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Edited Transcript of SPCE.N earnings conference call or presentation 5-Nov-20 10:00pm GMT

·44 min read

Q3 2020 Virgin Galactic Holdings Inc Earnings Call Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Virgin Galactic Holdings Inc earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jonathan Joseph Campagna Virgin Galactic Holdings, Inc. - CFO * Michael A. Colglazier Virgin Galactic Holdings, Inc. - CEO & Director * Michael Patrick Moses Virgin Galactic Holdings, Inc. - President of Space Missions & Safety ================================================================================ Conference Call Participants ================================================================================ * Adam Michael Jonas Morgan Stanley, Research Division - MD * Myles Alexander Walton UBS Investment Bank, Research Division - MD & Senior Analyst * Noah Poponak Goldman Sachs Group, Inc., Research Division - Equity Analyst * Oliver Chen Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst * Peter John Skibitski Alembic Global Advisors - Research Analyst * Robert Michael Spingarn Crédit Suisse AG, Research Division - Aerospace and Defense Analyst * Ronald Jay Epstein BofA Merrill Lynch, Research Division - Industry Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you, and good afternoon, everyone. Welcome to Virgin Galactic's Third Quarter 2020 Earnings Conference Call. On the call with me today are Michael Colglazier, Chief Executive Officer; Mike Moses, President, Space Missions and Safety; 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 third quarter 2020. During today's call, we will make certain forward-looking statements within the meaning of the 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 the 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 those risks and uncertainties included in the Risk Factors section of our Form 10-Q for the third 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. 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 issued earlier today, which is available on the Investor Relations section of our website at virgingalactic.com. With that, I'd like to turn the call over to Michael Colglazier. -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [2] -------------------------------------------------------------------------------- Thanks, Michelle, and good afternoon, everyone. I hope you and your loved ones are keeping healthy and safe. I last spoke with you, I was 2 weeks into the job, and over the last 3 months, I've immersed myself in the company's engineering, operations, brand, commercial and financial areas, and I'm well underway and getting to know our incredibly talented team members. Let me start this call by saying that the exposure I've gained in just 3 short months has caused my excited to far exceed my expectations from when I joined. I'll start today with a brief recap of our Q3 accomplishments and an update of how we are working within the constraints of the COVID-19 pandemic. And then I'd like to give you a glimpse into some of the key insights and observations that I've had in my first 100 days. I'll then ask Mike Moses to share an update on our upcoming flights and a review of our flight test program, which I know many of you are eager to hear about. We'll talk about progress with our second spaceship, and then I'll share initial thoughts on our commercial plans and provide an update on reopening sales. After that, Jon will provide detail regarding our Q3 financial performance. With that, let's get started with a summary of our Q3 accomplishments, beginning on Slide 4. Despite the challenges brought on by the pandemic, we accomplished many milestones this quarter across the company. We made good progress preparing our spaceflight system for our fall flight, including completion of data analysis that followed the June 25 glide flight and installing the cabin camera system and the hardware needed to provide live video downlink. We completed build-out of the astronaut exclusive training facility at Spaceport America, and we also made solid progress on our second spaceship in preparation for rollout, including application of thermal protection system on the wing and fuselage, progress on systems installation and successful completion of pilot simulator evaluations. I'll share more about our second spaceship later in the call. We continue to advance our efforts around high-speed point-to-point travel in Q3, and I'm very excited by the team's early work and also by the long-term market opportunity within the hypersonic space. While we won't be covering high-speed during this earnings call, we will accumulate our progress and bring a deeper dive discussion to one of our future earnings calls. Turning to Slide 5. I'd like to speak to some of the impacts we are continuing to experience on our operations and our fleet production due to COVID-19. As you might imagine, building spaceships during a pandemic is materially less efficient than normal. Our team members, though, have been simply incredible, and everyone has stepped up to continue progress on our key initiatives while working under stringent COVID protocols. Many tasks involved in building spaceships require close quarters work, including inspection and maintenance task on our first spaceship in mothership and installation of systems in our second ship. This type of close-in work is still progressing, albeit slower than expected. Our team members have moved to staggered shifts to lower density, and we have reworked communications processes with engineers who are primarily working from home. While it continues to be difficult to quantify the full impact to our overall flight test program, we are still experiencing schedule and cost inefficiencies, and we expect these to continue into 2021. Despite the pandemic, our team has managed to keep our fall flight on track, which has been really inspiring to watch. There's tremendous dedication to our mission, and I'd like to take this moment to thank all of them for their commitment and their efforts. Turning to Slide 6. As I said upfront, after 100 days of learning, I'm incredibly excited about the growth potential of this company, and I'd like to tell you why. To start, we have 3 incredible assets. Our spaceflight system, meaning our spaceship, the the hybrid rocket motors and our mothership is one of a kind. It is first and foremost, design for safety, is elegant, beautiful, thrilling and unique. And it is built for the express purpose of providing a transformative experience for our customers. Asset number two is our intellectual property. We have built an incredible economic moat of experience, data and knowledge that's been accumulated over 15 years of developing our system. And asset number 3 is our talent. We have an incredibly diverse and talented team of people who've come together for the shared purpose. The second reason I'm excited is that the transformational experience we are creating is just so over-the-top fantastic. As you'd expect, I'm looking forward to bringing some of the creative development approaches that I learned in my prior roles to build in even more value as an incomparable experience can support our pricing strategies over time. And third, I'm excited about our strategy to monetize and scale this business. After 15 years of development and testing, we are at the cusp of achieving technological feasibility, and this marks an inflection point in the company's journey. Turning to Slide 7. The first chapter of Virgin Galactic has been to accomplish an incredibly difficult task, creating a spaceflight system that can fly humans to space, give them a gift of a changed perspective and then bring them safely home. We are close to completing this task, and the team has done an incredible job to bring us to this point. The next chapter of Virgin Galactic is to use this system to bring thousands and thousands of people to space and deliver our purpose of opening space to change the world for good. At a reach of this objective, we are embarking on a multiyear effort that will lead to flying not once a month or even once a week, but targets flying 400 flights per year, per Spaceport. I am very bullish on the transformational experience that we intend to deliver and the price points we believe we could command for this one-of-a-kind supply-constrained product. The approach we are taking suggests we could generate meaningful revenues of $1 billion a year per Spaceport. And a fully utilized Spaceport can create an incredibly powerful economic engine, an engine that will come first to New Mexico, but also an engine that should have great appeal across other locations in the world. If you turn to Slide 8, to accomplish this, we must refine the organization to shift from R&D to production. I mentioned before that we have some amazing world-class talent in this organization, and we have already begun to assign individuals to key roles as we make this shift. On this page is a group of fantastic leaders who will be playing important roles in our next chapter. One example is Tom Pugh, our Senior VP of Programs and Engineering. Tom came to us following a 32-year career at Lockheed Martin Advanced Development Programs. Tom started his career at Skunk Works supporting the SR-71 Blackbird, and he played a part in many programs, including the F-117 and the F-22 along with other initiatives. Tom and the other great team members on this page are only a small slice of the extraordinary people we have across all levels of the company. As we set the organization up for growth and scale, I expect to see us recruit additional talent to play key roles in our next chapter. And we will also become a great stepping off point for people's careers as Virgin Galactic has long been an incubator of talent for early-stage innovative companies. Turning to Slide 9. This image captures our Spaceflight System shortly after launch in New Mexico, enabling this to happen 400 times a year per Spaceport is a multiyear objective that accelerates now. As part of the transition from R&D to production, we plan to find spending efficiencies in early '21 as we get people in place so that we can then go forward as efficiently as possible. My experience and career have been built around taking incredible creative ideas, developing them in ways that are market and economically viable and driving them to scale to bring value to both customers and shareholders. And 100 days in, I am incredibly excited to now be taking Virgin Galactic on a similar path of this inflection point in the company's journey. With that said, our immediate focus is to complete our flight test program and get to a commercial operation. Turning to Slide 10. As we said last quarter, our plan is to fly our first spaceflight for New Mexico this fall with 2 pilots. We would then continue our flight testing with a second rocket-powered flight with a full cabin of mission specialists in addition to our pilots. Once analysis on that flight is completed, we will follow with a third rocket-powered test flight that would include our Founder, Sir Richard Branson. Richard's flight will be a momentous occasion and will provide us with important feedback on the cabin design and the astronaut experience. At this stage, we are on track for each of these sites. As always, our progress towards the next flight depends on the results of detailed reviews of our prior flights, and our engineers may recommend conducting additional test flights. For our fall flight, I am pleased to announce that we have entered our final flight preparation phase, and we expect to launch from Spaceport America between November 19 and November 23. We have a number of activities to complete between now and then, which could cause slight adjustments to the specific date. And as with any spaceflight, there are a number of external factors such as weather, that could also impact our launch date. We are extremely excited about this flight. It will mark the first human spaceflight ever to depart from the state of New Mexico. And this is a huge milestone for the people of the state, which has built the world's first commercial Spaceport. I'd like to ask Mike Moses, our President of Space Missions and Safety to share more about this upcoming flight. -------------------------------------------------------------------------------- Michael Patrick Moses, Virgin Galactic Holdings, Inc. - President of Space Missions & Safety [3] -------------------------------------------------------------------------------- Thanks, Michael. Since our last powered flight to space, we have relocated our teams to New Mexico, and we have integrated our operations with the local agencies here. New Mexico Spaceport Authority, White Sands Missile Range, FAA Albuquerque Center and several other New Mexico state agencies. We have also flown 2 successful glide flights as part of our testing program. During this time, we have made several planned upgrades to our spaceship, VSS Unity. In our current development and test phase, a big part of what we do on these flights is assess any modifications and changes that may be required to optimize the vehicles for operations, customer experience and of course, safety. One of the upgrades we made is in the passenger cabin. As you saw with our cabin reveal in quarter 3, we have put significant work into the interior design. We've installed the crucial elements of that cabin in preparation for the full testing of the customer experience in our upcoming quarter 1 flights. On our upcoming November flight, we will test the new cabin hardware, including our reclining seats with test mannequin strapped in the seats. We will also test the full complement of cabin cameras and downlink hardware, which will allow us to assess our capacity to live stream future flights. This upcoming November flight will also include test points to continue evaluation of our upgraded horizontal stabilizers and flight control system. The horizontal stabilizers, also known as h-stabs, are the flight control surfaces on the outboard side of the feather [bound]. We've made improvements to these services as well as upgrading the flight control system that drives them. This system was already in development for future spaceships and is now installed in Unity. These changes will increase performance during the boost phase of flight. Both the h-stabs and the flight control system have been extensively tested on the ground as well as in previous 2 glide flights here from Spaceport America. And now we plan to verify their performance during this next rocket-powered flight. Another key feature of our November flight is that the cabin will be outfitted with 4 payload racks. 3 of these will carry NASA payloads as part of NASA's flight opportunities program, making this of revenue-generating flight. Carrying payloads means our pilots will be flying the vehicle slightly differently to how they would fly the vehicle with future astronauts on board. Once in space, we will pitch the vehicle 270 degrees following boost to get into the reentry altitude as soon as possible. This maneuver will maximize time for payloads to remain in zero-gravity data collection mode. I'd like to point out here that a great part of our system is that it is pilot flown as this allows us to fly different mission profiles and to more specifically meet the needs of our different customer markets. In addition to the NASA payloads, for the first time, we are enabling our team members to include small personal items as a payload that will fly to space on their behalf. It takes our entire company pulling together to achieve our mission, and this is a wonderful opportunity to share this momentous occasion with them. Finally, this next flight will also contribute to our current FAA commercial license. As we said on our last earnings call, we need data from a rocket-powered flight to complete the final 2 verification and validation elements that are required by the FAA under our current commercial spaceflight license. Back to you, Michael. -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [4] -------------------------------------------------------------------------------- Thanks, Mike. Upon successful completion of this November flight, including a satisfactory review of the post flight data and check-out of the vehicles, our flight test program will move to the next phase. This will begin with our second rocket-powered flight for New Mexico, which we expect to launch in Q1 when our spaceflight specialist will test and verify cabin interior hardware, a waitlist experience in space and our live stream camera systems. We expect the third rocket-powered test flight, also planned for Q1, will include our Founder, Sir Richard Branson. I've been speaking to Richard frequently about his flight and needless to say, he is incredibly excited, and we are all looking forward to seeing this wonderful milestone arrive. Turning to Slide 11 and our second spaceship. Our next spaceship is planned to roll out for ground and flight testing in Q1. We had originally planned to have this vehicle ready for rollout by the end of the calendar year, and this is one of the areas where the inefficiencies of operating with pandemic protocols have contributed to some delays. We have an exciting virtual event planned for the unveiling of this second space yet, and I don't want to spoil that, but there are some important things to note about this rollout. For context, rollout means the vehicle is ready to commence its comprehensive Integrated Vehicle Ground Testing program, or IVGT for short, one of the many acronyms I've been learning in my first 100 days, I might add. During IVGT, we will test the functionality of all the installed vehicle systems. This rollout will be a huge accomplishment for the company. We were able to take lessons learned from the build of SpaceShipTwo Unity to enhance the fabrication and assembly processes to deliver the vehicle in a more streamlined and efficient manner. And this spaceship differs from VSS Unity and that it has been designed for higher rate service but reduced turnaround time between flights. Higher flight rates with minimized downtime improve our efficiency as we scale and the learnings incorporated into this ship's design will help form the basis for how we design our spaceships at increased rate and efficiency in the future. In terms of our third spaceship, we expect to commence final assembly in 2021. Moving to an update around our commercial plans on Slide 12. I believe Virgin Galactic is at the vanguard of the experience economy, as we will be providing our customers with a transformative journey, a journey that starts when they join our future astronaut community, reaches a peak during the days they will spend at Spaceport America and then becomes a part of their lives for long after their spaceflight is complete. Now this is a creative and a business model, which I know how to scale and monetize, and I'm looking forward to pairing our world-class team of aerospace and spaceship designers with a team of world-class creative and experienced designers to ensure this transformative journey is like no other. We will be materially enhancing the experience for both future astronauts and also for their friends and family who will join us in the days leading up to the flights in New Mexico. These efforts are targeted to support a revenue model that expands beyond the astronaut ticket sales, and I look forward to sharing more of our plans and designs in upcoming calls. As I have learned more about the company, I have been struck by how our 600 future astronauts are far more than ticketholders for an upcoming spaceflight. These future astronauts have joined a truly incredible community with benefits that precede their flights and extend well after they have achieved their astronaut status. I believe the LTV of this community is an enormous asset and opportunity for our company as we begin to grow. We will restart sales and add new members to this future astronaut community following Sir Richard Branson's flight. As promised, we will provide the first sales opportunity to those people who have registered for our Spacefarer program, a group that currently numbers close to 900. And with the planned reopening of sales, we will be retiring the Spacefarer program at the end of the calendar year. I would now like to turn the call over to John for details about our third quarter financial results. -------------------------------------------------------------------------------- Jonathan Joseph Campagna, Virgin Galactic Holdings, Inc. - CFO [5] -------------------------------------------------------------------------------- Thanks, Michael. Looking at Slide 14. Our third quarter results reflect the progress we have made completing the final steps in preparation for VSS Unity's first powered flight from Spaceport America and our ongoing work ahead of commercial launch. We remain in a strong cash position and ended the quarter with cash and cash equivalents of $742 million as of September 30, 2020. In the period, we completed a public offering of 23.6 million shares of common stock at a public operating price of $19.50 per share, generating over $440 million in net proceeds. Net loss for the quarter was $77 million compared to a $63 million net loss in the second quarter of 2020. The increase in net loss primarily -- due primarily to additional cash charges and noncash stock-based compensation costs, including those incurred in connection with the hiring of our new CEO and the appointment of our Chief Space Officer as well as increased costs incurred to ensure proper COVID-related safety standards. Non-GAAP SG&A expenses for the quarter were $26 million compared to $23 million in the second quarter of 2020. Looking forward, for Q4 and later, we expect noncash stock-based compensation expenses to increase due to the scheduled grant of additional equity awards, which relate back to the closing of our transaction for Social Capital Hedosophia. GAAP R&D expenses for the quarter were $46 million compared to $37 million in the second quarter of 2020. The increase in R&D expenses primarily reflects a onetime $5 million noncash charge related to the identification of certain inventory items determined to not meet our policy for capitalization before achieving technological feasibility. As a result, similar to other vehicle build costs, these items were expensed to R&D during the quarter. In addition, incremental cash and noncash personnel costs as well as travel costs incurred as a result of more frequent employee travel between locations contributed to the increase. Non-GAAP R&D expenses for the quarter were $43 million compared to $35 million in the second quarter of 2020. Adjusted EBITDA, which excludes stock-based compensation, totaled negative $66 million for the quarter. This is compared to adjusted EBITDA of negative $54 million for the second quarter of 2020. Cash paid for capital expenditures was $4 million in the third quarter of 2020 compared to $6 million in the second quarter. Capital expenditures in the third quarter consisted primarily of vehicle tooling and other equipment costs. Turning to Slide 15. I'd like to run through some of the line items in our income statement to provide more context on the drivers behind some of these numbers in our income statement. As expected, we did not generate revenue during the quarter given our continued focus on flight test. We anticipate modest revenue related to the payloads, which will be flown in the fourth quarter, as Michael outlined earlier. Turning to R&D. As a reminder, our vehicle costs currently sit within R&D and will continue to be expensed there until we achieve technological feasibility. What we mean here is that once we have completed a powered test flight to space with 4 passengers in the cabin, we will begin capitalizing our vehicle costs. Our R&D expenses for the quarter totaled $46 million compared to $37 million in the second quarter of 2020. As I outlined previously, this reflects a $5 million noncash charge related to the expensing of certain inventory items to R&D and an increase in personnel and other costs. Our SG&A expenses for the quarter totaled $31 million, an increase of $5 million compared to the second quarter of 2020 primarily due to the granting of equity awards, including those granted to our CEO and Chief Space Officer, as previously mentioned. Turning to Slide 16 and looking at the cash flow statement. Free cash flow was negative $59 million for the quarter, which was generally in line with our Q2 free cash flow of negative $58 million. Although we are not providing specific guidance, we expect our negative free cash flow to increase in the fourth quarter of 2020 due primarily to the typical timing of annual premium payments for certain insurance coverages, which are concentrated in Q4. I would now like to turn the call back over to Michael. -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [6] -------------------------------------------------------------------------------- Thanks, Jon. I'll now hand over to the operator for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question is from the line of Adam Jonas with Morgan Stanley. -------------------------------------------------------------------------------- Adam Michael Jonas, Morgan Stanley, Research Division - MD [2] -------------------------------------------------------------------------------- Just a couple of questions. First, on the COVID issues that you highlighted. You expect them to persist into the first quarter, yet the Branson flight is on track for Q1. Is this because the Q1 Branson flight already factors in these delays? Or is it that the delays just aren't as significant for that part of your operation due to differences in working conditions in close quarters? -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Adam. This is Michael. We are seeing impacts from COVID. As I said, there's a lot of close quarters work that is just delayed as we spread out and follow our protocols. What we've been doing, though, is really focusing our talent and the resources that we can get into the ships on our flights, the upcoming flights. That's one of the reasons why you see a bit of a delay coming in our second spaceship coming off. So today, we do believe we have in the schedule the ability to successfully do this flight, like I said, November 19 to 23. We expect the second one to go off in Q1. And it will probably be the end of Q1, but we do expect our third rocket-powered flight to go still within that quarter. Of course, we're going to assess the data after each one of these flights, and there's always things that we may learn. But that is our expectation. -------------------------------------------------------------------------------- Adam Michael Jonas, Morgan Stanley, Research Division - MD [4] -------------------------------------------------------------------------------- A question on the modest revenue that you highlighted for the payload. How should we be thinking about that test payload revenue for the quarter, in that order of mag? -------------------------------------------------------------------------------- Jonathan Joseph Campagna, Virgin Galactic Holdings, Inc. - CFO [5] -------------------------------------------------------------------------------- Yes, sure, Adam. Yes. This is Jon. Yes, I mean, I think the best way to look at that is it's probably in the sort of $400,000 range for the payload. There's 3 NASA payloads that will be on that flight that we have planned, as Michael mentioned earlier, for later this month. -------------------------------------------------------------------------------- Adam Michael Jonas, Morgan Stanley, Research Division - MD [6] -------------------------------------------------------------------------------- Okay. That's great. And just finally, if I can slip one more in. Your price per ship. Can you remind us of the kind of telemetry of cost reductions? Obviously, your spaceship manufacturing capabilities are proprietary and something that gives you that edge, that moat. If you could tell us kind of from first to second, now that you're getting really, really close to final testing for the second ship of getting to that phase, what the price is? And then as you start seeing line of sight to the third spaceship, just give us an order of magnitude of how much the cost per ship are declining? -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [7] -------------------------------------------------------------------------------- Yes, Adam. So on that point, I think we're still evaluating those reductions that we're going to have, as Michael mentioned, as we move from an R&D-focused to a production-focused over the coming months here, in particular. We'll continue to look at how we're driving down those costs for future ships from second and third and onward. At this point, we're not in a position to sort of give an estimate as to what those cost reductions are. But as we are able to, we will certainly share that with you. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Your next question is from the line of Robert Spingarn with Crédit Suisse. -------------------------------------------------------------------------------- Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [9] -------------------------------------------------------------------------------- Michael, I wanted to ask you sort of a longer-term question. You mentioned the $1 billion per year per Spaceport. I guess that's a mature revenue number. And I wanted to understand that a little bit better, just what the flight portion of that is relative to the ancillary because that number is about double where we would get with 300 flights, but you mentioned 400. So it sounds like you're going to perhaps utilize the spaceships a little bit more. And I was hoping you could elaborate on that, maybe talk about if pricing bridges some of that gap between our number and yours? And maybe talk a little more about the ancillaries. -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [10] -------------------------------------------------------------------------------- Thanks, Rob. One thing I am really, really bullish on is the nature and truly transformative experience that we're going to be providing. I spent time talking to those in our company that have made this journey, and it will be incredible. I am also looking forward to expanding what we'll do. I think we focus so far on the spaceflight itself, which, of course, is going to be the peak emotional part. But this transformative journey really starts from the moment people sign on with us. And when they come to New Mexico, we will build and experience kind of bookending around the flight itself. That's one where I believe there will be a lot of opportunity for friends and family to join in and participate in parts of that. And then we think, of course, the experience will carry on. We're going to be adding into what that -- the value that, that experience will deliver. And I think when we add value in there, we will not have so much of a demand problem, it's more about supply. So I do think that will help support pricing over the experience as we go. And we will continue to look to ways to expand and widen the revenue footprint beyond the ticket, I'll call it, on the spaceflight itself. And we're looking forward to that. So I think that $1 billion does reflect those things. -------------------------------------------------------------------------------- Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [11] -------------------------------------------------------------------------------- Is it too soon for me to ask you to quantify that in terms of ancillaries relative to ticket price? It sounds like it could be as much as 50%. -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [12] -------------------------------------------------------------------------------- Yes. I think our pricing strategy is going to evolve off the experience. But one of the things that I am excited about is when you have a truly incredible product and one that will be supply constrained as opposed to demand constrained, it gives a lot of flexibility into our pricing model. So I am looking forward to being able to share in future calls what our experience looks to be and will bring pricing strategies around that experience at that time. -------------------------------------------------------------------------------- Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [13] -------------------------------------------------------------------------------- Okay. And then just to finish, just on the time line, I wanted to clarify, is the brands in-flight a third test flight, third powered test flight? Or is it built as a first commercial flight? How should we think about that? -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [14] -------------------------------------------------------------------------------- Sure. We, as you know, are continuing our flight test program, the first one coming up on November 19 to 23. The second flight test program, we think, will be in Q1, and that's where we'll bring, for the first time a full cabin, full of 4 passengers that go, those would all be employees. The flight with Richard will be part of the flight test program. And I think who better to assess the experience of what we're doing here. Our flight test is so far mostly focused on the technology and how we're getting up there. We also want to make sure that we are testing the weightless experience, how the cabin environment will go, and we think Richard is not only our Founder, but kind of the venture in chief as the first person to join on that flight. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Your next question is from the line of Myles Walton with UBS. -------------------------------------------------------------------------------- Myles Alexander Walton, UBS Investment Bank, Research Division - MD & Senior Analyst [16] -------------------------------------------------------------------------------- I was wondering if, Michael, you could comment on the transition here from retiring the One Small Step to initiating the ticket sales. And in particular, the retirement of the One Small Step, is that because you want to maintain scarcity in the funnel? And how much of the One Small Step population do you expect to accrete to the astronaut deposits? -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [17] -------------------------------------------------------------------------------- So we're looking forward, Myles, I, by the way, to opening up sales following the flight we do with Richard Branson. We -- one thing I have learned in speaking to some of our future astronauts is how important and incredible being part of this community has been to them. And so we're going to be thoughtful how we open those up. But the One Small Step program has been very helpful. It's -- we are a little shy of 900 people so far that have registered interest. And as we look to really opening sales up, we are going to do what we promised, and we will start with calling each one of those people and assessing their interest in joining this future astronaut community. But once we've decided is trying to reopen sales, I think that's where people are going to shift the focus there. And so it's not really much more complicated than that. I think the Spacefarer program has been really helpful in letting people sign up and register a degree of interest, but we're looking forward to now fully reopening sales following Richard's flight. -------------------------------------------------------------------------------- Myles Alexander Walton, UBS Investment Bank, Research Division - MD & Senior Analyst [18] -------------------------------------------------------------------------------- Okay. And maybe one other question. In terms of after the Branson flight, is that when you'll go into significant uptake in pace of flights? Or should we think of that as something that happens much later in '21? -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [19] -------------------------------------------------------------------------------- I think as you've probably heard from us before, as we close out flight test to achieve technological feasibility and then push into commercial service, we do plan to take that in a slow and measured way. We're going to focus on safety first, as we always do. But we also really want to focus and ensure we get the experience just right. The objective of all the people that we have signed up and who will come in the future is to truly have this transformative life experience. We want to make sure that is really dialed in. So you'll see us do a slow and measured start, and then we will be increasing that also as we increase our fleet size. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Your next question is from the line of Ron Epstein with Bank of America. -------------------------------------------------------------------------------- Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [21] -------------------------------------------------------------------------------- So Michael, just a big picture question for you. You've been at the company now, what, maybe 100 days, a little longer. But what's been the surprises? What's been the challenges? And if you can kind of give us your 100-day perspective. -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [22] -------------------------------------------------------------------------------- Sure. A couple of surprises. I was really pleasantly surprised with the depth of talent that we have and really going up and down across all levels of the company. And for a company doing what we're doing, it is grounded in talent. So that was really excellent to see. As I mentioned earlier in the call, the quality of the assets that we have is really incredible between the spaceflight system itself, but also what we've developed in our learnings, having gone through 15 years of flying and designing these things is really important. What I am also excited about is the ability now to monetize and scale this business. And I think this is -- what's come to date has really been an incredible first chapter. We're on the cusp of technological feasibility of this. And now as we move into the second chapter, it is going to be about growing the business, and that will require a shift in footing for us as we move away from third type and R&D focus and into manufacturing for scale. And I'm really excited, yes, surprised that we have such great talent that we can already put into some of those key roles as we now look to build the business. -------------------------------------------------------------------------------- Ronald Jay Epstein, BofA Merrill Lynch, Research Division - Industry Analyst [23] -------------------------------------------------------------------------------- And maybe on a little bit of a different question. It seems like maybe we're on the cusp of a change in Presidential administration and the Trump administration was very, very friendly on commercial space, right? If nothing else, the administration was a big believer in space. Secretary Ross and Department of Commerce was pushing commercial space in very positive ways. If we were to see a change in administration, do you think we'll see a change in how they feel about commercial space and not just the investments in commercial space, but Department of Commerce was real cheerleader for commercial space. I mean what do you expect to see happen if we see a change? -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [24] -------------------------------------------------------------------------------- Well, like, I'm sure everybody on the call, I have been following the elections closely. I appreciate your time breaking away from that to join us today. One thing I will say is really regardless of where the next administration plays out, over our 15 years, we've got a really great history of working with administrators and leaders and government on both sides of the aisle. And I fully expect that will continue. We have excellent relationships with government teams. And I think we're going to have a good path forward regardless where the election plays out. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Your next question is from the line of Oliver Chen with Cowen. -------------------------------------------------------------------------------- Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [26] -------------------------------------------------------------------------------- Michael, in your remarks, you mentioned customer lifetime value. How are you thinking about that opportunity? And also scaling, a creative and experience, like what will be more challenging or the bigger opportunities as you seek to scale that part of the equation? Our surveys indicate a lot of pricing leverage on both the raising as well as lowering. And then also just from a modeling perspective, as we think about Spaceport, the 400 sites per year, what does that assume for base ships? And as we look longer out, the number of Spaceports and the opportunity ahead. -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [27] -------------------------------------------------------------------------------- Thanks, Oliver. On the first part of that. Well, let me take the second part first, if you don't mind. So when I think about 400 flights per year, we obviously are going to need several motherships to accomplish that in a space for many spaceships and obviously, lots and lots of rocket motors. In our current footing, we've been focused on flight test. And in order to now pivot to be able to supply the demand that we expect here, we are going to have to ramp up manufacturing in that regard. But I think it will be on the order of a few motherships, many space ships, and like I said, a rocket motor for every flight as we go. When we reach that, and I think $400 million is a good approximate that will be of interest in other parts of the world. How many parts, I think we'll see in the future, but I'm very excited about that. And I'm sorry, Oliver, would you mind just restating the first part of your first question for me one more time? -------------------------------------------------------------------------------- Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [28] -------------------------------------------------------------------------------- Just thinking about customer lifetime value and maximization there and not likely intersects with scaling, creative and experiential as well as plans for pricing. So LTV and what you see, any hypothesis... -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [29] -------------------------------------------------------------------------------- Thank you. Obviously, I'm coming from a background where a relationship with a customer is not a one-and-done experience. And while we believe this is truly going to be a transformative experience, I don't think it's a once in a lifetime experience. I think the opportunity to fly and get this perspective from space is going to be so compelling that people will want to bring others with them as they come back and do that. And I think as we look over time to scale to different markets, it will be a different experience from different Spaceports. So the fact that right now, as I talk to our 600 future astronauts here, the commitment to the community that they have joined and the kind of shared journey that they're on has been really powerful. I think there's a lot of opportunity in that, but we'll focus on delivering value for our customers. And there are, I think, a lot of ways that will play out over time. -------------------------------------------------------------------------------- Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [30] -------------------------------------------------------------------------------- Okay. And on Spaceports, the number of Spaceports globally. And how will you approach Spaceport unit expansion and thinking about the capital required there and/or partnerships to make it more capital-light possibly globally? -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [31] -------------------------------------------------------------------------------- Thanks. I think at this stage, as you would imagine, we're really focused in the near term on completing our flight test, getting our technological feasibility proven, starting to get commercial operations going in and then growing into a fully utilized Spaceport. So I think it's probably a little premature for me to put for thoughts on how and how we'll fund future Spaceports. But I do believe the economic engine that will be generated here will provide a lot of opportunity, and I think it will be good partnerships with as we expand around the world with that. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Your next question is from the line of Noah Poponak with Goldman Sachs. -------------------------------------------------------------------------------- Noah Poponak, Goldman Sachs Group, Inc., Research Division - Equity Analyst [33] -------------------------------------------------------------------------------- Just want to make sure I have it clear that the move from October to November for Unity's first powered flight is 100% completely COVID restriction-related as opposed to anything technical or otherwise? And then how aggressive or not do you feel about the spacing you now have between powered flight 1, 2 and 3 with Unity? -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [34] -------------------------------------------------------------------------------- On the first part of your question, Noah, not actually COVID at all on that. We have always said we will be flying our first powered flight in New Mexico in the fall. What I think you may be referring to is, is part of an FCC license request for spectrum that we'll use as we're transmitting our downlinks. We had to open up a flight window and that flight window was put out in October 22. That was never planned to be part of when we be flying Unity here. So we're feeling good on our flight window there. As to spacing, well, I'll say this. At this stage today, we feel good about the second flight in Q1. We feel good about our third rocket-powered flight. It will be at the end of Q1. But with that said, as we always do, we take each of these flight by flight. And that's very purposeful. We are going to go forward prudently with safety, absolutely is the first thing in mind. And so what we do after each of these flights is we analyze all the data that comes from it. We look at the ships as they come back down, and we make our decision there. So it's always possible that our engineers will find something that they want us to retest or additional tests they would like. But as we sit with our knowledge today, I feel good about the upcoming flight dates. -------------------------------------------------------------------------------- Noah Poponak, Goldman Sachs Group, Inc., Research Division - Equity Analyst [35] -------------------------------------------------------------------------------- Okay. With regard to the second vehicle, can you tell us more about the milestones that are -- will be in the schedule after you've rolled that out? I mean will that -- how much of a full test program will that have? What kind of timing will we be looking at with that vehicle? -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [36] -------------------------------------------------------------------------------- Sure. So our second spaceship will have come off and for rollout in Q1. And when we bring this out into rollout and that panacea to my learning of IVGT, what we'll start with is ground testing. As we finish ground testing, then we will move into flight testing. And we will carry through the same type of data analysis that we've had here. So right now, we won't be giving guidance on the timing of all of those pieces, but we are excited because this ship, I do think will give us a ship that provides higher rate, higher service, shorter turnaround time, and that will be a model for our ships going forward. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- And your final question is from the line of Pete Skibitski with Alembic Global. -------------------------------------------------------------------------------- Peter John Skibitski, Alembic Global Advisors - Research Analyst [38] -------------------------------------------------------------------------------- Just a couple quick ones. Getting back to the discussion on the math of getting to 400 flights. And one of your slides mentioned the second ship is designed for higher rates. I think I have in my model each ship being able to do 5 flights per month. Can you talk about, at this point, the second ship, can it do 6, 7? How are you guys thinking about these follow-on ships and the rate that they can do? -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [39] -------------------------------------------------------------------------------- Well, I think for today, we're going to focus more about the target of where we're going and to hit 400 flights a year as we build our manufacturing into that, obviously, will be ships that move at a reasonably high-return rate. In the overall model, I think the ships themselves, the main factor is how quickly we can turn them, less about probably the specific cost of the ships. And so that's part of the learning that we will have going forward. I think it's probably a little early to give guidance in that regard. But we do know the second ship is designed to have a better turnaround time. It's designed in a modular fashion that lets us get to maintain it in a more quick and easy fashion. But as -- one thing we will be committing to is as we do get the clarity and learnings here, we will be committing to inform all of you about those things so that you can be closer with your own modeling. -------------------------------------------------------------------------------- Peter John Skibitski, Alembic Global Advisors - Research Analyst [40] -------------------------------------------------------------------------------- Okay. That's great. I appreciate it. And just last one for me. A little technical, but I'm curious on the upgrades to the flight control system, particularly the horizontal stabilizer that you guys mentioned, maybe Mike mentioned. But what does that do for this ship? Does that allow you to reach a higher altitude or just maybe improve the safety or smoothness of the ride? Can anybody speak to that maybe? -------------------------------------------------------------------------------- Michael Patrick Moses, Virgin Galactic Holdings, Inc. - President of Space Missions & Safety [41] -------------------------------------------------------------------------------- Yes. Pete, this is Mike Moses. I can answer that one. So the horizontal stabilizers are actually one of our primary flight controls that we use. So when we drop the vehicle, we're flying kind of straight levels and then the horizontal stabilizers turn and allow us to bite in and turn the ship up on its tail and boost straight up. So they're a very critical system for us. So anything we can do to kind of improve their reliability, the control that they have, the fine-tuning really does help us with performance because it allows us to net curve, if you want to sort of speak of that boost profile. So it really gives us a little more robust system. And maybe more importantly, talking to what Michael just talked about, it allows us some room to improve in the future even more with an electronic system that has software upgrade capability. And again, we were developing this for future ships, and we decided to go ahead and put it in Unity now to get some run time on it. But it's got some great expansion capability for us in the future as we look to a future of higher flight rates. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Thank you. And at this time, I will turn the call back to Michael for closing remarks. -------------------------------------------------------------------------------- Michael A. Colglazier, Virgin Galactic Holdings, Inc. - CEO & Director [43] -------------------------------------------------------------------------------- Hey, I'll be brief here. First, I just want to thank everybody for joining this call. There's a lot going on at the election news, and I appreciate you taking the time. I do want to take a moment to thank our entire team at Virgin Galactic. People have been working so hard preparing for this first powered flight for New Mexico, both people in Mexico, people in Mojave and the support has been incredible. I know I speak for all of us when I say we cannot wait for this upcoming spaceflight. And to all of you on the call, we appreciate your continued interest and support of our company. We look forward to updating each of you on our progress after the spaceflight in a few weeks and during next quarter's earnings call as well. Thanks, everybody. Have a good day. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- And this does conclude today's conference call. We thank you for your participation. You may now disconnect.