Virgin Orbit Holdings, Inc. (NASDAQ:VORB) Q2 2022 Results Conference Call August 12, 2022 4:30 PM ET
Company Participants
Stephen Zhang – Vice President, Investor Relations
Dan Hart – Chief Executive Officer
Brita O’Rear – Chief Financial Officer
Conference Call Participants
John Roy – Water Tower Research
Edison Yu – Deutsche Bank
Josh Sullivan – The Benchmark Company
Operator
Greetings, and welcome to Virgin Orbit Second Quarter 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. You may begin.
Stephen Zhang
Good afternoon. I’d like to welcome everyone to Virgin Orbit’s second 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.
Dan Hart
Thank you, Steve. Good afternoon to everybody on the line, and thank you for joining us for the second quarter 2022 earnings conference call. Today, I would like to begin with our recent accomplishments across launching our customers, growing our backlog and driving gains in operational efficiency. I’ll end with our upcoming milestones and our key priorities before I turn the call over to Brita for a closer look at the numbers.
Starting with launches, we recently executed our 4th consecutive successful launch, delivering seven satellites to low earth orbit for the United States Space Force. This capped off four successful launches over the past 18 months. System performance has been excellent with a 100% mission success for all of our operational missions and highly accurate orbit performance for a total of 33 satellites deployed serving customers across all of our key markets, commercial, DoD, NASA and the international community.
The flawless execution our team has achieved is exceptional for a new launch provider. And we are extremely proud of our team who have worked diligently to bring our first of a kind technology to production. Over these launches, we have proven the versatility and robustness of our system. We’ve now launched through increment weather, weather where traditional ground launch systems would have likely scrubbed.
We’ve achieved orbital inclinations for the first time ever out of California, only enabled by our air launch technology. In addition, we’ve demonstrated rapid payload integration and now operate at both day and night.
With regard to revenue, we recognized this launch on July 1st, which just fell out of the second quarter by less than 24 hours. However, we will recognize over $12 million in revenue related to this launch in our third quarter results. This is consistent with our guidance of higher revenue ranges per launch as we move beyond early development contracts and into operations.
As we increase our production rate, we are also driving efficiency and productivity through expanded automation, improved tooling, optimizing the factory flow, and leveraging our scale to lower unit cost. We’re engaging our entire workforce to focus on continual process improvement and affordability, which will drive increasing gross margins.
The results have been encouraging as we have been exceeding our projected learning curve. On our most recent mission, manufacturing labor hours were reduced by approximately 25% compared to the previous rocket. Looking ahead, we continue to implement affordability measures to drive greater efficiency.
Another measure of efficiency as well as responsiveness is represented by days in launch operations, which were lowered by 9% this past mission, with greater reductions expected for the next launch and subsequent missions. Fewer days in launch operations significantly reduces our overall launch costs and drives overhead efficiency, while increasing our launch responsiveness, which is one of our key differentiators. Overall, our manufacturing team is progressing ahead of planned learning curve with plenty of opportunities in front of us.
Our next launch will establish Spaceport Cornwall as the first active space port in Western Europe. This will be the first launch from UK’s soil and the commencement of our international space port business.
As you can see, there is growing enthusiasm across senior leaders ranging from the Head of the UK’s space agency, the Air Chief Marshall to the Royal Air Force, Leaders across the UK Government and Leadership in Cornwall, who all see the importance of this first launch from the UK in their evolution to becoming a fully capable space flight nation.
This historic launch will provide an example to other countries as they look to grow their space capabilities. We expect the UK experience will be an applicable blueprint to share with other allied nations and will help expedite international launch as we continue to work with global leaders to support civil space, national security and their local space economies.
We’ve recently added South Korea to our growing list of planned and potential space port agreements around the world. We are currently in discussions in 13 countries to potentially provide space ports and local launch operations.
With our differentiated launch capability, we can transform airports into space ports, capitalizing on existing infrastructure and reducing local environmental impact in stark contrast for what is required for complex ground launch facilities. And for some of these countries, our launch technology is the only option available to enable launch safely from within their borders.
Shifting to business development. As we’ve continued to deliver successful missions, demonstrating responsiveness and reliability, our engagement with customers has evolved accordingly. The demand side remains robust and we’ve seen strong response from the spacecraft community and notably, from established space providers across all markets.
Recently, we executed a contract with iQPS, a leading Japanese earth observation constellation operator for their synthetic aperture radar satellite. By directly launching them into their specific orbit and on their desired schedule, we will enable them to expand coverage of their constellation. This will allow them to maximize collections and information from areas of key interest to their customers.
And in Brazil, progress continues as we established an in-country entity this past quarter. We also received a launch operator’s license from the Brazilian Space Agency. We were honoured this month to host a cabinet level delegation at our facility to discuss the path forward to bringing an important new capability to the country and economic value to the region.
On the proposal side, in the second quarter we responded to well over $200 million worth of requests from customers, demonstrating increasing interest in our now proven LauncherOne system. We continue to capitalize on the growing space sector by targeting higher value missions and payloads while also executing on the growing markets of responsive launch, international space ports, missile defense and hypersonics.
As we pursue high value NASA and DoD launch contracts, we’ve made significant progress towards next level mission assurance certifications to compliment our AS9100 certified quality system.
And finally, we’ve announced a diverse set of payloads for our upcoming launch. Joining us on that mission will be the U.S. National Reconnaissance Office and the U.S. Space Force working jointly with the UK Ministry of Defense along with commercial customers across the countries of the UK, Poland and Oman.
Now turning to our priorities this year. Our first priority is always to drive mission success through flawless launch execution and fulfill our commitments to our customers. We’ve completed two launches this year and are on track to have delivered four total by the end of the year.
This leads us to our next priority, which is to execute the first orbital launch in history from Western Europe later this year in Cornwall. This will be a strategic proof point demonstrating our global reach and unique capabilities. As we ramp up, we will continue to drive companywide operational excellence, resulting in increased production rate and efficiency.
We’re encouraged with the improvements in labor hours, cycle time and cost reductions that have been seen to date and are building on that momentum. We plan to capitalize on our mission success and the rapidly growing space economy to grow backlog.
Our performance has been exceptional with 100% mission success through our first four launches, and we continue to see strong interest due to the differentiated capabilities of our LauncherOne solution and the Virgin Orbit team.
And with that, I’ll turn the call over to Brita to walk you through the results in more detail. Brita, over to you.
Brita O’Rear
Thank you, Dan, and good afternoon, everyone. Moving to our financial results on Slide 11, our revenue is shown. Our most recent launch valued in excess of $12 million, was executed within 24 hours of the end of the second quarter on July 1st. Accordingly, and in compliance with GAAP revenue recognition, this revenue will be recognized in our Q3 results.
Adjusted EBITDA for the second quarter of 2022 improved sequentially by $15 million and was a loss of $34.4 million driven mainly by timing of lower launch cost of revenue, which will be recognized in Q3 along with the associated revenue from the straight up mission as well as lower R&D and SG&A costs.
We continue to drive cost reduction across the enterprise, which is reflective in this quarter’s results. Adjusted EBITDA excludes the impact of depreciation in amortization, stock-based compensation and the change in fair value of equity adjustments. We’ve included a reconciliation table to adjusted EBITDA in our appendix.
Free cash flow for the second quarter of 2022 resulted in a 16% improvement versus the prior quarter with an outflow of $56 million. This includes $5.3 million of capital expenditures driven mainly by the progress of our next generation ground support equipment in support of our unique space port market position. As expected, we saw an improvement quarter-over-quarter in cash burn and see this trend continuing throughout the second half of 2022, as our efficiency gains continue to be realized.
Turning to revenue per launch, our most recent mission reflected the expected higher revenue from premium value missions, as we are moving beyond early development contracts. As we discussed on our previous call, we expect to maintain the $6 million to $12 million revenue per launch range in the near term as demonstrated by our recent launch on July 1st.
By nature, revenue per launch will vary depending on the customer, space port and mission specific requirements. Beyond that as Dan mentioned, we continue to pursue even higher value missions to capitalize on our unique capabilities.
In addition to traditional commercial launch activities, our scope and breadth encompasses civil space ports, responsive space, missile defense, hypersonics and space solutions. The development of these diverse revenue streams coupled with our reliability will drive additional opportunities beyond traditional launch, and will include maintaining readiness, O&M services and equipment sales. Our solution uniquely addresses each of these revenue channels.
Turning to our full-year guidance. We expect to have four launches in 2022 as we focus on executing our historic and strategic Cornwall launch later this year. In addition, we continue our progress toward obtaining higher level certifications for higher value missions. Our 2022 revenue outlook is between $30 million to $40 million, driven primarily by increasing revenues per launch. In addition to launch, we expect to recognize space port revenues as we execute on various studies across the world and start to provide local launch support systems.
For free cash flow, we expect an outflow this year in the range of $220 million to $230 million. This reflects our continuing focus to reduce cash burn as we expect over $20 million of favorable free cash flow in the second half compared to the first half. Higher launch revenues combined with cost reduction efforts and improving working capital will drive continued free cash flow improvements.
Finally, I want to touch on cash. As we continue to bolster our financial position through a variety of efforts, we are fortunate to have had the strong backing from our largest shareholders, which has enabled us to focus on development, execution and expansion of our launch solution to open space across the globe.
We finished the second quarter with cash and cash equivalent of $122 million, including a capital infusion of $50 million, which we expect to provide sufficient near-term liquidity. We will continue to be opportunistic in the capital markets.
Operationally, we continue to win new business and execute on our existing backlog, which will generate cash as we increase launch rate and drive cost reduction bolstering our gross margins. In addition, capturing new and higher value orders will drive working capital benefits and cash receipts.
And with that, I would like to thank you for your time. And we’ll now turn the call back over to Dan.
Dan Hart
Thank you, Brita. At this point, we’d like to open the line up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from John Roy with Water Tower Research.
John Roy
I had a question on the higher revenue per launch. Can you give us a little more color on why it was $12 million for this last launch? And I know you guided to $6 million to $12 million, but where can that go long term? What is the real kind of factors that drive that?
Dan Hart
Can you – I’m sorry, you dropped out just a bit on my phone. Can you just repeat that?
John Roy
Sure. So you were talking about higher revenue per launch for the last launch. I was curious as to the color on why that was high and where — I know you guided the $6 million to $12 million, but where can that go long term?
Dan Hart
Well, our initial launches were assigned before we really had technical feasibility demonstrated. And so you’re seeing a reaction to — of the market as we have steadily proven the technology and then gone into operations and demonstrated the reliability of the system. And so the risk quotient with customers changed considerably over the past 18 months as we’ve flown 4x and gotten 33 satellites into orbit.
So that’s part of what you’re seeing. You’re also seeing that some customers have additional requirements and needs, oftentimes government payloads require some additional aspects of mission assurance or handling of their payloads. And we see some real potential as we go forward to continue to drive towards higher value missions.
One of the things we’re doing right now, as I mentioned in the call, is we are working to obtain certifications for higher level value for payloads. And you can go and see what some of the NASA and DoD higher value payloads charge for launch these days or what the prices are, and that would give you some insight into some of the opportunities that we have, as well as space ports and launching remotely.
John Roy
Right. And maybe as a follow up to that, when you go international, I mean is that also going to maybe start out a little bit lower on the price, because you’re — obviously it’s your first time for international or do you expect actually that could be on the higher end?
Dan Hart
Well, yes, I mean, as we work internationally and in region, certainly there is a differentiator associated with flying from the region and being part of the local economy and part of the infrastructure of the country or region. And so there’s an opportunity there as well.
Operator
Our next question is from Josh Sullivan with The Benchmark Company.
Josh Sullivan
Just as we look at the cash burn outlook and we move from ‘22 into ’23 eventually, where are you still going to be investing or what are the big cash needs after this year? And then where I assume volume, but where else might we see some improvement on cash next year?
Dan Hart
Most of our focus right now is in ramping, and so — and that has a couple of flavors associated it. There’s actually investing in whip in terms of producing the rockets, but also some additional activities associated with laying out the factory, our feeder lines are in place, but they’re being optimized for the full rate. And so we’re investing there.
We also have R&D going, I mean, we continue to enhance the capabilities of the system, the rocket tune our engines, and we’re making — we’ll be responding to the market and our customers and their needs in making sure that our system is fully satisfying their needs, and that’ll help us to drive further market share. So those are the primary areas.
Brita, any other comments there?
Brita O’Rear
Yes. I think, you’ve captured it quite well, Dan. And we see that layover cash flow and we’ll continue to prove into the next year.
Josh Sullivan
And then the 9% improvement on the launch costs this quarter, what drove that and then maybe what should we think about the cadence of launch improvements going forward?
Dan Hart
Well, we’re in this initial phase of ramping up and as we do, as in most aerospace programs, you get a nice learning curve, and so we’re seeing that. We’re also putting a lot of innovation into how we build the rocket, the tooling associated with it, automating more of our testing and automating more of our transactions in the factory. And all of those are building momentum as we build more and more rockets. I mean, there’s a lot of smiling faces right now on Rocket 7 as we push it through integration. I was walking through the factory the other day and the speed in which integrated testing for instance was going is just so much faster than it was say, on our first rocket.
Josh Sullivan
And then as far as the Cornwall facility, what’s driving the timeline there?
Dan Hart
Well, Cornwall is an — is a fairly large endeavour in that, it’s the first time ever launching from the UK. And so there is really four or five pieces that are taking place. As I mentioned, our rocket is about ready to leave the factory over the next couple of weeks. It’ll head up to Mojave and we’ll do a full launch rehearsal. We are also working very closely with the CAA, they’re the regulatory agency, essentially the FAA of the UK. And this is the first launch that they’ve ever done, and so we’re working very closely with them and it’s a new process and it takes a bit of time to go through it.
We are — we’ve got a lot of engagement going there and it’s moving forward, but it’s — it is new. It’s not like with the FAA where they’re used to licensing. So that’s taking a bit of time. And then as every launch where the payloads are coming along and then the other, the last piece is Cornwall, has some updates to their airport and the facilities which are coming along nicely, but it’s all those pieces coming together that are driving the first launch in Cornwall.
Josh Sullivan
And then just one last one, I mean, any notable supply chain issues that you’re facing.
Dan Hart
We’ve had a few minor ones, but what’s unique and what’s really good about the way we’re set up is we’re very vertically integrated. And so where we’ve had say, an electric component that was short, we can go down and make a modification to the avionics box pretty quickly. It’s not a matter of coordinating with a supplier, it’s really an engineer talking to the floor. And so where we’ve had the isolated incidents where we’ve had a part that was short, we’ve been able to work through it pretty easily.
Operator
Our next question is from Edison Yu with Deutsche Bank.
Edison Yu
Just had two, fairly quick questions. So the backlog number, obviously quite strong. Do you have any sort of rule of thumb in terms of what you expect to convert on the non-biding backlog? There’s obviously been a lot of announcements, but curious if you have any sort of view on how much of that can ultimately become binding?
Dan Hart
I can’t give you a number on that. I can say what we’re seeing is the momentum building after every successful launch. And so what we’re seeing is stronger and stronger engagement from the most established spacecraft providers and operators successively as we’ve proven the system. And so we’re actually seeing growth and more reach through RFPs and queries than we’ve ever seen before. So we’re — I can’t really give you a guidance on that as much as saying, the trend is very positive honestly through each of the market spaces. I mean, we’re hearing a lot of input from NASA, from the DoD as well as from the commercial community.
Edison Yu
Understood. And then just there was a comment on the slide that, I think you submitted over 200 million in proposals in Q2. How do we — that’s not in the backlog number, correct? That would be potential, I guess incremental to that? Or how do we think about that 200 million.
Dan Hart
That’s correct. That would be adding to our backlog and really focused on our firm backlog, and building that higher. So that’s a reflective of really what I just mentioned.
Edison Yu
Okay. And just one more kind of higher level question. How do you sort of see the competitive dynamics going forward? I think there’s been quite a bit of news in launch across the board, there’s been I think delays as well, some failures for some competition. How do you view those competitive dynamics?
Dan Hart
So number one. As I mentioned in the call, I mean, I am incredibly proud of the Virgin Orbit team. Not only did they move forward and prove out a new technology in launch, but now with four launches in place and 33 satellites successfully delivered, it’s really well established. And so that’s one, a major differentiator between this team and really almost everybody out there.
The other aspects that I’ll mention is, we are very differentiated in our approach and it’s because of that technology. And so we have areas that we are penetrating the market and that frankly others don’t have access to, whether it’s international space ports and the ability to convert an airport into a space port, the possibility and the high level businesses associated with missile defense and hypersonics, and the kinds of experimentation that’s done using air launch today where we can achieve it in a straightforward manner with our system. And so those are areas that we’re very excited about.
So, I mean the bottom line it’s a small club of launchers that are in operation, and we have differentiation in markets that others don’t. So we’re pretty excited about where we are.
Operator
We have reached the end of the question-and-answer session, and I’ll now turn the call over to Dan Hart for closing remarks.
Dan Hart
Well, I want to thank everybody again for joining us on a Friday afternoon. Appreciate you being with us for the journey. And we look forward to sharing our news, our events, our milestones, our launches with you as we go forward into the third quarter. Everybody have a good weekend.
Operator
This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.
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