RKLB - NASDAQ

Good day, everyone, and welcome to the Rocket Labs First Quarter 2021 Financial Results Update and Conference Call. At this time, I would like to hand the call over to Murielle Baker, Communications Manager at Rocket Lab. Please go ahead, ma'am.

Thank you. Hello, everyone. We're glad to have you join us for today's conference call to discuss Rocket Lab's First Quarter 2024 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 Securities 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 the 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, Founder and Chief Executive, 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.

Thank you, Maria, and thank you, everybody, for joining us today. We've got a lot of great achievements and milestones to share on our start to the year, not the least of which is executing a record number of launches and Space Systems growth that delivered a record total revenue of $93 million in the quarter, up 55% quarter-over-quarter and 69% year-over-year. Adam will talk through the rest of the details of our financial results for the first quarter before covering the financial outlook for Q2 2024. After that, we'll take some questions and finish today's call with the near-term conferences we'll be attending. All right, on to what we achieved in the first quarter of the year starting with Electron. We had a great series of launches in Q1 with 4 successful missions, 3 of them for commercial customers from Launch Complex 1 in New

Great. Thanks, Pete. First quarter 2024 revenue was $92.8 million, which was towards the low end of our prior guidance range, reflecting significant year-on-year growth of 69% and sequential growth of 55%, driven by strong contribution from both business segments. Our Launch Services segment delivered revenue of $32.7 million in the quarter from 4 launches, in line with guidance of $32 million to $33 million representing sequential growth of 287%, driven by a return to normal launch operations after Q4 was impacted by our September anomaly. The average selling price per launch was $8.2 million, well above our target average selling price of $7.5 million, the result of a favorable mix of government and complex commercial missions. Our current backlog continues to support our target average revenue per launch with some variability tied to volume purchase commitments, launch location and mission assurance requirements. Our Space Systems segment delivered just over $60 million in the quarter, which was towards the low end of our prior guidance range of $60 million to $65 million, but reflecting sequential growth of 17%, driven primarily by growth in our MDA contract revenue, albeit slightly less than was expected. Now turning to gross margin. GAAP gross margin for the first quarter was 26.1%, slightly above the high end of our prior guidance range of 24% to 26%. Non-GAAP gross margin for the first quarter was 31.7%, which was also above our prior guidance range of 29% to 31%. GAAP and non-GAAP gross margin improvements relative to our guidance reflects continued efficiencies in both our launch and satellite manufacturing businesses. We ended Q1 with production-related head count of 872, up 20% from the prior quarter. Turning to backlog. We ended Q1 2024 with $1.02 billion of total backlog with launch backlog of $215.6 million and Space Systems backlog of $799.7 million. Relative to Q4 2023, total backlog was down only 3% sequentially or $31 million despite a $93 million quarter of revenue. Strong bookings continued in our Space Systems business, highlighted by initial orders related to the long-term supply agreement with a Tier 1 prime contractor that Pete alluded to earlier and a follow-on booking for reaction wheels supporting a mega constellation. For launch, backlog was down 13% sequentially or $32.7 million as we drew backlog down against a record number of launches in the quarter. We continue to cultivate a healthy pipeline, including multi-launch deals that can be lumpy given the size and complexities of these opportunities. We expect approximately 42% of current backlog to be recognized as revenue within 12 months. Turning to operating expenses. GAAP operating expenses for the first quarter of 2024 were $67.3 million, below the low end of our guidance range of $73 million to $75 million. Non-GAAP operating expenses for the first quarter were $56.4 million, which was below the low end of our guidance range of $62 million to $64 million. The increases in both GAAP and non-GAAP operating expenses versus the fourth quarter of 2023 were primarily driven by continued growth in head count and prototype spending to support our neutron development program and related infrastructure to support Neutron and our '18 satellite SDA contract, partially offset by shifting R&D resource to production to support for Space Systems. In SG&A, GAAP expenses increased $2.9 million quarter-on-quarter, largely due to a $1.6 million increase in stock-based compensation, along with increase in outside services, partially offset by a decrease in the change in contingent consideration related to our PSC acquisition due to a lower average stock price in the quarter. Non-GAAP SG&A expenses increased by $1.9 million, primarily due to the increase in outside services included in year-end audit expenses, legal fees and corporate IT and security spending that further enable efficient scaling of the business. Q1 ending SG&A head count was 263, representing an increase of 16% from the prior quarter. In R&D specifically, GAAP expenses were up $1 million quarter-on-quarter due to Neutron prototyping, materials and head count increases. Meanwhile, we have shifted certain non-new truck R&D resources to support the execution of our MDA contract production ramp. Non-GAAP expenses were up $900,000 quarter-on-quarter driven similarly to GAAP expenses. Q1 ending R&D head count was 625, represent an increase of 40% from the prior quarter. In summary, total first quarter head count was $1,760, up 76 heads from the prior quarter. Turning to cash. Purchases of property, equipment and capitalized software licenses was $19.2 million in the first quarter of 2024, an increase of $8.8 million from $10.4 million in the fourth quarter of 2023. This sequential increase was due to our continued investment in Neutron research, testing and production infrastructure projects, along with the expansion of our satellite production and space solar solutions capacity. Cash consumed from operations was $2.6 million in the first quarter of 2024 compared to $42.2 million in the fourth quarter of 2023. The sequential improvement of almost $40 million was driven by a lesser net income loss and working capital improvements owing to the ramp-up of production in our MDA Globalstar program and a step-up in launch cadence as well as strong cash collections, including initial milestone payments related to our Space Systems programs. Overall, non-GAAP free cash flow, defined as GAAP operating cash flow reduced by purchases of property equipment and capitalized software in the first quarter of 2024 was a use of $21.8 million compared to $52.6 million in the fourth quarter of 2023. The ending balance of cash, cash equivalents, restricted cash and marketable securities was $564.9 million as of the end of the first quarter of 2024. As discussed in our February earnings call, we generated $355 million in a convertible senior notes offering, which was coupled with 2 deployments of $43.2 million supporting our convertible capped call and equipment facility loan repayments as well as $11.2 million in debt issuance costs, yielding $257.4 million of net financing. We exit Q1 with a strong position to exercise inorganic options to further vertically integrate our supply chain with the critical capabilities, consistent with what we've done successfully in the past. Our fourth quarter profitability trend demonstrates progress towards adjusted EBITDA breakeven and attaining our long-term financial model. We expect Electron's gross margins to continue to improve over time due to increased scale and production efficiencies and satellite manufacturing contributions to improve due to increased scale and leverage of growing IP capabilities and infrastructure. With our strong launch Manifest and increase in scale driven by Space Systems contract execution in 2024, we are well positioned to continue our progression to adjusted EBITDA breakeven following our neutron investment cycle. And with that, let's turn to our guidance for the second quarter of 2024. We expect revenue in the second quarter to range between $105 million and $110 million. This range reflects $77 million to $81 million of contribution from Space Systems and $28 million to $29 million from launch services, which assumes 4 launches. As Pete noted, we do have a fifth launch slated for late June, but are taking a cautious approach in terms of guidance setting given the end of quarter timing risk. We expect second quarter GAAP gross margin to range between 24% to 26% and non-GAAP gross margin to range between 30% to 32%. These forecasted GAAP and non-GAAP gross margins reflect mix shifts in our Space Systems segment towards a larger and lower-margin satellite manufacturing program revenue contribution versus certain of our higher gross margin component offerings as well as a weaker mix within our components businesses. We expect second quarter GAAP operating expenses to range between $74 million and $76 million and non-GAAP operating expenses to range between $62 million and $64 million. The quarter-on-quarter increases are driven primarily by increased neutron investment, including staff costs, prototyping and materials as well as our annual merit increases effective April 1. We expect second quarter GAAP and non-GAAP net interest expense to be $1 million. We expect second quarter adjusted EBITDA loss to range between $23 million and $25 million and basic shares outstanding to be approximately 494 million shares. And with that, we'll hand the call over to the operator for questions.

[Operator Instructions]. And we'll go first to Erik Rasmussen from Stifel.

Maybe just on Neutron. You obviously made a lot of significant progress as the number of milestones in the Archimedes being the latest, I guess, a major one, but you are pushing that out by at least 6 months. Is it mostly on the engine side, sort of the conservatism there? And sort of what can pull that time line in or even push that out further?

Yes. Erik, so the engine is always a long pole in the tent with any launch vehicle development. So -- and look, we learned a lot building that engine and getting it to the stand, and we'll continue to learn more as we go through the Engen qualification and hot fire programs. But the engine is really the primary driver for the move. And market programs are notoriously difficult to kind of plan. And I think a lot of people see the rocket, but they don't see all of the tremendous amount of infrastructure around it that it takes to bring a rocket to fruition. So there's a lot going on in the program as you saw in some of the materials. But really, the engine is always certainly for us, the driver for the program.

Okay. And then what would you say then because it was the first call it, we'll call it an S mission, right, or an R&D mission. Could there be -- if you do get in the middle of the year, could you actually then -- what do you think the time line would be for you to start to -- and assuming that's a successful launch, what do you think the time line could be sort of matching what you previously said maybe 3 following that R&D the following year and then 5 of the other year. Is that still the right way of thinking about new...

Yes... Yes, totally it is. We've played this game before, and sort of the 135 is the right way to think about it. And I think that certainly, as we're building capability and in some cases, stock that's exactly how we're planning it still.

Okay. And staying with March, but going back to Electron, you had 22. It sounds like there's some changes in customers in the Manifest and that obviously is maybe impacting even this quarter. But we would have thought that if you hit that 22, you would have had to do 6 in Q2 and for each quarter for the remainder of the year given you did 4. Where do you think that number could wind up? And could you actually even hit 22 for the year, still?

Yes. Look, I mean, we had the sort of 22 emissions booked this year. And as I mentioned on the call that it's literally a game of benefits [indiscernible] and people move out. Very really as people move to the left, but that does occasionally happen. We have a bunch of folks that come in at the last minute. The biggest challenge for the launch time lines is not so much vehicles. It's often licensing and sometimes mission design and payload structure development. So although we're in May, certainly not waving the right flag, but as more time goes on, it gets more and more difficult to be able to do that and bring those missions in or add new missions to the manifest. So we're just making sure that we're being transparent here that it's going to be difficult to get those 22 emissions off purely color some of those reasons. So will -- we actually end up at the end of the year is kind of in the hands of our customers in a lot of respects. But I'll make the point that this is just the reality of launch. And none of these missions go away, are they just sort of move around and some will move into other quarters and some will move into next year.

Great. Well, and then maybe just last on the MBA contract, it seems like this program and revenue recognition is kicking in. Maybe just help us understand the revenue trajectory and contribution or maybe the weighting as we sort of progress through this year.

Yes, I can take that one, Pete. So Erik, yes, to your point, we are in now the meat of the rev rec underneath this program, and we expect to recognize the majority of the remaining contract value in 2024. And it will be, I would say, kind of you think about it kind of peaking probably in the -- kind of in the Q3 period, maybe shifts to Q4. And then we'll also start to see more meaningful contribution from the FDA contract that we announced early this year. So I think we've kind of managed to have things land in such a way where you don't have kind of a risk of a big drop off as the MDA contract kind of comes to conclusion because we've got a contract that's more than 3x larger kind of following it in the wings, if you will. So I think that, again, our plan is to still see that almost all of the remaining contract value recognized in the 2024 time period. And there is an operating contract, a SOC that goes along with this NDA Globalstar agreement, but that's relatively small in the grand scheme of things with regards to the total contract value of roughly $150 million.

And next up is Andre Sheppard, Cantor Fitzgerald.

Congratulations on the quarter. Just a quick one for Pete. Obviously, congratulations on the Archimedes engine build. You're now targeting the hot fire test, which will be a big important milestone there. With now targeting first launch earlier than middle of 2025, can you just maybe help us -- just remind us what are the other big milestones between the Hotwire engine and the launch.

Yes, sure. Thanks, Andre. So we've always said look for concrete on the ground at Wallops and in the test sites, look for large stage tanks and things like that and look for fire. And those things remain kind of the same things that I'd be looking for. So yes, getting something -- getting a pad built is a huge program and everything done right, getting the engine test facility built, it's a huge program that's done. And then like I said, now it's just working through the BR committee's final development and iteration. And then I think the other thing I'd be tracking is like making sure that we continue to build components for other launches. So not a one and done kind of a thing, it's like making sure that there's a bunch of other engines coming off the production line and more teams and structures and things like that. So that's sort of certainly something that we're focused on is making sure we keep the machine primed with all the components needed to not just get one launch way, but stand up a commercial service.

Got it. Okay. That's super helpful. I appreciate all that color. And maybe just a quick follow-up for Adam. Adam, just on the liquidity, sorry, if I didn't hear this correctly, but does the $560 million, let's call it, $565 million, does that include the net proceeds of the recent capital raise? And definitely remind us... okay. That's okay. Great. And then just remind us. So with that liquidity on hand, what is the run rate expected? Or how are you thinking about that?

With a run rate a runway. I think that the -- we raised a significant amount of capital, obviously, in this most recent transaction. And as we've stated, it was really all about providing inorganic growth optionality for us. And we do continue to see significant opportunities out there. I would say the deal pipeline that we're managing at this point is probably as full as it's been in really the last couple of years as far as potential actionable targets for us. So I think the timing on raising that, the funds was probably pretty ideal. If you look at the capital required to complete Neutron, we didn't raise the money for that. We had plenty of liquidity for that. We're -- given where we're at in the program, we feel like we're still very much on track to the $250 million to $300 million total spend to get Neutron to the pad. And fortunately for us, not all of that spend has landed on our backs. We've had some support from various partners that have brought capital to the table as well. So I think that, again, we feel very good about our ability to scale our Space Systems business, continue to scale Electron, get neutron the pad with the capital that we had pre-convertible, and we continue to look for options to deploy that convertible proceeds to inorganic means. So -- and I think that right now, we feel really good about where we're at from a liquidity perspective, and we really don't see the need right now to think about anything beyond that.

Got it. That makes sense. So it sounds though that you are potentially interested in continuing to grow inorganically. And to that point, maybe you remain active in the M&A market. But with that liquidity on hand, that's certainly feasible, at least so far. So... Okay, that's helpful. Congrats on the quarter. I'll pass it on.

Next question comes from Jason Gursky, Citi.

Pete, a quick question for you on the engine development. What exactly caused you to need to push by 6-plus months? You mentioned you had some learnings there. Hope maybe you kind of share some of those details with us or at least characterize whether they were issues with the design, issues with the manufacturability. Just kind of give us a flavor of what went wrong here?

So no like major issue, not -- we didn't run up against a wall and had to solve something majorly technically. But I mean, kind of as I mentioned on the call, like the point here is not to just make fire. The point here is to roll into production. And there are a number of kind of new processes and actually even new materials that we developed for our committees. And those are all intended to support production at a different time, we go into much more detail about some of the manufacturing methods we've used for the combustion chambers and things like that. But really, similar to other fed, when with the very first 3D print a chamber there. That was a new technology that hadn't been done before, and we spent a lot of time because we thought that, that was going to be a big payoff. So not dissimilar to that. There's some manufacturing techniques that we've employed on our committees that in the long term are going to pay off handsomely. So a lot of time we spend on that. And then just, quite frankly, just the time that it takes to stand up the factory and the machine that builds the machine is probably the biggest learning is -- look, we've done this enough. We know that is difficult and time-consuming. But an engine on the scale is certainly as an extra element to that. I mean you can't just pick up a pump volume and bolder on the engineer to get a crane to put the portfolio on -- so it -- everything is just such a larger scale that it makes it more difficult. So yes, not like one big staggering thing, just a whole bunch of stuff that just sort of adds up.

Yes. Okay. That makes good sense. And then do you have a sense of like you build buffer or contingency into the planning and now you've got this mid-25 date out there. How much kind of contingency do you have in that?

Well, as I mentioned before, we won greenlight schedules at Rocket lab. So in an engineering program, especially one of that scale, it's almost impossible to build sensible engineering buffer and because you never really know the elements that are going to cause your problem. You've got some inklings and you paired some areas. But if you walk into a room full of the engineers and ask them to add buffer in their schedule, then come back in 2040. That's just kind of the way it rolls. So we're always running greenlight schedules. So our schedules are always ambitious, and that's worked really well for us. I mean, if you look across the execution history, the time that it took us to put electron on the pad was extraordinary. I mean we started that program in 2014 had our first launch in 2017, and that was from absolutely 0. So there are some challenges with the vehicle of the scale. But -- and I always caution everybody all the time, that at the end of the day, this is a Rocket program, and it's a very difficult thing to execute. That's why there's only a few of us in the world that are pulled it off. But the way we run our schedules are informed by experience and what we've learned in the past, but we always run them very aggressively and very ambitiously.

Okay. And then maybe just a quick update on the demand for Neutron, and you talked earlier on the call about this 135 schedule from a launch cadence perspective. But maybe you can just kind of give us an update on over the last 3 months, which you've been hearing from potential customers there and whether 135 is just going to be scratching the surface? Or can give us an update on what your view of the market is there.

Yes, sure. All the things that I stay awake at night not tossing and turning about demand for electronic or new Transas just -- it's not one of them. And we continue to have really good, robust discussions with our customers. But I think as I've mentioned before, it's kind of -- you show me yours and I'll show you mine. And we maintain the fact that what we want to do is bring a launch vehicle to market that's ready to go and into a market that is a great need rather than do a whole bunch of early adopter pricing and deals that don't have any teeth. So it's fair to say that the interactions with customers over the last quarter have certainly strengthened and we maintain that we happy to entertain normal kind of deals where it's 10% down nonrefundable and normal kind of LSAs. But the reality is that people want to see a real rocket before they make such large commitments. And the same goes for us. We want -- if we sell a whole bunch of launch because most customers aren't looking to buy one, they're looking to buy mini that we don't commit to a customer that ultimately doesn't turn up in the pay because with electron, you can see the challenges that also causes is a reality of the space business. So we're looking at them and they're looking at us.

Right. Yes. No, that makes good sense. I appreciate that. And then, Adam, just one quick one for you. The comment that you made on backlog burn over the next 12 months, 42%, I think, was the number that you threw out here. Was that a reference to all of the backlog? Or was that just to the launch business? And then as maybe just a quick follow-on to this backlog question. What are your guys' expectations or goals here as far as book-to-bill is concerned for 2024 and kind of going forward in any given year? I know these awards can be pretty lumpy, and you've just built up some nice backlog here, but investors are certainly going to be focused on book-to-bill going forward. So just kind of update us on what the overall pipeline looks like and whether we can year in, year out of this new base that you've got here that book-to-bill to exceed 1.

Yes. Yes. So Jason, so yes, I should have been more clear. So the 42% applies to all the backlog. So it's not specific to launch, horsepase system. So it's a total business. And as far as the book-to-bill target, now you're right, of course, everybody -- we need to see a book-to-bill greater than 1, just given kind of what our growth aspirations are. I think that when you see that we've got backlog over $1 billion against a street consensus number that's obviously significantly lower than that. We've got quite a bit of ability to grow significantly based off of just the backlog that we have in place. But we're -- we continue to chase big deals. I think that's the one thing that's really evolved over the course of the last 12 months. And I think largely not -- I would say not disconnected at all from what we've seen, like, for example, landing that large SDA contract is that kind of as we start to get more and more of these super sophisticated programs, one, we seem to attract more of those kind of opportunities as well. So I think you'll continue to see us chasing big deals on the Space Systems side. I mean the component business continues to grow nicely, and that's great because of the margin profile that some of those businesses have by selling components into the merchant market. But I think that what we see are large program opportunities to continue to build the backlog, not to dissimilar to what happened with the FDA beta contract. But also as Neutron becomes closer and closer to its first launch, that's where -- that's a very chunky opportunity as we kind of -- as we sign LSAs for that vehicle, those are all needle moving, given the average selling price that we expect to realize from a neutron launch. So I think the -- you'll see and we talked about this last year as we progressed through 2023, is that when people kind of looked and said, "Hey, it looks like your backlog growth has stalled a bit. And what does that mean for future growth. We said, look, you have to be patient because the kind of opportunities that we're chasing are just such a scale and complexity that they don't come together on a predictable kind of programmatic way, they come in fits and starts. And I think we saw that again late last year with the FDA contract coming into focus. And then I believe you'll see similar things as far as program size and then again, across not only Space Systems, but also including Neutron. So I think that you're right, it's right for people to expect a book to bill greater than 1. I have no concerns similar to Pete said that's of the things that I sit up at night worrying about, that's also not one of them.

The next question is from Matt Akers wells Fargo.

Thanks for -- I guess you talked a little bit about reusability and putting the rocket back into the process. Just curious how you think about that ramping up. If that launch is successful, how fast you could start to see some of the cost benefits of doing that on a wider scale?

Yes. Thanks, Matt. So I mean, our focus this year has just been on production. And although the reusability program for electron has made good kind of strides and milestones, really just rolling the vehicles off the end of the production line has been our focus. Reasonable vehicles, they still have developments in the aspects of them that make them kind of distracting to production. But like I said, the vehicle looks great, and this is really the first one that's rolling back in the production. If this goes well, then it becomes much more of a standardized thing we can kind of roll this into being a much more usual part of what you see with electron launches.

Okay. Great. And I guess just one more just thoughts on latest on Solero margins and how you're making progress on, I think, the 30% margin target there.

I can take it .

Yes. Yes.

So Matt, on the Solera margins, again, that's something that we continue to work through the challenges of some pre-acquisition -- well, really on pre-acquisition owners contract which still has a bit of a ways to go on that. So kind of what we look to is if you kind of exclude that thing, which unfortunately, we weren't able to effect, we had to kind of absorb that upon adoption of the company. The bookings that are coming in now are very strong. So we look at additions to backlog for the Solero business, it would -- I'd have to strain my memory to think of one that was coming in recently that was below our target. Most of the business that we're booking for that is above that 30% gross margin target. And part of that is enabled by the fact that, again, we've been a little bit more, I would say, a little bit more hard nose on customer negotiations and holding price. I think when -- I mean, the other things that factor into some of the investments that we're making in the business as far as putting new reactors in place in Albuquerque that are more -- that are delivering better production efficiency. I think the business has always been very good at controlling their overhead costs, and it's a very tightly run business. So it's really all about kind of building the backlog in such a way where we have comped as we can deliver that kind of at the margins. I think there's probably more upside than downside to that longer-term target of 30% gross margin. It just takes a little while to get there. When we acquired the business, we said within about 2 years of acquisitions when we expected to kind of be able to have line of sight to those gross margin targets of north on 30%. And I think what we underestimated was just a challenge in kind of getting that one onerous contract behind us, and we still have a bit of that water to carry. But again, I think I feel very good about kind of everything else that we've been booking and where the backlog stands right now. I think it's probably going to be -- we've got at least through the end of 2024 and probably a little bit beyond that to get that out of the mix.

The next question comes from Michael Leshock, KeyBanc Capital Markets.

I wanted to follow up on the backlog question, very strong right now. And just wondering how high you can take your backlog before maybe having to walk away from business or in the same vein, do you expect to get more pricing power on future contract wins as your backlog grows.

Yes. I mean first...

Okay, go ahead, sorry.

you go ahead. I'll...

I was going to say, I don't think that it doesn't feel like we're in a position where we necessarily have got a problem because we have kind of too much backlog role to our ability to produce to that backlog. I think we are seeing some natural pricing support come on the Electron side just because of the fact that a lot of the competition that we're really aspirational have not materialized. And so I think that's certainly helping on the pricing front because I think now there's more rationalization going on with -- you can have more rational discussions because, again, you don't have people who don't know how to run a rocket business going out and trying to sell rockets and putting kind of phantom pressure on pricing. So that has really started to evaporate. I think that when you look at some of the things that we're doing, you have to put more capacity in place with places like Solero, I think that's helping us kind of remove any of those kind of kind of ceiling, if you will, on how big the business can grow to. So I feel pretty good about that. And I think all that is supportive of, again, margin expansion, gross margin expansion as we move forward. We've seen that in the business over the course of the last year. But we do have some interesting mixesmix challenges when it comes to kind of just the overall gross margin profile when you have some lower margin overall, call it, photon or satellite manufacturing skewing. So for example, we have more of the mix coming from that lower-margin Space Systems manufacturing part of the business. But what's helpful about that business, though, even though it may not have the same gross margin profile as the higher gross margin component, merchant component businesses, they can have a lot of operating leverage to them because we're able to basically reuse a lot of the IP that we've created on prior missions. And so we now have a pretty fulsome portfolio of IP, and we've invested in the manufacturing capabilities to the point now where incremental programs that may not have the greatest gross margin perspective can drop quite a bit to the bottom line because of what we've already put in place from an investment perspective. So that's kind of how I look at kind of the overall kind of margin shaping over the course of the next year or so. But I'll -- maybe Pete, you can jump in.

Yes. I think you said it well, Adam. The only thing I'd add there is that we are -- Rocket Labs known and our reputation is execution. So we're always kind of, as Adam pointed out, balancing our growth with our ability to execute because the last thing we want to do is fall behind on that. So when we look at programs and opportunities, we are selective and kind of as I have mentioned before, is the kind of programs you're looking for and spending time on a very large ones. So we have to be kind of always diligent to make sure we don't take on programs that absorb a lot of resource, but don't have a lot of scale. So we're continually juggling those opportunities against how we want to grow the business.

Yes. And Michael, I would further add that a little bit saying like Pete and I were talking the other day about the fact that it feels like the demand signal is stronger now than any time I could really remember it in the business. You think that it maybe would start to moderate a bit because we've now got a $1 billion-plus backlog and the business is kind of hitting a new scale with our Q2 guide above $100 million per quarter. But it feels like to a great extent, it feels like we're drinking from a fire hydrant here, and there's a lot of opportunities that we're having to kind of sift through, but there's a very strong demand signal out there as far as the kind of programs that we're being asked to look at.

Yes, absolutely. I appreciate that. And then on the launch side, specifically for haste launches. Just wondering if you see opportunities there for more pricing. I think if you look at the customers' alternatives, they could be significantly higher costs versus Rocket Labs offering. So is there a strategy there to increase pricing or keep it stable where it's at today? Any update on the haste side would be great.

Well, I mean, we see haste is a really fantastic opportunity for Electron, not only just on price but also on scale. And I guess the biggest opportunity for us here from a revenue perspective is the additional services from the launch vehicle as well. So yes, as you pointed out, Michael, the alternatives are significantly higher. But the reason why there's so few launches and a little advancement is because of that. So by coming into the market with a disruptively low price point, we're seeing just such a growth in kind of revitalization of that market that I think, ultimately, that's the best approach for the -- creating the most amount of value out of it is to stimulate it rather than [indiscernible].

And the next question is from Suji Desilva of MKM.

Just a little bit maybe following with the last question. The big -- does missions, you talked about being end-to-end service. I'm just trying to understand if there's incremental products or services you're offering there that can be productized and offered more broadly if there's a financial uplift of those incremental elements you're characterizing as part of the end-to-end service offering?

Yes, yes, for sure. I guess the biggest one is Rondeanproximity operations. I mean that is a very rare capability and something you need to dock space craft with ISS, for example. So kind of aligned with our strategy of only taking on work that we think is strategic to us, that's certainly a good example of that. But as an end-to-end service with a spacecraft, we're leveraging the foundation design from one of our spacecraft already. It certainly does make it possible to be more productized. And we see this is the direction that not just the U.S. government, but the world is heading towards, right? On-demand, rapid call up and whoever has the best solution there is in a good position because often, responsive launches talked about, well, I mean, that's useless unless you've got something to stick on top of it. So this is really the first demonstration of responsive space where it's all combined right down to the data handling and operations of the spacecraft.

Yes. And I think, Suji, I think along the hotline, I think one of the -- we talked about the financial benefits to the model, I think when you're able to couple the launch with the spacecraft manufacturer, I mean, you just -- you're increasing your odds of -- or your Pwin for these type of programs. When you can go with a turnkey solution because I think right now, what we're seeing is what the customer probably fears the most, it's not necessarily they feel like higher pricing or whatever they fear delay, right? Because I think there's just the supply chain within the space market, particularly new space has not yet gotten to the point where we could deliver scalable solutions on time. So I think that when we can go with the turnkey say, look, we have the launch capacity. We have the ability to design a spacecraft and manufacture spacecraft in a predictable time line because we're so vertically integrated. I mean it just kind of pushes the narrative forward and ultimately allows you to have just a higher overall market share and market kind of share capture approach. So I think this is really kind of a more of a sign of things to come. This is where we really wanted to take the business was being able to do these end-to-end solutions for the customers. And ultimately, with that will come just better scaling and more predictable scaling of the business across both segments. So we think this is a huge kind of validation of that strategy being realized now. And of course, with an incredibly sophisticated customer as well.

Sure. Great. Okay. And then my second question is you listed out the subcontractors on the FDA contract in the press release. Just trying to understand now, I know you've been targeting M&A to in-source. But is there sort of an equilibrium balancing point where as a prime contractor, you'll leverage external subcontracting and components versus wanting to keep bringing things in-house? How do you balance that going forward as you grow?

Yes. It's really 2 elements. I mean, we don't vertically integrate because we think it's some kind of revision. We do it for either 1 or 2 reasons. One, we think we can create more value for the company or 2, we need to control it because suppliers just can't deliver at either the scale or the time lines that we require. So as we kind of execute on prime, then as a prime then the subcontractors that deliver on schedule, on budget. This kind of to your point, there's no need to kind of religiously the capabilities in. It's just -- there seems to be a relatively rare thing in the space industry. So we end up more often than not having to own it, then rely on those parties.

Next up here from Cai von Rumohr, TD Cowen.

Yes. So it looks like -- it feels like your schedule has definitely slipped and I mean you talk of a manifest of 22, but you have the comment in there that you look for a record year in launches. I mean you only did 10 last year, that would say 11 would get you home. Can you give us your best guess as to a realistic range of number of electron launches we could see this year?

Yes, I think if we launched 11, that would not be a record year in our minds, that would be a massive disappointment. And look, it's just -- we provide a number, but it's just super hard to kind of predict given as the customers move around. But I think it's fairly fair to say that at this point, we'll struggle to achieve '22. But we have line of sight for probably a couple of less than that.

Yes. Okay. I would add something to that. I mean one of the benefits of diversification that we've been driving so hard towards and now getting more than 70% of our revenue coming from Space Systems is that we no longer it's no longer like a push out of a launch, threatens our entire kind of year's annual operating plan, right? So we believe that we've got strength in other parts of the business, particularly on the Space Systems side, where if we can't deliver those 22 launches, it doesn't really put at risk our ability to deliver a very solid year that's still on target with our internal plan for what we think we can deliver as far as revenue and growth. So as much as -- again, we are very, very, very reluctant to weigh the white flag on anything here. But to the extent that things move outside of our control, we do believe that we've got strength in the business more broadly that would make up for any potential shortfall that we'd see from a launch or 2 that move out.

Got it. Great. Got it. So if you look at the rest of your competitors, I mean, particularly in the satellite side, RTX basically said they're throwing in the towel on being a space prime. LHX is there. They bought satellites from MO. They basically have been late with problems. Keiran is basically on Ultralife support. It sounds like your competitors are really not doing particularly well. Any thoughts about, a, it sounds like things are actually a little bit more chaotic than they've been. Maybe that's an over read. Do you see that happening? And is there any opportunity to just take a radically different approach and basically raise your price is 25% because the problem I can see of getting your backlog is you don't have the opportunity to kind of do a more profitable launch for someone who might be willing to pay for it.

Well, Cai, I would say our business model and our strategy is working exactly to your point. The vertical integration and the power that brings to bring these platforms to market at a price point and as Adam mentioned, the schedule is disruptive, and that's what you're seeing. And then from a launch perspective, I think as Adam pointed out, there has been a kind of a weaning of who's real and who is not. And the there be opportunities for us there, I'm sure.

Great. And so I mean you talk about demand being better, but it doesn't really sound like pricing is a whole lot better. Is that a misread on my part.

Well, I think it is delicate. Go ahead.

I was just going to say, I think it's a delicate balance, Cai because to the point about the haste missions before is you want to stimulate the market. And if you just go and just all of a sudden, what a big price increase there, then you can potentially damage those markets that you're trying to grow because some of them are new and some of them are fragile. So I think you have to be very balanced and careful about how you do those things.

I would add to that, too, Cai, on the pricing side of things. If we look at what's happened with electron pricing, it's gone nothing but up for us in the last several years, right? So if you recall back a few years ago, we were talking about launch prices in the $6.5 million to $7 million, now $7 million to $7.5 million. And now this for the recent quarter was $8.2 million. And I think you're going to continue to see that type of trajectory on pricing as competition, again, as kind of people fail to execute, and we bring an increasingly scarce product to market. And the mix of that electron business, as was I think was being asked earlier with regards to the impact of things like haste on the overall mix. But I also think that when you look at our photon pricing, if you look at the contracts that we're competing on, the contracts that we're winning, we're not winning on the lowest price. It's quite the opposite. Like we can oftentimes price at a premium to our competition, again, because of the fact that we're bringing that level of vertical integration, which translates into schedule certainty and performance certainty, right? So I think that's really what is kind of playing into the strategy side. I think we're absolutely seeing pricing benefits that are accruing to us as a result of the strategy, not only for diversification, but actually the fact that we're executing that we're vertically integrated and that we represent strangely up a lower risk option for customers despite the fact that we're a very new generation new space company versus some of the legacy players that you mentioned earlier in your commentary.

Next up is Xin Yu Deutsche Bank.

Just a couple of quick ones. First, on Neutron, did the Baltimore bridge incident impact the infrastructure time line at all?

Not that we can see at this point in time, no.

Okay. Then on the financials, I think the R&D was a bit low in the first quarter. Is that just a timing thing? Should we expect that to really step up in Q2.

Yes, Xin Yu. Yes, absolutely. It's a timing issue. I think it seems like all things in our business, there's elements of lumpiness and certainly spend timing is one of those things. So the nature of particularly on Neutron how things come and kind of fits and starts, we have large, for example, prototyping expenses that they may end up slipping out a little bit relative to maybe where you thought they're going to be. But there will be volatility, and I think you would absolutely expect that over the next few quarters, we'll continue to see a march up in R&D, primarily driven by -- if not entirely driven by Neutron kind of first flight.

Understood. And just last one on the -- I guess, the FDA contribution, do we have any sense what that could be this year, next year? I know you said you would get some small amount, but just wondering if there's anything a bit more discrete, you can maybe provide on that curve in the launch curve?

Yes. So we're continuing to do our work. I mean the program is certainly progressing and with that progression. And we talked about identifying subcontractors to work with us on that program. As we kind of brought more people for one intent, we've got more color as far as kind of their timing and their ability to deliver against their milestones. So we definitely are starting to bake some of that into our operating plan for the remainder of this year. Earlier, we said that we couldn't -- we weren't positioned really say. So at the -- say, the impot that was in the Q1 results was actually very, very small, I would call that immaterial. It's starting to become more material in the numbers that you're seeing in Q2 that we guided towards, and you'll continue to see kind of building on that as we progress through 2024. And I would say that -- and part of -- and that is also allowing us to kind of overcome, I'd say a little bit of the earlier weakness that we talked about as far as progress being made against the MDA contract with regards to rev rec. Some of that NDA rev rec is being made up for from initial contributions from the FDA contract. But I think when Erik asked the question earlier about kind of what the timing of rev rec look like for the remainder of the MDA Globalstar contract. And that is given -- just given the delivery schedules, that will, again, continue to build momentum, probably peak sometime in the Q3 time period, maybe it's Q4. But ultimately, that's kind of peaking out, we've got this building of FDA coming in behind it to prevent a real kind of drop off, if you will, when that program comes to conclusion. So I don't think we're quite ready yet to give kind of full year contribution from the FDA program because, again, it's pretty early in his life. But it's -- again, part of the reason why we're confident that even if there was a launch or 2 that moves out of 2024 from that '22 launch manifest that we have the ability to not really feel that from an overall top line growth perspective. So we hope to be able to give you more color in a little bit. But right now, we're just a little too early to provide a lot of color on FDA contribution.

And at this time, there are no further questions. I'll hand things back to our speakers for any additional or closing remarks.

Okay. I think that wraps up today's presentation. Thank you, everyone, for joining us on the call. Rocket Lab will be participating in these up-and-coming conferences and look forward to the opportunity to share more exciting news and updates with you then. So thanks again.