Virgin Galactic Holdings, Inc. (SPCE) Q4 2020 Earnings Call Transcript

Virgin Galactic Holdings, Inc. (NYSE: SPCE) Q4 2020 earnings call dated Feb. 25, 2021

Corporate Participants:

Seth Zaslow — Vice President of Investor Relations

Michael A. Colglazier — Chief Executive Officer

Michael P. Moses — President, Space Missions and Safety

Jon Campagna — Chief Financial Officer

Analysts:

Robert Spingarn — Credit Suisse — Analyst

Myles Walton — UBS — Analyst

Ron Epstein — Bank of America — Analyst

Dan — Goldman Sachs — Analyst

Oliver Chen — Cowen — Analyst

Pete Skibitski — Alembic Global Advisors — Analyst

Presentation:

Operator

Good afternoon. My name is Jacqueline and I will be your conference operator today. At this time, I would like to welcome you to Virgin Galactic’s Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions] Thank you.

Hosting today’s conference will be Seth Zaslow, Vice President, Head of Investor Relations at Virgin Galactic. As a reminder, today’s call is being recorded.

I would now like to turn the conference over to Mr. Zaslow. Please go ahead.

Seth Zaslow — Vice President of Investor Relations

Thank you. And good afternoon, everyone. Welcome to Virgin Galactic’s fourth quarter and full year 2020 earnings conference call.

On the call with me today are Michael Colglazier, Chief Executive Officer; Mike Moses, President of Space Missions and Safety; and Jon Campagna, Chief Financial Officer. Following prepared remarks from Michael, Mike and Jon, we’ll open the call for questions. Our press release was issued about 45 minutes ago and is available on our Investor Relations website, as is 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 will 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 section of Virgin Galactic’s Annual Report on Form 10-K filed with the Securities and Exchange Commission and other documents filed by Virgin Galactic from time to time.

Readers 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. Please also note that we will refer to certain non-GAAP financial information on today’s call. You can find reconciliations of these non-GAAP financial measures to the most comparable GAAP measures in our earnings press release.

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

Michael A. Colglazier — Chief Executive Officer

Thanks, Seth. And good afternoon, everyone. I hope you and your loved ones are keeping healthy and safe.

First off, I’d like to welcome Seth Zaslow to Virgin Galactic. As you may have seen, Seth joined us a few weeks ago to lead our Investor Relations function and serve as our primary liaison with the investment community. Seth is awesome and we’re very pleased to have him on board. And I’m confident you will all enjoy working with him.

Second, I’m sure many of you saw that our CFO, Jon Campagna, will be stepping down from his role to pursue his next adventure. I’d like to thank Jon on behalf of the entire Virgin Galactic team. Jon has been our CFO during our transition from private to public company and helped build excellent relationships within the investment community. He leaves us with a strong balance sheet at a time when the company is well-positioned for future growth. I will share more about our incoming CFO, Doug Ahrens, later in the call.

Moving onto the agenda, I’m going to start today’s call with a brief recap of our 2020 accomplishments and an overview of our flight schedule. I’ll then ask Mike Moses to provide some detail on our December 2020 flight as well as an update on our upcoming flight, which I know many of you are eager to hear about. I’ll then talk about the progress we’re making on expanding our fleet, followed by some thoughts on commercial plans and how we are positioning the organization for scale and success. After that, Jon will provide detail on our financial results.

So with that, let’s get started. As I reflect back on 2020 and look ahead to 2021 and beyond, I can’t help but be excited. It’s an incredibly dynamic time for both our company and for the space industry as a whole as there is a high degree of interest in advancement that is bringing our society closer to the frontier space than ever before. And we are just getting started on what we believe is going to be a long period of growth and expansion.

Turning to Slide 4. 2020 was an active and productive year for Virgin Galactic, despite the challenges we faced as a result of the COVID-19 pandemic. At the start of the year, we completed a captive carry flight of our spaceship, VSS Unity, from Mojave, California to its new home at Spaceport America. This flight completed the transition of all Virgin Galactic spaceflight operations to our new commercial base in New Mexico.

Shortly after this flight, COVID began to have an impact on our operations. As we’ve shared in the past, building and flying spaceships during the pandemic is materially less efficient than normal. But despite scheduling and cost inefficiencies related to the pandemic, our team was able to make significant progress during the year. And I’d like to thank all of them for their extraordinary level of commitment and dedication to our mission.

In the second quarter, we completed two successful glide flights that provided us with valuable data on the ship and training for our team of pilots. Following these glide flights, we were able to complete seven FAA verification and validation reports, putting us in a strong position where we have now cleared 27 out of 29 reports and will address the proviso in our currently active FAA operator’s license. We saw great success with our One Small Step program, which demonstrated the strong consumer demand for spaceflight, closing the program with approximately 1,000 people signed up and we are pleased that our total number of future astronauts remained at approximately 600 as of the end of the year 2020.

In August, we took advantage of favorable market conditions to further strengthen our balance sheet, and Jon will cover this topic in more detail in his remarks. We followed up our successful glide flights with a further test flight on December 12, which Mike Moses and I will talk more about shortly.

During the year, we also made progress on the build of our second and third spaceships. And in December, we realigned the company’s structure from a business unit focus to a functional structure as groundwork for our plans to shift from a prototyping and R&D focus to an organization that can design and manufacture at scale. In this process, we retired the spaceship company brand and have aligned everyone in the organization under the Virgin Galactic brand.

Turning to Slides 5 through 7. These three slides summarize the plan we discussed on last quarter’s call for the next three flights in our test flight program. While the specific timing of each flight has shifted, we’re still working towards completing these three flights. The first of these was originally set for November 2020. Due to COVID restrictions in New Mexico, we deferred the flight to December.

While the December flight did not reach space as planned, it did provide valuable learnings. In particular, it demonstrated the effectiveness of our safety systems in a live scenario, which reinforced the importance of our spaceflight system architecture and our robust testing and training programs. Subsequent to the flight, we have performed and completed our root cause analysis, which has put us in a position to move forward with our program.

I’d like to ask Mike Moses to share details about the December flight and the status of our upcoming flights.

Michael P. Moses — President, Space Missions and Safety

Thanks, Michael. Moving on to Slide 8. During the December test flight, the rocket motor halted as it was starting the ignition sequence because the onboard rocket motor computer lost connection. This system, like others on the spaceship, is designed such that it defaults to a safe state whenever power or communications is lost. We plan for and rehearse many potential scenarios, including one such as this and the pilots in this spaceship as well as the engineers and machine control were well prepared for this event.

Following the flight, we completed an extensive analysis to investigate why the rocket motor computer lost connection. And we are confident that we’ve identified and isolated the issue to be a reboot of the computer likely caused by electromagnetic interference, or EMI. Unity has been upgraded with a new flight control computer system, which offers a finer degree of pilot control. This system has performed well in our glide flight tests and is one of the components we are testing in our rocket-powered flight. Our team has determined that part of this new system is the source of higher EMI levels that were present on that last flight.

EMI is a relatively common challenge in aerospace. And in January, we proceeded with modifications that were designed to lower the EMI levels and better protect certain systems. After confirming through testing that these corrective actions would prevent a reboot of the rocket motor computer, we determined that we were ready to target a February launch. As we completed our pre-flight technical readiness checks for that February flight, some of our shipboard sensor readings showed fluctuations. And it became apparent that those changes that we had made to address EMI had unintentionally created additional noise within our sensory environment. While this noise not in itself is a safety issue, it did let us know that the EMI levels on the ship were impacting areas that while low in probability could potentially trigger another fail-safe scenario, possibly one that could prevent us from seeing a full rocket motor burn.

Our safety culture is built around the principle that everyone in the company has the ability to call attention to an issue. And that’s exactly the right approach when you’re dealing with human spaceflight. In this case, we flagged an EMI issue that needs resolution and we chose to delay the February launch to mitigate it further before flying. To reduce the EMI levels, we will be enhancing the new flight control computer with additional features. Once we complete these modifications, we’ll thoroughly test the system on the ground both in the lab and on Unity, following which we will recommence our flight test program.

Michael, back to you.

Michael A. Colglazier — Chief Executive Officer

Thanks, Mike. Just to reinforce Mike’s comments, one of the imperatives for me when I decided to join Virgin Galactic was confirming the company had an unwavering commitment to its safety culture. And that’s exactly what we’re seeing here. We know our spaceflight system works. We know we can go to space. And we are all very eager to get back to space. But when we see something that isn’t quite right, we tackle it hard and we fix it and then we move forward. And that’s what we’re doing.

Once this EMI issue is addressed to our satisfaction, we intend to return to the test flight program sequence that we’ve previously communicated. Our estimate to complete this work is eight to nine weeks, which suggests our next test flight will be in May. While we’re not going to place specific dates around our second and third test flights, we expect them both to occur this summer.

Turning to Slide 9. Our spaceflight system is built to serve three markets; private astronauts, microgravity research and suborbital training for professional astronauts. Our flight with Richard Branson will demonstrate our private astronaut experience and we will open sales for this market following this flight. Our microgravity research product includes spaceflights where two pilots fly racks of research payloads in the cabin or when two pilots fly researchers on board with their experiment for a human-tended research flight. The suborbital training product supports governments and countries that would like to include suborbital spaceflight as part of a training program for their professional astronauts.

With regard to these latter two markets, I’m pleased to confirm today that the Italian Air Force has partnered with Virgin Galactic on a flight that will demonstrate our capabilities for both human-tended research and suborbital astronaut training. They will be flying three spaceflight participants and multiple payloads and they will conduct astronaut training in addition to experiments during the flight. The Italian Air Force flight, which we expect to occur in late summer or early fall, will be a revenue-generating flight and we’ll conclude our product test program.

Moving on to our fleet expansion on Slide 10. I am really pleased to announce that we’ll be rolling out the first of our SpaceShipThree class of vehicles on March 30. And I’m excited to show you the sneak peek at the next ship in our future fleet. SpaceShipThree has been built with a modular design and uses enhanced fabrication and assembly processes, which will enable better performance in terms of flight rate and maintainability. And SpaceShipThree will provide a base for how we scale the future design of our spaceships.

Moving to Page 11. The first vehicle on the SpaceShipThree class will commence its ground testing following the March 30th rollout event. And we expect that the ship will begin glide flight testing this summer. The second vehicle in the SpaceShipThree class will begin assembly at this point as well. Our current flight test protocol for the first SpaceShipThree vehicle calls for four glide flights and four powered flights, and we expect the spaceflights will be revenue-producing. Following our initial glide flight test, there will be a multi-month period of analysis and modification to the spaceship before we bring it out for our final glide test and power test.

Given SpaceShipThree will not require our mothership during this period, we’ve decided to implement enhancements and accelerate to the long-term maintenance updates to our mothership, Eve, that will improve the predictability and frequency of flight rate. To avoid sequential downtimes, we will also implement some additional enhancements to Unity during this period that will also improve predictability of flight rate. We expect the combined analysis and refurbishment period for all three vehicles to run for approximately four months. At the conclusion of this period, we expect that VSS Unity will begin flying private astronauts and SpaceShipThree will be in a position to complete its flight testing, which we expect to be in early ’22. And refurbished mothership, Eve, will be the carrier aircraft for both vehicles.

Moving to Slide 12. As we’ve previously communicated, we are embarking on a multi-year effort that targets flying 400 flights per year per Spaceport. To do so, we will need to efficiently build more spaceships and more motherships. I’m pleased to share today that we have formally launched two new programs within Virgin Galactic that will be critical to this effort.

The first will be for our next-generation spaceship, the fourth generation, which we’re referring to internally as the Delta class of vehicles. We’ll be updating our engineering drawings to improve manufacturability and we will invest in our manufacturing facilities, processes and partnerships to improve cost and schedule efficiency. These vehicles are designed to have faster turnaround times due to the reduction in maintenance between flights.

While we will initiate our commercial service using the SpaceShipTwo and SpaceShipThree class vehicles, it is our Delta class of spaceships that we believe will really accelerate the economic growth of the company. The second and equally important new program is for our next-generation mothership. We plan to have the capability to fly multiple times per day at a Spaceport and we will need multiple motherships to do so. We have incredible teams that signed on these important programs and we will have more to say on these initiatives as we move forward.

Turning to Slide 13. We are attracting incredible talent to join Virgin Galactic as we accelerate our path to commercialization. Today, I’d like to highlight some of the leaders and advisors who will play key roles as we pivot to higher-rate production and widen our lens on the commercial opportunities ahead of us.

As announced earlier today, Swami Iyer will be joining Virgin Galactic as President of Aerospace Systems. Swami is going to lead our extraordinary team of engineers, designers and technicians and support teams who are building the fleet of vehicles and designing the future opportunities that underpin our business. Swami will join us later in March and he comes to us from GKN Aerospace, where he served as President of Advanced Defense Systems. With over 20 years of experience in commercial and highly classified aerospace, defense and cyber industries, Swami brings great depth and expertise in business expansion, while also having the deep process and production orientation necessary to lead our growth and scale. He is a powerful leader who is perfectly suited to lead our aerospace team into the next chapter.

In addition, we are thrilled to welcome Steve Justice to Virgin Galactic as our Vice President of Engineering. Steve brings incredibly deep leadership and engineering experience having spent four decades at Lockheed Martin Skunk Works. Steve will lead and grow a world-class engineering team supporting our SpaceShipThree, Delta class, propulsion and new mothership programs, as well as our longer-term efforts around high-speed point-to-point travel.

Turning to Slide 14. I am excited to announce that Doug Ahrens is joining us as our new CFO. With prior experience as both a public and private company CFO, Doug has led global teams to rapidly grow companies in complex technology and manufacturing environments. Doug’s leadership and relational skills, his capital markets and M&A expertise will all be incredibly valuable as we scale and monetize the business. Doug most recently served as CFO at Mellanox, a public company in the semiconductor industry, where he was responsible for all finance functions, leading up to the successful acquisition by NVIDIA Corporation in 2020. And a fun fact, like Swami and Steve, Doug is also a pilot; and Doug, in this company, you are in great company there.

Turning to Slide 15. Our business model depends on ramping the production of our fleet. Our commercial success will also be built on the quality of the experience we offer to our future astronauts and the impact of our consumer brand and marketing strategy that will launch our sales effort and support widespread consumer engagement. To support these objectives, we are incredibly fortunate to have attracted two groups of advisors who are lending their truly world-class expertise to these endeavors.

First, on the commercial front. Earlier this week, we announced that Joe Rohde will serve as our Experience Architect and he will lead a team of internal and external experts to develop and bring to life the overall experience for our future astronauts, their guest and other customers. An incredible creative force, Joe previously spent 40 years at Walt Disney Imagineering, where he led projects that brought to life some of Disney Parks’ most authentic and compelling experiences, including Disney’s Animal Kingdom.

I am excited to share that Blair Rich has been engaged to support our customer brand architecture and marketing strategy. Virgin Galactic story is big and bold and requires a consumer engagement approach that is on an equivalent scale. Blair’s spent over 20 years at Warner Brothers, most recently serving as President of Worldwide Marketing, and she is uniquely skilled to advise us at this embryonic stage of our brand and marketing efforts.

And finally, I am thrilled that Geoff Goodman has been engaged to lend his expertise to our revenue planning and new business development efforts. Geoff’s deep expertise leading Global Business Development for Disney Parks and as Chief Commercial Officer for the Disneyland Resort is immensely helpful as we build our strategic roadmap to monetize the business.

Moving to Slide 16. We’ve also recently announced the establishment of a Space Advisory Board. The Advisory Board will serve as an important resource to me and to our senior team as we start commercial spaceflight service, develop next-generation vehicles and work to inspire people on a global scale. The Space Advisory Board will consist of established world-renowned experts within the aerospace industry. And it currently includes George Whitesides, our founding CEO and former Chief of Staff of NASA, who will chair the Board.

Dr. Sandy Magnus, former NASA astronaut and deputy Chief of the Astronaut Office. Dr. Magnus is a member of NASA’s Aerospace Safety Advisory Board and she has served in leadership roles at the Department of Defense and the American Institute of Aeronautics and Astronautics. Chris Hadfield, a former astronaut who served as commander of the International Space Station. Chris has flown to space three times, including a trip to the Russian Space Station Mir. He has also served as Chief of International Space Station Operations at the NASA Johnson Space Center. And Dr. David Whelan, who previously served as Chief Scientist, Boeing Defense Space and Security and Director of DARPA’s Tactical Technology Office. David is a member of the National Academy of Engineering and a former member of the Defense Science Board and the Air Force Scientific Advisory Board.

I would now like to turn the call over to Jon for a financial update.