Adam Spice speaks at 2024 Stifel Cross Sector Insight Conference

Yeah, sure. So I think Q1 is showing the strength that we have in the model where it's a diversified business. Obviously when people think of Rocket Lab they think of rockets, which makes sense. It's our heritage. And 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 and launch represents 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 got the launch segment which is about a third, space systems which is about two-thirds. And 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, and that's currently scheduled to launch its first test launch in the middle of next year. So as you pointed out, that's driving our financials to a pretty significant degree because it's 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. And right now we're still in that ballpark. We're still targeting an overall program cost of a little under $300 million.

So 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. So the model will change quite a bit once we get our first paying customer on that vehicle and then you get the benefit of absorbing those costs into COGS and then amortizing 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 again, which right now first test launch middle of next year, first paying customer likely within six months of that anticipation.

Yeah, 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. So 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.

So I would say that it's one of those businesses where, for example, if you look at 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 kind of 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. So 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 for that. So I would say that 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 Astra and the Relativity, and then there's kind of 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 like Terran 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. And the space system side really has a bigger TAM that you can kind of tap into. Even within that space systems business, we have a combination of ship-and-build type subsystems and then we have more of the overtime rev-rec 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.

Yeah. So we continue to move up the food chain, going from being a subcontractor to provide the bus to MDA for the Globalstar constellation. With 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, and then we also procure the payload from third parties and we've announced who some of those parties are that are providing payload capabilities.

And on the MDA Globalstar progress, this year is one of the bigger revenue contributors. We were anticipating about $100 million of revenue from that program out of a total of $150 million award that was announced a couple years ago, because really 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 Globalstar.

So I would say 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's also some funding challenges of Globalstar early on in that program. But I would say things have nicely come into focus and 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.

Correct. And that'll be throughout the year and probably more so second half weighted or towards the end of the year.

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.

Yeah, I mean, 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 yeah, I believe all of the hardware really should be delivered kind of before the end of the first half in 2025.

Yeah. So these programs are pretty typical whether it's a large commercial or a government program where you make your proposal, you're awarded, and then you go through a series of engineering milestones. So 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 into 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 say, just some rough numbers here. Let's say it's a $500 million program with 30 points of forecasted non-GAAP gross margin. And so that would indicate you probably have around $350 million of cost. So as you're realizing cost against that total estimated cost of $350 million, you're recognizing revenue and gross margin at that program level. So 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.

So 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. And that particular program will be delivering satellites kind of by end of 2026, kind of early 2027.

Correct. Yeah. Launch has not been awarded for those spacecraft yet. So that's again where our whole model where we're bringing this larger vehicle to market, Neutron, that ideally we'll be eligible to kind of throw its hat in the ring to not only build where we're building the spacecraft but also potentially launching it as well.