Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Eric Cerny, Vice President of Investor Relations.

Thank you. Good afternoon, everyone. Welcome to Virgin Galactic's second quarter 2023 earnings conference call. On the call with me today are Michael Colglazier, Chief Executive Officer, and Doug Ahrens, Chief Financial Officer. Following prepared remarks from Michael and Doug, we'll 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 see 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 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. With that, I would like to now turn the call over to Michael.

Good afternoon, everyone. Thank you for joining us on our second quarter earnings call. We are thrilled to have launched commercial service and look forward to sharing more about that on today's call. Turning to our agenda on Slide 3. I'll start today's call by highlighting the activity around our spaceflights during the quarter, and then discuss the progress we are making on our Delta Class ships, before turning the call over to Doug to share insights into our financial performance. Following our prepared remarks, we will open the call for your questions. Turning to Slide 4. We returned to space in late May with a spectacular Unity 25 space mission. The Unity 25 crew spent four days in training and preparation at Spaceport America, before boarding VSS Unity and rocketing to space at nearly 3 times the speed of sound. The mission was an incredible success. Not only did it validate the efficacy of our astronaut training program, it also affirmed the absolutely stunning experience Virgin Galactic provides. Moving to Slide 5. On June 29, we transformed VSS Unity into a suborbital space lab with the launch of our first commercial space mission, Galactic 01. The mission brought members of the National Research Council of Italy and the Italian Air Force to space, along with 13 research payloads. Galactic 01 was an outstanding achievement for our customers, as the Italian astronauts and ground-based crew successfully executed all 13 of their research experiments. Feedback from our Italian partners was extremely positive, and the Italian team members received congratulatory notes from across their country, including from Italian Prime Minister Meloni. As highlighted on Slide 6, our spaceflight system and flight profile provide researchers with a long list of benefits. Our spaceship cabin is modular and can be adjusted to various needs.…

Thanks, Michael. Good afternoon, everyone. Turning to Slide 10 and our financial results for the second quarter. We generated revenue of approximately $2 million, driven by a commercial spaceflight during the quarter and future astronaut membership fees. Operating expenses were $141 million, compared to $110 million in the prior-year period. The increase is primarily attributable to a $24 million increase in R&D costs tied to engineering work for our future fleet. SG&A increased $7 million. We reported a GAAP net loss of $134 million, compared to $111 million in the prior-year period, primarily driven by higher R&D costs. Adjusted EBITDA was negative $116 million in the second quarter, compared to negative $93 million in the prior-year period. Free cash flow was in line with our guidance at negative $135 million in the second quarter, compared to negative $91 million in the same period last year. Moving to Slide 11. At the end of the second quarter, cash, cash equivalents and marketable securities on the balance sheet totaled $980 million, a sequential increase of $106 million from the first quarter of fiscal 2023. During the quarter, we raised $241 million in gross proceeds as part of our at-the-market, or ATM, equity offering programs. With the start of commercial service, you will see some changes in the presentation of operating expenses when we report third quarter results in November. Going forward, the customer experience category will be expanded and renamed Spaceline Operations, accounting for costs associated with operating a commercial space line. These items include components of space line technical operations and space line missions and safety, which were previously presented in R&D or SG&A. This re-categorization does not change aggregate operating expenses. Moving to Slide 12 and our financial outlook. With commercial service, we anticipate a monthly flight cadence beginning in August with two commercial spaceflights in the third quarter and three commercial spaceflights in the fourth quarter. Given the flight cadence and manifest details, we forecast revenue to be approximately $1 million in each of the third and fourth quarters. Our capital expenditures for the third quarter are expected to be between $10 million and $15 million. The growth in CapEx is driven by the construction of the spaceship assembly facility in Phoenix, as well as technology used in the design process for our Delta Class vehicles. We continue to expect our forecasted free cash flow for each of the third and the fourth quarters of 2023 to be in the range of negative $120 million to $130 million. With that, I'll hand the call back to Michael for some closing comments.

Thanks, Doug. In closing, the second quarter was an important one for us. We celebrated a critical milestone for the company, having safely and successfully launched commercial service with extremely satisfied customers. We are very excited to be just over a week away from our second commercial spaceflight with Galactic 02 flying the first of approximately 800 customers with reservations. We look forward to delivering this transformational experience on a recurring basis, and we remain on track to scale the business in the future with the delivery of our Delta Class fleet. Finally, before we end the call today, I want to take a moment to address the passing of our good friend and Chair of the Board Evan Lovell. Evan was a champion for our mission and for the Virgin brand. We continue to keep his family in our thoughts, and will forever be grateful for his leadership and his time with us. Our entire Board has been incredibly helpful, and Ray Mabus, our Lead Independent Director, has seamlessly stepped in as our Interim Chair. Ray brings extensive public sector experience to our Board, having served as U.S. Secretary of the Navy and as the Governor of Mississippi. With that, we'll turn to questions. Operator, we're ready to begin the Q&A portion of the call.

Thank you. [Operator Instructions] Your first question comes from the line of Greg Konrad with Jefferies. Please go ahead.

Good evening.

Hi, Greg.

Maybe just to square the revenue comments, I mean, you did over $2 million in Q2, you talked about $1 million in Q3 and Q4 on two and three flights. What's included in that? I would think they'd be a little bit higher just given the spaceflight activity.

Hi, Greg. This is Doug. So, in Q2, we had the Italian flight, which was a research flight, so a little higher revenue. Going forward, for Q3 and Q4, when we look at the manifest details, it depends if it's going to be astronauts or research flight. So, depending on what we do with that mix and the manifest in particularly the fourth quarter, we may see higher revenue. So, if we look at the potential here is probably going to be closer to $1 million in Q3. And if we do research in the fourth quarter, it would be probably over $2 million.

And then just on the R&D, you talked about the restatement in Q3, but R&D stepped down about $25 million sequentially, CapEx up a little bit. Is that Q2 R&D kind of the right level ex the restatement going forward just given the rework and re-entry of Eve now being complete?

Yes. So you're going to see some things changing on the income statement, because the R&D will start to move over into space line operations. So, things that were historically there will now be in the operations category, which basically represents the cost of operating the space line. So, you'll see our technical operations group go over there, space line missions and safety, this is all the maintenance and ground support and safety and pilots and all of that. So, a lot of movement. But in general, what you're still seeing without that restatement is R&D is continuing at this level for a while because we're in the design phase of the Delta Class and that effort is continuing for the foreseeable future into 2024. So, without that reclass, you'd still see the R&D progressing at these similar levels.

Thank you.

Your next question comes from the line of Oliver Chen with TD Cowen. Please go ahead.

Hi. It's Tom on for Oliver. Just a question on how ticket sales are trending, especially after the most recent flight? And then how you expect that to trend forward? And additionally, if you could just remind us on how long the lower-priced tickets are expected to last relative to the price increase?

Hey, Tom, Michael here. So I think you may recall, we have -- I'm sure you'll recall, we have around about 800 people in the queue. And with the kind of monthly cadence off of our first ships, Eve and Unity, and until we get the Delta ships going in '26, that turns into generally a four-year backlog, which is a little longer than we prefer. I think a two- to three-year backlog is the appropriate place for that. So, you're going to see us, I'd say, use these early flights to add confidence in our system, to add confidence in the safety of human spaceflight on suborbital journeys, to see -- I think you're going to hear excitement, really impressive excitement from the people who fly and as those stories come back. And that combination is purposeful for us, because it will build confidence in this new industry, confidence in what this can be and aspirations and excitement to come. And so, we're going to let that build a little while, because we have a backlog that's a little longer than we would prefer. And then, as we start to get a little closer in towards our Delta ships ready to come online, we will open up in successive tranches of sales. And I think you'll see that from us that lets us manage the price points at which we release inventory. And we intend -- we will be supply constrained for a little while. So, it also helps us manage and we'll manage the supply as we put that out. So, we're going to not have sales outside of what we've talked about before. We've continued to allow for research sales to play forward, and we have a small amount of sales available through the Virtuoso travel network.…

Great. That's very helpful. And then a follow-up on the research flight demand. Could you just talk a little bit about the drivers of demand for research flights? And then what factors lead you to prioritize research flights relative to ticketed passengers for tourism? Thanks.

Hey, I'll take the last part first and then go forward. So, on the whole, we're going to prioritize the vast majority of our inventory to private astronauts. I think that's the broad vision that's always been at the founding of this company and kind of core to our vision of opening space and access to space up for individuals who aspire to do so. We do believe research is important. We believe research matters to the ongoing growth of human knowledge. We believe that research is a profitable business along the way. And we also believe research appropriately adds, I think, a halo -- a positive halo over the top of commercial spaceflight. And so, for all those reasons, we've allocated generally 100 of our first 1,000 flights, about 10%. And I would like to see that kind of be in that range as we grow. Now, what are the factors that are here? I mentioned briefly in kind of prepared remarks, there's kind of two ends of the spectrum that are currently available to people who want to do microgravity research. And microgravity research is hugely important as kind of humanity at large starts to work to spend more time in space for all the various reasons that are out there. So, there's a lot of research needs to be done. It has either been an experiment that goes to the space station, which is a long time to get in line, because there's not that much capacity for that. It's very expensive to get it there, and you kind of have one shot to make it work. And that puts a lot of pressure on those experiments to make them very, very robust. And you kind of have one experiment that lasts a long time. On the…

Your next question comes from the line of Peter Osterland with Truist Securities. Please go ahead.

Hey, good afternoon. I'm on for Mike Ciarmoli this afternoon. Appreciate you taking the questions. So first, I just wanted to ask, I appreciate the color you've given on pricing, but just kind of following up on that. In this timeframe where you're operating just with Unity, is $0.5 million per flight about what you're expecting on average for civilian flights through 2025? Or are there any considerations related to number of passengers per flight on these first couple of flights that are different from what you'd expect on average as you kind of get into 2024, '25?

Sure. So, when we look at the capacity of Unity and the ticket prices that we're flying these days, you would expect to see for the near term, about $600,000 per flight, because there is one seat allocated for an astronaut trainer in the near term. As we move into 2024, we expect to open up that fourth seat. And so then you would see 4 times $200,000 or $800,000 in revenue per flight is what we're projecting. And if we get research seats mixed in there, you would see some uplift from that.

Very helpful. Thank you. And then as a follow-up, I just wanted to ask on your fleet development activities, have you experienced any challenges or surprises that you'd call out either in terms of cost, labor or design challenges that might be different from what you expected at the beginning of the year? Or has it mostly just been on track up to this point?

No, I haven't seen surprises that are here. Aerospace, in general, is growing and competition for engineering roles in certain types of fields remains healthy. The defense industry has more pressure upon it for everything that's going on with the war in Ukraine. And so, we continue to hold our own, I think, against that, and we have an incredible group of engineers that are delivering against this. So that part, I would say, is just kind of normal for all aerospace that's going on. And we've had, I think, really pleased relationships with our Delta suppliers here. So, in fact, we've got some of them on site today from both Bell and Qarbon. And that's been really good. We are working with them. It's not new technology, but more state of the industry technology of using -- we'll use the word digital thread, you may hear digital twin. But design and software that allows us to go both for the design phase into the parts of the tooling and manufacturing phase, eventually all the way to maintenance. And so, ensuring that all of our teams, whether that's ourselves or our partners are facile with that software moving through is something that we put a lot of training into, but again, not surprising. So we are keeping great focus on this. Obviously, each time we talk about the Delta ships, we reiterate this is where the business model depends. This is where we ramp both in cadence and an ability to have a relatively low cost on the variable production unit cost of those ships. And they're super important. So all attention is on it, and we're going to keep it that way.

Great. Thanks a lot for taking the questions.

Thanks, Peter.

Your next question comes from the line of Matt Akers with Wells Fargo. Please go ahead.

Hey, guys, good afternoon. Thanks for the question. I wanted to ask just your latest thoughts on Imagine. And I think you've described that as kind of option value that you could activate at some point. Now that you've got Unity flying, is that something you could look to exercise at this point?

So, Imagine is, as you said, we've kind of kept it as an option for us, and it's going to remain as an option for us. The picture -- Page 9, I think, of the accompanying deck, which was talking about our Delta Class ships. That image is actually an image of Imagine. And we used it because Delta is derived from that base. And there are many things that we've already been able to benefit from in evolving the production model shift from Imagine. The reasons that we put it kind of off to the side is because the engineers that we have focused on this early design phase for the Delta ships are the same types of engineers that we would have through the testing phase of Imagine, modified sciences, like avionics work, areas like that. And we need those people focused upfront on Delta so that we can get the momentum of Delta into the supply chain that we've built. At the time when those key engineers have kind of completed that and we're kind of well down the path towards Delta, the production -- the build and production of those Delta ships is pretty quick. And the way in which we are not only going to learn through flight test, but we're also building -- as you would expect to see in a rapid commercial aerospace development program, we are building -- you'll hear the words iron bird or a static test article, we're building systems that are on the ground that can allow us to very rapidly move through design elements. And we're wind tunnel testing the Delta ship actually this month. So a lot of that allows us to have a relatively abbreviated flight test program. And so, when you hear us we're doing flight testing in '25 and allowing the first Delta ships into commercial in '26, we're kind of at a point where they're almost outpacing Imagine at that point. So, we are going to keep Imagine, all right? It's still here with us, and we have it secured and ready. But it's likely going to be used in service of the Delta program as opposed to, hey, we're going to turn our attention over to Imagine and get that going. And again, that allows us to anchor our technical operations, our flight support and mission control group on one consistent vehicle, which is the Delta ship. And then, as we have multiple of those ships, it's the same engineering base, it's the same maintenance manual, it's the same program, and that will allow for a more efficient operation.

Got it. Okay. Thanks for the color. I'll leave at that one.

Thanks, Matt.

Your next question comes from the line of Kristine Liwag with Morgan Stanley. Please go ahead.

Great. Hey, guys, good afternoon.

Hi, Kristine.

You mentioned the ability to flex cash burn by controlling the timing for next-gen motherships. Can you provide any color to your current thinking around the timeline?

Yes. So that strategy that we outlined in the last call is still consistent with what we're looking at today, again, because we're pleased with how Eve is performing after the enhancement period we're doing so -- or we did. So that now we see Eve continuing through the Delta flight test program. So, we are benefiting from that. So because of that, we are still anticipating that we will be working on Delta first and getting through some remaining design elements and then moving on to the parts fabrication and rolling off of that over to the next-generation mothership program. So it's a lot of the same engineers, again. So it allows us to stagger the engineering resources and the focus on the company from one program to the next. So that would be in the following year. So, 2024 is when you see the mothership program start to pick up more heavily as we roll off of the initial phases of the Delta program. So that's still consistent with what we were planning before.

And then just -- it's Michael, Kristine, just final continual thought on that is that allows us to bring these additional motherships in at this kind of sequence when we're building the volume of our Delta fleet. So that way, right at about the time that Eve will tap out from a capacity standpoint, we would be bringing on new motherships at that point to manage the scale of the fleet.

Great. Thanks. And then also after you guys changed your pricing structure to the $450,000 for the passenger flights and then you've got $125,000 in a fully refundable deposit, can you discuss any cancellation requests that you've received so far? And how sticky has been the orders that you guys have received to date?

So, we have a limited number of cancellations kind of year-over-year. The largest was not unexpectedly way back in 2014. And we have not seen, I'll call it a, out-of-line uptick in any of that. Where I get the most questions on that particular topic was following the Titan experience, and -- "hey, did you see any fall-off associated with all the media around that?" We did not, in fact. And we've heard from many of our future astronauts, they are very clear, especially those who have been with us a long time about everything that goes into the safety of this platform. And they were able to talk that through with themselves and others. And so we've not seen any dropouts due to that either. You'll see some people drop for -- not often, but sometimes it will be for economics, sometimes it can be for medical reasons or health reasons. And then that's why you've heard us say we keep some house seats there. And so what we're doing is generally replacing those as -- if somebody falls off, we can replace onesies and twosies back on the way. So hopefully, that gives you some color window into those.

Yes, great. Thank you for the color. Thanks, guys.

You're welcome.

Thanks, Kristine.

Your next question comes from the line of Michael Leshock with KeyBanc Capital Markets. Please go ahead.

Hey, good afternoon. I wanted to start on the cash balance that you're at today. And just as we think about some of the optionality that you have with your common stock offerings, what level of cash in marketable securities are you comfortable with? And do you expect to maintain that position of around $1 billion for the foreseeable future?

We're very pleased with the balance sheet right now and the strength there and our ability to have access to the capital markets, it's been great. So yes, we are approximately $1 billion today, and we like where we are. This gives us the flexibility to invest in these programs that we see are going to generate really high returns and gives us a pretty good runway. So we like where we are. And we fully intend to keep our balance sheet strong throughout this phase as we move towards the ramp of the Delta Class. So, we don't have a specific minimum cash balance, but we do intend to keep it strong.

And then following up on the Delta Class progression, you had mentioned you're on track with the development process. But wanted to ask a bit more specifically since you previously expected to complete design and tooling and then begin parts fab this year, is that still the near-term expectation? And what has been accomplished to date?

Yes. So that is still the expectation. Tooling will sequence before parts. And both of those sequence, of course, before the subassemblies can be created and then sent over to us. And the way we're rolling that a bit in a sequential pattern, we'll have tools completing this year, some parts being built on those tools, tooling probably finishing in early next year, so the tools that are needed later in the process come on and then the parts that are needed later in the process come back in. And all those need to be done because probably second half of the year, we will be bringing those into Phoenix for kind of starting the final assembly process. So that all kind of remains on track and moving as we expected through there. The -- yes, I think you asked a question what else are we seeing in there. One of the things, I guess, I'd share, I said in on, I'll call it, an executive overview, it wasn't an executive summary. It was a deep day on the design process and report out for where we are in some of the major milestones of Delta and how we've used the Imagine baseline into this fourth-generation spaceship, the Delta Class. I was really pleased with what's come forward there. The key things we're trying to do is not create a ship that looks different. And the ships that will -- we think will perform generally the same as our Imagine ship will perform. It's lighter, carry six people, go higher, all those things. What's really been validating is the work that has been done to enable us to turn this ship on a weekly basis, we're going to continue to aspire to even improve there, and the work that has…

Great. Thank you.

Your next question comes from the line of Myles Walton with Wolfe Research. Please go ahead.

Thanks. Good evening.

Hi, Myles.

Hey, Michael, I was hoping you could talk a bit about the engagement plan after Galactic 2.0. And in the frame of reference, I think you mentioned these would start to become more private experiences. And I'm just curious, how do you maintain the visibility that's going to be required to create and sell the experiential side of this while keeping it intimate private, what basically the customer is paying for?

Right. We have to do both, of course. So one, I'd say we will definitely find a frequent cadence of our flights that we want to kind of do deep showing of. That's easy around our research flights as we do those pieces, and there's new stories along the way there. And there will be some flights that we will want to do in a full public manner. As you'd expect, a lot, maybe not all, but a lot of our future astronauts are quite excited to tell their own story, but don't necessarily want us to broadcast their personal experience. And so, we'll find the balance. I think you'll always hear us talking about when our flights go, there'll always be recaps, there'll always be footage and video pieces out. There doesn't always need to be kind of a detailed streaming of the interior of the cabin for each group of private astronauts that fly. And what I do think you'll see though is we'll be giving that material to our astronauts. And not all, but I imagine the majority of those will also become very active in bringing those out. So, we're going to -- I won't even call it finding the balance, this is a both end type of a scenario. We have to, first and foremost, focus on our customers, deliver the experience that they want, deliver the quality and not kind of overly commercialize their personal experience. They've put a lot of energy and effort and aspiration into this, we have to deliver that. And when we do that right, that is the absolute best marketing we will get, because they will become missionary for us. So we're going to get that right. And I think within that, we can also ensure that we are touting what we do and building confidence in the safety, confidence in the power of the experience and just the general excitement of our company. I think we can do both. So, I don't want to overplay it now, probably I have just by over answering, but we -- I just want to make sure [indiscernible], "Hey, we may not showcase like the interior of every cabin flight, because it's not appropriate."

Yes. Maybe a different operational question on the Delta Class. At this point, do you have a viewpoint of how many would actually be in service in '27? Is it one or two, or is it the four to six you're thinking about it on an annual basis of capacity out of manufacturing, those four to six could be on the line in '26?

Yes. I think the end of '27 is what you're asking, we'll probably be in between there. As you've heard us say, we're building our factory for four to six ships a year. It's logical to start that on the lower side, right, as you start to build up just muscle memory and kind of work any kinks that are in the system out. So, we will probably be less than the full cadence of that, but more than the first couple, we're wanting to get a couple out right away. And because we will be using two ships, Myles, in the flight test program. And so those will roll right into service. We'll have probably a little bit of a break between those two, but not so far that we kind of mess up the line from a supply chain standpoint. And then we'll start moving again on a pace, probably let's get the first four out. I think the other question that will come with that is what's the turn rate of those ships. As I mentioned just on the question before, feeling very good about our ability to hit a weekly turn from all the analysis we've seen. And we're going to keep pushing on that metric. So nothing else to add today, but that's another one that I think has got some interesting leverage.

Okay. And last one on the financials. Is this a point where you can kind of confirm you're past peak cash burn quarterly cadence? I guess, it's implied for the second half, I just don't know if you're able to say that we're past this quarterly cadence we saw in the first half into next year as well.

Well, we're only giving guidance for Q3 and Q4. And for the following years, we are going to be making sure that we're able to invest in the fleet because we see these great returns. So that involves the Delta Class and the motherships because we see really great financial returns from those investments. So, we're going to be leaning into that when possible. But if necessary, we can control that pace. And we could slow that spending and keep that level down. But we think the returns are very attractive and shareholders will be supportive of us really trying to build the fleet at the rapid rate. So -- but we've got flexibility.

Okay. Thanks.

Thanks, Myles.

This concludes the question-and-answer session as well as today's call. Thank you for joining. You may now disconnect your lines.