Virgin Orbit Holdings, Inc. (NASDAQ:VORB) Q3 2022 Earnings Conference Call November 7, 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
Scott Deuschle – Credit Suisse
Edison Yu – Deutsche Bank
Josh Sullivan – Benchmark Company
Austin Moeller – Canaccord Genuity
Operator
Greetings. Welcome to Virgin Orbit Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded.
I’d now like to turn the conference over to your host, Stephen Zhang, Vice President, Investor Relations. You may begin.
Stephen Zhang
Good afternoon. I’d like to welcome everyone to Virgin Orbit’s third 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 that 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 third quarter 2022 earnings conference call. Today, I would like to begin with our recent accomplishments followed by our upcoming launch activities, the scaling of our business and expanding geographical reach and I’ll end with the latest on business development growth and our key priorities before I turn the call over to Brita for a closer look at the numbers. Let’s begin with a quick look at the highlights in the quarter.
On July 1, we executed our fourth launch. The mission continued our track record of 100% mission success over our first 18 months of operations. This brings a total of 33 satellites precisely delivered into our customers’ target orbits. We’ve had significant activity in our international spaceport sector with the signing of agreements across several countries including Australia and South Korea and just this past month with Luxembourg.
On the revenue side, we saw a significant increase in the quarter with over $30 million recognized, a testament to the dedicated Virgin Orbit team and execution on backlog. This includes the straight up mission in addition to proprietary launch service activities.
And finally, having deployed the LauncherOne system to Cornwall, we have demonstrated the mobility and flexibility of our Launch platform, which is a key differentiator of our LauncherOne solution.
Now let’s get into the details. Our third quarter began on a very strong note when we delivered seven satellites to lower Earth orbit for the United States Space Force. This was our fourth successful launch. We have now demonstrated the robustness of our system and its ability to execute in a range of weather conditions and various orbits. In addition, our system has shown responsiveness and launch operation by delivering customer payloads to their precise orbits early in the launch window.
On October 11, Newquay Airport in Cornwall was transformed into an air and spaceport when we successfully deployed our launch system and activated the site for space launch activities. Our upcoming Cornwall launch will come with many first, the first orbital launch from UK soil. The first orbital spaceport in Western Europe and the first of many international launches for Virgin Orbit. Through air launch, we can quickly and efficiently turn airports into spaceports and open sovereign launch capabilities across the world where traditional ground launch may not be possible or practical.
Our activities in Cornwall form a blueprint for other allied nations, which will aid them in developing spaceport capabilities supporting their local space economies and government needs. The flight manifest for start me up includes payloads from seven different programs, demonstrating our global reach and diverse customer base.
On the commercial side, we are opening space to a wide range of customers with missions across space-based manufacturing, maritime domain awareness, global navigation systems and general Earth observation. In this heightened geopolitical environment, the U.S. and the UK are using this mission to further their collaboration as allies in the space domain. Air launch provides the responsiveness and flexibility needed to preserve vital access to space.
Recent rhetoric threatening satellite service and actions in Ukraine have demonstrated that space is both a critical and contested environment. Participating in this launch are organizations, including the UK Ministry of Defense, the Royal Air Force, the U.S. National Reconnaissance Office and the U.S. Space Force. In addition, the Royal Air Force is leading a scenario-based exercise using LauncherOne to demonstrate how the unique capabilities of our system can provide options in response to a variety of potential world events.
The arrival of our air launch system in Cornwall has attracted significant attention from the UK space community, government, media and even royalty who recognize our mobile system as a key element of the UK space strategy and as an enabler for the local space ecosystem.
Turning now to new business. We recently announced a multi-launch agreement with Spire Global, who operates the world’s largest multipurpose satellite constellation. As a reminder, we demonstrated the flexibility of LauncherOne’s rapid call-up capabilities with a quick turnaround and late payload integration of Spire satellite onboard our January mission. Building on that success, we are now teaming up in a broader capacity to provide launch options and solutions for Spire and their global customer base.
We’ve expanded our geographic reach with the addition of spaceport agreements in Australia, Luxembourg and South Korea. In Australia, our agreement with Wagner Corporation, one of the region’s leading property and infrastructure development companies, establishes a partnership whereby we will engage with government and local stakeholders to further the development of a national mobile launch capability in Australia. The partnership seeks to certify Wagner’s Toowoomba Wellcamp Airport as a national spaceport and to perform an orbital launch demonstration in early 2024.
Last month, we were hosted by the Defense Minister of Luxembourg and the U.S. ambassador. During our meeting, we signed an agreement to begin a collaborative effort, whereby Luxembourg, a key logistics hub for NATO, would add LauncherOne capabilities to their portfolio. The goal is to provide a mobile air launch system with responsive space capabilities for NATO partners and other allies across Western Europe.
And in South Korea, we are under contract with J-Space to define the operational requirements and the industrial support needed to launch satellites from South Korea. This cooperative effort is designed to act as a catalyst to the Korean small satellite and space solutions market simulate local economic growth and provide the South Korean government with a flexible and responsive launch capability in support of a wide range of mission applications.
We continue to expand globally, demonstrating our growing international reach as our differentiated air launch technology continues to attract widespread interest. As we’ve shown in Cornwall, we can transform airports into spaceports, capitalizing on existing infrastructure and minimizing local environmental impacts, a major improvement over blasting off from traditional ground launch complexes.
For some of these countries, our technology is the only option to enable launch safely from their borders. We’re now in discussion or have agreements with over 13 countries across the globe and expect to book additional firm orders in the near-term. The market has taken notice of the execution we’ve demonstrated with 100% mission success across our first four missions.
On the national security side, working under contract for the Missile Defense Agency, we have confirmed the utility of the LauncherOne system for hypersonic development and missile defense target applications. Follow-on work is active with our objective being a full-scale demonstration followed by a growing cadence of mission support and services.
We continue to work closely across the national security community to enable tactically responses space through our air launch technology, which has recognized distinct advantages in this mission area. Our strategy includes capturing launch contracts for high-value payloads, resulting in increased revenues. By evolving our processes as we ramp our launch cadence, we’re driving to the required certifications while working closely with NASA and the Space Force.
Looking internationally, with the growing interest in the number of agreements we’ve signed across the space port sector this new market is shaping up to be a major growth area. On the commercial side, we’ve seen increasing interest from the satellite community and more notably from more established space providers such as Spire. We are actively engaged with several others for multi-launch agreements.
We see strong activity across market segments with approximately $0.5 billion in active proposals, of which several decisions are expected in the coming months. These proposals, in addition to our MOU and LOI agreements are approaching $1 billion of total opportunities. Overall, we continue to capitalize on our position in the growing space sector by targeting commercial multi-launch agreements, international space ports, high-value government payloads, responsive launch and other national security missions.
Now turning to our priorities for the balance of the year. Our first priority is to drive mission success through flawless execution and fulfill our commitments to our customers. To this end, our team is on site with our rocket underwing in Cornwall. We are proceeding through our launch campaign as we continue to work to obtain the necessary regulatory approvals in the UK.
We are now expecting three launches this year, driven by the timing of regulatory approvals, our efforts to obtain certifications for high-value payloads and satellite readiness. As we ramp up, we continue to see operational efficiency improvements resulting in higher production rates and lower cost. For instance, the time between launch and the next rocket delivered for launch was reduced by approximately 50% for our current mission as compared to the previous. And finally, we are building on our mission success, differentiated capabilities and market reach to expand our backlog. All of this is enabled by our talented world-class Virgin Orbit team.
And with that, I’ll turn the call over to Brita to walk you through the results in more detail. Brita?
Brita O’Rear
Thank you, Dan, and good afternoon, everyone. Moving to our financial results on Slide 17. We recorded $30.9 million of revenue in the quarter. This was driven by our most recent launch in addition to recognized revenues for our other proprietary mission unique launch service activities as well as funded studies. We are more than just a launch platform, other revenue streams encompass customer-funded R&D, planning and activating space ports, ground support equipment, studies and special mission services.
Adjusted EBITDA for the third quarter of 2022 was aligned with our expectations and a loss of $42.9 million, driven mainly by the cost of goods sold associated with the higher revenues. We saw improving gross margin percentages through higher revenues in launch, services and studies. Another positive contributing factor was our continued progression down the learning curve resulting in additional efficiencies.
Adjusted EBITDA excludes items such as the impact of depreciation and amortization, stock-based compensation and fair value adjustments. We’ve included a reconciliation table to adjusted EBITDA in our appendix.
Free cash flow for the third quarter of 2022 was an outflow of $52.5 million. This was a 6% improvement compared to the prior quarter as we had higher collections and continued to realize cost reduction gains. We are activating our state-of-the-art engine test stands in addition to investing in our production ramps and have just completed our next-generation ground support equipment, which is in operation at Cornwall.
Turning to our full year guidance. As Dan mentioned, we expect to launch 3x in 2022 as we focus on executing our strategic Cornwall launch and work with our customers on the timeliness of spacecraft availability.
On the revenue side, we have already secured the lower end of our previous outlook range and are holding the top end range of $40 million. Our launch operations execution to date gives us confidence in our revenue outlook.
No change to our free cash flow outlook as we continue to expect an outflow this year in the range of $220 million to $230 million. This reflects our focus to manage cash as we continue to expect second half free cash flow to be favorable compared to the first half.
Sequentially, in Q4, we are projecting higher working capital, mainly associated with the production ramp with offsets from additional contract signings and the corresponding cash receipts.
Looking ahead, similar to this year, we expect continued higher revenues per launch as we execute on our backlog and drive mission assurance certifications to deliver higher-value payloads. We will also continue to serve our government customers with diverse, highly specialized missions and services.
On the international side, we expect to continue to execute space port agreements and demonstrate the value of our unique mobile system. In terms of launch rate, we are targeting to more than double our launch rate next year as we focus on production ramp while building upon and extending our firm backlog.
In addition to launch, we will continue to expand into market adjacencies in international space ports, missile defense targets and hypersonics. Operational execution, market penetration and expansion and disciplined cash management will be key for us next year as we drive towards becoming free cash flow breakeven in 2024.
Finally, I want to touch on cash as we continue to bolster our financial position through a variety of efforts. We have strong backing from our current shareholders as demonstrated by the recent $25 million convertible investment from Virgin Investments, a part of the Virgin Group. We finished the quarter with cash and cash equivalents of just over $71 million. The recent $25 million investment is in addition to this balance.
We will be opportunistic in the capital markets to fund our growth. Operationally, we continue to win new business and execute on our existing backlog, which will generate cash as we increase launch rates and drive costs down, improving our gross margins. In addition, capturing new higher-value orders provides 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 or comment comes from the line of John Roy from Water Tower Research. Mr. Roy, your line is open.
John Roy
Great. So Dan, obviously, there’s a lot of momentum on the international side and on the space defense side. I wondered how this is impacting the team internally your ability to hire and also on your interactions with sales prospects?
Dan Hart
Well, I mean, the act of doing new and exciting things is a plus when it comes to exciting the workforce and bringing in the community. And that’s what really we’ve seen. So we’ve got a lot of energy going there. We have a team here in the UK doing something that’s the first time in history. If you walk down the street in Newquay and you’re wearing a red Virgin Orbit jacket, you’ll get a happy hello because the community knows that there’s something new happening and that all filters into the workforce. We’ll continue to do first as a company, and that’s to demonstrate our differentiation as an air launch platform, and drive open markets, which is what you’re seeing really in the international and the defense side as well.
John Roy
And as maybe as a quick follow-on. What are you seeing are your limits to your growth? I mean, I know you’re still working on making sure that everything works 100%. But what is kind of inhibiting you from necessarily growing faster?
Dan Hart
I think we – the operational ramp-up is critically important. It’s got a lot of our focus. And at this point in the company that it’s supply limited. And we need to be very mindful that you’re as good as your last launch. And we’re thrilled with the four successful launches we’ve just had, but we’ve got to mind our mission assurance focus and our technical activities as the factory ramps up and make sure that we keep that recipe and drive it forward.
John Roy
Great. Thanks.
Operator
Thank you. Our next question or comment comes from the line of Scott Deuschle from Credit Suisse. Mr. Deuschle, your line is open.
Scott Deuschle
Thank you for taking my questions. Brita, can you disaggregate revenue and COGS between launch and other activities?
Brita O’Rear
Scott, I’m assuming you’re referring to our Q3 revenue of the $30 million. And so in that value, as we discussed during our last earnings call in Q2, we do have the higher value launch revenue and in addition to that, we also have some launch-related service activities in addition to some study activity. And that’s really comprising the revenue mix that we have in the Q3.
In regards to the margin, you’re going to see that on the launch services-related activity. There is some higher revenues there and margin. But I’m not going to get too much into the detail of the launch versus non-launch COGS or margins. But it’s fair to say that our launch margin is lower. And that’s really looking at where we are in the initial rate of production, and we expect our launch margins to continue to improve. Of course, as we come down the learning curve, as we increase our rate and we scale and then we’ll also gain economies of scale. So what you’re seeing in the quarter is really a blended result.
Scott Deuschle
Got it. So would it be fair to say, I guess, without getting into the details, that the COGS per launch have continued to improve with the rate that you’ve expected it to improve over the past, call it, six to nine months? You continue to see the learning curve progression that you’ve hoped for?
Brita O’Rear
Yes. We are seeing – we are continuing to see efficiencies being gained there as we continue to scale.
Scott Deuschle
Okay. And then, Dan, can you talk a bit about TacRS and what your options are there at this point? Are you considering protesting the award? Or do you want to kind of preserve the customer relationship and not go that route right now?
Dan Hart
I mean, clearly, tactically responsive launch is a key market area for us, and we’re going to work and continue to work closely with that customer. We see that it’s highly valued. We were rated really very, very high in our technical and natural capabilities of the system. And so we were very encouraged by that. Obviously, we’re disappointed in the loss. At this point, we’re – at this point, we don’t anticipate a protest, but we’re – instead, we’re working very closely with that customer to bring forward a solution, which we think will be a game changer for them.
Scott Deuschle
Okay. Make sense. Thank you so much.
Operator
Thank you. Our next question or comment comes from the line of Edison Yu from Deutsche Bank. Just a second please. Mr. Yu, your line is open.
Edison Yu
Thank you. Thank you for taking the questions. First one, to your latest take on pricing. I know you’re hoping to double launches next year. Do you have any sense of where pricing is trending for that activity?
Dan Hart
Well, I think we’ve got a really wide spector of different customers with different value propositions. You’ve got – we’re seeing stability in the commercial market, where, as I think we mentioned in the call, multi-launch agreements are being discussed. And what we’re seeing is the companies that are in operations are driving a good value for their customers.
In addition, you’re seeing developments in the national security area and with our differentiated capability, we have not only a traditional launch, but as we just discussed, tactically responsive launch as well as inroads into hypersonic R&D and missile defense target areas, which other launches don’t have nearly as much of an opportunity for.
And so those specialized government areas carry a higher value. And as Brita mentioned in the call as well, there are different pedigrees of rockets and launch systems. And what we’re doing is we’re pursuing the higher class certifications for NASA as well as the Space Force to allow us to gain access to launching high-value payloads, which yield higher revenues as well. So that’s kind of how the overall landscape looks. And overall, we see a good value for our product.
Edison Yu
And a separate topic. Clearly, a lot of momentum on international. Any sense to provide some sort of range on what those opportunities could end up manifesting to be? I’m not going to try to pinpoint a specific number, but some sort of rough approximation of what those things could potentially be to one day. Thanks.
Dan Hart
Well, I can certainly describe – let me describe the overall approach, and I think that will give you some insights. And again, I mean, we’re seeing a huge amount of interest and a lot of agreements that we’ve started to enter into. And as well, I happen to be sitting in the UK right now, having just walked down what used to be a blank slab of cement at Newquay Airport is now an aerospace port.
But our proposition is to come over and really be part of the space ecosystem and provide a sovereign launch capability. There are obviously commercial as well as government purposes at work. And it’s always the most powerful when those come together, commercial and government purposes. I mean, that’s how space grew up in the U.S.
Our services vary from a campaign and doing a launch to something like what we’re doing here, where there’s ground equipment and some infrastructure associated with it, and we can sell and maintain infrastructure, ground equipment that services and fuels our rocket to an airplane that’s permanently stationed and supplying a full turnkey system.
And we’re having discussions with different nations on different levels of support that way. But obviously, we’re most focused on the latter. And those are the constituent pieces.
Edison Yu
Okay, thank you very much.
Operator
Thank you. Our next question or comment comes from the line of Josh Sullivan from Benchmark Company.
Josh Sullivan
Good afternoon.
Dan Hart
Good afternoon.
Josh Sullivan
As far as the regulatory process with the UK spaceport, what are the remaining large tentpoles that you see?
Dan Hart
We don’t have any major issues at play. I mean, this is the first space launch ever from the UK. There’s a new set of regulations. There’s a new team. We’ve been working very closely with them and it’s just taken time. I think there will be a lot of lessons learned from this that will help shore up the process. I’m hoping, and I think there’s been a lot of – some good discussion about trying to bring more commonality between the U.S. and the UK and maybe other nations processes. So that documentation and various things are not done in multiple ways.
But I mean, the good news is we don’t see a showstopper or like a big issue we’re working. But it is taking longer than we had anticipated and it is taking a bit more effort than we anticipated as well.
Josh Sullivan
And just on that commonality comment, I mean, are the other regions like Poland and elsewhere watching the process from afar?
Dan Hart
Yes, very much so. There are a number of countries watching and learning. And I think this activity will help us form a blueprint that we can apply again and again.
Josh Sullivan
Got it. And then just on the Spire multi-launch relationship, can you just provide some color there? How do you think you won that contract and then any other aspects that you might provide?
Dan Hart
Well, Spire is a really dynamic forward-leaning innovative company. I’d say probably the biggest thing that started this is, as I mentioned, was last December, we were getting ready for our launch and our team got a call from the Spire team and they had a satellite that was waiting for a launch in another launch provider, and they really were urgently needing it to get up, our G&C team looked at our performance and our orbit, and they said, we could do this.
So the FAA’s credit, I mean, we call them. And within a week, they said, we’re okay if you add that spacecraft. And three weeks later, they were in orbit. So that started the discussion. And then it’s a matter of our launch record, our responsiveness and our value proposition.
Josh Sullivan
And then just lastly, on the comment, looking for breakeven by 2024. What do you think are the major need to have to get there? And then maybe what are some of the risks around it?
Dan Hart
Again, as I said before, I think the ramp-up is our key focus right now. And so we are seeing good signs. The rocket that’s currently down the street from here and getting ready to launch came out of the factory in half the time from the last launch than the one before that. So we’re seeing some good, nice bright spots like that. We got to continue to push it.
We haven’t had any big supply chain issues, but balancing out your feeder lines into your factory are important. So all those operational activities are ongoing. And then what we – we want to see, and we’re working hard on and making progress on are these certifications, which I think help your operations, help your mission assurance, but also give confidence to customers so that they can put their high value payloads on your system.
We did just get ISO 9000 certification of two, three, four months back. We’re working on the other pedigree and items. So those pieces and it’s really just expanding into the markets we described.
Josh Sullivan
Great, thanks for the time.
Dan Hart
Thanks.
Operator
Thank you. Our next question or comment comes from the line of Austin Moeller from Canaccord Genuity. Mr. Moeller, your line is open.
Austin Moeller
Hi, good afternoon, Dan and Brita. So I mean, Virgin will have three launches this year and given that long reads can build at a sort of maximum build rate around 20 rockets per year, what do you see as key bottlenecks keeping you from ramping the number next year closer to two times the current, which would be maybe like six to eight? Is it more the supply side or more the demand payload readiness side?
Dan Hart
It’s really mainly the supply side. It is going through that ramp. I mean, we have the capacity. But what you do as you go through LRIP typically, low rate initial production is you make improvements, you make – you find whatever weak points there are in your components, in your build, in your tooling and you improve on those. And so any change is usually a headwind against ramping, but those changes are important because they give you a more efficient build process, overall. And for the long-term, it gives you a more capable and more reliable product in the long-term, too. So as we go through, we will make – and we are making small changes like that to make sure that the factory runs efficiently and the product is reliable.
And if you look at big companies who make airplanes and things, they sometimes call those early vehicles, they are teenagers. They take a little bit longer and – it pays off as you get into rate because then your rate really picks up. And so we’re right in that steady phase where we are ramping but we’ll hit a knee in the curve once some of these developments and changes we’ve done.
Austin Moeller
Okay. That makes sense. And one more, can you talk about the status of the L3Harris upgrade work on the two new 747 motherships?
Dan Hart
We’ve been really focused mostly on the ramp. We will probably defer the mothership a bit as we really focus on ramp. We do not need it for another 1.5 years to two years given the capability of Cosmic Girl. At the same time, we’re keeping them warm. We do have some customers who are interested in also having aircraft. And so as we expand in the market, and get signals there, we have the ability to ramp those up quickly.
Austin Moeller
Okay, great. Thank you for the color there.
Operator
Thank you. I’m showing no additional questions in the queue at this time. I’d like to turn the conference back over to management for any closing comments.
Dan Hart
Well, let’s see. I’d just like to thank everybody for joining us today. It’s an exciting time for the company. I happen to be in Cornwall right now, having just left the team as returning branches on an air field. And yes, stay tuned. We will be pressing forward, and we’ll keep everybody informed. Everybody have a great day.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.
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