RKLB - NASDAQ

Good day, and welcome to the Rocket Lab Corporation Q2 Earnings Call. [Operator Instructions] Please note that today's event is being recorded. At this time, I would like to turn the conference over to Murielle Baker, Senior Communications Manager. Please go ahead.

Thank you. Hello, and welcome to today's conference call to discuss Rocket Lab's Second Quarter 2025 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 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 a copy of the presentation will be available on our website. Our speakers today are Rocket Lab's Founder and Chief Executive Officer, so Peter Beck as well as Chief Financial Officer, Adam Spice. They will be discussing key business highlights, including updates on our launch in space systems programs, and we will discuss financial highlights and outlook before we finish by taking questions. So with that, let me turn the call over to sir Peter.

Thanks, Murielle, and thanks for everybody joining us today. Look, we have delivered impressive financial results this quarter with another record revenue of $144.5 million, above the high end of our prior guidance and up 36% compared to last year. Our GAAP gross margin expansion exceeded expectations this quarter 2 and the consecutive growth of the company is really exciting to drive. No surprises here that Electron continues to be the leader of the small launch industry. We had 5 launches across the quarter, 2 of them back to back from launch complex 1 in 2 days. Demand for its services is also increasing from different countries with multiple international space agencies signed up for Electron launches this year and next. We made rapid progress towards the pad with neutral this quarter. Launch Complex 3 is ready for its grand opening, and we've got the first rocket parts on their way to Virginia. More to share across the program in the up and coming slides here. And finally, in Space Systems, our prime contractor status is expanding with our imminent acquisition of Geost. Being able to quickly build and deploy entire satellite systems is the cornerstone of the future U.S. defense strategy, and we're in a prime position to play within those large opportunities within launched spacecraft and now payloads added to our end-to-end capabilities. So let's get into those details now. We're very close to finalizing our acquisition of Geost, a maker of missile tracking satellites for national security missions. Having cleared through the antitrust review, we're on track for signatures on paper here pretty shortly. I'll let Adam take you through the financial details later. But if there's one thing to take away from this deal, it's adding payloads on top of launch and spacecraft really cements our status as a one-stop shop for national security. We're really a trusted just -- we're already a trusted disruptor in the launch and prime contractor for Constellation build, and this acquisition adds to our competitive advantage. It will bring an extensive inventory of space-based missile warning sensors and manufacturing facilities in Arizona and Northern Virginia that secures the domestic supply chain of this critical technology for next- generation missile defense initiatives, like the Golden Dome and the SDA constellations. The $175 billion Golden Dome program could prove to be one of DoD's largest procurements to date, and we're in a great position to capitalize on opportunities here. Our strategic investment and the way that we scale the company to uniquely meet its needs positions us strongly to win either as a prime contractor or even as a sub or even as a component supplier. Our pursuit of the Golden Dome extends just beyond payloads. Across its entire ecosystem, we have the technology and capability ready to serve. We operate the world's most reliable and responsive small launch vehicle, Electron, operating at the fastest cadence of any small launch vehicle in history having just completed its 69th launch. With our hypersonic testing variant haste, we are revolutionizing the way missile defense technology is tested in a hypersonic environment. A new reusable rocket Neutron perfectly answers the call for a diversified launch of national security and can deploy entire constellations of spacecraft at once to build out the domes proliferated architecture. We've already won more than $0.5 billion contract with the SDA to build and operate a significant piece of their PSA network. So there's a golden opportunity to build upon that here with our existing capability. And look, the list goes on that, I won't belabor the point. Our advantage is our commercial speed improving execution. The way programs like this have been built in the past, dominated by the large defense primes just won't work the same time -- this time around to meet the administration's urgent time line. And this agility and innovation, vertical integration and on-time delivery and execution. That's why we've delivered time and time again across our programs to date and what we stand ready to deliver for the Golden Dome. There's no better mission on the box that demonstrates the full depth of our capabilities than the Vector Hays mission for the space force. Across its tactical responses space program, we're the only provider delivering a complete end-to-end launch plus base graft solution. We're bringing the full stack of offerings across the satellite design, component manufacturing, integration and testing flight software, ground mission and launch licensing and the launch itself and on-orbit operations. We own the entire mission life cycle and its capability for national security that very, very few others can provide. It's also a great demonstration of how commercial capability like ours can be leveraged to bring the concept of response space into operational reality, exactly what the U.S. administration is seeking with Golden Dome. This mission has a 24-hour call-up requirement, which quite frankly, is business as usual for Rocket Lab these days, and we recently cleared the program milestone for Vector Hays that moves us into the final integration and testing phase of our spacecraft for the mission and launch on Electron later is on track for later this year. Another program with a major milestone tech is our transport layer constellation build for the SDA. The program has signed off our satellite design and approach for manufacturing, which means we can now move into full-scale production of these 18 spacecraft and recognize further revenue from this $515 million program. As this constellation gets underway, we're also preparing for a much larger opportunity within the SDA and its next tranche of satellite contracts. This is where our strategy of bringing key satellite technologies in-house makes us an attractive commercial partner. Our income in sensor payloads, for example, are also in play for an SDA award and through other bidders. We can control the cost and reduce the schedule risk through our vertical integration in a way that others can't. And we hold the keys to their technology and components that are foundational to these contracts. And finally, for Space Systems. Another strategic area of focus for this past quarter has been in supporting the administration's plans for Mars exploration. It was great to see our $700 million provided for our Mars telecommunications arbiter in its recent but recent budget. The path to Mars for human spaceflight must begin with the ability to communicate there. And this is something that we've always strongly pushed for. In fact, we were the only company that proposed an independently launched Mars Telecom arbiter as part of the end-to-end Mars sample return mission. So our ambition is clearly in line with the administration's vision for Mars. Much of our technology is already across major Mars missions like NASA InSight Lander, the Engineered helicopter, the cruise stage that bought perseverance to Mars and of course, our ESCAPADE spacecraft that are ready for launch here soon. We have got the experience in delivering mission success for Mars exploration and a vertically integrated approach reduces complexity, controls cost and provide schedule certainty, all under a firm fixed price. Now onto Electron. Once again, another busy quarter for Electron as demand and launch cadence continues to soar. The beauty of Electron has been able to choose when we you want to fly. Sometimes for us, that can mean flying in very close succession like the 4 launches and 4 weeks that we saw in June and 2 of those blue just days apart, a record turnaround for us at Launch Complex 1. We since racked up launched #69 and #7 is scheduled for lift off next week, keeping us on track for 20 or more launches by this year's end. These missions are a great showcase of how quickly we can turn around launches as a manifest demand, with the infrastructure, production and capability to place and support a launch a week as the demand for small dedicated launch continues to expand. Beyond Electron's proven heritage as America's most frequently launched more rocket international space agencies are coming to rely on for access to orbit as well. We signed our first direct launch contract with the European Space Agency this quarter to launch a pair of satellites for the continent's future navigation constellation before the end of this year. The mission urgency stems from East need to meet spectrum requirements by early '26. But with few domestic rides to space available for them, Electron is stepping up to the task of responsive launch. It's a similar situation faced by another sovereign space agency that came calling for Electron 2. I can't quite reveal the full details of those missions yet, but it's fuel on the fire to Electron's international expansion and leadership as a -- in the smaller market globally. Now to cap off the list of Space Agency launch contracts. We secured another NASA emission on Electron, the launch early 2026. Time and time again, we've proven Electron to be the premier small launch of NASA science missions and we're looking forward to delivering the same precise orbital deployments that they've come to expect. Now on to our Neutron update for the quarter. Let's start with a top-down view of where things stand today. We're building more than just FRS Rocket. We're laying the foundation for long-term sustainable program. We know that from experience that building the first one is hard, but building the system that gets you to launch #10 and 20 and beyond is much harder. Most of the capital of any rocket program goes into building out the infrastructure, and we believe we've got all the critical elements in place now. Our launch in test sites are substantially complete, recovery infrastructure is on track. The Archimedes engine manufacturing line is now capable of knocking out an engine every 11 days, and we believe that we've scaled our operations to be ready to support -- to move into multiple flights a year after the first launch gets off the ground. On the launch vehicle side, the teams are working literally day and night to get Neutron to the pad. We're in a good spot with lots of core elements like the Hungry Hippo, major structures, second stage, engine qualification, et cetera. It's a green tech Stage 2 flight hardware and its qualification program, the brains of the rocket, like the flight computer and GNC are ready for flight. So lots of green across the vehicle as you'd expect. There's been lots of action on the regulatory approval front as well. We've been granted our FCC license for neutrons first launch, and the FAA has accepted our launch license application that puts us on track for a launch license to fly from launch complex 3 by the end of the year. We've also had the critical agreements in place to transport flight hardware to the launch site on Wallops Island. You've likely seen a bit of activity on that front around expanding our operations and dredging in the channel. But these are improvements -- these improvements are related to increasing operational flexibility as launch cadence ramps up, it's not a gate to new Neutron's debut. Importantly, the schedule is not sequential. Everything is happening in parallel and a lot of the progress markers that are underway are still pending are probably going to stay that way up until just before we launch. There are still some risks to retire like propulsion and full integration of Stage 1 testing, which we're taking our time on to make sure we're successful. And when the rocket is on the launch pad. But over the next few slides, I'll take you through the latest engineering updates and lay out the current expectations for the next few months ahead. Next up, an exciting moment on the path to launch. Neutron flied hardware is on its way to the launch site. Over the past couple of months, we've put the second stage through many, many tests to validate its readiness for launch, having completed its critical testing phase is headed to Launch Complex 3 for final integration in preparation for stage testing at Wallops Island. The large structures that make up the first stage like propellant tanks and trust structures are expected to be on the test stands before they shipped out to the launch site shortly. Once they've completed in a major structural test, they'll progress into a final integration and stage testing. As we move out of R&D into production for the next rockets in our fleet, our factories are all coming. We've automated the production of the largest composite rocket structures in history with our 90-tonne AFP machine that we installed there last year. We're calling flight parts off the machine now for the Stage 1 barrels and the pellets and allows us to scale efficiently. And we've made long lead commitments for manufacturing equipment that puts us in good place to build 3 vehicles next year. For our committees, engine testing is accelerating. And this is the most crucial and time-consuming aspect of any rocket development program and always the longest pole in the tent. We're running the engine to full mission duration and the operational test cadence is heading up to 3 or 4 hot flies a day now, 7 days a week as we work diligently through all the engine qualification program. And between hot fires, the team is making improvements and iterating on the design quickly and then getting right back into the next engine test via and on the stand. We expect these tweaks to -- all the way up to Neutron's debut launch and beyond. For those who are interested, take a look at the latest mission duration hot fire video we just shared. Moving on to Launch Complex 3. I'm pleased to say that we have an official date for the site opening later this month. The team in Virginia is well and truly into launch pad activation where we closed out the final construction activities. The water dilute system was activated last quarter, and now the team is meticulously making their way through assistant by system to prepare for a static fire operations on the launch mouth once the flight hardware arise. Launch Complex 3 is set to be a hugely important national asset. There's a space bottleneck at the other federal sites right now, and that shows how important launch site diversity really is. National Security must take priority. And with Neutron onboarded to the CSL program earlier this year, our rocket will be the first to fly for NSSL out of Virginia when we pick up missions under that contract. We'll be cutting the ribbon for launch complex 3 on August 28. We're also opening up a limited number of spaces for retail shareholders to join us on Wallops Island. So I encourage anybody who is interested to check out the details on our website. All in all, we continue to push extremely hard for an end of year launch. We're continuing to run a green light schedule with Neutron, which means every single thing needs to go to plan that they're scheduled to hold, but I also want to stress that we're not going to rush and take stupid risks to get a launch Neutron before it's ready. In the context of the life cycle of the vehicle and the program a couple of months here or there is completely irrelevant. What's really important is performance, reliability, scalability right from the get-go, and there'll be no cutting corners here to just rush to the pad for an arbitral deadline. I think everybody has heard me say it before. In fact, I'm a little bit infamous for it now. I'm not built to build chat. So with that, I'll hand it off to Adam. He can run through the financial highlights for the quarter.

Great. Thanks, Pete. Second quarter 2025 revenue was a record $144.5 million, which was above the high end of our prior guidance range and reflect significant year-over-year growth of 36%, driven by strong contribution from both business segments. Second quarter revenue increased 17.9% sequentially. Our Space Systems segment delivered $97.9 million in the quarter, reflecting a sequential increase of 12.5% and driven by increased contribution from each of our satellite components businesses. Our Launch Services segment delivered revenue of $6.6 million, reflecting an increase of 31.1% quarter-on-quarter. Now turning to gross margin. GAAP gross margin for the second quarter was 32.1%, above our prior guidance range of 30% to 32%. Non-GAAP gross margin for the second quarter was 36.9%, which was also above our guidance range of 34% to 36%. The sequential increase in gross margins is primarily due to an increase in Electron ASP paired with favorable mix within our Space Systems business, driven by increased contribution from our higher-margin component sales. Relatedly, we ended Q2 with production-related headcount of 1,150, up 62% from the prior quarter. Turning to backlog. We ended Q2 2025 with approximately $1 billion of total backlog with launch backlog representing approximately 41% of this and Space Systems 59%. In the quarter, launch backlog continued to take increasing share with promising underlying trends as we convert a very strong pipeline of Neutron, Electron and HASTE opportunities. Space Systems bookings remain lumpy given the timing of increasingly larger needle-moving customer and program opportunities but remains at a healthy level despite a step-up in revenue run rate for the past few quarters. Upon the anticipated near-term closing of the Geost acquisition and given an increased line of sight to the Mynaric acquisition closing, the composition of backlog will likely skew a bit back in favor of Space Systems and further underpin incremental future growth. We continue to cultivate a healthy pipeline in multi-launch deals and large satellite manufacturing contracts that, as mentioned earlier, can create lumpiness in backlog growth, given the size and complexity of these opportunities. We expect approximately 58% of current backlog to be recognized as revenues within 12 months. And we continue to get relatively quick turns business that drive top line growth beyond the current quant backlog conversion. Turning to operating expenses. GAAP operating expenses for the second quarter of 2025 and were $106 million, above our guidance range of $96 million to $98 million. Non-GAAP operating expenses for the first quarter were $86.9 million, which was also above our guidance range of $82 million to $84 million. The sequential increases in both GAAP and non-GAAP operating expenses were primarily driven by continued growth in prototype and headcount-related spending to support our Neutron development program. Specifically, investment has increased to support propulsion as we continue to qualify our committees as well as production mechanical and composite structures ahead of Neutron anticipated inaugural flight later this year. In R&D specifically, GAAP expenses increased $11 million quarter-on-quarter due to ramping up our commutes production paired with increased expenses related to mechanical systems and composites, I just mentioned. Non-GAAP R&D expenses were up $10.2 million quarter-on-quarter, driven similarly to the GAAP expenses. Q2 ending R&D head count was 935, representing an increase of 12% from the prior quarter. In SG&A, GAAP expenses increased $600,000 quarter-on-quarter due to an increase in nonrecurring transaction costs as we continue to advance a robust pipeline of M&A opportunities partially offset by a step down in stock-based compensation in the quarter. Non-GAAP SG&A expenses decreased by $200,000 due primarily to a decrease in audit fees, partially offset by increased legal expenses. We are encouraged by our ability to constrain SG&A spending as we look to scale the business more efficiently at this point. Q2 ending SG&A head count was 343, representing an increase of 11% from the prior quarter. In summary, total second quarter head count was 2,420, up 85% from the prior quarter. Turning to cash. Purchases of property, equipment and capitalized software licenses were $32 million in the second quarter of 2025, an increase of $3.3 million from the $28.7 million in the first quarter as we finalize LC 3 construction activities continue to invest in the engine test facility in Mississippi and make initial investments in the fit out of the return on investment cards. As we continue to invest in Neutron development, testing and scaling production, we expect to maintain elevated capital expenditures leading up to Neutron's first flight. GAAP operating cash flow was a negative $23.2 million in the second quarter of 2025, compared to a negative $54.2 million in the first quarter. The sequential decline in negative GAAP operating cash flow of $31 million was driven primarily by increased cash receipts from our SDA satellite program. Similar to the CapEx dynamics mentioned earlier, cash consumption will continue to be elevated due to Neutron development, longer lead procurement for SDA, investment in subsequent Neutron tail production and related infrastructure to scale the business beyond our initial test by. Overall, non-GAAP free cash flow, defined as GAAP operating free cash flow -- sorry, defined as GAAP operating cash flow less purchases of property, equipment and capitalized software in the second quarter of 2025 was a use of $55.3 million compared to a use of $82.9 million in the first quarter. The ending balance of cash, cash equivalents, restricted cash from marketable securities was $754 million as of the end of the second quarter of 2025. The sequential increase in liquidity is due to the at-the-market equity offering that we announced earlier in the year, which generated $303.8 million in the second quarter. which in part is intended to fund acquisitions, such as the announced Mynaric acquisition, the Geost acquisition and other targets in a robust M&A pipeline, along with general corporate expenditures and working capital. We exited Q2 in a strong position to execute on our organic expansion opportunities as well as inorganic options to further vertically integrate our supply chain and grow our strategic capabilities and expand our addressable market consistent with what we have done successfully in the past. Adjusted EBITDA loss was $27.6 million in the second quarter of 2025, better than our guidance range of a $28 million to $30 million loss. The sequential decrease of $2.4 million of adjusted EBITDA loss was driven by an increase in revenue paired with increased gross margin, partially offset by increased R&D expenses related to Neutron. With that, let's turn to our guidance for the third quarter of 2025. We expect revenue in the third quarter to range between $145 million and $155 million. We expect a further uptick in both GAAP and non-GAAP gross margins in the third quarter, with GAAP gross margin to range between 35% to 37% and non-GAAP gross margin to range between 39% to 41%. These forecasted GAAP and non- GAAP gross margins reflect improvement in launch ASP and overhead absorption. We expect third quarter GAAP operating expenses to range between $104 million and $109 million and non-GAAP operating expenses to range between $86 million and $91 million. These modest quarter-on-quarter increases at the midpoint of our guidance are to be driven primarily by continued neutron development, spending across staff costs, prototyping and materials, though the spend is beginning to shift from R&D to Flight II inventory. I'm encouraged given the impressive progress made towards neutrons first flight that we're getting closer to moving beyond the past few years of elevated R&D spend and on the path to generating future meaningful operating leverage and positive cash flow. We expect third quarter GAAP and non-GAAP net interest expense to be $1.3 million. We expect third quarter adjusted EBITDA loss to range between $21 million and $23 million and basic weighted average common shares outstanding to be approximately 528 million shares, which includes convertible preferred shares of approximately $46 million. Lastly, consistent with last quarter, we believe negative non-GAAP free cash flow in the third quarter will remain at an elevated level, consistent with the prior couple of quarters, excluding any potential offsetting effects of financing under our existing equipment facility. And with that, I'll hand the call over to the operator for questions.

[Operator Instructions] And today's first question comes from Michael Leshock with KeyBanc Capital Markets.

Wanted to ask on Neutron and specifically the Archimedes engine, I appreciate all the commentary there and around the hot fire test. Where does the Archimedes stand today in terms of performance? Are there any other performance metrics that you could share from what you're seeing in those tests? And how -- is there a way to frame it, how close you are relative to what is required for performance to power a new translate?

Michael, yes. So from a performance perspective perspective, we're very happy. One of the unique things about a reusable launch vehicle is you have a tremendous a number of different environments, the engine has to start and operate in. So normally, you have an ascent profile where there's a couple of throttle points and especially on Stage 1 and it's a fairly simple thing. But of course, we have a reentry burn and a landing burn. So you have to start the engine at different propellent temperatures, different head pressures and all these kinds of things. So it creates a much enlarged run box or set of conditions that you have to be able to operate the engine and it's much more challenging to do. But from like a basic performance of the engine, we're very happy where it is. And it's -- like I said, it's just a much more complicated qualification program to get through because you're qualifying Ascent and distinct at the same time.

Great. And then shifting to a longer-term question. You've talked about satellite constellation potentially being a long-term opportunity for the company. How close are you to begin working on a constellation of your own? We saw the release of Flatellite earlier this year and the focus of it designed to scale? Is a Rocket Lab constellation something that is being developed or talked about today? Or is it more likely a longer-term opportunity, maybe 5 or more years down the road?

Yes, sure. So we've always -- as you pointed out, we always made our ambitions clear here, and we think that is the power of being an end-to-end space company when you have the ability to build whatever satellite you need and launch it at well, it's a very powerful position to be in. However, I'm also very aware of entrepreneurial drift where someone doesn't finish one thing before they start the next. And while we've been methodically building all of the capabilities and vertically integrating all the satellite components and whatnot we need to be able to do exactly what we want to do until Neutron is finished and flying, that's a key element of being able to deploy a disruptive infrastructure of satellites. So I wouldn't expect any huge announcements from us on constellations until the big piece of the puzzle, which is Neutron starts to absorb less of our focus.

And our next question is from Erik Rasmussen with Stifel.

Great to hear all the progress, and I'm happy to hear the noise around the dredging seems like there's not really an issue in the near term of getting to your schedule. Just wanted to ask about backlog. And I think a lot of this has continued upon the SDA right now. I know you've also talked about the Golden Dome, but it looks like tranche 3. Maybe just if you could just update us on what your thinking is around potential timing around the RFP process, where Rocket Lab will compete? And at what -- and I guess in the vein of sort of the backlog, at what point will you start to include Neutron into the backlog?

Eric, I'll ask answer some of those, and I'll let Adam answer some as well. But more generally, in backlog, the kind of things that we're chasing now are really large programs. So by nature, these programs are pretty lumpy. SDA is a great example. I think we put ourselves in a very strong position. We're executing against our current SDA contract very strongly. And you've seen us acquire things like Geost that put us in a very strong position to provide solutions that are not plagued by delays and things like that. And also our recent penny acquisitions of things like Mynaric, which are one of the key elements in the SDA program. So I believe the timing of the announcement is somewhere between September and October for the tranche 3. It's always a little bit opaque as they work -- as the SDA works through those awards, but that's sort of a similar time frame. But at any one point, we're working very large proposals, both government and commercial. And just by their very nature, they take a little bit longer to solidified, but I'll let Adam, maybe if you've got any comments on backlog.

Yes. No, I think, Pete, I think you hit it right. I think, look, we've got diversity in the things that we're chasing. It's easy to focus on something like SDA Tranche 3 because it's kind of a big shiny object that a lot of people are actually chasing. But we've got a lot of diversity in the things that we're going after. And to your question on Neutron's influence on backlog, we do have 3 missions of Neutron in the backlog today. Those were added over the last few quarters. And I would say that, of course, we expect after a successful flight of Neutron that we -- that will start to gain a lot more momentum because, as you can imagine, launch customers are they're betting a lot when they launch vehicle, and it's a long-term choice, and there are limited choices out there today. So everyone is being very careful about what they do. So we do expect that demand to be kind of unleashed, if you will, once we have a successful test launch. I would say that the -- if you look across all of our businesses, again, we're starting to see the diversity benefits where if you look at the opportunities we're chasing across our subsystems business across Electron, both commercial, government, HASTE variants, we're seeing strong demand across all of them. So it's just a matter of kind of converging. And if you look at the trend of backlog over the last year, actually launch has been the bright spot, right? We had a huge step-up when we put the SDA tranche 2 award into backlog. And then basically be working against that as we recognize some of that revenue and then launches continue to build in the backlog. And that's going to continue to -- we believe to be the case once Neutron kind of gets past that next big milestone or achievement of initial launch.

Great. Maybe just sticking with launch and Electron. You already did 11%. It sounds like you have the 12-point coming up pretty soon your seventh launch. What would you say the mix between your traditional Electron launches and maybe HASTE missions in the back half of the year? What does that look like?

Yes. So if you look in our backlog right now, if you look at the mix, we're expecting about -- I think it's 3 of the remaining launches this year will be HASTE missions. So as Pete talked about, we're on path to do at least 20, hopefully, more than 20 launches this year, which will be nice growth of 2024. And so we haven't had any hate launches yet this year. So we're looking at roughly 3 launches and all of them in the back half of the year.

Great. Maybe just my final is on Neutron. And I'm just trying to sort of parse through some of the words that Peter had mentioned. In terms of cadence, I think previously, we were expecting the first test launch so you have more of a $135 million launch cadence for the first few years. But given the strong demand signals insured a launch and then maybe just if I'm reading right, is it possible that, that's something that you can accelerate? Or what does that look like? Are we still sort of targeting that $135 million?

Yes, Eric. I mean, I get written every day on that question. The reality is it just takes time to roll in the learnings between flights. So we proved with electron that, that was the right kind of scale up cadence. And if you look historically across Rocket programs, that it's even pretty aggressive. So we'll stick with that $135 million and -- but who knows that at the moment from where we are in the program that feels like the right kind of place to target everything.

Next question is from Andres Sheppard with Credit Suisse.

Andres here from Cantor Fitzgerald. I'm not sure what that was. Congrats on the quarter and all the big great success. I'll limit myself to 2 questions just to be respectful to all the other analysts. Maybe one on space systems and one of launch systems. On the Space Systems, Adam, I'm wondering if you can maybe remind us kind of what does the revenue recognition look like for the SDA tranche 2 awards, both for this year and for next year? And I know you mentioned, obviously, you're exploring several opportunities. But just to come back to SDA tranche 3 if I'm not mistaken, right, that could potentially be the largest contract in company history. And so how would you characterize maybe the likelihood of success there?

Yes, I can comment on kind of the rev generally for the SDA program, tranche 2 transporter that we have that we're executing against. So these programs typically -- the award was, I believe, in late 2023. And so you get -- typically, when the program kicks off, you're doing a lot of the kind of initial finalizing the design and so forth. So where you really experience the meat of the revenue recognition is when you're actually starting to take possession of the bill of materials to build the satellites with. So right now, as Pete mentioned, that's what we're kind of getting in now to that sweet spot where we're going full scale production of those vehicles. So we're going to see a ramp in spending -- sorry, a ramp in spending and a ramp in rev rec resultingly from that. So I think that you should expect that revenue will be pretty, I would say, evenly balanced between the second and the third year of the program, with 2025 being the second year in reality and next year is kind of the third year and then it will tail off. So you have kind of tails on either end with most of the revenue recognition in '25 and '26. I mean just if you want to just think broad strokes for contribution in 2025, it's probably -- if you want to think in the order of kind of $150 million to $200 million is the right range to be in. And then, again, that should look somewhat similar in 2026, assuming that we continue to execute like we have. And then if you look at SDA Tranche 3 tracking, should we be fortunate enough to win that program. As you said, it would be the biggest program by a significant margin that the company has earned to date. And they have a similar profile. I mean there's a chance that there could be some revenue recognized early in the program even as early as some of it later this year. And then you'd have kind of the buildup where 2026 would look for that program would look probably like 2024-ish looked for SDA. And then you'll have that again, probably 80% of the revenue being recognized within the middle 2 years of the 4-year program. So that's probably the best guidance I can give to you right now on that.

Got it. That's super helpful. And just maybe a quick follow-up, if I may. Maybe one for Pete on the launch systems. After getting closer and closer to Neutron, I'm curious if you're seeing perhaps an uptick from customer demand or prospective customer demand for future flights. Obviously, you have to the track record, the heritage from the Electron and HASTE, Neutron still coming up. But given the -- what you want to call it, the conflicts between the administration and space management team. Just curious if you've seen perhaps an uptick in interest for future Neutron missions. Any color there? Since Neutron essentially will be the only viable alternative to the Falcon 9, right? So just curious on what you're seeing.

Yes. Thanks, Andres. Well, I mean, look, I think the market does need a competitor to the Falcon 9. I think that was very clear, and that was presented to us both from our commercial customers and our government customers. So there's a lot of anticipation and pent-up demand for that vehicle to come to market, and that continues to increase all the time not just from sort of political events or geopolitical events, but also from just large programs being added, things like the Golden Dome, I mean that is going to be one of the largest DoD programs in the country's history. And they're all spacecraft and space, and they all need to get there. So yes, no, we're seeing growing demand and also I think it's fair to say, realization that sorting out from the real players from the players that are less likely to be able to provide.

The next question is from Ron Epstein with Bank of America.

So Pete, just maybe broadly, when we think about the first launch of Neutron, for you, I mean, just to kind of level set, what a successful launch be?

Ron, well, you're not going to hear some rubbish about just clearing the pads success. That is not. For us, the successful launch of Electron will be successfully getting to orbit and making sure the vehicle is ready to scale. I think you saw us come out of the gate with Electron going to orbit and then straight away 3 emissions after that, successfully delivering customers to orbit. So that will be the definition of success. The bit that we'll be a little bit more flexible on is obviously the reentry and soft landing of the first vehicle. There's a lot to learn there. We think we've got a good head start, but that's the bit that always requires a bit of iteration. So like I said, we'll declare success when we're in orbit. If we don't soft splash down on the first flight, I think there's a little bit of tolerance there for learning, but apart from that...

Got you. Got you. And then, Adam, maybe what drove the strong electronic ASP in the quarter. And is that a reasonable way to think about electronic pricing going forward?

Well, we've been -- well, there's a few things that drive that, but probably the most I would say, dominant force would be the mix of HASTE in the manifest. So as we've talked about, we -- the HASTE missions require very unique, I'd say, mission assurance and other things, the vehicles are unique and so forth. So that makes sense that the ASP would be significantly higher, but it's really driven primarily by that. I'd say overall, if you look at commercial HASTE -- sorry, commercial Electrons, those trends have been trending up nicely as well. So we really had -- we benefited from the fact that we've got customers coming back and they're doing bulk is of Electrons and the significantly higher ASPs than we've seen in the past. If you were to rewind the clock 2 or 3 years ago, we would get customers coming that wanted to buy bulk buys, but they were wanting a significant discount to do that. And so in order for us to build the manifest and be able to kind of continue to drive the market, we did that. And I think now we're in a position where we really don't have to accept any significant discounts, and we're getting bulk buys. And I think part of the strength as well is we're getting a lot of support, as Pete mentioned in his comments, from the international community. Sovereign countries are coming forward with strong demand. And I think it's a testament to the fact that execution in this market is so, so, so difficult. A lot of people can talk about it. They can put spec sheets on web pages and whatever else and pay with user guide. But at the end of the day, we're the only one that has had 69 launches of a small dedicated launcher. And I think right now, we're benefiting from all that hard work and execution. And so we really don't have the distraction of people kind of doing some false pricing in the market to put pressure. I mean now it's pretty clear that execution is key and you got to pay for execution.

Got you. Got you. And then that's actually a nice segue into my last question. When we think about the Mynaric acquisition and Electron adding the European Space Agency, what do you see as potential -- is there a potential European national security opportunity for you guys in space?

Yes, Ron, I think if you look outside the U.S., what is the next biggest market in space and it's Europe and you'll be a full not to be in there. So Mynaric a kind of stepping point in. And as you've seen, obviously, as you point out, the European Space Agency contracts, we'll continue to expand into Europe. And we have a lot of unique capabilities that only reside with us. So we'll look to apply those.

Our next question comes from Edison Yu with Deutsche Bank.

I wanted to ask, I think, probably it's for Pete, your latest thoughts on orbital transfer vehicles, space tugs. I know there was a bit of a craze several years back in that kind of flamed out a bit, but now it seems there's a lot of offerings coming to market, maybe trying to go farther away, bigger. And so is that an area of interest to you? I know you have the kick stage, but when you try to kind of tackle that more directly or more broadly going forward?

Yes, it's a good question. I've novelly understood the business opportunity and the business case for those because you start off with a relatively cheap ride share and you end up with a really expensive delivery. So as you pointed out, we had a couple of starts. So look, if it turns into being a real market, it's completely elementary for us to go after it. I mean we operate at kick stage on the top of electron essentially. And all the components to be able to do it, we have. So if it turns out to be a real market and a real opportunity, the time that it would take us to deliver a product to market would be extremely short. But at the moment, I just don't see it worth us investing in.

Understood. And then on Electron, I wanted to ask about the TAM and in the context of -- I have this big slide obviously on Golden Dome, hypersonics. Historically, I think the TAM, maybe 30-plus launches, do we think that the TAM now for Electron could be much, much bigger than that, like 50, 60 launches going forward or at some point in the future?

Well, you're talking to a conservative engineer by nature so it's hard for me to get too bullish. But if you just look at some of the programs like the Golden Dome, the amount of testing that that's going to require and the amount of suborbital kind of hypersonic missile stimulants that you're going to need to deploy to be able to validate that system. There's a pretty significant number there that would be required. So in HASTE alone, I think we're expecting that to continue to grow. But year upon year, the TAM continues to grow. And the exciting thing is that Electron is helping to create and open up that TAM. We see a lot of satellites these days that are made specifically to just fit on Electron, envelope its environment, and it's enabling a lot of stuff. So I think we continue to see the TAM expand, and I think I don't see any sign of that decreasing in the future.

Great. If I could just sneak one housekeeping one on Geost. Any color on how much revenue that could potentially bring in fit closes? And what kind of growth profile or backhaul that has going forward?

Yes, I'll take that one. Look, yes, we can't really say too much about it. It's still a pending acquisition. As Pete mentioned, we got through the antitrust review, which is great. And I think close should be imminent. But we'll hold back any comments and color on that business until we actually own it, if you don't mind.

The next question is from Jeff Van Rhee with Craig Hallum.

I guess, Peter, on Space Systems, when you kind of flesh it out in your mind what you envision Space Systems ultimately being, what percent of the way your vision are we in terms of the capabilities that, that segment currently has?

Yes, Jeff, great question. So the toolbox is looking pretty full, actually. So from purely like a nuts and bolts component level, the Mynaric optical terminals are an important one. And the vast majority of stuff has kind of come into focus. We'll see us spend a lot more time now is on payloads, and Geost was the first kind of beginning to that. And that really shifts you from being able to provide just a satellite bus to be able to provide a complete thing. So yes, the nuts and bolts, I'd say we're largely done. There will still be a little add-ons we want to do, but our focus will be on payloads and really rounding out the system.

Yes. Helpful. And Adam, on the margins as it relates to Space Systems, just -- correct me if I'm wrong, I think 40% was the target there. You've made some really good progress. Is 4% still the right number? And any sense of a time line or a sense of scope that it might take to get to that 40%?

Yes. There's a pretty wide mix, I would say, of margin profiles within our Space Systems business. you think about the margins on putting together a full turnkey platform solution, they tend to be lower. If you think about those margins kind of if you want to think about the ranges in the in the 20s to 30s, but on the good scale with them because of the size of the contracts that are involved. And actually, those are much better margins than most other people would expect to achieve, and that's because we're so vertically integrated. Now when you look at the subsystems, we also have a very wide range there. We have some products where the margins are in the 20s, but we have some where margins are well north of 60 points. So if you look at blended average for, I would say, the overall space systems between the weighting. And right now, it's kind of split evenly between subsystems and platforms. And as we start to mix in applications, we'll get even -- it will get different in a good way. You should think about 40%. We're not that far actually from that target. So I think our target was probably set a little bit on the modest side. So -- but if you think of 40 to 45 points kind of as the real target for margins are, I think that's probably a pretty good place to be. And that can be pretty good as far as contribution to the bottom line because there's not a lot of R&D that goes into those businesses, right? A lot of it is customer-funded R&D. So when you look at the contribution margin, it's very, very healthy. So again, I think that -- yes, we've been -- we set the bar, we like to kind of set expectations low and kind of overdelivered to those. And I think that we're on the path to do the same thing with our Space Systems business when it comes to margins.

Yes. Very helpful. Maybe last for me. On Peter, you mentioned production, and I missed a little bit of it. But on Neutron, obviously, you're spending a lot of time building scale manufacturing capabilities. Just where are you in terms of of Neutron's now in terms of how many are you initially building? And what is the manufacturing capacity that you're putting up to give us a glimpse in terms of how you're thinking in a number of ships this year, next year, year after?

Yes, sure, sure. So some areas are at a high production rate, like engines, we're pushing for 11 -- 1 engine every 11 days. And it's kind of -- because it's a reusable launch vehicle program, the whole production cycle is literally turned upside down. So we need the most number of vehicles in production at the start of the program rather than sort of ramping and scaling and as you go along. So as we talked about, there's multiple vehicles that we're building even now. And Stage 1 can be reused 10, 20 times. So you're not actually every year, you're not building that many Stage 1. So the most amount of stage 1s we'll ever build is probably year 2 or 3. Of course, the Stage 2 is expendable, but that's been highly refined for a very, very quick production and low-cost rate. So Yes. I mean, as I said before, sort of 3 stage 1s as next year is the right way to think about it.

Our next question is from Andre Madrid with BTIG.

This is Ned Morgan on for Andrea today. I was just wondering, I've seen a lot of partnerships lately in support of Golden Dome. And I was just wondering if you guys are looking at doing something similar as opposed to doing any M&A.

Yes, it's a good question, Ned. The reality is that we are very, very vertically integrated. And there's still obviously a piece of technology that we partner with, as we've shown on the SDA program. But I guess it's probably slightly less of a need for us to give -- like I say, given our vertical integration and just the breadth of stuff that we've got. We don't need to partner with that many people to deliver a solution.

Okay. Makes sense. And then maybe one more for me. Regarding tranche 3, how different would the upside look if you guys are selected as a prime versus a sub through, for example, Geost?

How do you mean the upside need? What do you mean by that?

If you guys are selected as a prime, I would imagine revenue contribution would be significantly more than as a sub through Geost prior bid. So I was just wondering how things would low if...

I can take that that piece. Yes. Basically, if you look at the value of the subsystem that Geost provides, you can think of that as being kind of somewhere around 30% of the total platform value is in the payload. So obviously, it's a much bigger opportunity as the prime that it's just the sub for a subsystem. Now there is the opportunity where you could have a goal situation where you select as the prime, but also Geost was bidding with other primes as well for that opportunity. So there's a range of outcomes there. But yes, certainly, our goal here is to sell at this time.

The next question will come from Kristine Liwag of Morgan Stanley.

Peter, you've been very clear about your disciplined approach to pricing regarding Neutron. And considering the tightness of supply of launch, I'm a little surprised that you still haven't built out a sizable backlog for the program. Can you provide more color on how advanced your discussions are with incremental customers for Neutron what they're waiting for to commit to an order? And how to think about the competitive landscape, especially as you've got a competitor rocket coming into a market that's fairly well capitalized, too?

Kristine, well, I mean, you can split this into both into commercial and government. I mean we were onboarded onto the Unisel program, which obviously is extremely large opportunities on $5.6 billion, if I remember. And then on the commercial side, we've talked about this before. We are -- they want to see a rocket that works before they commit because a lot of people have been burnt signing on vehicles that are either delayed or even in some cases, never turned up. And we've always talked about it as well, is we want to make sure that when we sign one of these customers that consume a large amount of their manifest that they actually turn up on time and all the rest of it. So we maintain that discipline going through. We -- it does nobody any good to fill up a whole bunch of manifests with a bunch of launches that -- or a bunch of payloads that don't turn up in time and you kind of left holding the bag. So the most important thing, I think, for everybody is we get to the pad and we start launching it and then we'll make the decision, who are the best customers and most reliable customers for us and the customers will make the same decision back. And on competition, I think I'm not sure I quite view that the same way.

And Adam, as a follow-up, you mentioned expectations for elevated cash consumption beyond Neutron's transfer flight as you scale up. How should we think about the capital intensity following this initial launch? And should we still expect 2026 to be a positive free cash flow year?

Yes. Look, I think the cash assumptions will continue after the first launch because as Pete mentioned, we're building the subsequent tails. And so if you think about the cost to build a booster, and I think we've kind of used this, we've communicated this term or this figure before. But you assume around $60 million for a booster, and you're building several of them in series or in parallel in some cases here. You could consume additional capital from that. The key thing for us is getting through that first test flight. We've gotten the point where we've gotten the infrastructure largely in place. We do have some incremental scaling investments that need to be made such as this return on investment barge that we've talked about. So yes, I mean, I think the business could consume -- continue to get some money through 2026. So I would say, more realistically for, I would say, positive free cash flow, 2026. Again, given how aggressively we're moving forward given the demand signals that we're getting, I think that's probably not likely. I think it's much more likely to be in 2027, but it depends. We could come across opportunities that generate enough offsetting incoming cash flow that it kind of balances that out. But right now, I'd say, you should think of Neutron as being continued to -- even in a success scenario, in particular, in success scenario, continuing to consume cash as we kind of build out that capability and put the -- all the other scaling infrastructure in place. Yes. I think it's important, Kristine, to to differentiate that. I believe that the P&L will obviously look much, much better once we get through the initial kind of successful test launch of neutrons. So I think it's important to to separate the kind of the free cash flow from the P&L optics, right? Because I think the P&L does get much, much, much friendlier much sooner. And then I think like a lot of other growth businesses, we're we're going to be continuing to invest to grow, but the P&L should start to look much more attractive. And I think that's -- we're keeping our eye on both, obviously.

Great. And as a follow-up to that, I mean, look, it's a good problem to have if you have a product that works and if you can scale up very quickly, those are all good problems to have as a growth company. But when we think about the capital size that you might need if you can build like in a bull case scenario, how much capital could you potentially consume free cash flow in 2026? And when you think about the cash balance today, is that enough? Or would you need to raise capital to meet the demand? Should you be really successful and have that bulk scenario play out?

Yes. Look, I think we have sufficient capital to scale Neutron. So really, if you look at where -- when we're raising additional capital, it's really not for Neutron. It's really all about doing things like Mynaric and Geost and other things that we have in our funnel yes, we could put a lot of money to work to kind of respond to the demand signal and it evolves for Neutron that could continue to demand cash. But I don't see it outstripping kind of even what we have today. So again, I think that -- you're right, it's a good problem to have. I don't think that any liquidity constraints would be driven by Neutron. I think it would really be driven by how aggressively we want to go after and enable inorganic TAM expanding type of opportunities.

Great. I'm tempted to ask one more, so I just might. So when you look at that opportunity, I mean, it seems like the capital markets are fairly open. Your stock is at record high levels. How aggressive do you want to accelerate some of those growth TAM opportunities? And where are those verticals? Where are you most interested? And what does that look like?

Yes, I'll let Pete comment obviously as well. But I would say, look, we continue to see opportunities to further vertically integrate our supply chain. So we've done that very successfully in the past. We'll continue to find those types of opportunities. I would say that when you look at the ultimate end-to-end vision obviously has application elements to it, which is -- Pete talked about some of that earlier, but I would say right now, it's probably too early to show a lot of leg on kind of where we're going there. Because as Pete said, given the focus and the risk of entrepreneurial drift, we're very, very, very focused on getting Neutron delivered, establishing very key fundamental foundational payload capabilities. And then the rest is to be kind of putting the focus a little bit later, but Pete, over to you.

Yes, you said it very well, Adam. I mean Kristine, we're not finished yet, that's for sure on M&A opportunities.

The next question is from Ryan Koontz with Needham & Company.

Great. And most of my questions have been answered, but I'll touch on Space Systems that nice progress on gross margins. Obviously, I know you had acquired the solar business and some backlog there that was lower margin. How do you think about that business going forward and have the margins in that business now kind of normalized with new contracts and such that make you comfortable with the vector and continuing to see some uplift on Space Systems.

Well, I take part of the tactics on that one real quickly. So if you actually look at the progress on gross margin for the Solero business, first of all, has been very, very strong. When we acquired that business, we were looking at high single-digit gross margins. And in the first half of 2025, we delivered margins that were above the long-term target that we had set for that business. We set a target of 30%. That business is subject to -- the margin volatility is subject to kind of when some of the -- again, that early contract, which still hasn't completely kind of flowed its way through the books yet, but there's still some to be delivered on that. And so it's the timing of when that kind of comes in and out of deliveries. But I would say, look, if you just kind of look at where we'll be for the year, we're going to be pretty much spot on our long-term target of 30%. And I think longer term, there's upside to that. And I think more importantly, that deal has really -- or that acquisition has really kind of fulfilled its strategic import of kind of really taking control of a very critical and tricky component in supply chain for being a long-term kind of system provider and owner. So I think on that front, hopefully, that gives you some color and then I think maybe, Pete, you can speak to maybe the types of opportunities that we see in that business going forward and kind of where you expect margins to land for those?

Yes. Thanks, Adam. Yes. So we continue to expand capability in that business. obviously, you would have seen that we were successful with some chips money, which has enabled us to completely modernize or will enable us to completely modelize the reactor fleet in there and that drives in itself efficiencies and -- but if you look at programs like the Golden Dome, there is an unprecedented amount of spacecraft and power that's needed to fulfill that. And there's 3 space-grade suppliers in the world, and we're currently one of the largest, if not the largest. So I see a lot of exciting opportunities for that business going forward. I mean, we are one of the permanent providers for national security solar. So that's a pretty exciting future.

Our next question is from Suji Desilva with ROTH Capital.

Adam, can you just remind us or tell us how the Neutron costs will flow maybe from OpEx to COGS. As the first launch goes and whether that might be material to the gross margin, so we could anticipate that as these first few launches go up?

Yes. That's going to be a really challenging thing to model for you guys. I think that -- and that's a function of the fact that the first the test flight, of course, all of that's flowing through R&D, right? And now we're actually starting to -- for the subsequent tails, that's not going to flow through through cost of goods sold with revenue cover associated with it. So the P&L is going to fluctuate quite a bit to the positive, as I mentioned to an earlier question. Now when you start talking about the reusability and what that introduces to the volatility to margins, you can imagine that as we progress through "hardening" Neutron's reusability, how many reuses will, for example, we'll be able to assume for for amortizing over kind of future missions, that's going to be a great influencer of our gross margin. So you can imagine if the rocket is only kind of assumed initially to do x number of reuses, but it actually surpasses that or comes in underneath that, you're going to have a lot of volatility because you got to have a situation where we have a fully amortized booster with all the revenue going forward on it or you could have made assumptions where you expect to apply a certain number of times and it under kind of achieved to that. And so you have a lot of incremental costs for future missions that weren't assumed. So it's going to be a tough one to manage. I think that the only thing that we can really point to is a bit different because it wasn't designed to be reasonable from the outset was Electron. And we've been able to bring down Electron costs dramatically, right? And that's without reusability. So we have a track record of successfully kind of scaling and bringing down costs as we've talked about many, many times, another big influence to gross margins is overhead absorption. So I suspect that Neutron will be a little bit different, but not fundamentally different from the fact that what's going to drive its gross margins is going to be cadence, right? So it's reusing cadence. But Cadence is something that we, again, we saw, we understand how that works with Electron, the huge benefits you get when you get the cadence up, and that's going to be a large driving factor for Neutron as well. again, also coupled with our success in getting this vehicle to be reasonable as quickly as possible and for as long as possible.

Okay. Great. I'll get my granular computer out. And the other question I have is on payloads. Is Geost kind of your entree here? Do you have efforts in-house for payloads as well as this inorganic effort? Or will that segment be grown through inorganic exclusively?

Yes, Suji. So a little bit of both. The reality is that often these payloads, especially when you're looking to to bring solutions to beer and national security, have very, very long development cycles and a lot of heritage associated with them, which kind of naturally lends itself to acquisition more than organic creation. But there's certainly some elements of payloads internally that we're looking at that we will just go under our own steam. And then some things like Geost best-in class, it would take decades to recreate that. So an acquisition is, by far, the most efficient way of opening that opportunity up.

The next question is from Anthony Valentini with Goldman Sachs.

I'm just curious if -- I recognize you guys are laser-focused on Neutron here. But is there any reason to think that you guys would introduce a new launch vehicle in the future that is either larger than Neutron or maybe even in between Electron and Neutron in terms of the capacity that it can take into orbit?

Yes. Good question, Anthony. So certainly not -- we don't really believe there's really a market between the Electron and Neutron side. It's very limited opportunity in that range. Now if we need to go larger, I guess, the good news is that the vehicle is very scalable. It's a 7-meter diameter Stage 1 tank. So it's a very short dumpy vehicle. So typically, that's what governs your ability to increase the vehicle sizes, your tank diameter otherwise you end up with big long skinny pencils. and that becomes challenging. So we have no intentions at this point in time. We think we've got the market accurately sized and we've proven historically that we are not bad at making those kind of calls. But for whatever reason, the market drastically moved to a larger scale, we have a vehicle architecture that is very easy to scale.

And at this time, we are showing no further questions in the queue, and this does conclude our question-and-answer session. I would now like to turn the conference back over to Peter Beck for any closing remarks.

Yes. Thanks very much, operator. So before we close out today, there should be some slide here of our upcoming events and conferences that the team will be attending. We look forward to sharing more exciting news and updates with you there. And otherwise, thanks for joining us. That wraps up today's call, and we look forward to speaking with you all again about the exciting progress we make here at Rocket Lab. Thanks very much.