Rocket Lab USA, Inc. (NASDAQ:RKLB) Q4 2023 Earnings Call Transcript February 27, 2024
Rocket Lab USA, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day. My name is Ellie, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Rocket Lab Fourth Quarter, 2023 Financial Results update and conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I’d now like to introduce to the call Colin Canfield, Head of Investment and Relations. Colin, you may now begin.
Colin Canfield: Thank you. Hello, everyone. We’re glad to have you join us for today’s conference call to discuss Rocket Lab’s fourth quarter and full-year 2023 financial results. Before we begin the call, I’d like to remind you that our remarks may contain forward-looking statements that relate to the future performance of the company, and these statements are intended to qualify for the Safe Harbor protection from liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance, and factors that could influence our results are highlighted in today’s press release, and others are contained in our filings with the Security and Exchange Commission. Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments.
Except as required by law, the company does not undertake any obligation to update these statements. Our remarks and press release today also contain non-GAAP financial measures within the meaning of Regulation G enacted by the SEC. Included in such release and our supplemental materials are reconciliations of these historical non-GAAP financial measures to comparable financial measures calculated in accordance with GAAP. This call is also being webcast with a supporting presentation, and a replay and copy of the presentation will be available on our website. Our presenters today are Rocket Lab’s Founder and Chief Executive Officer, Peter Beck, and Chief Financial Officer, Adam Spice. After our prepared comments, we will take questions. And now, let me turn the call over to Mr. Beck.
Peter Beck: Yes, thanks, Colin. So, we’ve got a lot of great achievements and milestones to share across Q4 2023 and Q1 2024. Adam will then talk through our financial results for the fourth quarter before covering the financial outlook for Q1 2024. After that, we’ll take questions and finish today’s call with near-term conferences that we’ll be attending. Okay, on to what we achieved in the fourth quarter and for the year, starting with our launch business. So we had a successful return to flight in Q4. We rounded out 2023 with that flight, successfully deploying a satellite for a Japanese customer iQPS. This launch marked the conclusion of an in-depth, round-the-clock investigation that got to the bottom of the issue we had experienced on the previous launch.
With mitigations now in place for future missions, we’re starting to pick up the launch pace for this year. In Q4, we also hit a new annual launch record, ending the year with ten launches, besting our previous record of nine. Not only did we reach this record, but we also commenced launches from our U.S. launch site, introduced and launched our HASTE suborbital Hypersonic vehicle for the first time, and we were the only small launch provider to launch more than one orbital mission in 2023. Overall, a strong year for the Electron team with plenty of firsts and new records, and we look forward to building on that this year. With the end of the fourth quarter, we wrapped up a record year of another kind, this time for new launch deals. We signed 25 new launch contracts in 2023, including 18 Electron missions and seven HASTE missions.
Contracts were signed across a diverse customer base, including civil, defense, and national security and government customers, as well as commercial constellation operators. Clearly, demand for Electron is strong and continues to grow. With two launch sites now up and running, we’re well-positioned to meaningfully increase our launch cadence this year. We’ll dig into some more Electron achievements since the end of Q4 soon, as well as some key Neutron milestones. But first, let’s take a look at some of the key highlights from our space systems business across the final quarter of 2023. Well, we closed out 2023 and we secured a contract that started a new era for Rocket Lab, and that is the era of being a prime contractor. We were selected by the Space Development Agency to design and build 18 spacecraft for the agency’s tranche to transport layer.
As prime contractor for the approximately $0.5 billion contracts, we are leading the design, development, production, test, and operations of the satellites, including procurement and integration of the payload and subsystems. It’s our largest single contract to date and establishes Rocket Lab’s position as a leading satellite prime contractor, providing supply chain diversity to the Department of Defense. All 18 satellites will integrate subsystems and components built in-house by our team, including solar panels, structures, star trackers, reaction wheels, radios, flight software, avionics, and for the first time a launch dispenser. This is a vertical integration strategy at work, and it gives us a real level of control over supply chain, enabling efficiencies, uncertainty on cost and schedule and quality of course.
Of course, the SDA contract is not the only spacecraft constellation we have in development build. Our space systems team rounded out Q4 and the start of Q1 with some key milestones in the development of our constellation for Global Star. We’re now officially progressing from the design phase into production with the first flight frames and build for the constellation of 17 spacecraft. Simultaneously, our spacecraft component teams are getting to work on their subsystems, including solar panels, flight software, and so on. This constellation is still in the early phase, but we’re making rapid progress ahead of the 2025 launch schedule. Now onto a mission scheduled to launch much sooner than that. Our ESCAPADE mission for NASA and the University of California, Berkeley, we’re building two spacecraft headed to Mars orbit via Blue Origin launch scheduled for Q3 this year.
In recent months, we’ve completed both propulsion decks, started environmental testing, and getting ready for ground operations at the launch site in preparation for launch. After a successful mission to the moon for NASA in 2022, we’re looking forward to pushing the boundaries of even more on this highly ambitious space science mission. That’s just a quick overview of some of the key highlights across Q4 and broader 2023. There’s plenty more we could have shared, but in the interest of time, let’s move on to some of the exciting progress and achievements so far in Q1. Okay, Neutron’s path to first flight. So there’s more green across the board, which is what we always like to see with Neutron team delivering on some key milestones at the end of last year and in early 2024.
But let’s dive into some of the details. So, with Neutron vehicle development, we’ve hit my favorite part of the development program. Real flight hardware is not only coming off the production line, but it’s entering the integration test phase in preparation for first flight. The Avionics team has kicked some major goals with successful hardware in the loop, testing for simulated flights to orbit as well as landings. This is a process where we integrate real flight software with real flight avionics and hardware to get thousands of simulated flight environments. Hardware in the loop, or huddle testing, as we call it, has really been a key part of Electron’s success, enabling us to test like we fly on the ground. And it’s exciting and great to be entering that phase for Neutron now.
We’re also well into the test and validation campaign for the Canard’s, which provides stability and steering to Neutron, particularly on re-entry and descent. We’ve now tested our first complete flight representative Canard drivetrain, including motion controller software, linear actuator, and all the Canard mounting hardware, bearings, and so on. Now this is really a big step forward for Neutron, and this represents one of the things we haven’t done before, so it’s great to get that behind us. On the structures side, development and production of Neutrons fairing, and Stage 1 and Stage 2 tanks continue, fairing molds and plugs are completed. These are some of the final steps before carbon composite flight structures start to come out of the factory.
Things start to move very quickly in composites from here, so expect to see some more structure resembling a complete Neutron in coming months. And it’s been a big few months for the propulsion team bringing the Archimedes engine to life. The single-element pre-branded test campaign was completed. All of the engine components are complete or in final production for the first engine and once integrated testing is complete, we’ll start to see some fire at [indiscernible] and can move into production of those flight engines following successful test campaigns. Then on the launch infrastructure, Launch Complex 3 in Virginia is taking shape nicely. The team has completed initial piles and concrete foundations work for the water tower, locks tank, and of course the launch mounts.
And having built three launch pads now, even though I said I’d never built another one, we’re really starting to get well refined and streamlining the process to build these quickly and efficiently. One of the ways we do this is by developing lots of key infrastructure in parallel. So we don’t wait until foundations to be done to you know, start the cryo tanks. We do it all concurrently and so on and so forth for launch mounts. We fabricate all those large steel structures off-site and bring them to site and install them just as soon as that foundation work is done. That’s how we’re able to build LC-2 in the record time of just ten months. And now with foundation work substantially underway, above-ground infrastructure like the launch mount, water tower, and tanks will start to be installed across the next couple of months, ready for final integration testing, and then, of course, in preparation for launch.
Now over to Mississippi, where Archimedes test stand is ready for hot-fire at NASA Stennis, all the major concrete and steel construction work is complete and commissioning of the locks cold flow systems is underway. We’re on track for the stand to support an engine by the end of March. After that, we’ll really start to see some fire, which would be good. And on the Neutron production infrastructure in Q4, we announced we are establishing a space structures complex in Middle River, Maryland, in the former Lockheed Martin vertical launch building. This facility will be home to the development and production of a wide range of large composite structures and products for both launch and space systems, including Neutron. Just a couple of months after taking over the building, we’ve ready the facility to accept and install the large-scale production equipment, including our automated fiber placement machine, which is really the key to rapid repeatable production of Neutron’s composition structures.
So across the board, we’ve reached some really critical milestones on our journey to the first Neutron launch over the past quarter and a bit. Now we’re at the pointy end of the development program where all the hardware, systems, and infrastructure start to integrate, culminating in Neutron’s first launch. Currently, our schedule closes for this by the end of 2024, and we do have a track record for delivering programs faster than typical industry standard timelines. But we’ll know more about how close to the schedule and timeline we are and we can hold once Archimedes breathes fire and we complete a couple of other major tests. So we’ll have an update on that soon. And then, now back to small launch. We had a strong start to the quarter, so far with two successful Electron missions.
These included a dedicated launch for Spire Global and North Star, as well as a really complex and unique mission for Astroscale. The mission launched a satellite designed to rendezvous on orbit with an old derelict Japanese rocket stage. The purpose was to demonstrate the ability for a satellite to closely follow and monitor a non-cooperative object in space, with a view to understanding how satellites might be able to dock with pieces of space junk in the future and drag them back to Earth and obviously reduce orbital debris and increase space sustainability. Now, I don’t think many people really realize just how wildly ambitious and challenging that mission was for our team. It’s difficult enough to rendezvous two items in space that talk to each other like an astronaut capsule and the [ISS] (ph).
They’re both communicating with each other and they know where each relevant object is. But in the case of a derelict rocket stage, it offers no data on its location, speed, tumble rates, all of these things you really, really need to know to approach something in space. So to put Astroscale’s spacecraft into exactly the right place at the right time to rendezvous with the stage. A GNC team demanded highly accurate orbital insertion with tighter margins than required on just about any missions. The exact zero was only able to be defined a day prior to the launch and required an [LTAN] (ph) accuracy of only plus or minus 15 seconds. I should note that the GNC team was able to deliver that accuracy to within 1.05 seconds, so 15 times better than the speed that was required.
The team delivered perfect bullseye, the spacecraft was deployed to exactly the right location and they were able to contact the spacecraft and prepare to start commissioning it with only minutes — with after minutes after launch. It’s this level of tailored mission design, and that simply is just not possible on rideshare missions. And why demand for Electron continues to grow. With two launches down. We have two more to complete this quarter, including a mission for Synspective from LC-1 on March 9 UTC, followed by a dedicated launch for the National Reconnaissance Office on March 20 UTC from LC-2 in Virginia. The missions are a testament to the trust and value of our customers place in Electron since this will be Electron’s fourth launch for Synspective and fifth launch for the NRO.
It will however be our first NRO launch from U.S. soil, so we’re excited to demonstrate responsive launch capability for the DoD on two continents. Not only did we launch two missions from Q1 so far, but we brought an Electron back too. We recovered Electron’s first stage from the Spire mission in January, bringing it back for an ocean recovery. Electron’s recovery process has been iterative, enabling us to make small modifications and improvements to the stage and marine recovery process without causing a slowdown on the rocket production line, enabling us to keep increasing Electron’s launch cadence. Generally, a program like this would cause a lengthy pause in production to allow for design freezes and production changes, but by taking small steps on each flight, we’ve been able to continue delivering the launch service to our customers and the one that they rely on.
Happily, this process has yielded successful results. The January mission saw Electron come back in the best condition yet. The stage is currently undergoing hydrostatic testing to determine if we’re comfortable to put it back on the pad. The next milestone for the recovery program is to fly a mission with nine pre-flown Rutherford engines. You remember that we successfully relaunched a single Rutherford engine late last year, so now we’re going to put all nine of them through their paces. So keep an eye out for that milestone coming. Right, on to some of the key highlights for our space systems since the end of Q1 and just last week, we achieved a world first, successfully reentering a capsule from orbit that was used to manufacture pharmaceutical products in space.
We designed and built and operated the spacecraft for Varda Systems Industries to host their in-space manufacturing capsule. Launched in of June last year, the spacecraft was initially designed to operate in orbit for around four months before being deorbited into the Utah desert. However, lengthy delays in regulatory approvals to bring the spacecraft home meant that we ended up on orbit for more than eight months, and in a testament to both our spacecraft builders and operators, it performed flawlessly for that extended duration. Now, operating a spacecraft is one thing, but bringing it home and landing it within a tiny designated area is quite another. A team managed 24/7 flight operations, conducted multiple engine burns, and carrying out real-time trajectory calculations and adjustments to set the capsule on a course for the Utah testing and training range.
For context, the margin of error is less than 0.05%, and if an engine burn is even a fraction of a second too long or too short, you end up hundreds of miles away from your designated landing zone. This is typically the stuff of huge government programs and decades of development. The only other company to successfully reenter a capsule from orbit for a purely commercial mission is our friends over at SpaceX. So we’ve joined a very elite club on our first attempt. This mission was the first of four missions that we have booked for Varda, and the next spacecraft is built and ready for launch in the middle of the year. Excitingly, the lessons we’ve learned on this program are helping inform future projects, including scientific sample returns, point-to-point cargo delivery, and of course, human spaceflight capability on Neutron in the future.
So on that note, before I hand it over to Adam to talk through the financial highlights and outlook, it’s fitting time to share an update on our wider spacecraft programs. In 2020, we launched our very first Rocket Lab-built satellite called Photon. It was really a defining moment for the business, a line in the sand where we became an end-to-end space company, not just a launch provider. Since then, we’ve had the privilege of developing, launching and operating spacecraft for a broad range of customers. And they’ve all told us the same thing, they need a reliable, highly capable spacecraft built quickly, affordably, and at scale and we’ve done this. We’ve developed a spacecraft that has delivered a mission — a successful mission to the moon for NASA, we’ve developed twin spacecraft for a mission to Mars, we’re building constellations of half-ton spacecraft for SDA and NDA.
And of course, we’ve proven spacecraft reentry capability now too. As we’ve delivered more and more successful spacecraft missions, demand for these spacecraft or similar variants on them has grown. So we’ve expanded beyond Photon to create a full family of standard spacecraft buses. So allow me to formally introduce Lightning, Pioneer, Explorer, and of course the original Photon. Lightning is our newest spacecraft bus designed for a twelve-year-plus orbital lifespan in LEO. It utilizes electric propulsion, delivers high power and radiation tolerance, and incorporates full redundancy in all critical subsystems. This is a half-ton, three-kilowatt bus, ideal for communications, imaging, and remote sensing. Then there’s Pioneer, a highly configurable platform designed to support large payloads and unique mission profiles, including reentry.
For interplanetary missions there’s Explorer, a high delta V spacecraft with around about a kilowatt of power, large propellant tanks, and precision orbit determination system ranging transponder, and all the things you need to go into deep space. Explorer enables small spacecraft missions to planetary destinations, near-Earth objects, and Earth-moon Lagrange points. And of course, Photon is sticking around as the original spacecraft plus launch option. Thanks to our vertical integration strategy, these spacecraft share many common components and subsystems designed and manufactured in-house by us, enabling us to deliver spacecraft quickly, affordably, and reliably using flight-proven components. Each of the spacecraft are currently on order in a range of quantities, with 40 plus satellites currently in our production backlog.
So from humble beginnings with one spacecraft just four years ago, to a full family of them designed to serve commercial and government partners is certainly an exciting time for our space systems business. So that wraps up the key business highlights from Q4 2023 and Q1 this year so far. So from here, I’ll hand over to Adam to take us through the financial updates. Over to you, Adam.
Adam Spice: Thanks, Pete. Fourth quarter 2023 revenue was $60 million, in line with our revised guidance provided on January 31, 2023, but below the low end of our original Q4 guidance in November, due primarily to the pushout of one of our planned Q4 launches, which was due to the longer than anticipated September anomaly remediation’s. Fourth quarter revenue represented a sequential decline of 11.3% due to the reduction of launches from three in Q3 to one in Q4, partially offset by continued growth in our space systems business. On a full-year basis, 2023 revenue was $244.6 million, with impressive growth of approximately 16% year-on-year, especially when taking into consideration the effect of September’s Electron anomaly.
Our launch services segment delivered revenue of $8.5 million in the quarter from one launch, which is above our targeted average selling price of $7.5 million and consistent with our revised guidance of $8.5 million. Our current aggregate electron backlog reflects an average selling price of $8.1 million and we’re encouraged by a funnel of new business that is consistent with this pricing level. On a full-year basis, launch delivered revenue of $71.9 million, or an increase of 18.5% year-on-year. Our space system segment delivered $51.5 million of revenue in the quarter, which was up 11.2% sequentially and in line with our revised guidance of $50.5 million to $52.5 million. With sequential growth driven by our MDA satellite bus contract, as well as growth in our component businesses.
On a full-year basis, space systems delivered revenue of $172.7 million or an increase of 14.9% year-on-year. Turning to gross margin. GAAP gross margin for the fourth quarter was 25.8%, in line with our revised guidance of 24.8% to 26.8%, while non-GAAP gross margin for the fourth quarter was 32.3%, which was well in line with our revised guidance of 31.4% to 33.2%. GAAP and non-GAAP gross margin performance reflects improved mix in both our merchant component and satellite manufacturing businesses, partially offset by the effect of less overhead absorption in our launch business due to only one Electron launch in the quarter. We ended Q4 with total production-related headcount of 852, up 36 from the prior quarter. Turning to backlog. We ended Q4 2023 with just over $1 billion of total backlog with launch backlog of $248.3 million and space systems backlog of $797.8 million.
Relative to where we ended 2022, total backlog was up 108%, or $542.5 million, thanks primarily to the $489 million base portion of December’s $515 million SDA Beta award. For space systems backlog was up 106% year-over-year, or $410.4 million, again, largely due to the SDA Beta contract signing. In our launch services business, backlog was up over 213% on the back of multi-launch Electron deals with government and commercial partners along with strong HASTE bookings. We expect approximately 41% of current backlog to be recognized as revenues within 12 months as we scale our work in Electron, HASTE, MDA, and other space systems projects. Turning to operating expenses in the quarter, GAAP operating expenses for the fourth quarter of 2023 were $63.4 million.
In line with our revised guidance of $62.5 million to $64.5 million. Non-GAAP operating expenses were $53.5 million, again, consistent with our revised guidance of $52.5 million to $54.5 million. GAAP operating expenditures grew 63% from the prior year’s fourth quarter, almost entirely within R&D due to increases in staff costs within space systems and Neutron, as well as prototyping and materials-related expenses. Non-GAAP operating expenditures grew 95% year-over-year, largely due to the same reasons above, less the effect of stock compensation expenses. Now focusing on the quarter-over-quarter changes. As mentioned in the prior slide, GAAP operating expenses for the fourth quarter of 2023 were $63.4 million and non-GAAP operating expenses were $53.5 million.
The increase in both GAAP and non-GAAP operating expenses versus the third quarter of 2023 were primarily driven by a reduction in contra R&D credit that wrapped up in Q4 related to Neutron upper-stage development from our U.S. government partners, as well as the impact of increases in headcount and increased depreciation amortization expenses related to the recent CapEx additions. In SG&A, GAAP expenses declined $1.3 million quarter-on-quarter due to a decrease in performance reserve escrow related to our ASI acquisition, partially offset by an increase in change in contingent consideration related to our PSE acquisition. Non-GAAP SG&A expenses increased by $500,000, primarily due to increases in headcount along with increase in outside services expenses.
Q4 ending SG&A headcount was 247, representing an increase of 11 from the prior quarter. In R&D specifically, GAAP expenses increased $10.9 million quarter-on-quarter due to the previously mentioned roll-off of contra R&D credits related to Neutron upper stage development, as well as an increase in Neutron development spending offset somewhat by a reduction in stock-based compensation expense. Non-GAAP expenses increased by $13.3 million due to the same underlying factors driving the GAAP spending increases. Q4 ending R&D headcount was 585, representing an increase of 65 from the prior quarter. In summary, total fourth quarter headcount was 1,684, up 112 heads from the prior quarter. Turning to cash, purchase of property, equipment and capitalized software licenses was $10.4 million in the fourth quarter of 2023, a decrease of $10.6 million from the $21 million in the third quarter of 2023.
This sequential decrease was due to lumpiness in the timing of our large CapEx items across both of our launch and space systems businesses. Cash consumed from operations was $42.4 million in the fourth quarter of 2023 compared to $25.2 million in the third quarter of 2023. The sequential increase of $17 million was driven primarily by the timing of receipts and payments related to our satellite manufacturing business and the impact of delayed launch services milestone invoicing due to shifting manifest adjustments post Electron’s September 19, 2023 anomaly. Overall non-GAAP free cash flow, defined as GAAP operating cash flow reduced by the purchase of property, equipment, and capitalized software in the fourth quarter of 2023, was a use of $52.6 million compared to $46.2 million in the third quarter of 2023, or a more apples-to-apples comparison of $54.6 million when including the impact of our asset acquisitions, most of which is classified as PP&E.
The material step up in negative non-GAAP free cash flow was, as noted in my prior GAAP operating cash flow commentary was result of the lumpy timing of payments and receipts associated with our space systems manufacturing operations and the impact of post anomaly launch services milestones invoice delays for which we expect the reversal of this negative working capital cycle through early 2024. The ending balance of cash, cash equivalents, restricted cash, and marketable securities was $327.9 million as of the end of the fourth quarter of 2023. Reflecting on the past four quarters, we continue to make meaningful progress towards our long-term financial model. Increased Neutron investment will likely continue to drive EBITDA losses in 2024 as we move through the year we believe a trend to improving scale and efficiency in our space systems business and Electron launch, cadence, and production efficiencies provide an optimistic outlook towards achieving our long-term target business model.
Overall, we expect gross margin trends will continue to improve over time, thanks to the same factors that help drive improvement this year. In terms of when we can get to adjusted EBITDA breakeven Neutron investment, especially R&D spend, continues to be the pacing item to achieve its critical milestone. Turning to our recent fundraising of $355 million in convertible senior notes. With this financing, we believe we secured a large quantum of cost-effective and shareholder-friendly capital. The roughly $300 million of proceeds, net of our capped call and deal fees, positions the company to exercise inorganic adoptions to further vertically integrate our supply chain with the critical capabilities that are consistent with what we have done successfully in the past, which has enabled larger and more strategic program wins like the recent $0.5 billion SDA program.
With that, let’s turn to our guidance for the first quarter of 2024, we expect revenue in the first quarter to range between $92 million and $98 million, representing sequential revenue growth of between 53% and 63%. This range reflects $60 million to $65 million of contribution from space systems and $32 million to $33 million from launch services, which assumes four launches. Although modestly lower than what we previously expected for Q4 just a few months ago. We don’t want to understate how encouraged we are with the magnitude of this forecasted quarter-on-quarter growth and how positively it reflects on the capabilities of the team to deliver this level of growth in such a complex and competitive set of businesses. We expect first quarter GAAP gross margin to range between 24% to 26% and non-GAAP gross margins to range between 29% to 31%.
These forecasted GAAP and non-GAAP gross margins reflect improved projected launch cadence in Q1, offset by mixed shifts in our space systems business bias towards the larger and lower margin satellite manufacturing program revenue contribution versus certain of our higher gross margin component offerings. We expect first-quarter GAAP operating expenses to range between $73 million and $75 million and non-GAAP operating expenses to range between $62 billion and $64 million. The quarter-on-quarter increases are driven primarily by increased Neutron investment, including staff costs, prototyping, and materials, as well as the runoff of contra R&D credits related to our Neutron upper stage development agreement with U.S. Space Force. We expect first quarter GAAP and non-GAAP net interest expense to be $1.5 million.
We expect first-quarter adjusted EBITDA loss to range between $28 million and $30 million and basic shares outstanding to be approximately 490 million shares. And with that, we’ll hand the call over to the operator for questions.
Operator: We’re now opening the floor for the question-and-answer session. [Operator Instructions] Our first question comes from Andres Sheppard from Cantor Fitzgerald. Your line is now open.
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