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

Good afternoon. My name is Desiree and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's second quarter 2026 earnings conference call. [Operator Instructions] Thank you. I will now turn the call over to [ Ken Michaels ], Vice President, Finance. Please go ahead.

Thank you. Good afternoon everyone. Welcome to Virgin Galactic's second quarter 2026 earnings conference call. On the call with me today are Michael Colglazier, Chief Executive Officer, and Doug Ahrens, Chief Financial Officer. Following our prepared remarks, we will open the call for questions. Our press release and slide presentation that will accompany today's remarks are available on our Investor Relations website. Please refer to slide 2 of the presentation for our safe harbor disclaimer. During today's call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions and, as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements made on this call. For more information about these risks and uncertainties, please refer to the risk factors in the company's SEC filings made from time to time. You are cautioned not to put undue reliance on forward-looking statements, and the company specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call, whether as a result of new information, future events, or otherwise. Please also note that we will refer to certain non-GAAP financial information on today's call. Please refer to our earnings release for a reconciliation of these non-GAAP financial metrics. I would now like to turn the call over to our CEO, Michael Colglazier, who will begin our discussion on slide 3.

I'm pleased to share our recent tranche of spaceflight expeditions has booked out ahead of schedule, demonstrating strong demand from a wide range of customer segments. The allotment we had held at the $750,000 price point was oversubscribed, and we have added over $50 million to our expected future spaceflight revenue. We've moved our first commercial spaceflight to this coming February to allow additional time to complete avionics and systems installations. No single issue is driving the schedule push. Rather, we have experienced modest time duration extensions across hundreds of relatively small but important installation tasks involved in the first build of our new spaceship. Our teams bring disciplined urgency to their efforts, and they have made outstanding progress on both our first ship and the ship sets that are following. This progress required more time than we expected ahead of our integrated vehicle ground testing. It was needed to complete the work with the thoroughness and precision we demand. This work is wrapping up in the next couple of weeks, and we expect to begin integrated vehicle ground testing later this month. We've incorporated the learnings from this first build into the schedule forecast for our second ship, which we now expect will join the fleet in New Mexico in March. That schedule continues to support the cadence of flight rate that we shared last quarter, and we maintain our projections to deliver positive quarterly cash flow within 2027. I'll share some insight on the sales process and the additions we've made to our astronaut community, followed by some detail into the build process for our first spaceship, our static test ship, and our second spaceship. I'll then pass it over to Doug for our financial discussion and further context into the unit profitability of our spaceships. Turning to page 4 in the slide deck. We now have over 700 members within the Virgin Galactic astronaut community, and we're very pleased to welcome our most recent arrivals. This new group, like those who have been in our community for a while, are passionate about space. As a cohort, they represent a diverse range of organizations and individuals who broaden our target market. One new trend we are seeing is an increase in multi-seat bookings. Approximately 60% of this new cohort is part of a group of some form or another, ranging from multi-generation expeditions of all sorts to research missions, corporate charters, and nonprofit bookings. Many are adventurers, but most are joining the community for the deep, transformative experience that is enabled with our spaceflights. Many of our new arrivals see space as a platform for broader initiatives, including science-based and nonprofit endeavors. Consistent with our prior statements, we have now closed active bookings as we onboard our new astronauts and engage them in the community. We have retired the $750,000 price point, and we plan to open a new tranche of spaceflight expeditions this fall at higher price points. Moving to page 5 to discuss spaceship progress. I'll start this section with 1 of the many fun facts around our spaceships. We have over 12 miles of wire running between the various computers, systems, and sensors throughout the entire ship. Every 1 of those wires is designed, fabricated, bundled, and connected with detailed precision. And the image on this page gives you a glimpse into the complexity of installation within the unique configuration of our spaceship. The progress our team has been making is incredible, and they are doing their work with thoroughness, precision, and quality. As I mentioned at the outset, many of the hundreds of preparation and installation tasks have required more time to complete than we had estimated. We will always take the time that's needed, and that has caused us to move our first spaceflight expectation to February. We take the time needed for on-ship work and related engineering and quality assurance processes. We also have added resources and improved process management to minimize the overall time impacts. We're operating with 2 shifts, 7 days a week, and I'm very proud of and grateful for the massive joint effort of our team and the extended workforce we have brought in from California, New Mexico, Bell Textron, and partner agencies to complete the effort. These added investments will show up as incremental spending in Q3 and to a lesser degree in Q4. These added expenses bring high return by helping us maintain our expected flight cadence in 2027. On page 6, we're highlighting progress with our static test ship, which we use to verify our as-built structural configurations. The image on the upper left shows the wing assembly, and the images on the lower left show the fuselage structure in process of assembly. These will be joined together and shipped to the Southwest Research Institute for structural testing. Our feather assembly, shown in the image on the right, is already at the Southwest Research Institute and is being wired for testing, which will start in early September. As soon as the static test wing and fuselage are joined and shipped, we will pivot our manufacturing team to begin assembly of the second spaceship. So let's turn to page 7. These images show major parts of our second spaceship as they move through the production and assembly process. The image on the left shows a wing skin. The image on the top right shows a cabin skin being fabricated. And the image on the bottom right shows our nearly completed feather assembly. It's exciting to see multiple spaceships being built at the same time. With that, I'll turn the call over to Doug starting on slide 8.

Thanks, Michael. Good afternoon, everyone. We are very excited about the upcoming start of commercial service, which is fast approaching. Ahead of this transition, we've strengthened the balance sheet. We have our sights set on growth. Starting with our balance sheet, during the second quarter, we raised $134 million through our current ATM or at-the-market equity offering program, which is now substantially complete. We ended the second quarter with $286 million of cash, cash equivalents, and marketable securities, up from $251 million at the end of the prior quarter. Also, during the second quarter, we reduced the principal balance on our 2027 and 2028 notes by $93 million and further aligned the timing of future payments with the expected ramp in our spaceflight operations. Specifically, we now have just $17.9 million in principal payments remaining for the 2027 notes. The 2028 notes have no required principal payments due until March 2028. With a higher cash balance and reduced debt obligations, we are ready to launch the exciting growth phase of our business. Next, we'll do a quick recap of our financial results for the second quarter. Please turn to slide 9. Operating expenses were $65 million compared to $70 million in the prior year period. Capital expenditures were $41 million, down from $58 million in the prior year period, reflecting lower capital requirements overall as we progress through manufacturing our spaceships. Free cash flow was negative $91 million, a 20% improvement compared to the prior year period. Let's move to our projections on slide 10. Revenue for the third quarter of 2026 is expected to be approximately $400,000 for future astronaut access fees and events. While quarterly capital expenditures have generally been trending lower since last year, given the recent increased time and labor to complete the systems installations for the first spaceship, we now expect to see a temporary increase in capital expenditures in the third quarter. Therefore, free cash flow for the third quarter of 2026 is expected to be in the range of negative $95 million to $100 million. While this represents a quarterly uptick in CapEx for this specific scope of work, we are very proud of the teams that are tirelessly and very skillfully building our spaceships. The work must be done with meticulous attention to detail, and these assets are being prepared to provide extraordinary experiences to our customers with the goal of also providing extraordinary returns to our shareholders. More on these expected returns from our spaceships in a minute. We forecast the downward trend in capital expenditures to resume in the fourth quarter of 2026. We expect a corresponding improvement in free cash flow, which is projected to be in the range of negative $80 million to $90 million. Revenue recognition for spaceflights is now expected to begin with the start of commercial spaceflight operations in February 2027. Furthermore, with the start of commercial spaceflight operations, we expect to begin receiving cash inflows from customers ahead of their spaceflights. These inflows represent the remainder of the purchase price for each spaceflight expedition, which is to be collected in connection with the customer signing the conditions of carriage prior to their spaceflight. With our second spaceship entering service, we continue to forecast that we will achieve a flight rate of 10 or more spaceflights per month by the end of the second quarter of 2027. This flight rate is an unprecedented achievement in human spaceflight, and this is made possible with our highly reusable spaceship design. Given these flight rate expectations, we continue to forecast quarterly positive cash flow within 2027, followed by rapid growth in revenue and adjusted EBITDA as we manifest our more recent and higher-priced spaceflight expeditions. Let's turn to page 11 and circle back to the economic returns we project with each new spaceship. Our practical experience flying our first spaceship Unity and our design and manufacturing refinements in our new spaceships have yielded an elegant, purpose-built vehicle optimized for both repeatable production and repeatable operation. It's a beautiful machine with vast potential, and now we are approaching the moment when we bring it all together with the ramp of commercial spaceflight operations. Let's do some quick math on what to expect in terms of unit economics for each spaceship. We've already created and refined the design for our spaceship, and we have invested in the tooling and manufacturing capability to make copies of that design. Our projections have stayed consistent, and we expect each new spaceship to cost approximately $60 million to produce. With a conservative lifetime estimate of 500 flights per spaceship with 6 astronauts per spaceflight, average pricing of $600,000 per spaceflight expedition, and a contribution margin over 80% per spaceflight, each new spaceship has the potential to generate over $1.4 billion of lifetime contribution margin. In addition to turning the dream of human spaceflight into reality, it's clear that these financial returns are also expected to be spectacular. These exceptional unit economics for our vehicles are what drive the economic model shown on slide 12. We've shown this model before, and it highlights the tremendous economies of scale that can be achieved as we build and operate multiple spaceships and expand to multiple spaceports. To reiterate the model, with our first 2 spaceships in service, we expect to achieve the economics shown in the first column by the time the average price reaches $600,000 for each spaceflight expedition flown. Therefore, as higher prices flow through the flight manifests, we expect to achieve adjusted EBITDA during a quarter within 2028 that will result in an annualized adjusted EBITDA of $100 million, as shown in the first column of this page. As we noted at the start of today's call, we are pleased to report that we were oversubscribed for the recent tranche of spaceflight expeditions priced at $750,000. This strong demand indication, combined with the economies of scale from expanding our fleet, will make the tremendous economic return shown on this page possible. As we continue to add spaceships and launch vehicles to the fleet, we can move to the right on this page and we see the potential flow-through of profit that we expect to achieve as we expand. While there is a variable cost component for each flight, much of our corporate cost structure does not need to grow materially as we increase the number of flights. Specifically, as we fully utilize 1 spaceport by doubling the size of our fleet from 2 spaceships to 4 and adding a launch vehicle, we project the adjusted EBITDA will more than quadruple to over $450 million per year. That is just for 1 fully utilized spaceport, and we plan to keep going. With 2 fully utilized spaceports, we expect to be able to generate over $1 billion of adjusted EBITDA annually. These economies of scale are expected to continue as we expand into additional spaceports globally. With that, I'll turn the call back over to Michael.

Closing on page 13, here's an image of our first ship having its livery installed. The livery and window transparencies are some of the last steps before integrated vehicle ground testing, and it's exciting to see this ship getting ready for the next stage. We're thrilled with the market response to our latest tranche of spaceflight expedition bookings, and we're pleased with the progress we are making on all our ships. We will incur some added expense in Q3 and Q4 as we absorb the added time to our schedule, but the added efforts will help us maintain delivery of quarterly positive cash flow within 2027. Our astronaut community is growing and very engaged. Today, we had a group of them together in Majorca to see the eclipse. And we have exclusive activities planned as they prepare for their upcoming spaceflights, which are soon on the horizon. Let's open the call for questions.

[Operator Instructions] Our first question comes from the line of Oliver Chen with TD Cowen. [Operator Instructions]

This is [ Julia Shulansky ] on for Oliver Chen. We have 2 questions for you this afternoon. First, regarding the commercial launch timeline shift, can you help us distinguish between timing and scope? Has any material work been added since the 1Q update or is this primarily a de-risking decision to increase confidence in the flight test and the commercialization schedule? And second, on demand durability, you've now had 2 consecutive tranches sell out ahead of schedule at very high prices. Do you see any natural ceiling to that demand curve and how are you thinking about pricing going into the next fall release? Thank you.

Excuse me. Hi, Julie, it's Michael. Let's see, timeline, you asked the question on scope. Let me answer it this way and see if it addresses what you're asking. Generally same scope, same work, same expectations in finishing the installation of all of our avionics and mechanical systems. And the work, which is hundreds, literally hundreds of reasonably short tasks, and a lot of those tasks have taken us longer to complete than we had allotted in our estimates and schedule forecast. And what are those things? It's not that it's a new scope per se. We put a picture in the deck. You'll look at kind of where the pilots would be sitting. There's a panel that's not installed. So you can see kind of the degree of wires and cables and connectors that are involved. And a lot of these examples are taking all the parts in the kit that need to go in, 1 of our technicians who are massively capable, does the work. And as they kind of put 1 wire harness in and another wire harness in and metal tubes for pneumatic systems in. Some of it starts to, the whole, I'll call it height of those things going on top of each other may end up to be a few thousandths of an inch taller or shorter sometimes than our design had expected. Sometimes that's not an issue. Sometimes that starts to get to a place where we have a requirement that we'll go and confirm through engineering analysis whether that needs to be adjusted or not. And whenever that happens, there's a whole process for it. Our quality inspectors look at every installation we do. They get the quality engineers. The quality engineers go find further engineers for assessment if necessary. It all happens pretty quickly, but the number of those kind of, oh, we didn't expect this to not fit just perfectly coming in is higher than we had allotted for. And so that just has started to accumulate on us. It really picked up at the tail end of July. And for a bit, we thought we could manage that in, but the team just needed more time to do it the correct way. So what we've done is we flowed the time needed out so that we can finish the task correctly and do it the right way. And when you add that up, it means we will start our integrated vehicle ground test program almost a couple months later than we had assumed, and we've flowed that through our schedule. So happy to give you more examples of what it is, but it's a collection of small items, each of which have taken longer than expected. And the kind of summary of all those, adding up all those extra durations is added to our time. No different scope. We expect to wrap all this phase up later this month. We'll start our integrated vehicle ground testing efforts through there. We've done power on in our ship, and so we'll continue to be testing both the power and connecting everything in the correct way, and all the mechanical systems are operating in the functions we like. And then we plan to send the ship out to New Mexico in October to begin our flight test program, and that will carry on just the way we thought before. So hopefully that gives you a little bit of insight into what's behind the push. I think more excitingly is what's behind getting closer to the finish line on this build and to the start of actually carrying our astronauts to space. Shifting to your demand question, yes, we expected to close this first tranche of bookings about the time of our flight test, so not this early. We were getting near the end and we sent the people that we were in conversation with still a note that we were going to close the booking. A number of those came in and we were oversubscribed by a reasonable amount and that's great. And so we've closed this price point as we said we would do. And we're going to focus on bringing all these people into our astronaut community and making sure they are prepared for the journey ahead of them. We expect this fall's opportunities, it will be at a higher price point. And so you asked for some perspective on that. We're really the only people that will be carrying humans to space because beyond if you want to kind of do a $50-plus million orbital flight, which are very few in capacity and very expensive, the real comparison was probably what the Blue Origin folks were flying. They never published their prices. Anecdotally, I think people are probably in the $1 million to $2 million range. So you know, there's demand I think for them at probably average that out to $1.5 million. I don't think we need to be driving our prices up that quickly, but there is strong and solid demand, and we do expect each time we release a tranche of tickets, it will be priced higher than the tranche before, and that's appropriate. So I think you'll see us do that for a little bit longer.

Thank you. Very helpful. Best regards.

Our next question comes from the line of Michael Leshock with KeyBanc Capital Markets. [Operator Instructions]

I wanted to start with the rocket production starting in 4Q. Just given that it's the same propulsion that was used on Unity, will there be additional labor needed to start that back up, or did the propulsion team shift to other areas for these new spaceships in development and are they going to be moving back to propulsion? And then maybe secondly, how long does it take to produce 1 rocket motor?

Thanks, Mike. The team we have in Arizona are multi-task capable. So right now they are finishing up the systems installation. You see a picture at the end of our deck, finishing up livery installation and will move the ship into the integrated vehicle ground test. When we do that, a lot of the technicians that we have in Phoenix will pivot back over, finish out the static test ship, and when that is shipped out, we will then have all the parts coming in for our second production spaceship, and they will build that. And as we get ready to finish that and send the second ship out for testing and off to New Mexico, then the majority of that team will shift over into the rocket production area. So we do not expect a big ramp up of labor for that. Most of the labor is currently there in Phoenix and we will move people from 1 set of tasks to the other as we go. The pace we can do rockets is, with this new production line, quite rapid. We will be testing out and ramping initially up to about a 3-motor-a-week capability, just to kind of keep up with the flight rate of our first 2 ships. The line itself and the equipment is built to handle more than that. And we can handle more of it with adding extra shifts. So what I gave you is kind of a single shift across a week duration. So we could always add extra shifts. And there are only a couple, I'll call it equipment bottlenecks in that line, that when we're ready to have an expanded fleet at Spaceport America, we can ramp the same infrastructure, this production line, to handle all of that. So probably closer to 15 motors a week when we're ready to go. We can also use that capacity for other things with rocket motors, but right now we're really focused on just supplying the fleet of spaceships that we'll be flying.

And then on the cash position, do you see the need to raise additional capital to get to that positive cash generation in 2027? I appreciate the color on the quarterly guide, but is there any reason we should expect a big step down in promoting that in early '27 or just any way we should think about 2027's cadence once commercial flights resume. Thank you.

Yes. Thanks, Mike. This is Doug. So we don't need to raise anything right now. We don't need additional capital at the moment. What we highlighted was what we already did with our at-the-market program. We raised $134 million during the quarter. So we have more cash at the end of the quarter than what we started with. We also managed our debt payments and created the time to get ramped on commercial service so we can time our operating cash flows with those debt payments. So as we get into kind of the near term, when we get into the start of commercial service in Q1, that's when we start to see inflows coming from the customers. We timed that for February of 2027. So with that, we get the remainder of the expedition price from the astronauts. And we actually start collecting ahead of some of the future flights. We start to get these inflows. And that changes the whole cash flow dynamics as we go forward. So we're getting down to kind of our cost now as we finish up the CapEx towards the end of the year. But we get to our kind of cost base as we exit because we're done with the manufacturing, we're just moving into the operating stage. But Q1 is that point when it crosses over and the inflows change. So with that said, there will be a time when we want to drive a faster growth and that's when it would make sense probably to add some capital. We can add more vehicles more quickly, expand the fleet, and that's why we spent some time highlighting these great unit economics for these spaceships. It can tie any future capital raises to some very attractive returns on additional assets that can be added more quickly with that capital. So, again, there will come a time, and we'll tie it to growth drivers, and the rationale will be great for shareholders, in our opinion. But nothing to do today with the capital raise.

Next question comes from the line of Sheila Kahyaoglu with Jefferies. [Operator Instructions]

This is [ Kira Perry ] on for Sheila. On a similar note, I was wondering if you could frame how we should think about the trajectory for CapEx third quarter into 2027 based on the updated flight schedule. Thank you.

So, CapEx in particular is coming down significantly because what's driving that is the build of the spaceship. So, as we're wrapping that up, we've done the heavy lifting, right, which included the tooling and then all the parts fabrication and then all of the labor and everything that goes into the assembly of the ship, that's all CapEx. But that's moving along and with the first vehicle headed into ground test and then the second vehicle coming pretty close behind, we expect CapEx to be coming down quite a bit by the fourth quarter and then quite a bit more in 2027 because it's just not a CapEx-driven cost structure at that point. Now we're moving into more OpEx for the commercial spaceflight. So it's a shift. So you'll see a continued drop in CapEx after we get by the fourth quarter.

Thank you so much.