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 Third 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 would now turn the call over to Eric Cerny, Vice President of Investor Relations.

Thank you. Good afternoon, everyone. Welcome to Virgin Galactic’s third 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 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 see slide two 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 filings with the SEC filed by Virgin Galactic 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. Go ahead.

Good afternoon, everyone. Virgin Galactic successfully achieved several important milestones in the third quarter, which, in combination with some important adjustments we are making in our near-term operating model has set the company on course to define and lead the suborbital space travel industry. We're going to cover a lot of ground today, so I'll open the call with four key headlines. First, we have demonstrated that our spaceflight system works on a repeatable basis. As planned, we completed six spaceflights in under six months with our initial spaceship VSS Unity. This is an unprecedented achievement in human space light. Second, the Virgin Galactic customer experience has been overwhelmingly positive and meaningful and the value of our experiential product is exceeding our high expectations. The backlog of demand for experience is robust, and our early customers are Virgin Galactic astronauts. They love it. Third, we expect the advances being built into our Delta class ships will enable each of these new ships to fly up to eight times x per month during steady-state operations. This turn time metric is unrivaled in the industry and will enable breakthrough capacity and revenue generation. And fourth, we forecast our quarter end cash and marketable securities position of approximately $1.1 billion, provides sufficient capital to bring our first two delta ships into service and to enable our crossover to positive cash flow in 2026. We look forward to sharing details behind these headlines on today's call. Turning to our agenda on slide three. I'll start with an overview of the Virgin Galactic astronaut experience and share customer insights from our first six flights. We'll review progress from our Delta spaceship program and talk more specifically about the expected unit economics of our Delta class ships. We'll then discuss adjustments to our near-term operating model,…

Thanks, Michael. Good afternoon, everyone. Turning to Page 11 and our financial results. In his opening remarks, Michael provided some important information about the company's operations and the related economics. As a follow-up, I'd like to share some additional context relating to both our near-term and long-term financial outlook. First, I'll explain the new expense category called Spaceline operations and what trends to expect going forward. Second, I'll review the financial results for the third quarter and provide guidance for the fourth quarter. Third, I will describe the shift has begun toward the building of capital assets, our longer-term projections for overall spending and the expected path to positive free cash flow. And fourth, I'll expand on the attractive future economics we foresee with the expansion of our Delta class fleet. Let's start by taking a closer look at the new expense category, Spaceline Operations and how that plays into our third quarter results. In our last earnings call in August, we previewed the introduction of Spaceline Operations, which followed the launch of commercial service and achievement of technological feasibility for our current Spaceflight system. In order to understand and interpret what Spaceline Operations represents, it is important to recognize that Virgin Galactic is somewhat unique as a company that both produces and operates space vehicles. We first built fixed assets, such as spaceships and motherships, then we utilize those assets to provide Spaceflight services. While we are able to capitalize certain costs for production of vehicles, some production costs cannot be capitalized and must be recognized as an expense. These non-capitalizable production costs reflected in Spaceline Operations, along with the current cost of conducting Spaceflights. Note that the presentation of Spaceline Operations does not indicate an increase in spending, but rather a remapping of expenses that were previously in…

Thanks, Doug. To recap the key items from today's call, our spaceflight system works on a repeatable basis, and the Astron experience is exceeding our very high expectations. With each new Delta Ship delivering steady-state revenue capacity of up to 12 times greater than VSS Unity, we expect to cross into cash flow positivity in 2026 as we bring our first two Delta Ships into service. Our end of quarter cash and marketable securities balance of approximately $1.1 billion is expected to be sufficient to bring these first two Delta Ships into service as we tightly manage and prioritize our resources against the Delta program, while reducing expenditures associated with flying VSS Unity. All of these factors support our business model, which is highly profitable and cash generative at steady state. While the upfront capital costs are meaningful, ongoing CapEx needs for each baseboard are relatively modest given the long lives and high capacity of our ships. Variable costs are relatively low in relation to our ticket prices and incremental spending to expand our fleet is expected to bring high operating leverage to high double-digit contribution margins and excellent return on investment. I'd like to thank our Virgin Galactic customers, shareholders and fans for their support as we work to ensure our company's future for the long-term. And I'd like to sincerely thank our teammates for the incredible work they have been delivering, while also recognizing the loss that will be felt across the company as we part ways with some of our friends and coworkers. We are now stepping forward and placing all focus on safely, efficiently and successfully executing the Delta program. With that, we'll turn to questions. Operator, we are ready to begin the Q&A portion of the call.

Thank you. [Operator Instructions] Your first question comes from the line of Matt Akers with Wells Fargo. Your line is open.

Hi. This is Eric Yan on from Matt. Thanks for the question. Could you discuss more details around the Delta works you've done this year so far? And if there are any updates to the plans or milestones you laid out for the next couple of years?

Sure. I think, as we shared in the prepared remarks, We've been executing Delta on our plan, on our schedule. This year is primarily about adapting the designs from all the learnings that we've done in building out our first initial space flight system. In particular, transitioning those designs to a different carbon composite system is a big part of that that has a lot of benefits into the process. That design process and taking advantage of the things that we've learned from flying Unity on a monthly basis have let us build in and confirm the much improved turn times that we're going to see from the delta shifts along the way. We've also begun working through our test asset systems. We clearly are designing for this turn rate. We're also building the test assets to verify them. You heard us referencing a copper bird and an iron bird. Those systems have started up. We've been working closely with our partners, our key partners that will be building these ships with us, in particular Bell from Bell Textron and Carbon. They're tightly interwoven with our efforts and using the same kind of software platform along the way. And the tooling that those companies are building that will then do the parts has already begun. Initial parts are coming off those tools. But the majority of parts and then fabrication will happen in 2024. In line as we bring our spaceship factory in Phoenix down, If you see the image of the spaceship factory, I think page nine in the attachment, the core and shell, that's all done. We're going to be starting to do the interior build out of the factory in the first quarter of next year, actually probably into this year. And then we plan to occupy that somewhere around April so that we can then put in our own systems to begin the final assembly of the ships. So that's all tracking as previously shared. And that puts us on paths to our flight testing in 2025 and putting these into revenue service in 2026.

Okay. Got it. Thanks. That's very helpful. Also wanted to ask if you have a more specific timing on the Delta launch now? Is it more like the first half or later in the year?

Nothing more specific for today, but I will say you're going to see them flying in 2025 as we do our flight testing. Flight tests will include, they'll start with what we call captive carry flights, then they'll move to what we call glide flight where we're releasing without the power of rockets. And then we'll start to power the flights up towards space. So you'll be seeing all that happening in 2025.

Okay. Thanks so much.

Thank you.

Your next question comes from the line of Greg Konrad with Jefferies. Your line is open.

Good evening.

Hi, Greg.

Just to start with one clarification question. I mean, you talked about pausing Unity flights in mid-2024, and I think you mentioned Galactic 06 and 07. Is 07 going to be the last Unity flight, and is there any commercial flight activity between mid 2024 and the introduction of Delta into service in 2026?

Yes. Let me just kind of more color on what we're doing. Obviously, we've had incredible success flying Unity. And as we are sharing the business reasons for flying Unity are to demonstrate what this industry is about, both the safety, how the ships work, the fact that we can repeat them and importantly, getting a chance to showcase the customer experience. Unlike, whether you're a new electric vehicle start-up or something similar, people are familiar with the business model and human space flight is something that private citizens have really never had the chance to do. So Unity is demonstrating all that, but it is very resource consumptive as we do it. So the big move we're making here is pivoting the resources that are -- have been being put into the Unity flights and redirecting them over to get the delta ships done with the cash we have on hand and take that kind of market risk off the table. So as we're doing that, we will continue to fly out. We're moving to quarterly because it allows us to reduce cost as we do that. And we know we'll go on January is when we're doing Galactic 6. We'll do Galactic 7 probably in the earlier side of the second quarter. And then whether we do Galactic 8 with Unity before we move our team or not is really around the specific timing of when our very skilled teams that are in New Mexico, both technical operations and engineers. We want them to be a part of the build process of our delta ships. It's better from a spending standpoint. So we aren't ramping up as many incremental folks along the way. And really the importance is it allows our teams that will maintain these ships to have the hands-on experience of building them, and that will help us more quickly ramp up to rate as we bring them into service. So whether that starts, I'd say, at the tail end or the beginning of the third quarter or the -- until end of the second quarter, beginning of the third quarter or a little later, will depend upon whether we fly Galactic 8 with Unity or not. So we're not going to make that call today. We're going to let the Delta program and need for those team members to drive that. And then we will take a pause with Unity, whether it's after 7 or after 8 as we put our attention on building these delta ships because that's where we will drive the economic value of the company.

That makes sense. And then the eight times per month on Delta, I think previously, maybe you talked about weekly flights if I remember correctly. What's kind of changed there or got you comfortable with that higher expected flight cadence?

Yes. Our -- previously, we've been talking weekly. My direction internally to our engineers really will be weekly, we should be able to turn these on a twice a week basis. But the team had work to do on that. And so the first piece that's informed that is just the progression of our designs. And specifically designs that are enabling us to do less between each flight. Now, the Unity flights have been really important in that as we've gone through the six and six months and built that operating cadence, it's very dialed in. Our technical operations teams are pros and they know exactly what they're going to be doing between those flights. And while that work happens to turn Unity, that also shows our engineers and design teams exactly the things that we would like to engineer out of the Delta systems, so that we don't have to put that work in between flights, because we built the ships in a way that doesn't require. That work has been kind of validated on the design side, as we've learned the specificity of maintenance on the Unity flights. So that's been super, super helpful. And then, you heard us talking about the test articles that we're putting in here. We're not going to wait all the way until flight test to validate that. We're going to be validating these designs with our copper burden, or iron burden, our static test article systems along the way. I'm really proud of what the engineers have been able to do and what our technical operations teams have delivered. It's that collaborative effort that lets us speak with confidence on a 2x a week or kind of 8x a month on average flights for Deltas when we get to steady state.

And then just sneaking one last one in. I mean eight times, 12, 96 are sell flights a year for each Delta. How are you thinking about capacity for each spaceport? I mean I think you've in the past you've maybe talked about 400, just thinking about how many spaceships to fill up the first baseboard and kind of start planning for a second?

Yes. You're bringing up a great point. With the turn time objectives on Delta, now something we've got confidence in, this has great benefit in reducing the amount of CapEx needed for every spaceport. So with each space ship being able to do round about 100 flights a year on a steady-state basis, you probably need four to five, right? And that's what we would put in at a spaceport. And so we'll probably start with four and just see how we're doing with those and do we need to add a fifth as kind of one that's always kind of available on the side. We will take I'm sure, a month out of that year. I'm giving you monthly rates on average. We'll take a month of the year as a more intensive overhaul, like an annual overhaul, like you would see in other aerospace type vehicles. But the average of the year will be eight times a month, 96-ish a year. So hopefully, that gives you a little bit of perspective on that.

Perfect. Thank you.

Thank you.

Your next question comes from the line of Myles Walton with Wolfe Research. Your line is open.

Thanks. Good evening. I was hoping to pick up where that left off, maybe. As you get into 2026 and you're sort of going to this very, very high OpTempo. How quickly have you assumed getting to that OpTempo in the cash flow breakeven analysis?

We're giving ourselves in 2026 time to sort new ships out. Now we have gone through the whole flight test and ground test and with the extensive ground test assets we've talked about. In this type of work in our internal modeling, we're giving ourselves half a year, a year to ramp that up. I would note the skill of our technical operations teams. We've given ourselves several flights before we were kind of sure if we'd hit a monthly cadence on Unity and we hit a monthly cadence pretty much right out of the gate. So I'm very proud and impressed with that team, and they'll be moving that as quickly as we can, but we think it's prudent to be conservative at this point.

Okay. And obviously, this is not -- the company has not been one to run the business without cash on hand. So I just want to make sure I understand the $1.1 billion is what you require to get to cash flow positivity, is that without thinking about just a normal level of cash on hand? Or is $1.1 million basically the CapEx and operating costs to get from here to there is another way to ask it.

Yes. This is Doug. Yes, sufficient to get there. And we mentioned, we would likely at some point, tap into the ATM, what's the remaining of $100 million, we don't need to in any near-term time frame. So we haven't put like a minimum cash balance out there, but we foresee that the $1.1 billion is sufficient to get through to cash flow positivity by 2026.

One thing, Myles, I'd probably add is context to that. We often will look to say how much of that time runway do you want to have on hand. As we get out into 2025 and move into 2026, the overall cost footprint of the company is also much less than it's been. At this point, we're through all sorts of things. We're through all the upfront engineering, the nonrecurring engineering. We're through all the upfront tooling and infrastructure test assets go in. We're in through all the infrastructure of the factory. We've got the supply chain built out and going. And so all of those costs are behind us at that point in time and we're at a lighter footprint. So the need for cash on hand is less than you may have seen from us in the past.

And just one other one. The mothership you said, the second one, you're planning enters in 2027. I think the mothership is more restrictive in terms of how many flights you can actually achieve. Can you remind us of what the status is on that, because obviously, you've made pretty good progress on the Delta? What's the current status of limitations of flights on the mothership?

So our first mothership Eve, as we fly with Eve and Unity, Unity is the bottleneck in the system. We'll be able to turn Eve as an airplane around quickly, and we feel Eve is able to do two or more flights a week on spaceflights and Unity can't keep up with that. So generally reliant to, we think there's probably some opportunity to go above two with Eve. But that means Eve will be the kind of constraining factor as we bring the first Deltas on board. So that also balances out as we're learning to turn the Deltas on that twice a week cadence by having two of them out, they'll probably balance out with Eve alone.

Okay, all right. Thanks so much.

Your next question comes from the line of Michael Leshock with KeyBanc Capital Markets. Your line is open.

Hey, good afternoon, guys. I wanted to start just asking now that we're in commercial service for some time now, you've had several successful flights. I wanted to ask on how Unity has really influenced the Delta Class production and design of that fleet, and how are you thinking about Delta Class differently versus maybe three or six months ago in terms of flight cadence or technical capabilities, you have the eight times a month flight right now, but anything else that's different than what we had initially expected?

Sure. The flights have been fantastic. I've had a chance to talk to the majority of the astronauts who have flown. It's very, very meaningful. We put just a few of the quotes in here today. And that's been very rewarding to the entire company. But business-wise, it's super meaningful. I've never contemplated an experience that is having the value that this is having for people and I think that will bode incredibly well for us as we go forward. So Unity has been delivering that. There are a lot of things on Unity that this is fantastic, and it will carry forward. We love the design of our cabin. We love the way the cabin interior generally is laid out. I would love the mirrored element in the back. We love the way we have the windows scattered around the sides and the ceiling kind of becomes a glass bottom boat as we flip the ship outside down. The collection of all those and being able to see almost kind of like through, the French doors looking out on able to use your peripheral vision as you're above the planet and see the vast pence of space. All that in Unity is amazing and will be carried forward into the Delta ships. Now Unity has things that we want to change, right? It is heavier than the delta ships will be. And so deltas, of course, will come out with six seats, so adding 50% to the capacity along the way. We're changing the system, the composite system of Delta. And that's really what's driving the majority of the work on the engineering side as we update the parts elements for that. So then as you kind of pivot to what is really different in Delta than where we've been before. From an engineered standpoint, not much is different than where they are before. They're just confirming for me what I'd ask them to be able to deliver is we should be able to turn these ships on a twice a week basis. And as we've advanced our design, that charge kind of extra credit charge they had for me, they have been delivering against. So that's very compelling and that's why we're feeling comfortable sharing that with you here today. The -- there are smaller things that I think we're learning around the flight. But the biggest things that we've picked, I'd say, a value on this type of call is by understanding what it takes to turn Unity on a month-by-month basis, we know that very specifically. We can target those things specifically in our design and verify it and test so that we don't need to do all those things like by flight, and that's how we're going to turn this so much more quickly.

And then I wanted to ask on research flights. Would you look to increase your mix in terms of more research versus private astronaut flights before you get to free cash flow positive just given the higher revenue per flight? Or are you still targeting that 10% research number?

Yes. I think the mix is going to be important. It's incredibly -- for our future, we have to be commercially -- in a commercially reasonable cadence with our early flights. And while we have, I'd say the long term is 10%. I've been very pleased listening to our researchers, both the Italians, Alester Kelly Gerard, have been very powerfully speaking about the benefits of this and the cost benefit of this for research. So I think we're going to lean into that. One of the things you're seeing in the revenue per flight we kind of pointed out for Galactic 6 and Galactic 7, it's meaningfully higher than what we've seen in the early flights, and that is leading in -- has the 4 seat, of course, leaning in heavily to the research mix also has a place where we've had -- if seats have become available in the manifest, we are offering those up kind of a market rate. And that market rate, as I mentioned, has been closer to $1 million on a seat versus our kind of based pricing that we'd had last at 450. And so all those things kind of combined into the mix of a revenue per flight. When we come into deltas, we clearly want to be moving through our existing customers. They've been very patient. We also have to use commercially reasonable efforts to make sure we've got the revenue coming in to maintain a cash positive and a profitable position. So we'll work with the mix to balance all that out.

Got it. Thank you.

Your next question comes from the line of Oliver Chen with TD Cowen. Your line is open.

Hi Michael and Doug, there's a lot of very helpful information on the Delta Class contribution margin as well as cost. On the 75% contribution margin, what would you articulate some of the major sensitivities there in terms of upside or downside potential? And then Michael, as you continue to enhance the customer experience, it sounded like there's a lot of great personalization as well. What are your thoughts in terms of retaining the customers that experience the flight? And any earlier thoughts on customer lifetime value as you think ahead and continue to innovate commercially? Thank you.

Thanks, Oliver. This is Doug. I'll take the first question. So, regarding the contribution margin, we have a good line of sight into the cost structure because we are already flying, right? We know how much it costs to purchase or build the items that get consumed in the flight. So the cost part of that is something we can see and we'll continue to drive efficiencies there over time. That has things in it like the rocket motor and the fuel and that sort of things. The more variable item is the revenue per flight. And Michael talked about some of the variation there that can occur depending on the mix of the manifest -- and the -- we've got the standard as ticket pricing or we have some research mixed in there or any other variety. So, I'd say there's some upside in that more than downside because when we gave you that 75% that was using a $450,000 per ticket price. So, we've indicated today that there's upside there based on what we're seeing today and the flights that are coming. So, I'd say more upside than downside in that metric.

And thanks for the notes, Oliver, we have tried to bring forward good information for everyone today. You talked about what we think we've been learning from the experience talking about retaining people and then lifetime value and kind of future opportunities. So, I'll try to hit those. It's hard to describe how powerful this experience is and the customers -- the future astronauts who are now graduating to our astronaut community, they're just bold over and so happy and so pleased, and it has been a long way has been so worth it. And that experience is going to help in kind of retaining of others as they share that, of course. But as I kind of move into like the value of that group -- some of those people, not all, but some of those people will themselves want to repeat. They want to repeat its Spaceport America or they'll want to repeat as we move to other Spaceports. The other thing, I think, second, in value is all of their direct friends that are here. So, what we've learned in these last six space lights is the event and the moment that is happening around these space flights. So, currently, these are just kind of opened up to the friends and family of our astronauts who are flying and it is happening. It's emotional, it's meaningful. It's fun. There's -- of course, there's celebration and ceremony that goes with that. And so there's some, I'll call it, ancillary revenue opportunity just around that. That probably gets bigger as we open up the Spaceports to more have viewing because it is an event, and we keep hoping to get people out to witness this. And I hope you have a chance to come do this. It is just…

Okay. That's really helpful and innovative. Last question, the Spaceship factory is on track to open in mid-2024. I mean in the past, there were supply chain disruptions, of course, and timing and also cost and time and money. What's ahead with that in terms of what you're monitoring? Is that enough cushion in terms of what you see in the current environment with availability and the flexible arrangements you're using as well? Thank you.

Thanks, Oliver. So we've got a team on the program management side of this, I'll call it more so than the engineers per se and our supply chain team, these groups are pros. And the big thing that's going on now, of course are scanning out the long lead items. And there's a little bit of whackable with that, but we whack down things when we see those things pop up. And by having our Delta design be a derivative design, not a brand-new thing, it's a derivative design of the work that we've done in the past. We know what those long lead items are. And so we've got the time to be out searching and adapting as we need to. We're working with really seasoned partners in Bell and Qarbon, they've been incredibly responsive. We've started to bring some of their team members and leaders out to see our spaceflights. I think it's really important that those teams feel part of our team and feel part of the emotion and the huge value of doing this. So that helps us build kind of cultural momentum there as well. And it's a collective effort. So I -- this is an Aerospace project, and there's always things that are popping up, but we've got the right focus and the right team and the right buffers built into our plans and schedules that we feel good on them. And we're going to continue to manage day-by-day, week-by-week, month-by-month on that.

Thank you. Best regards.

Thanks, Oliver.

There are no further questions at this time. This will conclude today's conference call. We thank you for joining. You may now disconnect your lines.