Virgin Galactic Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 9 speakers on the call.

Operator

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I will now turn the call over to Mr. Eric Cerny, Vice President of Investor Relations.

Speaker 1

Thank you. Good afternoon, everyone. Welcome to Virgin Galactic's Q3 2023 earnings conference call. On the call with me today are Michael Colgleser, Chief Executive Officer and Doug Ahrens, Chief Financial Officer. Following prepared remarks from Michael and Doug, we will open the call questions.

Speaker 1

Our press release and slide presentation that will accompany today's remarks are available on our Investor Relations website. Please see Slide 2 of the presentation for our Safe Harbor disclaimer. 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.

Speaker 1

For more information about these risks and Certainties, please refer to the risk factors in the company's SEC filings made from time to time. You are cautioned not to put 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, whether as a result of new information, future events or otherwise. Please also note that we will refer to certain non GAAP financial metrics on today's call. Please refer to our earnings release for a reconciliation of these non GAAP financial metrics. With that, I would now like to turn the call over to Michael.

Speaker 1

Go ahead.

Speaker 2

Good afternoon, everyone. Virgin Galactic successfully achieved several important milestones in the Q3, which in combination with some important adjustments we are making in our near term operating model has set the company on course to define and lead the suborbital space travel industry. We're going to cover a lot of ground today, So I'll open the call with 4 key headlines. First, we have demonstrated that our spaceflight system works on a repeatable basis. As planned, We completed 6 space flights in under 6 months with our initial spaceship, VSS Unity.

Speaker 2

This is an unprecedented achievement in human spaceflight. 2nd, the Virgin Galactic customer experience has been overwhelmingly positive and meaningful, and the value of our experiential product is exceeding our high expectations. The backlog of demand for experience is robust and our early customers, our Virgin Galactic astronauts, love it. 3rd, we expect The advances being built into our Delta class ships will enable each of these new ships to fly up to 8 times per month during steady state operations. This turn time metric is unrivaled in the industry and will enable breakthrough capacity and revenue generation.

Speaker 2

And 4th, we forecast our quarter end cash and marketable securities position of approximately $1,100,000,000 provide sufficient capital to bring our first two Delta ships into service and to enable our crossover to positive cash flow in 2026. We look forward to sharing details behind these headlines on today's call. Turning to our agenda on Slide 3. I'll start with an overview of the Virgin Galactic astronaut experience and share customer insights from our first six flights. We'll review progress from our Delta spaceship program and talk more specifically about the expected unit economics of our Delta class ships.

Speaker 2

We'll then discuss adjustments to our near term operating model, including restructuring actions announced yesterday that will redirect resources towards our Delta program as we focus the entire company on realizing the profit potential from these ships. Finally, will share financial results for the quarter and discuss the expected spending profile of our Delta program in greater detail. Following our prepared remarks, we will open the call for your questions. Turning to Slide 4. Since our last earnings call, we completed 4 space missions on the monthly cadence that we had planned.

Speaker 2

Each mission was an incredible success, and we are now graduating customers from our future astronaut community into the Virgin Galactic astronaut community. Our Virgin Galactic astronauts experience their spaceflight in ways that are unique to their background and motivation for traveling to space. One point of commonality though has been that the overall experience is dramatically impacting our customers in an extremely positive way. Moving to Slide 5. The quotes on this page are from some of our astronauts following their space flights and they capture just a sliver of the meaning that our customers have come away with.

Speaker 2

I'll read just 3 of them on today's call. The first is a quote from a GALACTIC II astronaut. This has been the best day of my life, the most sensational day of my life, and you can't get any better than that. It exceeded my wildest dreams. The second is from a Galactic 4 astronaut who said, I always knew it was going to be the most extraordinary experience of my life.

Speaker 2

I always knew that. And people kind of told me it was going to be. But then when it is and it's on another level to the experience you thought you were going to have and is very difficult to explain. And from our youngest astronaut who shared, I was shocked at the things that you feel. You are so much more connected to everything than you would expect to be.

Speaker 2

You felt like a part of the team, a part of the ship, a part of the universe, a part of Earth. It was incredible, and I'm still starstruck. Fastly exceeding the expectations of our customers is the best way to convert those customers into ambassadors for our company. Based on initial feedback, we are delivering a truly incomparable experience that our astronauts will carry with them for their lifetimes. We will continue to learn and adjust the overall customer journey, but the early results have been exceeding our very high expectations.

Speaker 2

Moving to Slide 6. Our focus on the astronaut's journey and the very way in which we bring people to space is paying off in the overall experience. Our training takes place at Spaceport America, an incomparable facility built by the state of New Mexico, and the stunning setting has been a hit with astronauts and their guests alike. The 90 minute spaceflight experience, including the climb to release altitude while attached to our mothership is proving to be an experiential advantage. The smoothness of it all combined with the raw power of the rocket motor during the boost phase has been a standout feature for our astronauts.

Speaker 2

The view of the earth in its natural habitat of space has literally taken breath away and drawn tears and deepened motions because of its stunning beauty and brilliance. And the fact that we land back on the same runway where we took off with all the friends and family awaiting has made for a completely magical return experience. Our training program is a huge differentiation point. We took the opportunity on our early flights to have our astronaut instructors observe the customer experience from within the cabin to guide adjustments to our ground based training process. This process was valuable and has been successfully completed.

Speaker 2

Starting with GALACTIC 6, we will open up this instructor seat and all 4 Unity seats will have paying customers. 6 human space flights in 6 months with VSS Unity is a tremendous accomplishment that establishes new turn time records for reusable human spaceflight systems. It's important to note that the primary business objectives of Unity's missions are to demonstrate the efficacy of our spaceflight system, to build learnings that inform our Delta program and to showcase the incredible emotion, impact and value of Virgin Galactic Spaceflight experience. We have done that. These flights have built confidence in our spaceflight system, increased credibility as we consistently deliver on plan and clearly demonstrated the powerful customer benefits of a Virgin Galactic spaceflight.

Speaker 2

The success of these flights has been accomplished through the collaborative effort of our entire Company, and I'd like to call out the incredible work from our teammates who have made this possible. Moving to Slide 7. Virgin Galactic Spaceship and Mothership both have industry leading reusability metrics, but our airplane based Mothership has the additional benefit Fast turnaround times. Our primary goal with the Delta program is to also bring that fast turn time capability to our spaceships to unlock a step function increase in capacity. In this regard, the next page, Slide 8, makes it clear why we are so focused on our Delta ships.

Speaker 2

Two metrics that will be of importance to our industry are revenue per flight or RPF and Flights Per Month or FPM, which is referenced on a per ship basis. Taking a look at the table on Slide 8, Our 4 seat SpaceShipTwo model, Unity, has a revenue per flight potential of $1,800,000 to $2,400,000 at our current prices depending upon if it is flying private astronauts, research customers or a mix. Unity has an average flights per month of around 1, and the product of those two metrics leads to modest revenues. As I mentioned earlier, Unity's flight objectives are to demonstrate our system, showcase our astronaut experience and provide learnings for our Delta program. While one flight per month with Unity is a material step above competitive offerings, The total cost to support Unity's flights surpassed the relatively modest monthly revenues.

Speaker 2

Delta ships will have 50% more seats than Unity. So using our most recent pricing of $450,000 per seat or $600,000 for research seats, The revenue per flight for a Delta ship is $2,700,000 to $3,600,000 With our current expectation of Delta ships Turning twice per week in steady state operation. Delta ships would have a flight per month metric of 8, which makes the monthly revenue potential of a Delta ship up to 12 times that of Unity. As a high temperature carbon composite spaceplane, we expect each Delta ship to have a vehicle lifecycle of 500 or more flights. And as we shared previously, we expect each new Delta ship to cost around $50,000,000 to $60,000,000 in steady state production.

Speaker 2

Our Delta class ships are powerful economic engines. Because of their breakthrough capacity and revenue generation, we are choosing to leapfrog past our 3rd generation ship, BSS Imagine, and move directly to our 4th generation, the Delta class, as the model type basis for our production fleet. BSS Imagine will be used to support ground based elements of the Delta program, and we will not bring that ship into service. Our Delta program continues to track to the key milestones we've laid out. Tooling builds have already started and our spaceship factory in Phoenix is well underway and will come online in Q2 of 2024.

Speaker 2

Ground and flight based testing of our Delta class ships is on track to begin in 2025 with revenue service beginning in 2026. The top image on Slide 9 shows progress that is being made on our spaceship factory in Phoenix. Construction has been advancing on schedule, and we expect to begin interior fit out in April with major assemblies from our primary suppliers, Bell and Carbon, beginning to arrive midway through 2024. We are making several upfront investments in test infrastructure and we will be conducting extensive ground testing of our Delta ships. This is a key factor in accelerating our flight test program and in our ability to verify the durability and longevity of our ships.

Speaker 2

Build out and installation of this test infrastructure has begun and build out will continue into the first half of twenty twenty four. We will incur one time expenses for these important test assets during those periods. The first test asset is known as a Copperbird Systems mock up. The Copperbird will allow us to configure and test our avionics, flight controls and electrical systems.

Speaker 3

As you

Speaker 2

can see in the image on the lower left of Slide 9, this effort is already underway at our engineering headquarters in Orange County, California. Along with the design and testing of our updated cabin interior, including our new seat design shown here on the lower right. The second test system also located in Southern California is known as an IronBird and it will be verifying and cycle testing our mechanical systems in validating our designs. Each of these test systems as well as a dedicated static test article will enable us to verify the Performance of the key elements of our Delta ships that are driving our improved turn times and will reduce the amount of time needed for final assembly, ground test and flight test. Moving to Slide 10.

Speaker 2

We expect near term uncertainty in capital markets to continue as high interest rates persist and geopolitical unrest expands. In response to this environment, Virgin Galactic is taking several important actions to ensure our existing cash runway is sufficient to reach positive cash flow. As a growth company as also defining a new industry. Virgin Galactic has been pursuing 2 parallel work streams. Our Space Line Operations teams have been demonstrating our technology and customer experience with our Unity spaceship.

Speaker 2

While our programs and engineering teams have been developing a production platform that will deliver profitable growth with our Delta program. Both of these areas consume substantial resources and both have been critical to our company. That said, our company's financial growth is built around our production spaceships, the Delta class, and we are shifting all company resources towards the safe, efficient and successful execution of this program. This necessitates 4 changes to our near term operating model. First, we will reduce net spending within our space line operations by decreasing the cadence while increasing the revenue per flight of Uniti's remaining missions.

Speaker 2

Galactic 6 is expected to take place in January as planned, and we will move to a quarterly flight cadence versus a monthly flight cadence for Unity's remaining space missions. We expect the average revenue per flight for Galactic 6 and Galactic 7 This increase is driven in part by the additional revenue seat that had previously been occupied by an astronaut instructor and in part due to a customer mix that includes research revenue. Additionally, when we have openings in the Flight Manifest, We are making those seats available to customers who are interested in participating in an earlier spaceflight at a premium price. These seats, as they become available, have been priced closer to $1,000,000 than to our prior price point of $450,000 2nd, we will be pausing Unity Spaceflight in mid-twenty 24, so our highly skilled space line operations teams in New Mexico can support the final assembly effort of our 1st Delta ships. This is cost efficient as it allows us to optimize our total workforce.

Speaker 2

It also provides our technical operations teams hands on experience with the Delta ships during the build process, which will be invaluable for maintenance and turn time support when those ships move to Spaceport America for flight test and revenue service. Flights from Spaceport America are expected to start again in mid-twenty 25 with Delta Flight Test. 3rd, and as shared on our last call, we have resequenced the timing of our next mothership to coincide with the ramp up of our spaceship fleet. This allows us to better manage the timing of our capital expenditures, and it allows our engineering teams to complete the bulk of the delta work before pivoting to the next mothership effort. We expect the first of our next two motherships to enter service in 2027, which will support the timing of additional spaceships coming off the line in Phoenix.

Speaker 2

Our existing mothership, Eve, is performing well following its enhancement program. And Eve will carry our first two Delta ships during their flight test program and into revenue service in 2026, where it will support meaningful revenue and cash flow positivity. And 4th, as we focus the entire company towards the successful execution of the Delta program, Mike Moses, With his deep expertise from both NASA and Virgin Galactic, we'll take on the expanded role of President of Virgin Galactic Space Line. We will be aligning the entirety of our technical engineering and non customer facing operations teams under Mike with a full company focus on bringing our production fleet into service, crossing over to cash flow positive operations and readying our company to scale and continue to lead this exciting industry. With these adjustments to our plans, we project our end of quarter cash and marketable securities position nearly $1,100,000,000 to be sufficient to support the development and entry into service of our first two Delta ships and to achieve cash flow positivity in 2026.

Speaker 2

These adjustments to our near term operating model have impacts on our flight manifest and on our staffing levels. Regarding manifest impacts, with Unity's fewer seats and low flight cadence, These changes will have minimal impact on total astronauts carried. However, a subset of customers who are early in the manifest will have a longer time extension before their flights. Internally at Virgin Galactic, achieving this plan has required us to make the difficult decision to reduce the size of our teams that support our space line operations and our staff areas. Our teammates at Virgin Galactic are talented, purpose driven and they excel in their professions, and it is deeply unfortunate to part ways with some of our coworkers and our friends.

Speaker 2

With the restructuring announced yesterday, along with headcount management efforts that have been taking place across the year, we expect to enter 2024 with approximately 840 full time employees. By taking these actions now, we ensure Virgin Galactic continues to have access to the resources needed to reach positive cash flow and to deliver on our mission, bringing the wonder of space to our existing customer base and to the generations of customers who will follow. Doug, let's turn the call over to you.

Speaker 3

Thanks, Michael. Good afternoon, everyone. Turning to Page 11 and our financial results. In his opening remarks, Michael provided some important information about the company's operations and the related economics. As a follow-up, I'd like to share some additional context relating to both our near term and long term financial outlook.

Speaker 3

First, I'll explain the new expense category called Spaceline Operations and what trends to expect going forward. 2nd, I'll review the financial results for the Q3 and provide guidance for the Q4. 3rd, I will describe the shift that has begun toward the building of capital assets, our longer term projections for overall spending and the expected path to positive free cash flow. And 4th, I'll expand on the attractive future economics we foresee with the expansion of our Delta Class fleet. Let's start by taking a closer look at the new expense category, Spaceline Operations and how that plays into our Q3 results.

Speaker 3

In our last earnings call in August, we previewed the introduction of Spaceline Operations, which followed the launch of commercial service, an achievement of technological feasibility for our current Spaceflight system. In order to understand and interpret what Space Line Operations represents, it is important to recognize that Virgin Galactic is somewhat unique as a company that both produces and operates space vehicles. We first build fixed assets such as spaceships and motherships. Then we utilize those assets to provide spaceflight services. While we are able to capitalize certain costs for production of vehicles, some production costs cannot be capitalized and must be recognized as an expense.

Speaker 3

These non capitalizable production costs are reflected in spaceflight operations along with the current costs of conducting space flights. Note that the presentation of space line operations does not indicate an increase in spending, but rather a remapping of expenses that were previously in R and D or SG and A. I'll share more about our expectations for the Spaceline Operations expense category following a discussion of our results for the Q3. Turning to Slide 12. We generated revenue of $1,700,000 driven by commercial space flights during the quarter and future astronaut membership fees.

Speaker 3

Total operating expenses were $116,000,000 compared to $146,000,000 in the prior year period. Spaceline operations expenses were $26,000,000 compared to approximately $1,000,000 in the prior year period with the increase attributable to the updated presentation of expenses. R and D expenses were $45,000,000 compared to $97,000,000 in the prior year period, with the $52,000,000 decrease primarily due to remapping of some expenses to Spaceline operations and lower outside vendor costs. SG and A expenses were $42,000,000 compared to $46,000,000 in the prior year period, with the $4,000,000 decrease primarily due to remapping of some expenses to Spaceline operations. We reported a GAAP net loss of $105,000,000 compared to $146,000,000 in the prior year period, primarily driven by lower operating expenses and a $9,000,000 increase in interest income from returns on our portfolio of marketable securities.

Speaker 3

Adjusted EBITDA was negative $87,000,000 in the 3rd quarter compared to negative $129,000,000 in the prior year period, primarily driven by lower operating expenses. Free cash flow was negative $105,000,000 compared to negative $102,000,000 in the prior year period. Free cash flow came in better than our guidance negative $120,000,000 to $130,000,000 due to the timing of certain vendor payments. Moving to Slide 13. At the end of the Q3, cash, cash equivalents and marketable securities on the balance sheet totaled approximately $1,100,000,000 a sequential increase of $108,000,000 from the Q2 of fiscal 2023.

Speaker 3

During the quarter, we raised $211,000,000 in gross proceeds as part of our at the market equity offering program. Moving to Slide 14 and our financial outlook. For the Q4, we expect revenue to be approximately $3,000,000 primarily driven by 2 commercial space flights, Galactic IV, which occurred in October and GALACTIC V, which occurred last week. Our capital expenditures for the 4th quarter are projected to be between $25,000,000 $30,000,000 We expect to approximately double our capital expenditures over the 3rd quarter, primarily due to the construction of the spaceship assembly facility in Phoenix and building of tooling for the Delta class spaceships. We expect our forecasted free cash flow for the Q4 of 2023 to be in the range of negative $125,000,000 to $135,000,000

Speaker 2

to account

Speaker 3

for both the timing of vendor payments that favorably impacted our Q3 as well as the increase in capital expenditures just mentioned. In connection with the restructuring effort that Michael mentioned and which is already underway. We estimate a one time restructuring charge of approximately $5,000,000 and an annual cost reduction of approximately $25,000,000 relative to our current cost base. This cost reduction will be realized beginning in Q1 of 2024. Now I'd like to provide some context around our longer term financial outlook.

Speaker 3

Let's move to Slide 15. For clarity, it's helpful to first consider our business model. Our economic life cycle began with a multiyear research and development phase to create and prove out our initial spaceflight system. We have successfully demonstrated that by conducting regular commercial space flights on a monthly cadence with our Unity spaceship and Mothership Eve. We are in the upfront investment phase of our production vehicles, the Delta Class spaceships, which are expected to deliver 12 times the monthly revenue capacity of the initial Spaceflight system.

Speaker 3

A period of nonrecurring engineering or NRE as followed by a period of upfront capital investment to build the fixed assets such as a factory and tooling that are then available to produce multiple vehicles, namely spaceships on a continuing basis and at a relatively low recurring cost per vehicle. Each of these vehicles are additional assets and are expected to have significant ongoing profit generating potential based on the performance criteria we have specified. Through 2023, our spending has predominantly gone toward operating expense, mostly tied to non recurring engineering costs for the development of our Spaceflight system. As we achieve certain milestones in the development of the Delta Class vehicles in 2024, these engineering costs begin to be capitalized. In addition, we are investing in fixed assets such as a spaceship assembly factory, tooling, sub assemblies, test assets and Spaceport facilities that will drive future growth.

Speaker 3

This chart shows how our spending is expected to shift primarily to CapEx in 2024. While this chart is for illustrative purposes, we are not giving specific cash flow guidance for multiple years. You can generally see that the 2 year average spending for 2024 2025 will be below that of 2023. Spending is expected to be weighted more to the front end because of our planned CapEx investments and fixed assets that enable future revenue growth. Earlier, we discussed the actions we are taking to reduce our cost structure.

Speaker 3

Because of the reduced flight cadence, our space line operations expense is forecasted to decrease in 2024 compared

Speaker 4

to our

Speaker 3

current spending level. Other reductions in headcount and streamlining of operating expenses contribute meaningfully to our lower spending footprint going forward. Given the strength of our balance sheet with approximately $1,100,000,000 in cash, cash equivalents and marketable securities available, combined with our actions to reduce spending, We have paved the way to positive free cash flow in 2026 with our existing capital. I'd now like to provide more insights about our expected future economics upon the completion of the Delta class spaceships. While cash flow breakeven is one milestone along our journey, we clearly intend to capitalize on our unique high margin product offering to drive top line growth and strong shareholder returns.

Speaker 3

By 2026, We expect to be entering the cash positive growth phase as shown on the chart on Page 15. We mentioned on a previous call that we project the contribution margin from our space flights to exceed 75%. Given this margin profile, we expect that we will cross over to positive free cash flow in 2026 when we have 2 Delta ships in service. At this point, cash inflows from space flights are projected to exceed our overall cost base. Importantly, by 2026, we anticipate we will have completed the upfront investments in manufacturing capacity to produce incremental Delta class spaceships at a cost of $50,000,000 to $60,000,000 each.

Speaker 3

Given the expected flight rate and revenue capacity of these ships, We expect a payback period of less than 6 months for each new vehicle that we add to our fleet. Additional motherships will also be required to accommodate the expanded fleet of spaceships. Given these compelling economics, we are singularly focused on the delivery of Delta Class spaceships. As mentioned earlier, our $1,100,000,000 balance of cash, cash equivalents and marketable securities is expected to be sufficient to achieve positive free cash flow. While not required in the near term, we intend to utilize the approximately $113,000,000 left on the current at the market equity offering, which would support further investment in revenue generating assets like additional motherships, additional Delta class ships or to further strengthen our balance sheet.

Speaker 3

To summarize, with a focus on cost management, we are mitigating the risk associated with accessing capital markets in order to meet our longer term objectives. We project we have sufficient capital to build the revenue generating assets necessary to achieve positive free cash flow. With that, I hand the call back to Michael for some closing comments.

Speaker 2

Thanks, Doug. To recap the key items from today's call, Our spaceflight system works on a repeatable basis and the astronaut experience is exceeding our very high expectations. With each new Delta ship delivering steady state revenue capacity of up to 12 times greater than VSS Unity, We expect to cross into cash flow positivity in 2026 as we bring our first two Delta ships into service. Our end of quarter cash and marketable securities balance of approximately $1,100,000,000 is expected to be sufficient to bring these first two Delta ships into service as we tightly manage and prioritize our resources against the Delta program, while reducing expenditures associated with flying VSS Unity. All of these factors support our business model, which is highly profitable and cash generative at steady state.

Speaker 2

While the upfront capital costs are meaningful, ongoing CapEx needs for each spaceport are relatively modest given the long lives and high capacity of our ships. Variable costs are relatively low in relation to our ticket prices and incremental spending to expand our fleet is expected to bring high operating leverage, high double digit contribution margins and excellent return on investment. I'd like to thank our Virgin Galactic customers, shareholders and fans for their support as we work to ensure our company's future for the long term. And I'd like to sincerely thank our teammates for the incredible work they have been delivering, while also recognizing the loss that will be felt across the company as we part ways with some of our friends and coworkers. We are now stepping forward and placing all focus on safely, efficiently and successfully executing the Delta program.

Speaker 2

With that, we'll turn to questions. Operator, we are ready to begin the Q and A portion of the call. Thank

Operator

Your first question comes from the line of Matt Akers with Wells Fargo. Your line is open.

Speaker 5

Hi, this is Eric Yan on for Matt. Thanks for the question. Could you discuss more details around The delta work you've done this year so far, and if there are any updates to the plans or milestones you laid out for the next couple of years?

Speaker 2

Sure, Eric. I think as we shared in the prepared remarks, We've been executing Delta on our plan, on our schedule. This year is primarily about adapting the designs From all the learnings that we've done in building out our first initial spaceflight system. In particular, transitioning those designs to a different carbon composite system is a big part of that that has a lot of benefits into the process. That design process and taking advantage of the things that we've learned from flying Unity on a monthly basis have let us build in and confirm the much improved turn times that we're going to see from the Delta ships along the way.

Speaker 2

We've also begun working through our test asset systems. We clearly are designing for this turn rate. We're also building the test assets to verify them. You heard us referencing a Copperbird and an Ironbird. Those systems have started up.

Speaker 2

We've been working closely with our partners, our key partners that will be building these ships with us, in particular, Bell from Bell Textron and Carbon. They're tightly interwoven with our efforts and using the same kind of software platform along the way. And the tooling that those companies are building that will then do the parts has already begun. Initial parts are coming off those tools. So the majority of parts and then fabrication will happen in 2024, in line as we bring our spaceship factory in Phoenix done.

Speaker 2

If you see the Image of the spaceship factory, I think it's Page 9 in the attachment. The core and shell, that's all done. We're going to be starting to do the interior build out of the factory in the Q1 of next year, actually probably into this year. And then we plan to occupy that somewhere around April so that we can then put in our own systems to begin the final assembly of the ships. So that's all tracking as previously shared and that puts us on path to our flight testing in 2025 and putting these into revenue service in 2026.

Speaker 5

Okay, got it. Thanks. That's very helpful. Also wanted to ask if you have a more specific timing on the Delta launch now. Is it more like the first half or later in the year?

Speaker 2

Nothing more specific for today, But I will say, you're going to see them flying in 2025 as we do our flight testing. Flight tests will include they'll start with What we call captive carry flights, then they'll move to what we call glide flight where we're releasing without the power of rockets. And then we'll start to power the flights up towards space. So you'll be seeing all that happening in 2025.

Speaker 6

Okay. Thanks so much. Thank you.

Operator

Your next question comes from the line of Greg Konrad with Jefferies. Your line is open.

Speaker 4

Good evening.

Speaker 7

Hi, Greg. Maybe just to start with one clarification question. I mean, you talked about pausing Unity flights in mid-twenty 24, and I think you mentioned Galactic 2006. Is 07 going to be the last Unity Flight. And is there any commercial flight activity between mid-twenty 24 and the introduction of Delta into service in 2026.

Speaker 2

Yes. Let me just kind of more color on what we're doing. Obviously, we've had incredible success flying Unity. And as we are sharing, the Business reasons for flying Unity are to demonstrate what this industry is about, both the safety, how the ships work, the fact that we can repeat them and importantly getting a chance to showcase the customer experience. Because unlike whether you're a new electric vehicle startup or something similar, People are familiar with the business model and human spaceflight is something that private citizens have really never had the chance to do.

Speaker 2

So Unity is demonstrating all that, but it is very resource consumptive as we do it. So the big move we're making here is pivoting The resources that are have been being put into the Unity flights and redirecting them over to get the Delta ships done with the cash we have on hand And you'll take that kind of market risk off the table. So as we're doing that, we will continue to QIOD. We're moving to quarterly because it allows us to reduce cost as we do that. And we know we'll go January is when we're doing GALACTIC 6.

Speaker 2

We'll do GALACTIC 7 probably in the earlier side of the second quarter. And then whether we do GALACTIC 8 with Unity before we move our team or not is really around the specific timing of when Our very skilled teams that are in New Mexico, both technical operations and engineers, we want them to be a part of the build process of our Delta ships. It's better from a spending standpoint, so we aren't ramping up as many incremental folks along the way. And really, the importance is it allows Our teams that will maintain these ships to have the hands on experience of building them and that will help us more quickly ramp up to rate as we bring them into service. So whether that starts, I'd say, at the tail end or the beginning of the third quarter or the Until the Q2, beginning of Q3 or a little later will depend upon whether we fly GALACTIC 8 with Unity or not.

Speaker 2

So we're not going to make that call today. We're going to let the Delta program and need for those team members drive that. And then we will take a pause with Unity, whether it's after 7 or after 8 as we put our attention on building these Delta ships because that's where we will drive the economic value of the company.

Speaker 7

That makes sense. And then the 8 times per month on Delta, I think previously maybe you talked about weekly flights, if I remember correctly. What's kind of changed there or got you comfortable with that higher expected flight cadence.

Speaker 2

Yes. Our private previously we've been talking weekly. My direction internally to our engineers were like, well, beat weekly. We should be able to turn these on a by twice a week basis, but the team had work to do on that. And so the first piece that's informed that It's just the progression of our designs and specifically designs that are enabling us to do less between each flight.

Speaker 2

Now the Unity flights have been really important in that as we've gone through the 6 6 months and built that operating cadence. It's very dialed in. Our technical operations teams are pros and they know exactly what they're going to be doing between those flights. And while that work happens to turn Unity, that also shows our engineers and design teams exactly the things that we We'd like to engineer out of the Delta systems so that we don't have to put that work in between flights because we've built the ships in a way that doesn't require it. That work has been kind of validated on the design side as we've learned the specificity of maintenance on the Unity flight.

Speaker 2

So that's been super, super helpful. And then you heard us talking about the test articles that we're putting in here. We're not going to wait all the way till flight test to validate that. We're going to be validating these designs with our copper burden, our iron burden, our static test article systems along the way. I'm really proud of what the engineers have been able to do and what our technical operations teams have delivered.

Speaker 2

It's that collaborative effort that lets us speak with confidence on a 2x a week or kind of 8x a month on average flights for deltas when we get to steady state.

Speaker 7

And then just sneaking one last one in, I mean, 8 times 12, 96 or So flights a year for each delta. How are you thinking about capacity for each spaceport? I mean, I think In the past, you've maybe talked about 400, just thinking about how many spaceships to fill up the 1st baseboard and kind of start planning for a second.

Speaker 2

Yes. And you bring up a great point. With the Turn time objectives on Delta now something we've got confidence in. This has great benefit in reducing the amount of CapEx needed for every spaceport, So with each spaceship being able to do roundabouts, 100 flights a year on a steady state basis, you probably need 4 to 5, Right. And that's what we would put in at a spaceport.

Speaker 2

And so we'll probably start with 4 and just see how we're doing with those and do we need to add A 5th is kind of one that's always kind of available on the side. We will take, I'm sure, a month out of that year, I'm giving you monthly rates on average. We'll take a month of the year as a more intensive overhaul, like an annual overhaul, like you would see in other aerospace type vehicles. But the average of the year will be 8 times a month, 96 ish a year. So hopefully that gives you a little bit of perspective on that.

Speaker 5

Perfect. Thank you. Thank you.

Operator

Your next question comes from the line of Myles Walton with Wolfe Research. Your line is open.

Speaker 4

Thanks. Good evening. I was hoping to pick up where that left off maybe. As you get into 2026 and you're sort of going to this Very, very high optempo. How quickly have you assumed getting to that optempo in the cash flow breakeven analysis?

Speaker 2

We're giving ourselves in 2026 time to to sort new ships out. Now we've gone through the whole flight test and ground test and with the extensive ground test assets we've talked about. In this type of work, in our internal modeling, we're giving ourselves half a year, a year to ramp that up. I would Note the skill of our technical operations teams, we've given ourselves several flights Before we were kind of sure if we'd hit a monthly cadence on Unity and we hit a monthly cadence pretty much right out of the gate. So I'm very proud and impressed with that team and they'll be moving that as quickly as we can.

Speaker 2

But we think it's prudent to be conservative at this point.

Speaker 4

Okay. And obviously, this is not the company has not been one to run the business without cash on hand. So just So I make sure I understand the $1,100,000,000 is what you require to get to cash flow positivity. Is that without thinking about just a normal level of cash on hand? Or is 1.1 basically the CapEx and operating costs To get from here to there is another way to ask it.

Speaker 3

Yes, this is Doug. Yes, it's sufficient to get there. And we mentioned we would likely at some point tap into the ATM what's remaining of $100,000,000 although we don't need to in in the near term timeframe. So, we haven't put like a minimum cash balance out there, but we foresee that the $1,100,000,000 is sufficient to get through to cash flow positivity by 2026.

Speaker 2

One thing Miles I'd probably add is context to that. We often will look to say how much of a kind of a time runway do you want to have on hand. As we get out into 'twenty five and move into 'twenty six, The overall cost footprint of the company is also much less than it's been. At this point, we are We're through all sorts of things, right? We're through all the upfront engineering, the non recurring engineering.

Speaker 2

We're through all the upfront Tooling and infrastructure test assets go in. We're in through all the infrastructure of the factory. We've got the supply chain built out and going. And so all those costs are behind us at that point in time and we're at a lighter footprint. So the need for cash on hand is less than you may have seen from us in

Speaker 4

Fast. And just one other one, the mothership you said, the second one you're planning enters in 2027. I think the mothership is more restrictive in terms of how many flights you can actually achieve. Can you remind us of what the status is on that? Because obviously, You've made pretty good progress on the Delta.

Speaker 4

What's the current status of limitations of flights on the mothership?

Speaker 2

So our first mothership Eve, As we fly with Eve and Unity, Unity is the bottleneck in the system. We'll be able to turn Eve as an airplane around quickly And we feel Eve is able to do 2 or more flights a week on space flights. Now Unity can't keep up with that. So generally, we're looking to we think there's probably some opportunity to go above 2 with Eve. But that means Eve will be the kind of constraining factor as we bring the 1st deltas on board.

Speaker 2

So that also kind of balances out as we're learning to turn the deltas on that twice a week cadence. By having 2 of them out, they'll probably balance out with Eve along the way.

Speaker 4

Okay. All right. Thanks so much. Welcome.

Operator

Your next question comes from the line of Michael Leshock with KeyBanc Capital Markets. Your line is open.

Speaker 8

Hey, good afternoon, guys. Good morning. I wanted to start just asking now that we're in commercial service for some time now. You've had several successful flights. I wanted to ask on how Unity has really influenced the Delta Class production and design of that fleet.

Speaker 8

And how are you thinking about Delta Class Differently versus maybe 3 or 6 months ago in terms of flight cadence or technical capabilities. You have The 8 times a month flight right now, but anything else that's different than what we had initially expected?

Speaker 2

Sure. The flights have been fantastic. I've had a chance to talk to the majority of the astronauts who have flown. It's very, very meaningful. We put just a few of the quotes in here today.

Speaker 2

And that's been very rewarding to the entire company. But business wise, it's Super meaningful. I've never contemplated an experience that is having the value that this is having for people And I think that will bode incredibly well for us as we go forward. So Unity has been delivering that. There are a lot of things on Unity This is fantastic and it will carry forward.

Speaker 2

We love the design of our cabin. We love The way the cabin interior generally is laid out, I would love the mirrored element in the back. We love the way we have the windows scattered around the sides and the ceiling. Ceiling kind of becomes a glass bottom boat as we flip the ship upside down. The collection of all those and being able to see almost kind of like through the French doors looking out On able to use your peripheral vision as you're above the planet and see the vastness of space.

Speaker 2

All that in Unity is amazing And will be carried forward into the Delta ships. Now Unity has things that we want to change, right? It is heavier than the Delta ships will be. And so Deltas, of course, will come out with 6 seats. So adding 50% to the capacity along the way.

Speaker 2

We're changing the System, the composite system of Delta. And that's really what's driving the majority of the work on the engineering side as we update the parts elements for that. So then as you kind of pivot to what is really different in Delta than where we've been before. From our engineers' standpoint, not much is different than where they are before. They're just confirming for me what I'd ask them to be able to deliver is We should be able to turn these ships on a twice a week basis.

Speaker 2

And as we've advanced our design, that charge kind of extra credit charge they had for me, they have been delivering against. So that's very compelling and that's why we're feeling comfortable sharing that with you here today. There are smaller things that I think we're learning around the flight, but the biggest things that we've picked that I'd say are The value on this type of call is by understanding what it takes to turn Unity on a month by month basis. We know that very specifically. We can target those things specifically in our design and verify it and test so that we don't need to do all those things flight by flight.

Speaker 2

And that's how we're going to turn this so much more

Speaker 8

quickly. And then, I wanted to ask on Research Flight, Would you look to increase your mix in terms of more research versus private astronaut flights before you get to free cash flow positive, Just given the higher revenue per flight or are you still targeting that 10% research number?

Speaker 2

Yes. I think the mix is going to be important. It's Incredibly, for our future, we have to be commercially in a commercially reasonable cadence with our early flights. And While we have, I'd say the long term is 10%. I've been very pleased listening to our researchers, both the Italians, Alan Stern, Kelly Girardi have been very powerfully speaking about the benefits of this and the cost benefit of this for research.

Speaker 2

So I think we're going to lean into that. One of the things you're seeing in the revenue per flight, We kind of pointed out for Galactic 6 and Galactic 7, it's meaningfully higher than what we've seen in the early flights and that is leaning in. Has the 4 seat, of course, leaning in heavily to the research mix, also has a place where we've had if seats have become available in the manifest, We are offering those up at kind of a market rate. And that market rate, as I mentioned, has been closer to $1,000,000 on a seat versus our kind of base pricing that we'd had last at $4.50 And so all those things kind of combine into the mix of a revenue per flight. When we come into Deltas, we clearly want to be moving through our existing customers.

Speaker 2

They've been very patient. We also I have to use commercially reasonable efforts to make sure we've got the revenue coming in to maintain a cash positive and a profitable position. So we'll work with the mix to balance all that out.

Speaker 8

Got it. Thank you.

Operator

Your next question comes from the line of Oliver Chen with TD Cowen. Your line is open.

Speaker 6

Hi, Michael and Doug. There's a lot of very helpful information on the Delta Class contribution margin as well as cost. On the 75% contribution margin, what would you articulate as some of the major sensitivities there in terms of upside or downside potential. And then Michael, as you continue to enhance the customer experience, it sounded like there's a lot of great personalization as well. What are your thoughts in terms of retaining the customers that experienced the flight?

Speaker 6

And any earlier thoughts on customer lifetime value as you think ahead and continue to innovate commercially. Thank you.

Speaker 3

Thanks, Oliver. This is Doug. I'll take the first question. So regarding the contribution margin, We have a good line of sight into the cost structure because we are already flying, right? We know how much it costs to purchase or build the items that get consumed in the flight.

Speaker 3

So the cost part of that is something We can see and we'll continue to drive efficiencies there over time. That has things in it like the rocket motor and the fuel and that sort of things. The more variable item is the revenue per flight. And Michael talked about some of the variation there that can occur depending on the mix of the manifest and the if we've got the standard, astronaut ticket pricing or we have some research mixed in there or any other variety. So I'd say there's some upside in that more than downside because When we gave you that 75%, that was using a $450,000 per ticket price.

Speaker 3

So we've indicated today that there's upside there based on what we're seeing today, and the flights that are coming. So I'd say more upside than downside in that metric.

Speaker 2

Oliver and thanks for the notes, Oliver. We have tried to bring forward good information for everyone today. You talked about what we think we've been learning from the experience, talking about retaining people and then lifetime value and future opportunities. So I'll try to hit this. It's hard to describe how powerful this experience is.

Speaker 2

And The customers, the future astronauts who are now graduating to our astronaut community, they're just bowled over and so happy and so pleased and it has been a long way. It's been so worth it. And That experience is going to help in kind of the retaining of others as they share that, of course. But as I kind of move into like the value of that group, Some of those people, not all, but some of those people will themselves want to repeat. They'll want to repeat at Spaceport America or they'll want to I'll repeat as we move to other spaceports.

Speaker 2

The other thing I think second in value is all of their direct friends that are here. So what we've learned in these last 6 space flights is the event and the moment that is happening around these space flights. So currently, these are just kind of opened up to the friends and family of our astronauts who are flying. And it is a happening. It's emotional.

Speaker 2

It's meaningful. It's fun. There's a of course, there's celebration and ceremony that goes with that. And so there's some, I'll call it, ancillary revenue opportunity just around that. That probably gets bigger as we open up the spaceports to more have viewing because it is an event and we keep hoping to get people out to witness this and I hope you have a chance to come do this.

Speaker 2

It is just super meaningful just to even watch. But then not only the friends coming to watch, That's the best chance we have to convert somebody is bringing friends to watch and your friend or your family member goes and you see What this is about in person, it is very compelling to then want to move those people forward. And then the next A piece of that is when you've had a meaningful experience at this level of depth and emotion, it is much easier to become a missionary and a passionate ambassador for our company going forward. And that's where you really get the multiplicative value to us. That's where you get lifetime value of an individual customer, but also through them bringing in new people into our community.

Speaker 2

So those are a bit, I'll call it the direct side. As we graduate people into the astronaut community. We absolutely are going to look how to curate that for additional value to those now Virgin Galactic astronauts, but also, of course, driving value to the company. So we're just starting to build that community up, but I have a lot of high interest and engagement of what we can do with a very kind of passionate and deep allegiance to the company group of people like that.

Speaker 6

Okay. That's really helpful and innovative. Last question, the spaceship factory in terms of what you're monitoring. And is that enough cushion in terms of what you see in the current environment, its availability and the flexible arrangements you're using as well. Thank you.

Speaker 2

Thanks, Oliver. So we've got a Team on the program management side of this, I'll call it more so than the engineers per se and our supply chain team. These groups are pros. And the big things that's going on now, of course, are scanning out the long lead items. And there's a little bit of whack a ball with that, but we whack down things when we see those things pop up.

Speaker 2

And by Having our Delta design be a derivative design, not a brand new thing. It's a derivative design of the work that we've done in the past. We know what those long lead items are and so we've got the time to be out searching and adapting as we need to. We're working with really seasoned partners Envel and Carbon. They've been incredibly responsive.

Speaker 2

We've started to bring some of their team members and leaders Out to see our spaceflight. I think it's really important that those teams feel part of our team and feel part of the emotion and the huge value of doing this. So that helps us build kind of cultural momentum there as well. And it's a collective effort. Yes.

Speaker 2

This is an aerospace project and there's always things that are popping up, but we've got the right focus and the right team and the right Buffers built into our plans and schedules that we feel good on them and we're going to continue to manage day by day, week by week, month by month on that.

Speaker 6

Thank you. Best regards.

Speaker 2

Thanks, Oliver.

Operator

There are no further questions at this time. This will conclude today's conference call. We thank you for joining. You may now disconnect your lines.

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Key Takeaways

  • Virgin Galactic completed six space flights in under six months with VSS Unity, proving their suborbital system works on a repeatable basis and setting new turn-time records for human spaceflight.
  • The early astronaut experience has been overwhelmingly positive, driving robust demand, strong customer loyalty and turning participants into passionate ambassadors for Virgin Galactic.
  • The upcoming Delta class ships will carry 50% more passengers, fly up to eight times per month and generate an estimated $2.7–3.6 million in revenue per flight—around 12× the monthly revenue potential of Unity.
  • To focus on the Delta program, Virgin Galactic will pause or reduce Unity flights in mid-2024, restructure operations and headcount, and reallocate technical teams to the production of the next-generation fleet.
  • With approximately $1.1 billion in cash and marketable securities and targeted cost reductions, the company expects to fund the first two Delta ships and reach positive cash flow by 2026 without immediate external financing.
AI Generated. May Contain Errors.
Earnings Conference Call
Virgin Galactic Q3 2023
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