Yahoo Finance Virgin Galactic Holdings, Inc. (NYSE:SPCE) Q4 2023 Earnings Call Transcript
Virgin Galactic Holdings, Inc. (NYSE:SPCE) Q4 2023 Earnings Call Transcript February 27, 2024
Virgin Galactic Holdings, Inc. beats earnings expectations. Reported EPS is $-0.25, expectations were $-0.3. Virgin Galactic Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's Fourth Quarter and Full Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Eric Cerny, Vice President of Investor Relations. Please go ahead.
Eric Cerny: Thank you. Good afternoon, everyone. Welcome to Virgin Galactic's fourth quarter and full year 2023 earnings conference call. On the call today with me are: Michael Colglazier, Chief Executive Officer; Mike Moses, President of our Spaceline; Doug Ahrens, Chief Financial Officer. Following our prepared remarks, we will open the call for questions. Our press release and slide presentation that will accompany today's remarks are available on our Investor Relations website. Please see Slide 2 of the presentation for our safe harbor disclaimer. During today's call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties.
Many factors could cause actual events to differ materially from the forward-looking statements made on this call. For more information about these risks and uncertainties, please refer to the risk factors in the company's SEC filings made from time to time. You are cautioned not to put undue reliance on forward-looking statements, and the company specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call, whether as a result of new information, future events or otherwise. Please also note that we will refer to certain non-GAAP financial information on today's call, please refer to our earnings release for a reconciliation of these non-GAAP financial metrics. With that, I would like to turn the call over to Michael.
Please go ahead.
Michael Colglazier: Good afternoon, everyone. Thank you for joining us. 2023 was incredible for Virgin Galactic, as years of R&D and flight test culminated in launching our Commercial Spaceline and successfully flying back-to-back monthly space flights, each delivering an exceptional experience for our customers. Importantly, 2023 proved that each time we fly to space, we change lives for the better, and I'm incredibly proud of and thankful to our Virgin Galactic team for this successful year. Since our inception, the vision for our company has been clear and consistent to make space more accessible to people around the world, and to do it in a way that's transformative and unforgettable. That vision, that dream behind Virgin Galactic came into sharp focus as we repeatedly flew spaceship Unity in 2023.
Now, in 2024, we're poised for even more meaningful accomplishments as we build the fleet of spaceships that will turn the dream into reality and long term success. It's a new day for Virgin Galactic. We've entered Phase 2 of our company's journey, having grown beyond our R&D and prototype roots into an engineering, manufacturing and astronaut-driven consumer space company with an industry-defining product and customer experience. At the top of the call, I'd like to share that our Delta class spaceships remain on track to begin ground and flight testing next year, and commercial service in 2026, and our balance sheet continues to be strong with cash, cash equivalents and marketable securities at just under $1 billion. Turning to the agenda on Slide 3.
I will start with a recap and overview of 2023 covering our launch of commercial operations, the incomparable life experience we are delivering to our customers; and related to that experience, the strong value and pricing opportunities we are seeing. I'll then revisit our strategy to scale the business and drive long term growth. Because our Delta class spaceships play a pivotal role in our future. I've asked Mike Moses, President of Virgin Galactic Spaceline, to join today's call and dive deeper into how these next generation vehicles are being built and how they will accelerate value creation for the company. Finally, Doug will share financial results for the year and the fourth quarter, thoughts on the size of the commercial space travel market and our growth model as we build out our Spaceport operations.
Following our prepared remarks, we'll open the call to your questions. With that, let's get started on Slide 4. We officially commenced commercial operations last year with great success, proving that we can execute as a commercial spaceline flying safe, regular and repeatable missions. We've created a customer experience that sets the industry standard for years to come. The comments from our newly minted astronauts have been overwhelmingly positive. To hear them describe it, the customer journey delivered by Virgin Galactic from preflight activities and immersive training to the spaceflight itself is perhaps the most meaningful experience of their lives. We're not only taking our customers to space and back, our customers tell us it's an incomparable life moment, and we're seeing what's called the overview effect in action, where the experience of seeing the Earth from Space literally changes you.
It's a thrilling and overwhelming sensory experience, to be sure, giving everyone who does it the adventure of a lifetime, but it's also the visceral realization of the vastness and the brilliance of the Earth and the enormity of the human endeavor that brought them to this point. This is a life journey, and it matters like nothing else people have experienced. Because we take off and land from the same spaceport runway, our astronauts can have their family and their friends share in this journey, and that is just wonderful. They watch their loved ones rocket into space, see them floating in awe above the planet, and then cheer as they gracefully glide back down to the spaceport. The reunions and the hugs are deeply emotional, because we thoughtfully integrate family members and friends into the scheduled activities and overall experience, the days at Spaceport America become a shared experience that is completely unique and deeply meaningful for everyone involved.
On Slide 5. For our last flight, GALACTIC 6, we hosted our largest crowd of friends and family since launching commercial service, and the energy was undeniable. We host this group for the benefit of our customers, but this service also enables invaluable sharing and testimonials via word of mouth, which will be of great value to the company when we reopen sales ahead of the Delta ship's arrival. In addition, many of our flown astronauts have become ambassadors for our product, which will draw more people to the adventure and discovery associated with our spaceflight experience. Our astronaut testimonials are very moving, and I encourage you to go listen to our more recent ones from GALACTIC 6 on our social channels. Since May of 2023, we brought 24 people to Space, bringing Virgin Galactic's current total to 32 astronauts.
This is almost 5% of human history's total number of astronauts, and we will surpass the 5% mark with our next mission GALACTIC 7 later this year. All this was done with our first prototype ship, and these numbers will be dwarfed as we scale up the Delta class fleet. Everything I just discussed, how we deliver successful flights, along with the superlative customer experience has tangibly demonstrated the appeal and the value of being a Virgin Galactic astronaut. And our experience with actual customers has reaffirmed the company's strong market opportunity. As a practical example of this market opportunity, we have sold recent openings in our manifest at a market rate that is substantially above our historical pricing. Our next spaceflight, GALACTIC 7, will have a blended manifest of researchers and private citizens, and we expect the revenue for that flight to exceed an average of $800,000 per seat.
With a current backlog of approximately 725 future astronauts, new sales are not planned to open until we are closer to the launch of our Delta fleet. However, we have a limited number of house seats that we have made available to private astronaut referrals from our future astronaut community. We have moved the entry price point of these private astronaut seats from $450,000 to $600,000, in line with the entry level price per seat of our research flights. We believe these prices continue to reflect outstanding value for the product and lifetime experience we are delivering. And as Doug will share in a moment, we believe there is a large and robust addressable market at these price points. Before I hand the call over to Mike and Doug, I want to clarify and reaffirm our vision and growth strategy for the company.
Moving to Slide 6. let's start with the building blocks of our core business model. We've laid out the unit economics of a single Delta ship. With 6 seats, these ships can deliver a revenue per flight of $3.6 million at current pricing levels. We are targeting each Delta ship to average 8 spaceflights per month. Allowing for annual maintenance cycles and an appropriate amount of redundancy, we expect each spaceport will be optimized with a fleet of four to five spaceships and two motherships. This set of assets should enable a range of 300 to 400 spaceflights per year per spaceport in steady state operation. To illustrate, a spaceport that operates 300 flights a year at $3.6 million per flight, generates over $1 billion per year in revenue from the spaceflights themselves.
But that's not all that we expect to have going on at a spaceport. As we've demonstrated with our early flights, witnessing a spaceflight in person is an extremely compelling experience, not only for friends and family, but also for people who are interested in Space and Aerospace technology in general. As we approach a flight cadence that is closer to daily than weekly, we expect many people will wish to be part of that experience. Some of those people will eventually become astronauts themselves, and some will be satisfied with being part of human spaceflight from the ground. All of them, however, will have an outstanding experience during the day at our spaceports, and this can be accomplished at prices that are much less than our spaceflights.
This larger volume of attendance at our spaceflights is very important to the communities where we operate. On top of the high wage jobs generated directly and indirectly from our operations at the spaceport, additional jobs and positive economic impacts should flow into the community as all the people in attendance during their spaceflight days spend time and money within the surrounding areas. At a macro level, it is this fully-utilized spaceport that is the primary economic engine for both Virgin Galactic and our communities. It will be a compelling public-private partnership that we're working to first scale-up and realize at Spaceport America in New Mexico. We will then take that fully-utilized spaceport model to governments and communities in other parts of the world that wish to develop a local Space economy.
I want to note that the upfront infrastructure we are now building for our Delta class ships, including our final assembly spaceship factory in Phoenix, is planned to support this future expansion. This is where we expect to drive excellent contribution margins and this is where we see significant upside potential in our business model. Once our upfront infrastructure is in place, we expect to lean into the profitable expansion of our fleet. While the capital we have on hand is sufficient to bring our first two ships into service, we do expect to bring on additional growth capital to fund the assets needed, primarily additional spaceships and motherships to expand our business at an appropriate rate. With high margins and short payback periods on additional spaceships and motherships, we forecast the returns on this growth capital, when deployed, to be very attractive and value accretive to the company.
Our primary effort right now, however, is to remain laser focused on completing the upfront design, build and test work so we can launch our Delta fleet and move into cash flow positive operations. With that in mind, I'll hand the call over to Mike Moses, President of Virgin Galactic Spaceline for an update on our Delta ships.
Mike Moses: Thank you, Michael. It's great to join all of you today. It's a tremendously exciting time for our company and I'm thrilled to be part of it. I'll start by addressing a couple of questions that I hear frequently, because the answers will help everyone better understand the strategy and design behind our next generation spaceships. The first question I hear most frequently, how is Delta different than Unity? Typically, that question is quickly followed with, what gives us confidence that we can deliver the first Delta class ships next year to begin ground and flight tests ahead of commercial service in 2026? Let me start on Page 7 with the first question. What is different between Unity and Delta? Simply put, Delta will look almost identical to Unity.
The dynamics of the flight, the shape of the vehicle, our pilot-led approach and our fundamental customer experience won't change, but each of the aspects will be enhanced. The Spaceship system emphasizes safety first, and then ultimately, reusability and frequent flight rate. While it will look very similar, there are differences, and they can be broken down into three categories: capacity, flight rate and cost. First, each Delta spaceship has increased cabin capacity. Delta will be able to carry six astronauts in addition to the two pilots, compared to only four astronauts in Unity, this is a 50% increase in seating capacity, which directly translates into increased revenue per flight. A key metric that highlights why we are so focused on the Delta fleet is, revenue per flight.
More seats in each spaceship means more revenue per flight. We achieve the increased capacity by removing weight from the design. One of the key enablers to reducing the weight is the composite materials that we use to build each ship. We have switched to a high temperature composite resin system called bismaleimide, typically abbreviated as BMI. The ability of the base composite material to withstand higher temperatures reduces the amount of thermal protection required for each Delta ship, thus saving weight and increasing our cabin capacity. In addition, we are optimizing the structural skeleton of the Delta spaceship, because we know from Unity flight experience exactly how we need the ship to perform, we can size and locate various structural parts more precisely, which in turn saves weight.
The second difference is the increased flight rate of a single spaceship. It should go without saying, but a spaceship is more beneficial to the business the more often it is safely flying as opposed to sitting on the ground. Quicker turn times will enable us to grow the business quickly. This highlights another key metric, flights per month. Delta will be capable of flying 8 times per month compared to the once a month for Unity. Coupled with increased revenue per flight, Delta can generate 12x the revenue compared to Unity. We achieved this through thoughtful and precise design and testing of the Delta space ships. Turn time is how much time you spend on the ground between flights and the biggest impact on turn time stems from periodic inspections required to check that the system and structure are performing as desired.
A major advancement with Delta is that we are building specific dedicated test articles that supports cycle testing on the ground. One such article is the static test article. This is essentially a Delta ship. It's the major assemblies It's the major assemblies of the spaceship, built as if they were being used in a Delta spaceship, but installed into ground test rigs. We will then pull, push, bend and twist that piece of structure until it breaks, verifying its capabilities compared to computer model predictions. This type of testing is common in aerospace manufacturing, and it allows you to have high confidence in your limits and capabilities. With Unity, we did some of this testing, but because our original prototype didn't always have a test part capable of being broken on the ground, we adopted a strategy of inspecting Unity regularly to validate our performance.
A static test article represents a significant investment in time and materials, but the payoff is well worth it. Similar to how modern airliners are maintained, the Delta fleet will have test data to inform the number and frequency of inspections that will be needed with the ability to space these out over the course of its lifetime. While Unity needed an average of 14 days of inspections between flights, the Delta fleet will only need less than a day. Delta spaceships are being designed for easier access to the areas that do require inspection. Knowing specific maintenance tasks required ahead of the design process, we can ensure that parts requiring regular inspection aren't buried deep within the ship and that access panels can be removed and reinstalled quickly without requiring special tools or equipment.
Finally, there is a significant difference in the cost to build each spaceship. Unity was a hand-built spaceship. The parts were laid up by hand and assembled piece by piece when our company was vertically integrated, meaning that we did almost everything in house. For Delta, we are leveraging the best practices of modern aerospace manufacturing. We are using a digital twin that models all of the parts electronically and stores all relevant metadata in a common graphical data structure. This process facilitates smoother manufacturing and assembly and has great benefits in test and verification as well as commercial operations and maintenance. We are leveraging aerospace industry expert suppliers, Bell Textron and Qarbon Aerospace to develop, build and assemble Delta's major subassemblies, the wing, fuselage and feather assemblies.
These parts will be fully built and integrated with wiring, subsystems and components and delivered to our new Phoenix-based final assembly facility, where Virgin Galactic will combine those elements and perform final ground check out before starting flight test. Investing in the design and drawing release process upfront, will enable a much smoother and quicker assembly phase. In addition to shorter assembly times, this development approach reduces the variable cost per spaceship dramatically, with an estimated cost per incremental Delta ship in the range of $50 million to $60 million. This is the new way to make spaceships. Addressing the second question I'm often asked about Delta, what gives us the confidence in our schedule to deliver Delta for commercial service in 2026?
You can break our schedule down into three phases: design; build and assemble; and test. As I've highlighted, Delta is based on the learnings of Unity, and that is the most relevant fact that drives our confidence. In the design phase, we know that Delta needs to fly the same way as Unity. It has the same shape or outer mode line, flies through the same environment and follows a similar path to Space. Thanks to Unity's flights, our designers already have the end, well-defined. In the Build and Assemble phase, I just highlighted the key changes that drive confidence there. The digital models, integrated major sump assemblies and development test equipment that allows us to check components before they go on the ship. On Pages 8 and 9, you can see the continued progress we are making on the buildout of our spaceship factory.
In the test phase, we again build off the foundation of Unity. We are not flying into new and unknown territory. We need flight testing. But for Delta, we are looking at the performance of what has changed, not learning new things on each test flight, like was needed for Unity. In the test world, this is more like regression testing as opposed to new envelope testing. Finally, for those with a more detailed interest in how our spaceships are being built, Page 10 shows examples of tools that Qarbon Aerospace is using to build the BMI composite parts. These tools work much like molds that allow us to build and cost effectively replicate parts for multiple spaceships. The carbon fiber parts are laid up into these tools, and then cured in pressurized ovens called Autoclaves that are located at Qarbon's facilities.
Page 11 shows the Delta flight deck simulator we have recently installed at our engineering headquarters in Orange County, California. This critical test asset supports the evaluation of our cockpit layout and human control interface, evaluation of flight controls, and updates to pilot procedures and checklists. It has taken a tremendous amount of expertise and experience to arrive at this exciting point in our trajectory. Every flight we have taken, every lesson we have learned, every leap forward we have made, all have brought us here. What we are accomplishing with Delta and the scaling of Virgin Galactic is nothing short of amazing, and I look forward to sharing more details as continued progress is made. Now I'll hand over the call to our Chief Financial Officer, Doug Ahrens, for a financial overview.
Doug Ahrens: Thanks, Mike. Good afternoon, everyone. Turning to Slide 12 and our financial results for the fourth quarter. We generated revenue of $2.8 million, driven by commercial space flights and future Astronaut membership fees. Total operating expenses were $117 million compared to $154 million in the prior year period, primarily driven by lower R&D and SG&A expenses. We reported a GAAP net loss of $104 million compared to a net loss of $151 million in the prior year period, with the improvement driven by lower operating expenses and an increase in interest income from our marketable securities. Adjusted EBITDA was negative $84 million in the fourth quarter compared to negative $133 million in the prior year period. Turning to Slide 13.
For fiscal year 2023, we generated revenue of $6.8 million, driven by commercial space lights and future Ascena membership fees. Total operating expenses were $538 million compared to $502 million in the prior year. We reported a GAAP net loss of $502 million compared to $500 million in the prior year. Adjusted EBITDA for the year was negative $427 million compared to negative $431 million in the prior year. Free cash flow was negative $114 million in the fourth quarter compared to negative $135 million in the same period last year. Our free cash flow was better than guidance due to variation in timing of payments to suppliers. For the year, free cash flow was negative $493 million compared to negative $397 million in the prior year. Moving to Slide 14.
Our balance sheet remains strong with $982 million in cash, cash equivalents and marketable securities. In 2023, we generated $484 million in gross proceeds through an at-the-market or ATM equity offering program. We did not utilize the ATM in the fourth quarter. Moving to our projection. Revenue for the first quarter of 2024 is expected to be approximately $2 million. Forecasted free cash flow for the first quarter of 2024 is expected to be in the range of negative $125 million to $135 million. Michael mentioned earlier, the strong value being delivered to our customers, and as shared, we have updated our private ascent pricing to align with our research pricing at $600,000 per seat. I'd like to now discuss how we view the size of the commercial space travel market that we are pursuing.
We've triangulated a few sources of research to help us better understand the total addressable market, or TAM, leveraging a 2021 Jefferies report, a 2023 Credit Suisse report and our own proprietary data, we have estimated a number of individuals that have both the desire to fly the space and the resources to do so. Using conservative assumptions, we believe the TAM for private astronaut space travel is approximately 300,000 individuals growing at an estimated annual rate of 8%. Putting that market opportunity into context, one fully operational spaceport, supporting around 2,000 aspirants per year would represent less than 1% market penetration. This type of market analysis, combined with the tremendous customer feedback we're seeing from the spaceflight experience shows the clear opportunity to keep expanding our fleet of spaceships and other ships with the goal of adding multiple space ports around the globe.
In the prior earnings call, we stated our ability to achieve positive cash flow with two Delta class space ships. We have allocated sufficient capital to bring them into service. But our growth aspirations do not stop there. We plan to continue to expand our fleet and fill additional space sports. The onetime capital investment planned for 2024, which includes tooling at suppliers and the opening of our spaceship assembly factory in Arizona will give us the manufacturing capacity needed to continue building additional space ships at relatively low incremental costs. Let's now discuss the economic model behind the fully operational spaceport. We believe the most effective utilization of the spaceport will occur at 300 to 400 flights per year.
If we were to assume average ticket pricing of $600,000 for now, we would generate approximately $1.1 billion to $1.4 billion of revenue per space board annually from space flights. The space ships and motherships are the high return, quick payback assets that are expected to drive the outstanding economics for each Spaceport. Because of the attractive economics just described, at some point in the future, we would expect to bring in additional growth capital to acquire additional spaceships and motherships to revenue-generating assets that increased profits. We forecast returns on this growth capital, when deployed to be very attractive and value-accretive to the company. For now, however, having recently rightsized company, we are prudently managing our resources and focusing the organization on good execution to bring our first Delta class spaceships into service.
I will now turn the call back over to Michael.
Michael Colglazier: Thanks, Doug. To recap the key takeaways from today's call, the bold dream of commercial space flight was realized in 2023 as we officially launched our commercial space line with six flights in six months, demonstrating the Virgin Galactic spaceflight system is designed for safety, reliability and repeatability. Our astronaut journey is delivering an incomparable life experience that is of great value to our customers. We see positive indications for both pricing and the overall potential size of the commercial space travel market. 2024 marks a new phase as we move past our R&D and prototype roots and are now advancing the development of our production space ships with ground and flight testing expected to commence in 2025 and entry into service expected in 2026.
We continue to pursue our high-growth business model of creating fully utilized space ports with plans to first scale operations at Spaceport America with a fleet of four to five spaceships, followed by expansion to additional space ports in compelling locations. With that, we'll turn to questions. Operator, we're ready to begin the Q&A portion of the call.
Operator: Thank you. [Operator Instructions] Your first question comes from the line of Greg Konrad with Jefferies. Your line is open.
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