approach. So we've invested let's call it 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 kind of 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. So pretty much on time and pretty much on budget.

So we've had a few key milestones. We had a successful pre-burner test. And one of the challenges, 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. And the whole purpose for that is the lower pressure, lower temps allow for much greater reuse. So less refurb before the next flight. So 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. And so the next big thing there would be a hot fire test. So I think we're targeting hot fire tests down at our Stennis engine test cell of end of the quarter, kind of early Q2 is where we're at. And so obviously we're pretty close to that. So we know where we're at right now. I think we're pretty comfortable with those dates. And then 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 kind of more of the rest of the structures. But really propulsion is the main kind of hurdle to get over. Because 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. So really in terms of things we would see, the hot fire test is key.

Yeah, there'll be more. Once we get through that hot fire test, that'll give us a lot more confidence to how we kind of lay out the remaining development stages. I think Pete will be pretty disclosive about that on upcoming calls. And then the plan still is hopefully the target is to sort of launch by about year end.

Yep. The goal is to have an integrated Neutron on the pad by the end of this year.

There's a reason they call it rocket science.

Yeah. So 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, right? Just as it's bad when a customer is late on delivering a payload, you don't have a rocket ready. So you really got to line things up. And 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 kind of the rest of the rocket being kind of assembled, put together, we know that we're within 6, 9, 12 months, right? Whatever that is. And then they can start to assume some confidence in a launch schedule. So 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, right? We don't want to just take no deposit, easy to cancel contracts. And we're also, Pete's been very clear that we're not going to sell launch at a discount. So 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 again we get the hot fire test kind of behind us, which again is hopefully not too far off.