Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's First Quarter 2022 Earnings Conference Call. Hosting today's conference call will be Liz Calvillo of Investor Relations. As a reminder, today's call is being recorded.

I would now like to turn the conference over to Ms. Calvillo. Please go ahead..

Thank you. Good afternoon, everyone. Welcome to Virgin Galactic's First Quarter 2022 Earnings Conference Call. On the call with me today are Michael Colglazier, Chief Executive Officer; and Doug Ahrens, Chief Financial Officer. Following prepared remarks from Michael and Doug, we will open the call for questions.

Our press release was issued about an hour ago and is available on our Investor Relations website as well as the slide presentation that will accompany today’s remarks. Let me refer you to Slide 2 of the presentation, which contains our Safe Harbor disclaimer. During today’s call, we may make certain forward-looking statements.

These statements are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements made on this call.

For more information about these risks and uncertainties, please refer to the Risk Factors in the company’s filings with the SEC filed by Virgin Galactic from time to time.

Readers are cautioned not to put any undue reliance on forward-looking statements and the company specifically disclaims any obligation to update the forward-looking statements that maybe discussed during this call. Please also note that we will refer to certain non-GAAP financial information on today’s call.

With that, I would now like to turn the call over to Michael..

education and enrichment, astronaut development and training and impact in inspiration. The training and space experience components may be familiar to you. I'd like to take a moment to explain the focus on education.

Many future astronauts have a designer to use their time in the future astronaut community as an educational experience by deepening their understanding of space, engineering, technology and the planet.

Examples include multi-seat and and parents and families who emphasize the role that they would like the preflight astronaut experience to play for their now teenage children during the run-up to the flight.

Our customers are hungry for knowledge and giving them a peek behind the hanger door and access to the experience and expertise within our team is something they highly value and also something that apart.

For our membership community, we have the opportunity to curate and personalize the customer journey, further enhance our product distinction and leverage signature Virgin customer experiences, which will in turn attract potential customers on building our brand.

As we resume space flights following our enhancement period, we expect to see a spike in global engagement as we saw with the previous flights.

We've shown how effectively we can use these milestone events to capture the imagination and millions of people and the attention of global media, which in turn builds our global cultural relevance, engages our brand and increases affinity towards Virgin Galactic. I'll now turn the call over to Doug for an update on our financials..

Thanks, Michael, and good afternoon, everyone. Turning to Slide 11 and 12. Let's review our financial results for the first quarter. We generated revenue of $398,000 in the quarter, driven primarily by future astronaut membership fees associated with new ticket sales.

Operating expenses for the first quarter were $92 million compared to $81 million in the prior year period. The increase in expenses is primarily attributable to higher manufacturing labor spend as we're progressing through the fleet enhancement period.

GAAP net loss for the first quarter was $93 million compared to a loss of $130 million in the first quarter of 2021. The smaller net loss is primarily due to their no longer being and there being no associated change in fair value of those ones flowing through the income statement.

Adjusted EBITDA was a negative $77 million compared to a negative $56 million in the prior year period. Free cash flow was negative $68 million compared to negative $50 million in the same period last year.

The increased spending was primarily attributable to growth in manufacturing head count during the fleet enhancement period as well as an increase in marketing expenses. Regarding our guidance for the second quarter, we forecast free cash flow to be in the range of negative $80 million to $90 million.

The projected growth in spending quarter-over-quarter is expected to be driven by the ongoing work during the fleet enhancement period combined with the ramp and design effort for our future fleet as well as investments to increase the scale of our flight operations leading up to commercial service.

Our balance sheet remains strong, with over $1.2 billion of cash, cash equivalents and marketable securities. Going forward, we'll continue to evaluate opportunities to raise capital as we grow and scale our business.

We plan to use a combination of cash on hand, revenue from commercial space flights as well as future influence of capital to fund our strategic objectives. I'd like to now hand the call back over to Michael..

Thanks, Doug. I'm pleased with our positive start to 2022 and the progress we've made so far. It's a global backdrop of escalating supply chains and labor constraints. Our teams are containing the majority of issues to minimize impact on schedules.

We look forward to returning to space in Q4, launching commercial service in the first quarter of next year. So to recap, we expect to begin space flight later this year with commercial launch in the first quarter of 2023. We are seeing strong uptake across our product offerings, including multi-seat and well as interest in research plans.

Our future astronaut community stands at approximately 800 reservations. The design work for the next generation of our spaceflight system is well underway, and we are making progress in establishing the infrastructure to scale our business.

Coming months will continue to be very busy for us as we complete our enhancements and approach commercial service. I'm looking forward to sharing updates on our progress. With that, we'll turn to questions. Operator, we're ready to begin the Q&A portion of the call..

Our first question comes from Robert Spingarn with Melius Research..

Michael or Doug, with all the changes to the spaceship and the mothership, do you foresee a scenario where the FAA wants the updates to go through a different certification process than just a few test flights? Does there anything changed there?.

No, we do not foresee that, Rob. We -- the ships are the same. You're familiar with our licensing process, I believe, and the updates that are going through here aren't changing the foundational structure of the ship or any of the systems there. Like I said, strengthening various structures and getting things ready for higher volume commercial use.

So the license that we operate on will stay the same..

SP29154009 Okay. And then just on this -- the process of developing these space ships, you've talked about leveraging the aerospace supply chain to build the -- both the ships and the mother ships.

With the struggles that a lot of suppliers are having now with raw materials and labor, just general supply chain issues and the work they have with others, how are you getting them to agree to work with Virgin Galactic under these conditions? Or are the volumes so low at this point, they really don't have to make these decisions?.

So I think you've got a couple of things going on. One thing that we've been purposeful about doing is, as we talk about evolving, right, because it's an evolution of our current ship that 17 years behind it to this Delta class.

The main work is allowing us to take what used to be many, many kind of subsystems or subassemblies and consolidating that down to just a few such that when we take those few major subassemblies out into the market, they're substantial dollars, right? There are substantial contracts that are meaningful to people.

So that's one thing that has allowed us to attract people to the table. I think the essence of what we're doing is also kind of exciting into the marketplace there. But people need to make money, and we're putting together contracts and buys that will be material for folks.

The availability of capacity within the market is still good and still solid for us. And so we were really pleased to see the turnout and the responses as they're starting to come in on the RFI process. I think the supply chains are snarled around the world, and there's a lot going on with that.

The timing, I'm not going to try to predict 2, 3 years out. But what we're doing upfront isn't dealing with major things in supply. Upfront is going to be working with each other on the engineering of this deciding how we're going to determine what part of the design we will finish ourselves and what we'll ask these suppliers to do.

And so the main material ramp-up is going to come later. So I think we're ahead of it, and everyone will have time to manage that appropriately. But the big thing we're doing is making sure we have material contracts that are just good for people's business. And I think we're seeing great response to that..

And you mentioned these dollars, maybe Doug can take this.

Should we see any kind of movement in CapEx here over the next several quarters as more and more people get involved? Or it just doesn't happen that soon?.

The -- what you'll see is R&D expense, it doesn't actually become CapEx until we get to a later stage. It will cross over perhaps like in 2020 -- late 2023, 2024. It's actually an accounting convention that everything is reflected as R&D until we reach that point..

Fair enough, but then how does that trend?.

So the trend in the spending -- yes. So what you'll see, we gave 1 quarter guidance of $80 million to $90 million. You'll see a ramp happening through 2022, into 2023. We didn't quantify that, but you can see the layers of spending coming in between the design work and the building out of the factory and other infrastructure that we're doing.

So you'll see a ramp into 2023, but we haven't quantified that publicly..

Our next question comes from Oliver Chen from Cowen..

On the decision to delay to Q1, I was just curious about the rationale there and would it have made more sense to give yourself more cushion to Q2, just given a lot of the uncertainty that we're seeing out in the market? Also, with regards to the ticket sales and the demand that you're seeing, I would love your thoughts on if it's been volatile? And any updated thoughts on the ticket window, that would be helpful?.

Sure. Oliver, it's Michael here. The -- on the first one, we try to provide as accurate point of view on schedule as we can. And we've been, I think, improving our ability to forecast out. So we're still several months away, right? We're here in early May now.

But the teams have been doing an incredible effort to basically contain all these little issues that have potential to push schedules back. And they've really done an excellent job on that. But cumulatively, we are seeing both enough things that have taken a week here, 2 weeks there that have kind of extended on a critical path.

So we think it's appropriate to add further contingency in. So you asked have we given ourselves enough? As we -- we do expect to have a slight back to space with Unity in the fourth quarter. And so that gives you kind of a little bit of sense of containment on schedule.

And so moving from Q4 to a projection of Q1 of '23 for commercial service, we think is appropriate. We've built in an assessment of our own schedules, and we've added contingency against this new schedule as well. We want to be accurate again.

We don't want to be in a spot where we're not meeting the day, but we also don't want to be so padded that we're also not being accurate in that sense. So we think we've given the right direction on where these are going. That's how we came up with these dates.

Sorry, Oliver, you asked about -- could you ask the ticketing part of that again? Was it just are we seeing -- I heard you use the volatility and the volatility in what way?.

Curious about the demand profile and also the duration of the sales window in terms of any updated thoughts on what you're seeing for ticket sales?.

No, no. Of course. Ticket sales are going really well. And what we generally have right now is a backlog of people that have gone through our CRM processes.

And I said, yes, I'm ready to go now, can you please call and we have -- it's effectively a 2-way interview with people, just understanding what they're looking for, people understand how the service and the experience will work and the timetable is in there. It's going really well. We are -- as you said, we have about 800 people right now.

That's quite a bit of backlog relative to starting commercial service in Q1 of the upcoming year. So we're not, I'd say, in an internal race with ourselves to complete out. We only have 200 left to go. So it's a very small team that is taking these calls one by one as they come through. Our conversion rates are excellent.

And at this stage, where we only have 200 left, we don't need to add more people to that. So we feel we're kind of right on track to get ourselves the 1,000 people we wanted to put as kind of our first in these commercial service launches, but we're really good there.

And then I said we're doing this with effectively one -- very small people, just put it that way. And what we’re learning from that is, as we didn’t get further down and we started to get closer to where the Delta teams are going to ramp. We know we can basically replicate the process we’ve been doing and that’s how we scale the.

So it’s been really good and the people are coming in have been mostly still going forward single key, but we’re also starting to see purchases cross our spectrum, on multiple seats as well as both side buyouts.

And that’s been really exciting to see people have understanding they want to do this, not just as an individual pioneer but also groups and families that are encourage to make this a part of -- a meaningful part of their life. So I like how that to play now..

Okay. And that's very helpful. Last question on the membership community comments. Do you have any updated or further thoughts on what kinds of partnerships and/or experiential focuses you have? And then on the Digital Twin. That was interesting.

What's the implication for that kind of technology, I assume, speed, agility and quality and it enables you to really collaborate in more real-time across suppliers?.

Sure. So I don't say something not necessarily new in what we're trying to do in our community piece. But the importance of it, we just continue to emphasize on each of these calls. It's a meaningful part of the dialogue we have with customers as they come in.

I think they very much recognize this is a journey to a critical moment and that journey matters. So some of these things are going to be virtual moments that we can include the entire community. Some things are going to be very meaningful gatherings. We've got one that will come up in the fall in Wyoming.

That will be very purposeful that with speakers that will be very interesting. Some things are more for social engagement along the way. So I don't think we have anything new to share in that regard other than the importance in that and the appeal of this as we discuss it with the customers as they are joining on, remains really strong.

So we like that part of our strategy. We think that differentiates us a lot.

And then Doug, we've been talking a ton on the Digital Twin, so I think do you want to take that part?.

Sure. Yes. We have a summary of it in Page 9 of our deck. But kind of -- to go into the details of it, you can think of it as a platform or a suite of tools -- digital tools that really enables higher quality and velocity through the design and production cycle.

So this has been proven out by leading aerospace companies and allows us to integrate seamlessly with the supply chain because we have a digital database that we're all using together.

But to go a little deeper, it gives you the ability to do model-based systems engineering and design so we get all of the aircraft requirements into this database and do our CAD. We can do the simulation and optimization of the design across all of the disciplines and then extends through to product line management.

We collaborate and it gives the governance on the whole system for change control and such. You put all together allows us to work very seamlessly and much, much faster than we did before. So it's going to be very helpful to our rapid aircraft development program that we're going into..

Our next question comes from Greg Konrad from Jefferies..

Just maybe to start, on Unity and Imagine, you mentioned 3 flights per month once those get ramped.

I mean is there any learning curve? Or once those enter commercial service, should we think about that 3 flights a month when they're both in service is kind of happening right away?.

I think on Unity, we understand that ship well. We've been working with it for so many years. We understand what we've put into this enhancement program. Our teams in New Mexico are getting ready to do that. So we expect to see that come together well. We will have -- if you call it right, we will have a test flight coming out of the enhancement period.

And there will actually be 2. One, we'll do what we call a glide flight, where we take Unity out and release and come down in an unpowered fashion. And that just kind of confirms all the air handling services and flight dynamics and then we'll do a space as well. So those 2 things also allow us to cut our teeth on how we're going to turn the ship.

So by the time we start commercial service, we feel good and confident we'll be able to do that on Imagine, we'll be doing the same thing while it will be starting commercial service, we expect midway through '23, it will itself be going through a series of flight test program.

And those are the ones, while also do a little bit more analysis because it will be first time out of the barn, so to speak. It will give our maintenance teams time to basically practice that and cut our teeth on that. So by the time we get to commercial service, I think we will be pretty close to where we're expecting on turning.

There may be 1 or 2 flights in which we learn a little bit in between. But on average, I think we're targeting that every 2 weeks. So a little bit of time maybe after these first 2 commercial flights, but pretty close..

And then just kind of checking the math question.

I mean when we think about the 750 to 800 customers, is it fair to assume they're offered a slot in the 2026 time frame? Or how do we think about the current customers that are signing on when their flights are planned?.

Yes, I think that's a fair estimate as we have the same conversation with our customers as we do on these calls. We talk about our expected rates for Unity and expected rates for Imagine. We talk about the first of the flights coming out on Delta in '25 with commercial service really start at '26 for the Delta.

So everybody does that same math and says, okay, by the time I'm on the tail end of this first 1,000, that's likely kind of '26 area there. So people recognize that.

And that's, again, very related to why this community, not only is important on the journey, it's helpful to understand this is what I'm going to be engaged with and how I'm going to get value by signing up now here. And it also gives people there's only 1,000 of 1,000. Right now, there's only 200 left.

And I think people are understanding the scarcity of this particular group, and that's helping as well..

Our next question comes from Pete Osterland with Truist..

This is on for Mike First, just regarding the labor constraints you called out, so what kind of roles within the company are you mainly seeking to expand your hiring for right now? And what have been the biggest challenges that you've encountered on the labor front? Do you see this dynamic improving over the next quarter or 2? Or does it seem like the situation could be becoming more challenging?.

Primarily the place where we have labor, I think, constraints within the engineering group. So manufacturing, we've actually been able to kind of staff our team well there, both with our own team and supplemented by contracted forces as we go. The engineering piece is where we have amazing people. I'll put it in 2 ways.

On one hand, we're ramping up engineering for the future fleet, and we're having great success there. I think I spoke with our Head of the People Organization, we've got 40 engineers showing up this month. So we're doing a great job on hiring.

But the enhancement program, we're really using our engineering force that knows our ships because the new people are hiring, they're going to be on the future fleet. And where we have been, we had an engineering team that mostly had been building 1 ship, Imagine, because Unity and Eve were more in flight test and more of an operational fleet.

We now have that same engineering team that has experienced spread over all 3 ships. And they're doing incredible work, but there's obviously much more scope. So we've been supplementing them as they go, but that supplementing has come at a somewhat slower rate than we've been able to keep our schedule against.

And that's why you see us talking about labor constraints. It's within the experienced engineering group as we split our existing team from a main focus on 1 ship to working on 3 all at once. So that has a contained box to it, right, as we finish up the enhancement programs.

We'll be rolling -- many will continue with the existing ships as they're in service, but many of those experienced engineers will also transition as planned into our Delta class and new mothership designs. So that gives you maybe some parameters around it..

Okay. Yes, that makes sense. And then just a question on pricing.

Just with broad-based inflation on everyone's mind right now, has there been any indication at all in your conversations either with customers that currently have reservations or prospective customers that would suggest that demand or interest has maybe slowed down at all versus what you were expecting at the beginning of the year? And is there a potential that you would need to modify your pricing strategy at all?.

No, we're not seeing that -- two things. I think the customers that had been with us from early on are in a really good value position, right? They came in at $200,000, $250,000. I think they're in a great value point of view. So that's if you kind of look at inflation rates, they invested early, and I think that's a good thing.

And we will be taking up to the rest of this first 1,000 at $450,000. And we don't plan to, I'll call it, inflate that price for the remaining 200 tickets. But once those kind of full -- those last 200 are gone, we'll assess pricing appropriately against the market there. But I think in the world, inflation is hitting the cost of other things.

We're not taking the cost of these remaining 200 seats. We don't plan to take those above the $450,000 we've announced..

Our next question comes from Kristine Liwag with Morgan Stanley..

On the supply chain issue, I mean, you touched on it a lot.

I was wondering if you could provide more details on exactly what you're facing? I would have thought that with parts for Inspire, you would have some spares?.

Sure. So let me -- I'll give you one piece and just cut for everybody listening. Inspire was -- is a ship that was going to be following Imagine, and we have parts built for that. So Kristine, I know you're aware, the majority of our ships are carbon, right? And we join carbon-carbon with epoxies and things.

But there are places throughout all of our ships, motherships and spaceships where we use high-performance metallics sometimes to be in between joining carbon-to-carbon pieces, sometimes for joining carbon into the metallics. It's metallics where we're really seeing delivery times that are quite extended. So we've been handling these as they come up.

And I give you an example, we had a part that is built out of an aluminum alloy, and that particular part is part of this process came into a redesign area. Through the redesign, the kind of block of raw material, the ability of aluminum grew in size from what's generally a standard aluminum to something that's often a bit more custom.

Those particular getting a block of material that we would need might have been a very short couple 3 weeks lead time. We see those really extending out. And the supply chain has done a great job beating those back for what could have been material schedule impacts to finding alternative sources of supply and being very creative in that.

So we've been able to pull back from what could be a more complicated scheduled extensions to things that are pretty managed. But cumulatively, these things start to add up.

And so that's where I think supply is part of the topic as we talked on an earlier question, just the pace at which we're moving through the engineering drawings to get to the work instructions to allow people to get on the ship as we spread kind of our experienced engineers over 3 shifts versus 1.

The combination of these things have added up where we thought it was appropriate to add more contingency into our schedule. It's not more than that, but it's not less than that. These are the 2 things that we're really seeing together combined. That's why we made a call early to share what we expect to see our schedule shifting..

That's really helpful. And then also, when we think about the enhancement actions on Unity and Eve, can you describe the milestones you've already achieved? You've been going through the process for 8 months now. So I'd imagine you guys have accomplished quite a lot.

Can you just share with us what some of those milestones have been?.

Sure. And the teams have just been amazing to watch them go on this because, again, our existing team got a 2 to 3x ramp-up in work. And obviously, we're growing again then for the future. So people have really stepped up. Unity is in solid shape. It will be the scope that we gave Unity, it will complete, I'll call it on our original schedule.

So the Unity team will probably have some time just to do a few extra bonus items there. Eve is really the ship that's got the longer piece of time in there. But the milestone that we put in the presentation today was talking about the launch of pylon.

For those who aren't familiar with kind of what's going on our ships, it's probably a hard picture to understand. But this is the piece that attaches the spaceship to the center of the wing and the mothership, not only at a structural level, but also this is where all the electricity moves through there, the air moves through there.

It's a very important part. And the original design of that had 3 points, and that was fine for the work and the efforts we were doing with-it in-flight test. But as we move into commercial service, we just want to open up the envelope of conditions that we would fly within and we wanted something structurally much, much more robust.

But it's going in and doing some reasonable amount of surgery onto the wing and opening that up. And so you saw that picture coming in back in April, where we are actually able to fit a new part into an existing effort in the wing with all the structural efforts kind of done and ready to go. That was a big milestone.

We actually brought everybody together got a big picture around that. So I think that was the biggest one we've seen, and that was also kind of just a good one to be behind us, right? So now we have more things to fit and finish up. But as far as big, big milestones, that was the one that we went through in April, and we were pleased to see it..

Our last question comes from Myles Walton from UBS..

So maybe to just build into the Delta a little bit, I think, Michael, you had said reiterated on the call late '25 is still the target for that. And so this current flip on the reentering commercial core entering commercial service.

It's not in any way having a effect in terms of constraints or anything like that, still late 2025?.

Yes. The timing table we've got out on Delta, we believe, is not impacted by this. At a practical level, some of those, I'll call it, experienced engineers will be a little later over to the party. But in the schedule we've laid out for ourselves there. We don't think that has a material impact..

Okay. And then on the RFIs that you are in the process of issuing or have issued, I guess.

So does this mean that you are in a firm design at this point? Or are you still in collaborative design with what their capabilities are and deciding what you're going to outsource versus in-source? Or is this RFPs telling that you've frozen the design, you know what you're going to in-source what's going to outsource and now it's just a question of price?.

Well, let's see. I think just -- again, speaking because a lot of folks are probably listening, it's important for the grounding. This isn't a brand-new ship going forward, right? This is an evolution off of our current ships. And that matters, right? Because the vast majority of that design is done as an intact.

And what we're doing heavily is now reworking that design when we use these words design for manufacturability, allowing it to come together in fewer larger subassemblies that can be sent out. So that's -- there's much of that design work that is done as, I'll call it, in place from that standpoint.

What we are finding out through the RFI process is we mentioned one example around item composites in the discussion earlier. But we're finding where people have either some new capabilities that we didn't fully recognize or maybe a supplier might have multiple capabilities that we thought might be in 2 different suppliers, things like that.

So that's causing us to continue to make some trades on what do we want to do, if we could get more out to this group, is that a more efficient process along the way. So there's still trades to be made in that category -- those types of categories.

So I'd say in the detail, it's not locked from design because we're making trades with these thought players, we've talked to down select them. But again, this is an evolution of the current design relative to a new airframe, a ton of our designs locked..

Got it.

And sorry, in the first point, which was the last one where you issued those acceptance or you get them back and you issue the contracts for supply, do you think that is sort of end of year type of time frame for the major assemblies?.

I think sooner than the end of the year, for sure..

There are no further questions waiting at this time. So I'll pass the conference back over to the management team for any closing remarks..

I think we always appreciate everybody who both are on the call with questions and all of those who are listening in. We're excited for what's still to come, and thank you for your time today..

That concludes the Virgin Galactic's First Quarter 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines..