Virgin Galactic Holdings, Inc. (SPCE) Q2 2020 Earnings Call Transcript

Virgin Galactic Holdings, Inc. (NYSE: SPCE) Q2 2020 earnings call dated Aug. 03, 2020

Corporate Participants:

Michelle Kley — Executive Vice President, General Counsel and Secretary

Michael Colglazier — Chief Executive Officer

George Whitesides — Chief Space Officer

Jon Campagna — Chief Financial Officer

Presentation:

Operator

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 Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Hosting today’s conference call will be Michelle Kley, Executive Vice President, General Counsel and Secretary of Virgin Galactic. As a reminder, today’s call is being recorded.

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

Michelle Kley — Executive Vice President, General Counsel and Secretary

Thank you, and good afternoon, everyone. Welcome to Virgin Galactic’s second quarter 2020 earnings conference call. On the call with me today are Michael Colglazier, Chief Executive Officer; George Whitesides, Chief Space Officer; and Jon Campagna, Chief Financial Officer who will provide prepared remarks.

Earlier today, we issued a press release and made a slide presentation available on our Investor Relations website, which provides an overview of our business and financial highlights for the second quarter of 2020.

During today’s call, we will make certain forward-looking statements within the meaning of federal securities laws. Forward-looking statements are predictions, projections and other statements about future events that are based on current expectations and assumptions and, as a result, are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from the forward-looking statements in this communication. For more information about factors that may cause actual results to materially differ from forward-looking statements, please refer to the earnings press release we issued today and other documents filed by Virgin Galactic from time to time with the Securities and Exchange Commission, including our Form 10-Q for the second quarter of 2020. Forward-looking statements speak only as of the date they are made. Readers are cautioned not to put undue reliance on forward-looking statements.

As I’m sure most of you have seen, today we filed a registration statement on Form S-1 for a proposed underwritten offering of Virgin Galactic stock. Given securities law restrictions around public offering, we will not be hosting a Q&A on today’s call, but we will resume our normal Q&A structure on our Q3 earnings call.

With that, I’d like to turn over the call to Michael Colglazier.

Michael Colglazier — Chief Executive Officer

Thank you, Michelle. And good afternoon everyone. I like to start by thanking each of you for joining us today. I hope that you and your loved ones are continuing to stay healthy and safe. Today marks the start of my third week at Virgin Galactic. Over the past two weeks, I’ve been focused on meeting our team and getting up to speed on the primary efforts taking place within the company. I knew this would be the case, but my excitement and my passion about joining this talented team continues to grow each day.

I joined Virgin Galactic from the Walt Disney Company, where I gained over three decades of experience, developing and growing consumer oriented businesses. Although clearly different companies, Virgin Galactic and Disney Parks have similarities in many respects. Both companies share central focus on safety. This is built into the engineering, operations, processes, and culture here at Virgin Galactic. And this is something I’m very familiar with from my time at Disney. Like Disney, Virgin Galactic will provide amazing transformational customer experiences. It’s the core of what we’re offering at Virgin Galactic and I look forward to working with our team as we proceed with momentum towards commercial service.

My priority for this initial onboarding period is to listen and to learn from the talented leaders, engineers, and technicians, who have led Virgin Galactic to this point in the company’s journey. As such, I’ve asked our Chief space Officer and Founding CEO, George Whitesides, along with our CFO, Jon Campagna to lead the bulk of today’s call.

Now, let me hand the call over to George and I will join at the end to share final comments.

George Whitesides — Chief Space Officer

Thanks, Michael. Before I begin, I just wanted to say that we feel tremendously privileged that Michael has joined the company. He and I have now been working closely for the past couple of weeks and that has only solidified my view that he is exactly the right person to lead the company through its commercial growth phase. Michael’s deep experience, building and scaling fantastic customer experiences all around the world will serve this company well. So welcome Michael and thank you for joining this incredible team.

Today, we will start our discussion of the quarter by providing a recap on the main areas of progress. We will then provide updates on our flight test program as well as the ongoing impact of COVID-19 on our operations and fleet production. We will then discuss our business highlights for the quarter and close by covering new developments in our future business opportunities. Jon will then provide detail regarding our financial performance.

Turning to Slide 4. We achieved a significant number of milestones during the quarter in both our space flight operations as well as our advanced development initiatives. I will provide a short summary here and provide details on each during the call. We conducted a number of successful flights from Spaceport America as we prepare for the next stage of our test program and we made important progress in our process to gain clearance to fly paying customers under our commercial launch license from the FAA.

We saw strong growth in customer pipeline and stability in our existing customer community. We hosted a virtual event last week to unveil our spaceship cabin, which I hope you all had the opportunity to watch. This morning, we announced a new series of steps in our high speed flight strategy. And today, I’m excited to be able to share some important news in the development of our commercial orbital spaceflight initiative. All of this has been achieved at the same time as we have had to navigate the inevitable challenges brought on by the COVID-19 crisis, which we will cover later on in the call.

Turning to Slide 5. In the quarter, flight operations continue to ramp up at Spaceport America. And we completed eight flights between our spaceship and the carrier aircraft. As previously announced and discussed on our last earnings call, on May 1, we successfully conducted our first glide flight from Spaceport America. This was an important milestone for us, as it was the first time our spaceship, VSS Unity, flew freely in New Mexico aerospace. During the glide flight, the vehicles climbed to an altitude of 50,000 feet before Unity was released. The spaceship achieved a glide speed of Mach 0.70 and completed multiple test points before touching back down smoothly for a runway landing at Spaceport America.

We were also able to complete six flights from Spaceport America with our carrier aircraft VMS Eve during the quarter. These flights provided an opportunity for the pilots and space flight operations team to continue familiarization with the new aerospace around Spaceport America and a chance to conduct further pilot training. We will continue to perform these flights, as we lead up to commercial launch. Finally, our team conducted several tests of the ground infrastructure at Spaceport America that will support space flights, including a full scale exercise that involved loading VSS Unity with a rocket motor and filling the tanks with propellant and pressurant, a first for us at Spaceport America.

Turning to Slide 6. Following our first glide flight from Spaceport America in May, our teams conducted in-depth analysis of the flight data in preparation for our second glide flight, which we successfully completed on June 25. On the second glide flight, the spaceship achieved a faster glide speed of Mach 0.85 after being released from the carrier aircraft VMS Eve at an altitude of 51,000 feet. And completed multiple test points before touching back down smoothly for a runway landing at Spaceport America. The pilots performed a series of maneuvers with Unity, designed to gather data about the spaceships performance and handling qualities while flying at higher speeds. This data has been verified against similar maneuvers that were performed in the previous glide flight to enhance aerodynamic modeling. Following the completion of an extensive analysis of the data from this flight, the team has now started preparing for the next stage of our flight test program, powered space flights from Spaceport America. We have several steps to complete, prior to and during the final phases of powered flight testing, including review of flight data to prepare the vehicle for the next flight, final modifications to the spaceship customer cabin and detailed inspections of the vehicle systems.

Turning to Slide 7, and the FAA approval process. We have made progress with important aspects of the FAA approval process over the quarter. As we discussed in previous calls, the company has already been awarded its FAA Launch License. The license includes a series of elements that must be verified and validated before we are cleared to fly paying customers under the license. I am pleased to share today that in the second quarter, we were able to clear an additional three verification and validation elements, bringing our total cleared up to 27 out of 29. These three elements related to cabin humidity, vehicle landing gear, and environmental control systems. We are continuing to progress towards completing the final two of elements, which will be one of the goals relating to our next powered flight. Once we complete these remaining elements, we can be approved to fly paying customers to space under our existing commercial license from the FAA. We will also continue our own set of test objectives that we will complete in addition to the FAA’s milestones that may involve additional test flights prior to commercial launch.

Finally, we are pleased that during the quarter. The FAA accepted our Safety Management System or SMS. SMS is a formal systemic approach to managing safety risk, which includes agreed upon procedures, policies, and practices, and has become standard throughout the aviation industry worldwide. While not specifically required for our license, we have adopted SMS as an industry best practice.

Turning to Slide 8. I’ll now provide more detailed information regarding the progress we made during the quarter in our test flight program and look forward at our plans. We are currently preparing the vehicles in operational facilities at Spaceport America for the next test flight. Although we were able to conduct two successful glide flights with VSS Unity from Spaceport America during the quarter, our test flight program schedule has been impacted by COVID-19. The COVID protocols that we have put in place have limited the number of people we are able to bring back into the facilities in both New Mexico and Mohave, reducing the pace at which we can work compared to pre-COVID. To help safeguard the progress on the commercial test by program, we have prioritized staff resources to be a aligned here.

The glide flights we completed during the quarter have given us a good set of test results regarding operations from our new location at spaceport America. Those successful glide flights mean that we have baseline our next flight as a rocket powered space flight with a crew of two test pilots, which we expect to complete this fall. This flight will be carrying payloads as part of NASA’s flight opportunities program, the third such flight for the company, which will generate a modest amount of revenue. As always, I flag that our engineers may want to repeat a test point and fly another flight as we proceed through the final stage of flight testing.

Pending a satisfactory review of the data from this fall flight and a checkout of the vehicles, we would then plan to conduct a rocket powered flight to space with a crew of two test pilots in the cockpit and four mission specialists in the cabin. The primary test objective of this flight will be to evaluate the performance of our full customer cabin and associated hardware as well as procedures and training details. The mission specialists will be company employees specifically trained for these detailed evaluation.

Presuming things go as expected on this fully crewed flight, we would then plan to fly Sir Richard Branson on the third powered flight from New Mexico, which we would plan to occur in the first quarter of 2021. Sir Richard is in a unique position to provide the ultimate cabin and space flight experience evaluation as a visionary of the Virgin customer experience. On future earnings calls, we will continue to share progress updates and envies [Phonetic] on how results from our ground and flight tests are being incorporated into the schedule.

Turning to Slide 9, where I will provide an update on our fleet build program. We’ve had to adjust many of our manufacturing processes and facilities safety protocols to ensure we can continue operating safely during the COVID-19 pandemic. Although our team responded swiftly to take proactive steps to keep our team safe and minimize potential disruption to our business, our pace of progress was impacted during the quarter. First, we had a full shutdown of shop floor operations from the middle of March to early April and cautiously restarted operations with small trial work cells.

Thanks to our protocols, we have been able to maintain progress within our manufacturing facility, while enabling many staff to work remotely. The cumulative effect of these new protocols have led to delays in shop floor and engineering work process and have impacted the manufacture and assembly of our second and third spaceships. However, during the quarter we continue to make progress on key fabrication metrics and preparing our second SpaceShipTwo vehicle for integrated Vehicle Systems testing as well as the release of all structural closeout drawings and remaining engineering definition.

Although the COVID protocols have created some delays to our process, we have continued to progress with our fleet expansion efforts and we expect to complete assembly of our second SpaceShipTwo vehicle ready for roll-out and commencement of ground testing this year. For our third spaceship, parts fabrication is now over 75% complete and we are expecting to complete assembly and ready the vehicle for testing in 2021.

Turning to Slide 10. Last week, on July 28, we unveiled the design of the SpaceShipTwo cabin interior via an exclusive virtual event streamed live on YouTube. Alongside the reveal, we also launched an immersive experience of Virgin Galactic space flight and cabin interior using augmented reality technology that can be accessed by aspiring astronauts and space enthusiast around the world through a mobile app available to download for free on the App Store and Play Store. We are excited about this milestone and I am in awe of what our team has accomplished with the cabin stunning design.

To allow a profound view from space, 12 windows with soft extended hedges are positioned around the cabin for a 360 degree awe inspiring view and with the overhead windows pointing towards Earth creating a life-changing vista. This includes the use of automated mood lighting in the cabin that harmonizes with each phase of flight. Additionally 16 cabin cameras, plus those in the cockpit and mounted externally, will generate high definition output to provide everything from the first Instagram post to a beautifully edited and historically significant personal movie. It was an exceptional event and really speaks to our team’s creativity in finding ways to share these exciting milestones with all of you while we continue to navigate through these unprecedented circumstances.

Turning to Slide 11. During the second quarter, we continue to make meaningful progress and the build-out of Spaceport America. Specifically, we completed construction of the third floor customer area, which is where our astronaut training and flight preparation activities will take place. The third floor also includes our customer space ship training cabin and astronaut lounge. Following completion of the third floor, we were able to receive the certificate of occupancy for this space, which was the last such certificate for the whole facility. We look forward to unveiling the special area to our customers and the media later this year.

Turning to Slide 12. During the second quarter, we continued to see steady growth in our sales pipeline, a testament to the demand for our experience and the stability of our future astronaut community. In light of the global COVID-19 pandemic, we paused our active marketing campaigns around our One Small Step program in the beginning of second quarter, but have now restarted this campaign. Despite temporarily suspending our active marketing efforts, we continue to see a positive response as registrants continue to sign up to join our Small Step community. As of July 30, 2020, we have received over 700 deposit payments for our One Small Step program, a substantial increase since our last earnings call update. In total, this means the number of people who have signed up for our One Small Step community now substantially exceeds the number of future astronaut deposit holders. It also means that we have more small step candidates than the total number of people who have ever been to space. As a result of our strong customer relationships and an active engagement strategy, we also continue to see stability and minimal refund requests from our approximately 600 future astronauts.

As I said on our last call, the financial profile of many of our customers helps to limit the impact of economic downturns on our business. I am tremendously encouraged that during this challenging time, almost all of our customer community has continued to stick with us reaffirming their commitment and belief in our mission.

The next decade for Virgin Galactic will be commercially focused, and I couldn’t be more excited to have Michael onboard to lead the company into the launch of the commercial service and beyond. Michael’s arrival has enabled me to transition to my new role as Chief Space Officer, which allows me to focus my attention on spearheading Virgin Galactic’s efforts for the future business opportunities, leveraging the amazing talent across the organization, which has led us to some exciting early stage progress and developments. I would like to share updates on two of these advanced development program.

Turning to Slide 14, and our orbital spaceflight initiative. As you will recall in June we entered into a Space Act agreement with NASA focused on commercial participation in orbital human space flight to the International Space Station. Ranging from private citizen expeditions to government enabled scientific research missions. In partnering with the agency via the Johnson Space Center, we will leverage our commercial expertise and industry knowledge to help develop a program for private astronaut mission to the ISS including, identifying interested candidates, arranging transportation to the International Space Station and managing on orbit and ground resources in support of the mission. We will contribute end-to-end program management and integrated astronaut training packages for private passengers, tailored to meet the needs for a commercial orbital spaceflight experience. As part of this, we will offer our existing space training infrastructure at Spaceport America and customize future astronaut readiness program, which will play an important role in training private astronauts for orbital travel, allowing these private astronauts to become familiar with the environment in and en route to space such as G force and zero G.

This initiative has been largely driven by the considerable demand among our existing customer base to participate in orbital spaceflight. Since the NASA agreement announcement, we have been in communication with our existing future astronauts about their opportunity to put down a significant refundable deposit to demonstrate their interest in the orbital space experience. The existing customers, these individuals will also have unique opportunity to train for their orbital spaceflight using their sub orbital spaceflight, a connection that NASA has itself recognized in its recent initiative to consider sub orbital spaceflight for its research employees and astronaut corps.

I’m very pleased to share today that since our NASA Space Act announcement, we have entered into deposit agreements for orbital spaceflight with 12 customers. We have not yet set final pricing for the orbital spaceflight experience, but we expect pricing to be competitive with other offerings in the market and with the premium service and training the people expect from the Virgin Galactic brand. We are thrilled to be partnering with NASA on these efforts, and we look forward to helping grow another market for the new space economy, driven by greater demand for use of the International Space Station for scientific and technological research and development, commercial activity, and international collaboration.

Turning to Slide 15. We have discussed high speed travel as a longer range opportunity for the company for some time, and I’m excited to report on some important progress in this area. Earlier today, we made an announcement unveiling the initial design concept for our high-speed vehicle effort, following the completion of our mission concept review phase. Our initial design are based on the following parameters, a targeted Mach 3 certified delta wing vehicle, a cabin design that would accommodate from 9 passengers to 19 passengers flying at an altitude above 60,000 feet and a vehicle design that aims to help lead the way towards state of the art sustainable aviation fuel.

To support the design process, we have signed a non-binding memorandum of understanding with Rolls-Royce to facilitate further collaboration on the development of sustainable cutting edge propulsion systems for this type of aircraft. As a leader in the technologies that deliver clean, safe, and competitive solutions to the planet’s vital power needs Rolls-Royce has a proven record of delivering high Mach propulsion. Powering the only civil certified commercial aircraft, the Concord, capable of supersonic flight.

The design philosophy of the aircraft is geared around making high speed travel practical, sustainable, safe, and reliable, while making the customer experience a top priority. We are designing the aircraft for a range of operational scenarios including service for passengers on long distance commercial aviation routes. Aircraft would take off and land like any other passenger aircraft and integrate into existing airport infrastructure and international aerospace around the world.

We’re also working closely with international regulatory communities to ensure compliance with the highest safety and environmental standards. FAA Center for Emerging Concepts and Innovation has reviewed the project direction and authorized FAA resources to work with the Virgin Galactic team to begin the outline of a certification framework during the pre-project guidance phase. We believe that baseline and sustainable technologies and techniques into the aircraft design early will also act as a catalyst to the adoption of sustainable practices in the rest of the aviation community. The announcement today leverages and build on the Space Act agreement we entered into with NASA in May to facilitate the development of high speed technologies over the coming years.

Turning to Slide 16. We’re excited with the progress we have made in a relatively short time. And on a personal level, I am thrilled to be able to devote my efforts and time to this area as we work on opening up a new frontier in high speed travel. We believe that high speed point-to-point travel will revolutionize the way we move about the planet and cut travel times drastically. Importantly, according to our analysis, Mach 3 vehicle has the potential for travelers to do around trip in one day between 85% of the most frequently traveled global city pairs. This project is a long-term effort and this is just the start, but we have hit the ground running. On this slide, we have laid out a high level roadmap to give some context on what is ahead.

Turning Slide 17. We believe that Virgin Galactic is well positioned competitively to be a leading player in the high speed market. We are the only company in the world to have flown a non-pilot crew member in a winged vehicle at Mach 3 plus and we plan to continue to collect large amounts of relevant data from our flight program. We have a strong team in place, we have a vertically integrated design, development, manufacturing and test capability and we are excited about the prospect of complementing those strengths with the capabilities of Boeing, NASA and Rolls-Royce.

Finally, we are excited about the experience we can offer customers by leveraging the service design we have built up for our core product. We have unique advantages in this area, and I look forward to sharing more updates with you in the future.

I would now like to turn the call over to our CFO, Jon Campagna who will provide details about our second quarter financial results.

Jon Campagna — Chief Financial Officer

Thanks, George. Looking at Slide 19. Our second quarter results reflect our ongoing work as we prepare for commercial launch. We remain in a strong cash position and ended the quarter with cash and cash equivalents of $360 million on our balance sheet as of June 30, 2020. Net loss for the quarter was $63 million compared to $60 million net loss in the first quarter of 2020, our first full quarter as a public company.

Non-GAAP SG&A expenses and non-GAAP R&D expenses have been adjusted to exclude stock-based compensation.

GAAP SG&A expenses for the quarter were $26 million compared to $27 million in the first quarter of 2020. Non-GAAP SG&A expenses for the quarter were $23 million, which was consistent with the first quarter of 2020. GAAP R&D expenses for the quarter were $37 million compared to $34 million in the first quarter of 2020. Non-GAAP R&D expenses for the quarter were $35 million compared to $33 million in the previous quarter. Adjusted EBITDA, which excludes stock-based compensation totaled negative $54 million. This is compared to adjusted EBITDA of negative $53 million in the first quarter of 2020. Cash paid for capital expenditures was $6 million in the second quarter of 2020 compared to $4 million in the first quarter. Capital expenditures in the second quarter consisted primarily of vehicle tooling costs and investments in Spaceport America as we continue to prepare that facility for commercial operation.

Turning to Slide 20. I’d like to take some time to run through some of the line items in our income statement to provide more context on the drivers behind some of those numbers. As you know, our primary focus is executing on our test flight program and ensuring the safety of our workforce, given the challenges associated with the COVID-19 pandemic. As a result, we did not generate any revenue during the quarter and we anticipate modest revenue during the remainder of the year given our continued focus on these areas.

Turning to R&D. As a reminder, our Vehicle cost currently sit within R&D and will continue to be expensed there until we achieve technological feasibility. While subject to change, we anticipate achieving technological feasibility once we have completed a power test flight to space with four mission specialists in the cabin. At the point of achieving technological feasibility, we will begin to capitalize our vehicle costs.

Our R&D expenses for the quarter totaled $37 million, an increase of $3 million compared to the first quarter of 2020, primarily due to an increase in allocation of facility cost from SG&A to R&D as a result of the transition of our vehicles to New Mexico as well as an increase in personnel costs. Our SG&A expenses for the quarter totaled $26 million, a decrease of $708,000 vs. first quarter of 2020, primarily due to the aforementioned facility cost allocation to R&D.

Turning to Slide 21, and looking at the cash flow statement. The decrease in cash and cash equivalents over the quarter totaled $59 million, which was generally in line with Q1 cash burn. Although we are not providing specific guidance as we noted last quarter, we continue to believe this is an approximate indication of our ongoing cash burn with the incremental public company related costs. However, there may be some strategic initiatives that we decide to invest in that may lead to an increase in our burn rate. Cash paid for capital expenditures increased from the prior quarter by $2 million to $6 million. Capital expenditures for the quarter were primarily attributed to continued investment in Spaceport America, operational readiness and vehicle tooling costs.

I would now like to turn the call back over to Michael, for some final remarks.

Michael Colglazier — Chief Executive Officer

Thanks Jon. I’d like to spend a few moments briefly recapping our next steps. As we navigate through these unprecedented times, our number safety of employees and their families and the communities in which we operate. As George mentioned earlier on the call, we expect to advance to the next phase of our test flight program by conducting the first rocket powered space flight from Spaceport America this fall.

After that flight, we will conduct a second powered flight from Spaceport America, which is expected to include four mission specialist in the cabin. In addition to conducting a variety of functional test within the cabin, these specialist will help us block and choreographed the ways we will capture and cover Richard Branson’s history making flight. If all goes as expected on this fully crewed flight, we would then plan to fly Sir Richard Branson on the third powered flight from Spaceport America, which we anticipate will occur in the first quarter of 2021.

As always, safety will remain our central focus. And we will continue to progress with the step by step diligent approach throughout the test flight program as we prepare for commercial service. As such, our schedule may adjust as we process data from each of our test flights.

Before we close the call, I’d like to recognize and congratulate George on successfully bringing us to this inflection point in Virgin Galactic’s journey towards commercialization of human space flight. I’m incredibly excited to work with George and the team as we develop our advanced technology efforts, including participation in the commercialization of orbital spaceflight and our work in high speed travel.

Thank you everyone for joining today’s call. We appreciate your interest and support. We look forward to sharing more with you on future earnings calls.

Operator

[Operator Closing Remarks]