Hi, good afternoon, everyone, and I'm excited to host our next session on Rocket Lab. I'm Kristine Liwag, Head of Aerospace and Defense Research here at Morgan Stanley, and I'm excited to have Colin Canfield, who is the Head of Investor Relations at Rocket Lab, with us today. Welcome.
Thanks, Kristine. Before we begin, just wanna make sure we get forward-looking statements out of the way. So today's discussion may contain forward-looking statements. All statements are based on Rocket Lab's current expectations and beliefs and may involve risks and uncertainties, which are beyond Rocket Lab's control. Actual results may differ from those expressed by today's statements, and factors could cause actual events to differ materially from the forward-looking statements in today's presentation. So with that, I think we can begin.
Thanks, and I'll read my disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley representative. So with that, you know, Colin, you know, Rocket Lab is a leader on small launch segment with their workhorse rocket, Electron. It is the second-most used rocket launcher in the U.S. behind SpaceX's Falcon 9. So, you know, but the strategy for Rocket Lab has evolved to be also an end-to-end space company, which is much broader than just launch. Can you help us understand the strategy and where you are in this journey?
Sure, sure. So I think it's important to kind of frame it within a historical context. If we go back, you know, a few years back to kind of, you know, our pre-going public process and the cash that we raised during that going public process, it was important for us to kind of consider, you know, not just doing small launch, but also expanding the scope of our portfolio, for a combination of, I would say, tactical and strategic reasons. So if you think about the tactical reasons of kind of buying, you know, four space systems acquisitions over that period, it really provided a kind of better stability for the business in terms of earnings and cash flow.
Just kind of pivoting that to the strategic framework, if you think about, you know, small launch is a great way of opening a relationship with your satellite customers. Space Systems has been a really great way of expanding that relationship and kind of leveraging what I'd say is a broader opportunity into things like medium launch, as well as full-scale satellite manufacturing.
Great. And, looking at the competitive landscape, Rocket Lab has now launched your 40th Electron mission at a time when peers and newer space companies are having difficulty getting off the pad. So this is creating a constraint, especially with the withdrawal of Russian vehicles from the international market. How are you thinking about launch capacity, and how does that impact Rocket Lab and impact on pricing for launch in the industry?
Sure. So very broadly, it's important to kind of differentiate between what I'd say is aspirational and operational launch providers. A lot of folks that have come forward with, you know, very cool-looking rocket designs have ultimately gone bankrupt or are nearing bankruptcy. And I think that if you think about, you know, what having an operational launch vehicle does, is it allows you to scale, you know, some of the key elements that are constraints for other launch vehicles, things like avionics, guidance and navigation control, you know, even as kind of important as reusability on, I would say, as the Electron rocket. So, you know, bridging that into kind of the supply-demand environment, you know, we're very keen on getting Neutron to the pad.
And we think that as you think about the supply-demand environment, what's really important to kind of differentiate between is industry as well as the kind of full-scale stack players. And so within that framework, there's probably gonna be, you know, multiple full-scale stack players that do both satellite manufacturing and launch. And so as we, you know, lever into, or we kind of focus in on, you know, the key supply-demand constraints, we think that we can not just access that from a medium launch and service it from a medium launch perspective, but also utilize those relationships to develop, you know, greater satellite supply relationships over time.
The effect on pricing?
That's, you know, that's a good question. I think that if you think about the balance of small launch versus medium launch, I think the small launch environment, in light of our competitor bankruptcies, has become a lot more accommodative for, for price increases. Although, I would say that it's important to differentiate between, you know, dedicated and rideshare. You know, missions that are gonna go on rideshare, things that are agnostic to orbit insertion dynamics, things that, you know, are a little bit less sensitive to schedule, will continue to be price competitive, but the dedicated domain continues to be very price accretive, just given the lack of available competitors. It's, it's important to kind of note that, you know, it's not just the small launch providers that have gone bankrupt in the U.S., but there's also been struggles internationally.
A mix of what I'd say is new startups that have kind of either, you know, been slow to get to the pad, or quasi-government organizations that have had launch issues of their own. And if you think about kind of the medium launch domain, it continues to be a competitive price environment. But what I would say is that people are willing to pay a premium, in order to work with, you know, who they view are really good strategic suppliers. A really kind of great signpost for that kind of dynamic is, you know, the price that Amazon paid across three separate launch suppliers and, you know, how that compares to, you know, say, a Falcon 9.
We think that's a really good signpost for where the strategic landscape will go over time, and how those dollars will flow through into a Rocket Lab pricing environment.
Yeah, and can you comment on the recent announcement with Telesat going to SpaceX? How does that dynamic and decision to go with a rideshare versus a dedicated small launch... Can you give more color on how your perspective on how that came about?
Sure. I think that, if you think about the capital environment, it's really key for folks to kind of secure, what I'd say is the cheapest launch and the most reliable launch in the near term. It's a very competitive environment in the satellite communications domain, so folks are really playing to kind of scale and live to fight another day. And so within that constraint, you know, people will go with what's available, given not just what I'd say is kind of the affordability dynamic, but the availability. If you think about what's happened, within the construct of other launch providers in the medium domain, the only one who's launching reliably is SpaceX.
And so even though, you know, you might trade what I'd say is kind of strategic considerations for price, as we get to market with a Neutron, we think it'll be in a really great spot, where once we prove out our vehicle, we can be a strategic supplier for, for folks like that.
Great, and I'll touch on Neutron in a later question, so we'll come back to that. But on launch profitability, you know, Rocket Lab has suggested that, you know, volume is really the key to profitability. You're on track for 15 launches this year, and your manifest suggests about 20 launches in 2024. So first, like, what are the key gating factors in increasing launch volume? And then also second, you know, can we see upside to the manifest if competitors continue to struggle with execution?
Sure, sure. So focusing first on kind of the first part of, on that question, I think if you think about the choke points of, you know, getting launch supply out there, you know, we remain to be a, a very, very vertically integrated company. A lot of the kind of key pieces of the bill of materials we've developed in-house, as a function of kind of a, what I'd say is the New Zealand environment, which we were generated in. And so that has allowed us to control what I'd say is the key choke points of the supply chain.
As you think about, you know, going back to kind of the first, first kind of, backdrop of the question, you know, profitability versus cadence, I think that if we think about, you know, 15 launches in 2023, 20 launches in 2024, that's a manifest that's fully booked and has what I'd say is a good amount of margin potential, not just from the cadence increase or the reusability, but also the pricing dynamic that comes with, you know, the more accretive pricing dedicated launches.
One thing that I will note is that if, if you think about, you know, the knock-on effects of reusability, it continues to be a key part of our thesis, where we think that, you know, as you get to the 2020 investor day launch target, a 50% of mission reusability kind of set can help get us back to, or get us towards the 45% to 50% Non-GAAP gross margin that we're targeting, alongside price, cadence, and other elements.
So excluding the reusability, can you talk about the magnitude of margin lift you would get from going from 15 launches to 20 launches?
Yeah, sure. I think that if you think about, on a per rocket basis, the typical reusability kind of economics to consider is that the first stage of the rocket is typically 60% of that, kind of that cost of goods sold, of the kind of final manufactured piece of the rocket. And so recovering that and reusing, you know, maybe not the full piece of that rocket, but reusing the key bill of materials choke points, you know, things like propulsion, which we've done, and which we're planning to do on our next launch with, you know, all nine of those Rutherford engines being reused. And so within that construct, it can help us bridge, you know, towards that launch target margin that we've discussed.
Although I'd say that there's, you know, kind of variability within the three elements that I've talked about, which is, you know, price, cadence, and what pieces get reused.
You've completed your first HASTE, Hypersonic Accelerator Suborbital Test Electron, quite a mouthful, launch out of Launch Complex Two in June. Can you unpack this new offering a little bit? What is... Why is hypersonics an attractive vertical for Rocket Lab? And how much, how material could this business be over time?
Sure. So if you think about kind of the hypersonics environment, and the pieces of budget that you can focus in on, if you go to kind of the FY 2024 request across DoD, as well as NASA, you know, there are kind of clear, identifiable budget line items that are going towards the test and development of these capabilities. I think that if you think about, you know, as that market evolves, Rocket Lab will be a really great opportunity for both, you know, kind of the established primes as well as some of the newer defense primes.
For us to be essentially both the cost out and schedule reliability, if you think about, you know, what it costs to build and test your own hypersonic vehicle, it could run anywhere in the $10s of millions. And we think that, you know, where Electron slots in as a commercially available vehicle, could help drive, you know, better schedule and costs effects. And as you think about, you know, how that market evolves over time, eventually the conversation will probably flip increasingly towards counter hypersonics. You know, we're starting to see Department of Defense awards pick up around that sort of framework.
If you kind of take a line between, you know, today and three years out, we think Electron will be a really, really great kind of offering to simulate not just the data on the kind of hypersonics platform, but counter hypersonics targets.
Interesting.
Mm-hmm.
That should be a lot of fun to watch. In terms of the Neutron, which, you know, we'll get back to now, the medium-class rocket, I mean, it's 13,000 kilograms to LEO. That's 40 times the capacity of Electron. So, as you approach getting your target, your target of getting the first Neutron off the pad by the end of 2024, at this point, how is the demand for Neutron shaping up? And also, you know, what sort of customers are you targeting initially?
Sure, sure. So if you think about, you know, what the comp is between the two vehicles, I think the really key thing to focus in on is Neutron being 13-ton downrange versus a Falcon 9 at a, you know, roughly 15-ton downrange, so a pretty competitive weight class. I think that if you think about, you know, how you underwrite that demand. From a customer order perspective, you know, the hope is that as we get through kind of the 3 key milestones that we've identified, bucketed into frosty tanks and hot fire, that should help drive the order momentum. And as you think about, you know, where that goes from here, you know, what are the key kind of line items that you can underwrite as an investor?
So, you know, first and foremost, I think is the opportunity set for Rocket Lab to participate in national security space launch. We've seen some headlines around Lane 1. I'd say that, you know, there's nothing final until Congress is able to get the FY 2024 budget passed and, you know, kind of make sure that language like that is locked in. But as you think about kind of the commercial sphere, there hopefully should be, you know, good follow-on orders for folks that wanna make sure they work with a strategic supplier versus a strategic competitor.
Great, thanks for the color.
Mm-hmm.
Do you think it'll be competitive versus SpaceX?
Yeah. So a really good way to think about it is Dedicated Launch is how satellites are acquired. I know that the, kind of the market has, you know, seen the rise of Rideshare as a means to take cost out, but at the end of the day, a lot of the satellite design, you know, dynamics that we're seeing are pulling up from that, what I'd say is low LEO, you know, at 300 to 500 km altitude, you know, closer to the higher end of what I'd say is high LEO. Things like 1,000-1,200 km out. And so within that framework, it becomes a lot more difficult for Rideshare to be as competitive from a mission assurance or kind of mission capability perspective.
Just from a pricing perspective, the dedicated launch dynamic is, you know, Falcon 9 is typically about a $70 million price tag, and I'd say that the Neutron is targeted at about a $50 million price tag. I'd say that, you know, as launch supply-demand becomes more constrained, we reserve the right to bring price up. But it's something that we think will be a very, very competitive dynamic as the markets, you know, starts to realize that it's not just a dollar per kilogram metric.
Yeah. I mean, Neutron's clearly a game changer, in terms of, capacity for Rocket Lab. Can you update us on where you are today with the development of Neutron, and what key milestones we should watch out for, regarding its development?
Yeah, definitely. So if you think about, you know, the two buckets of frosty tanks and hot fire, the frosty tanks being our stage two cryogenic static test, and then our stage one cryogenic static test. You know, both of those tests, you know, working to kind of simulate the fuel capability of the craft, as well as, you know, cold fuel driving frost on the outside, thus frosty tanks. And that's going to occur, you know, through the remainder of the year.
I think that as we get to the end of the year, you know, as we start to begin the hot fire element, which is the static fire tests of the Archimedes engine system, that'll be kind of the key milestone to focus in on, and hopefully something where once we're able to prove out that operational capability and prove out that it's real and not just a vaporware rocket, you know, that should hopefully drive, I'd say, more realization of where Rocket Lab can be over time.
Great. Recently, you scrapped the retrieval of an Electron for ocean splashdown, and just a few weeks ago, Rocket Lab also flew a pre-flown Rutherford engine. So, can you talk about reusability? You mentioned earlier for that first stage, it's 60% of the rocket cost. So the plans for helicopter recovery or recovery from the ocean and reusing, where do we stand on those? And in the long run, what % of the first stage do you think Electron could reuse, either from a helicopter recovery standpoint or from a sea recovery standpoint?
Yeah. I'd say we're definitely leading in on the maritime recovery dynamic and that reusability. I think that the trade to consider within that framework that we had originally considered was that, you know, seawater would cause, you know, outside level of damages in terms of the cost of the rocket, such that the cost of operating a helicopter and the air recovery could be a very viable option. But, you know, once we were able, you know, I'd say, let the Electron take a swim, the saltwater dynamics were something that we found that, you know, even engine and the like were crawling pretty well.
And so as we think about, you know, operationalizing that from here, we've proven we can fly on, refly a Rutherford, and our next launch will have, you know, all 9 Rutherford engines be reused. And so as you think about going forward, I think operationalizing maritime will be a pretty key kind of proof point of Rocket Lab's ability to do reusability. As you think about, you know, how that impacts, you know, what pieces of the bill of materials can we recover? The focus is the engines, but there's also, you know, separate pieces like battery packs and the like, where each launch we do, we continue to iterate different pieces of reusability so that we can recover increasing dollar amounts of that value set on the first stage.
And so from an undersea or it's like a sea recovery, what % do you think it would cost to refurbish?
Mm.
How much of that, you know, 60% savings could you keep?
Yeah. So if you roughly think about an Electron cost into the bucket of what I'd say is labor, overhead, and bill of materials, I think that the incremental cost around reusing a rocket is a little bit of man-hours, or probably the bulk of it are man-hours, right? Paying for rocket scientists to get on a ship, go out to sea, get the thing, bring it back, and refurbish it, as well as a bit of overhead. But the kind of key point is that, you know, reusing the big pieces of the bill of material of the rocket, that's where we, you know, we really start to see the kind of margin effects within the paradigm we've put out.
... Shifting over to the space system side of the business, I mean, you're playing both as a component provider as well as a provider of the full up spacecraft. Can you talk about the differences in being the sub-component versus the prime? I mean, you guys are a sub-component manufacturer for Globalstar and then for MDA, right? Which ultimately will feed up to Apple, but you've also got your own systems. Which vertical is more profitable, and can you talk about the differences in margin?
Sure. So, so, you know, net-net, I think the space systems margin that we strive for, and this goes back to our 2022 Investor Day slides, right, where we put out that 30% adjusted gross margin target for SolAero, by two years of close, so 1Q2024. I think labor rates have been a bit higher than we'd expected, and thus, you know, kind of a little bit of, I'd say that target moving to the right, commentary from earlier this year. You know, fortunately, the, I would say, the capital injection that we're driving into that business is driving better efficiencies, but that, you know, 30%, you know, target of 40% adjusted gross margin is a good bogey to play for within the, the kind of space systems domain.
If you think about the trade between, you know, satellite manufacturing full scale and being a supplier, you know, some of the benefits of owning and investing in a lot of these acquired assets allows us to margin set, and allows us to be, you know, not just competitive on price, but also be competitive around the schedule and availability. I'd say net-net, if we think about, you know, the kind of array of options ahead of us in satellite manufacturing, the key thing to, you know, keep in mind is that it'll be both an NPV and a margin trade, right?
So if you think about, you know, satellite manufacturing and quality, quality satellite, satellite manufacturing being constrained, we're gonna make sure that, you know, what we fill our fabs with is the best for Rocket Lab in terms of kind of that margin and NPV dynamic.
Great. And, you know, you mentioned SolAero. That was one of the acquisitions you've done.
Mm-hmm.
You've also, in the past six months, acquired others like ASI, PSC, which all seem to be bearing fruit, including SolAero. So how are you thinking about M&A going forward? What does the pipeline look like, and are there opportunities to acquire space assets at a discounted price, considering the capital interest rate environment?
Yeah, I'd, I'd say that the interest rate environment is definitely driving what I'd say is a little bit more reality around price within the kind of private space domain. If we think about, you know, what our strategy entails, the key focus is making sure that our organic strategy is in place, right? Getting Neutron done, getting our existing assets integrated, which we have, and getting them scaled to the kind of, you know, margin and sales profile we're comfortable with.
You know, with that in mind, I'd say that, you know, we continue to focus on the key choke points within the space supply chain, and kind of what I'd say is, the ability of Rocket Lab's culture to accelerate not just the, strategic profile of other partners, but also, allow us to help them do better on margins and the like.
Back to, you know, capital. You know, capital's tighter in this environment. How do you think about the requirements of Neutron's development program?
Mm.
I mean, earlier this year, Rocket Lab purchased Virgin Orbit's assets out of the bankruptcy proceedings. I mean, how did that purchase change near-term investment requirements for Rocket Lab?
Sure. So net-net, you know, Neutron development spend about $250 million-dollar wallet, and we continue to track towards that. I think that if you think about, where, you know, the Virgin Orbit acquisition benefits will be realized, I think it's still being definitized. Where pieces of that, you know, transaction, and we've been public where it's... You know, we paid $16.1 million for, I'd say, about $100 million in value, $20 million of leasehold improvements, $80 million of equipment. Within that framework, you know, we feel really good that that can help us accelerate the production of Neutron and the scaling of Neutron, although that doesn't impact what I'd say is the R&D cycle. So nothing changed in terms of that acquisition versus the development timeline for Neutron.
And if you think about, you know, how that shapes our CapEx plans in out years, the benefits will probably be realized. And we think that, you know, the end of the day, that transaction will be a really good strategic accelerant. But we're still working to define, you know, what that means for our Neutron production wallet.
Great. You know, we wanna make sure we leave some time for questions from the audience. So if you have a question, please, raise your hand, and we'll give you a mic. Holly?
Just a quick question. I know there's a lot of noise around the budget environment.
Mm.
Any concerns there? I know space is obviously a big focal point, but any sort of chatter, or you think it's still full steam ahead?
Yeah, so a couple of considerations to think about there. You know, from a top-down perspective, you know, defense budgets typically more protected versus total budgets, although total budgets are still subject to, you know, what I'd say is both, the interest rate versus the deficit funding, as well as kind of the political appetite to cut. I think net-net space, given the national security environment and given the kind of civil environment, has proven time and again that it's an incredible multiplier of force structure. And so if you think about, you know, where those budgets go from here, we feel relatively good about the defense space side of those budgets being protected, as well as the programs within the civil space budgets being relatively protected.
You know, where that goes from here and how what happens if we get to a point where budget considerations become more important versus the kind of national security environment. I think the key thing to focus on is, you know, who are the commercially developed players, and who can provide the best price and schedule effects. And then we think that, you know, agnostic of whether the budget's up or the budget's flat or the budget's down, Rocket Lab should be in a really good spot to continue to service customer needs by virtue of our commercially developed portfolio.
Colin, you know, I asked you a lot of questions.
Mm.
But was there one that you wish I asked you?
Yeah, I think it's key to kind of think about the balance of risks and opportunities within the business. So as you kind of underwrite the visibility of this business, a lot of the kind of Space Force and NASA FYDPs can give you a lot of confidence on what a 2030 timeframe looks like. I think that if you think about, you know, what Neutron entails, we've been, you know, incredibly transparent about what are the key milestones and design issues that we think we can solve by virtue of just kind of the culture that Rocket Lab is.
One thing that I focus on is, you know, really think about what does the next kind of seven years look like from a relative growth perspective, you know, versus a structural growth dynamic like space, as well as, you know, the buckets of folks that will be there in the 2030 timeframe. So if you think about the constellations that are announced today, broadband being, you know, Kuiper and Starlink, a couple of government constellations like SDA, Europe's IRIS, as well as Japan's government constellation that they've announced at the end of 2022. You know, within that framework, Rocket Lab's gonna do a really great job of supplying those folks because we can guarantee the price and schedule that folks deserve.
Great. And if there's anything in the next 12 to 24 months, what are you most concerned about?
Yeah, I think the importance of getting a budget passed and kind of a shutdown is really something that I think government contractors have become used to in terms of being able to mitigate the environment and focus on not just the government side of the house, but maybe filling fab with commercial. But it's, you know, absolutely critical to make sure that we get the right programs funded that are able to kind of, you know, not just deliver what I'd say is the necessary effects, but the necessary effects at the right price. And it all goes back to kind of that commercially developed story where, you know, we've seen other commercially developed portfolios do incredibly well.
Things like defense electronics, you know, things like UAVs, items that, where, when companies are able to kind of formulate the strategic plan, put the dollars up front, and take an incredible amount of price out. Defense National Security Space Launch also being a great example. We think Rocket Lab will be able to participate and succeed in that kind of environment.
Well, great. Well, you know, with that, are there any more questions from the audience?
Hey, Colin, you mentioned about this migration from sort of low LEO to high LEO, and presumably that'd be meaningful to you if rideshare can't service that well.
Mm-hmm.
So just if you can unpack that a little bit, what's sort of driving that trend? And maybe you can point to a few recent constellations and progress that are targeting sort of the higher LEO. Thanks.
Yeah, that's... No, that's a great question. I think it's arguable, you know, whether or not rates have had a factor and inflation have had a factor in that. You know, there's an argument to be made about what does asset utilization and kind of what do capital plans look like in a high-rate versus low-rate environment? If you think about, you know, satellite design today versus satellites that are being launched, typically satellites that are being launched are a function of design multiple years ago. And so within that construct, it's been easy to understand, you know, low rates, cheap capital allows you to scale single-use items very quickly and at a kind of affordable rate.
But as you think about, inflationary pressures, higher interest rates, and kind of, you know, the desire to essentially not throw away a multimillion-dollar asset, we think that Rocket Lab's bus design will be a really great feature within that. And so if you think about, you know, the trade-off is that over a 10-year period, we've migrated what I'd say is kind of GEO back to, I'd say, the last few years of low LEO. But if you think about asset utilization trends and the ability to mitigate things like, you know, radiation burn on electronics through redundancy and the like, you know, that's something that Rocket Lab will be really keen to service. If you kind of look at the last, I'd say, week of commentary, there's been some constructive commentary around people planning for that high LEO architecture.
And then if you look at, things like, you know, Space Force FYDPs, right, and you go out and look at the SDA dollars, there's a fair bit of desire to do, you know, things like SDA tracking in that, we'll call it, high LEO. It's termed, you know, mid-Earth orbit. But if you think about, you know, kind of the operating altitude, you know, operating at a kind of 1,000 to 1,200 kilometer range can help to, you know, drive things like a 10-15-year useful life of an asset, which, you know, I think the last week's sell-side notes, too, you know, there's been concerns about recurring CapEx of low LEO.
We think that, you know, our design and our architecture, as well as the assurance that we can provide around our really high efficiency space-grade solar, will all combine into kind of a winning satellite manufacturing strategy going forward.
Well, great.
Appreciate it.
Well, thank you, Colin, and this concludes our presentation on Rocket Lab.
Thanks.