On September 11, 2023, Kristine Liwag, Executive Director and Head of Aerospace & Defense Equity Research at Morgan Stanley, hosted a discussion with Adam Spice, Chief Financial Officer of Rocket Lab. This conversation took place during Morgan Stanley’s 12th Annual Laguna Conference.
The discussion provided insights into Rocket Lab’s current market position, launch capabilities, and ambitious plans for the future. Spice shared details about the company’s flagship Electron rocket, the development of the new Neutron launch vehicle, and Rocket Lab’s strategies for growth in the competitive space launch and systems market.
Rocket Lab’s Electron is the second most used launch vehicle in the U.S., offering affordable small dedicated launches at around $8 million compared to $40-$50 million for previous competitors in the space.
Rocket Lab is developing Neutron, a new medium-class rocket, to provide an alternative to SpaceX’s Falcon 9, aiming to launch it by mid-2025.
The demand for small dedicated launches is growing, with Rocket Lab having a backlog of over 36 Electrons and planning 15-18 launches this year.
Electron is also being used for hypersonic test campaigns, which is the fastest-growing part of Rocket Lab’s launch portfolio.
Neutron aims to provide a cost-effective and optimized medium-class launch solution, leveraging Rocket Lab’s experience with Electron.
SpaceX currently has a monopoly on medium-class launches, making it uncomfortable for government and commercial customers who need alternatives.
Neutron is designed to offer different payload capacities depending on the mission, with a maximum of 15 tons expendable and 8 tons reusable back to the pad.
Customers face long waiting lists for Falcon 9 launches (up to 2 years), highlighting the need for more launch capacity in the market.
Rocket Lab’s Electron has launched 52 times with a great success rate, and this heritage is expected to help build a healthy backlog for Neutron.
The launch business is very fixed-cost intensive, making launch cadence a critical factor for profitability.
Rocket Lab has the capacity to scale up to a realistic 50 Electron launches per year, with facilities in New Zealand and Virginia.
The market has seen a significant increase in satellite launches, primarily driven by SpaceX’s Starlink, but this has been limited to one provider.
Future opportunities for growth in the launch market include government platforms and new constellations like Amazon’s Kuiper.
Rocket Lab receives most (~90%) of the cash up front before launches, making revenue recognition lumpy but providing financial stability.
The company has seen a steady increase in ASPs from $5 million in 2018 to $8.2 million currently, with production costs decreasing due to efficiencies in BOM, labor hours, and amortization of buildings and machinery.
The company aims to achieve a gross margin of 45-50 points by increasing launch frequency to two per month, with reusability potentially adding 500 basis points of margin improvement.
The switch from helicopter to ocean recovery for rockets was driven by cost and operational efficiency, allowing for more recoverable launches.
Revenue recognition for launches is challenging due to its point-in-time nature, but the company maintains a positive working capital model by collecting most of the cash in advance.
The company anticipates normal lumpiness in revenue due to the dependency on customer payload readiness, which can be delayed by technical issues.
Pricing for Electron rockets has increased to $8.2 million, with limited competition in the small launch market, allowing for potential further price increases.
The company is focusing on volume over maximizing ASP to achieve better margins, aiming for a 40-50% gross margin with Electron launches.
Neutron’s sales strategy differs from Electron’s, with less pricing pressure in the medium launch market, and aims to avoid low-dollar value backlogs.
The space systems business has grown rapidly, becoming a prime contractor for U.S. government missions and developing capabilities for sophisticated spacecraft.
The company’s long-term vision includes deploying its own payloads using Neutron, similar to SpaceX’s model, to create recurring revenue streams.
Neutron is seen as the key enabler for future constellation opportunities, with the company aiming to provide end-to-end solutions from spacecraft design to data management.
The company is open to inorganic growth opportunities in the applications market, leveraging its capabilities to support constellation operators.
