Rocket Lab - Q3 2023

Transcript

Operator (participant)

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rocket Lab Q3 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Colin Canfield, Head of Investor Relations. Please go ahead.

Colin Canfield (Head of Investor Relations)

Thank you, Eric. Hello, everyone. We're glad to have you join us for today's conference call to discuss Rocket Lab's third quarter 2023 financial results. Before we begin the call, I'd like to remind you that our remarks may contain forward-looking statements that relate to the future performance of the company. These statements are intended to qualify for the safe harbor protection from the liability established by Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance, and factors that could influence our results are highlighted in today's press release, and others are contained in our filings with the Securities and Exchange Commission. Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments. Except as required by law, the company does not undertake any obligation to update these statements.

Our remarks and press release today also contain non-GAAP financial measures within the meaning of Regulation G enacted by the SEC. Included in our, in such release in our supplemental materials are reconciliations of these historical non-GAAP financial measures to the company's comparable financial measures calculated in accordance with GAAP. This call is also being webcast with a supporting presentation, and a replay and copy of the presentation will be available on our website. Our presenters today are Rocket Lab Founder and Chief Executive Officer, Peter Beck, and Chief Financial Officer, Adam Spice. After our prepared comments, we will take questions. And now let me turn the call over to Mr. Beck.

Peter Beck (Founder and CEO)

Thanks, Colin, and welcome, everybody, for joining us. Today's presentation, we will go over our key business accomplishments for the third quarter of 2023, as well as further achievements we've made since the end of the quarter. Adam will then talk through our financial results for the third quarter before covering the financial outlook for Q4 2023. After that, we'll take questions and finish today's call with the near-term conferences where we will be attending. All right, on to what we achieved, excuse me, in the third quarter for the year. Starting with Electron. In July, we launched a mission with several satellites for NASA and others, which was the first of a two back-to-back reusability-focused missions. After successfully deploying the first mission seven spacecraft, Electron's first stage was brought back to Earth and recovered from the ocean.

Then we followed that up with our 40th Electron launch and even more recovery milestones, including a return first stage and a first to launch a re-flown Rutherford engine, previously flown on our 26th mission, there and back again. The engine performed flawlessly like a new one, completely validating our pursuit of reusability for Electron and setting us up well to refly an entire engine set as our next major reusability goal. So next, I'll provide a bit of an update for Electron. Following those two successful flights, as you know, we unfortunately experienced an anomaly on our 41st mission.

It's important to remember that up until this launch, we have had 37 successful orbital missions to place 171 satellites in orbit, and the past two years have been flawless, with a record of 20 successful missions, one after the other. For flight 41, as soon as the issue occurred, our team jumped into action. In the weeks since, the team has been scouring through thousands of channels of flight data and manufacturing data to determine what was the probable root cause. I'll take you through their investigation in detail over the next couple of slides.

Working in parallel with the FAA, the FAA has conducted its own review of the mission safety processes, plans, and procedures, which concluded that they all worked as they should, to keep the public safe, and I am pleased to confirm that the FAA has since given us approval to resume launching from Launch Complex One. With our investigation in its final stages and our launch license remaining active, we are fully anticipating to return to flight within the next few weeks. Following updates and changes to our testing and manufacturing processes, we'll be returning to the pad with an even more reliable vehicle to meet our busy launch manifest for the remainder of 2023 and into 2024. Now, let me take you through what happened and what we've learned. So here's a slide on the anomaly timeline. The anomaly that ended the mission happened incredibly quickly.

From the first action in the chain of events, when Electron cut off its data relay, the team only had 1.6 seconds of anomaly flight data to work with. This was always gonna be a highly complex issue to figure out, but with deep diligence and analysis, here's what we've been able to determine. On our 41st mission, launched September 19 from LC-1, it completed all the usual launch milestones through liftoff Max Q stage separations. And at 151 seconds, the second stage engine tried to ignite, which is confirmed by flight telemetry that showed the igniter pressures building and the LOX and kerosene pump speed rising to pump propellants into the combustion chamber.

The voltage levels from the battery packs that power the engine and the motor controllers are nominal at this point, and nominal at that point of ignition, but within milliseconds, in fact, 151.7 seconds, we get our first indication of the anomaly. The system's high level voltage levels take a sudden dip and rise of about 100 volts within 30 milliseconds, indicating an energy escape from the system. That then led to a full loss of power to the second stage lower avionics, cutting off telemetry and communication with the second stage. And with that, it was all over... So we'll move on to the issues. So, you have to bear with me on this, there's a little bit to talk about here.

But with good visual evidence with the onboard cameras and over 12,000 channels of data, and this high-level timeline to draw from, the investigation narrowed in on the issue. More than 200 sub-investigations were launched to rule out hypothetical causes of the anomaly. After more than seven weeks of extensive analysis of the mission's manufacturing, test, and flight data, the findings of the Rocket Lab investigation team overwhelmingly indicate an unexpected electrical arc occurred within the power system. Shown in the image on the top right, the team did some tricky optical triangulation and image processing of a small shadow on the engine bell caused by the arc.

From that, they were able to pinpoint and re-triangulate the failure's point origin to an area where the two battery packs connect, known as the fixed pack to supply the high voltage power. Now we're all gonna take a little lesson in Paschen Law and Paschen curves. Paschen Law describes how, in partial pressure environments, the likelihood of an arc to occur changes in high voltage systems, depending on the environmental composition. An approximate guide they can then be applied across different situations, called the Paschen curve, which uses the relationship between voltage, pressure, multiplied by distance, to indicate what the range of danger is for an arc to form through various gases like helium, argon, nitrogen, et cetera. The graph on the bottom right is what's known as a highly simplified Paschen curve.

So basically, the easiest way to think about this is if you have a positive and a negative terminal of a battery at 500 volts down here on Earth, you could place those two terminals of the battery about 0.03 millimeters, or one third of the thickness of a human hair, beside each other, and they would not create an arc or jump a spark between them. Now, take the same 500-volt battery and terminals and put them in the worst part of the Paschen Curve, which just happens to be just after stage separation and stage 2 ignition of Electron, and the same 500-volt battery and terminals will now arc to each other when they are nearly 1 meter apart.

So different gases, different pressures affect this distance, and there's also other things like AC ripple that can have a huge negative effects. But for now, let's just keep it simple. For Electron, with its high voltage, 500-volt rail power supply, we have to ensure that every connection is essentially hermetically sealed. A tiny pinprick or insulation failure will result in arcs, given that they can travel over large distances when in the Paschen Curve. All of this is in flux and very transient because as we ascend higher during the second stage burn and go into the hard vacuum of space, the arcing distance goes back the other way, and it becomes hard to arc again. It's really just at stage separation, where things are the worst, and we bottom out the Paschen Curve.

As you can imagine, this is extremely difficult to test for down on Earth. We actually, you know, currently put the whole rear engine assembly in a vacuum chamber, pull it down, and inject gases like argon to try and aggravate the phenomenon. But even the smallest insulation compromise cannot always be detected, especially when you compile that with other factors like AC ripple and trace gases. Excuse me. So now that everybody understands Paschen curves, during the second stage ignition, we're at the worst part of the curve, and we had a small concentration of helium in the vicinity of the upper stage, which is normal, and a high voltage AC ripple that lowers the spark threshold even lower, and a tiny, undetectable fault in the HV loom insulation. All of which, excuse me, all of which combined, allowed for an arc to briefly occur.

If any of these things were not present, then the failure would not have occurred. All four had to be there, and to be honest, with all the testing we do before flight, you would also have to be incredibly unlucky to have the insulation failure point also line up with an electrical path to be able to arc to chassis. And look, I don't generally believe in luck as an engineer, but in this instance, I would say that so many things had to line up, that most people would say that this, you know, the occurrence, the probability of this occurring would be largely improbable. So with that, now that we kind of understand and we've explained the failure, what are we gonna do to get back to flight?

So, the failure is obviously, you know, a highly complex set of conditions that are extremely difficult to predict. Our team's top priority through the investigation has been to find a way to make sure that this never happens again, and as a result, there's a couple of key corrective measures. The first is to increase the fidelity of the stage level vacuum testing. We now have a much more sensitive instruments implemented in the pre-flight tests, both at the component level and the stage level, that can sense partial discharge all the way down to a picocoulomb now. This gives us much more confidence in the testing. However, I was not happy to stop there, and so we've implemented a rather brute force solution.

What we've done is seal up the battery frame that contains all the high voltage connections and equipment and then pressurize it to about 0.5 PSI. I'll draw your attention to the graph on the top right, surprise, surprise, it's another Paschen Curve, that shows that by pressurizing the high voltage area, we shift the Paschen Curve to the left, out of the red zone and into the green zone. Meaning basically, we're back to what it's like on Earth, where it's not really possible for big arcing distances to occur. Now, this has been a lot of work to implement by the team, and is a fairly extreme solution. But really, I thought it was the only way we could put the Paschen Law well back in its box.

So the best way to solve a problem, in my opinion, is always to eliminate the problem, and that's what we've done. Getting to the bottom of the issue and back to the pad for our customers has been the team's number one priority. It's been incredible to witness their perseverance, dedication over these past few weeks. Not only on the anomaly investigation, but in the work that they've completed in parallel, to make sure that we're good to go as soon as we get back to the pad. The launch window for our return-to-flight mission will open on November 28 and extend into December. This dedicated mission will be for iQPS, a Japanese-based earth imaging company, with the rocket for that mission going through pre-launch testing on the pad at launch complex right now. To move on to Electron launch manifest.

In 2024, we have a really big year ahead of us. Even with our pause in operations, Electron remains the world's most frequently launched small orbital rocket. Dedicated missions for small satellites continue to experience strong demand, which we've seen in multiple bulk buys by returning customers and constellation operators. In fact, we've booked out Electron launches next year, completely booked. We see the market for the Electron product being very strong, and this manifest validates that. Frequent launch opportunities, flexibility over schedule, and control over orbital deployment are what our customers are looking for, and that's what Electron has been providing and will continue to provide in the new year.

And all that, all we have to do really, with our 2024 manifest, is execute, as is, as in with, with anything in the space industry. By ramping Electron production and keeping on top of demand with recent acquisitions, as well as continuous improvement in automation across our manufacturing processes, we look to continue improving on an already impressive performance in manufacturing. We also note that the scaling is coming with improved gross margins. In Q3 2023, we achieved a 27% GAAP launch gross margin, which should look to enable to progress our profitability targets for Electron as we drive scale and efficiency into the business. I now want to take you through and highlight some of their accomplishments in so far in Q4. So Neutron structures. We'll start with a Neutron update.

Earlier this quarter, we reached a major milestone and had a first second stage tank up on the stand for structural and cryogenic testing, which is really a key marker for our Neutron program development and Neutron program. The team's job was to push the tank to its absolute limits by loading it up with cryogenic fluids and test to destruction. Something like 96,000 liters of liquid nitrogen was used for this test campaign, and an exploded tank in this instance is very much a good thing and what we wanted to achieve. The team took the tank past MEOP, or Maximum Expected Operating Pressure, at more than seven times atmospheric pressure. What they've learned in the campaign has been applied to the next stage two tank, and currently under production.

To really bake in structural reliability early as we get closer to our date with the launch pad. Speaking of baking, this is quite literally what our carbon composites team has been up to with our next full-scale Neutron structures and components. The images on this slide here show you the scale of some of the in-tank devices being produced, more than seven feet in diameter for those circular propellant management devices, and the stage two dome being laminated in the bottom section. Models for Neutron's fixed fairing sections are coming together nicely, and of course, we have another second-stage Neutron tank being built for our next test stand to go on our next test stand in the first half of 2024. Then over to Neutron's Archimedes engine.

Another test we're celebrating was a critical combustion test that the team achieved with Neutron's Archimedes engine. There's plenty of benefits to pursuing methane LOX propellants, but it does come with some of its own challenges. The critical piece really, and one of the challenges was in using methane and liquid oxygen for Archimedes, is getting the preburner dialed in. Where generally you want a fuel mixture ratio in a chamber of something like 3-to-1 oxygen fuel, we're running an oxygen-rich preburner cycle on Archimedes that forces us to flow all of our oxygen through the combustion device. Therefore, our ideal mix is something between 60-to-1 to 100-to-1, which is a challenging thing to achieve without all the excess oxygen extinguishing combustion.

Archimedes also has an extremely benign operating point, making it great for reliability and reusability, but it does mean that the pressures are low, and ironically, harder for the preburner. But I'm happy to say that we met all the operating points that we wanted to on those tests. That was a great accomplishment by the team. At the same time, the Archimedes team had been producing and testing full-scale hardware like valves, chambers, injectors, controllers, and assemblies, in preparation for development and propulsion tests. Making for a really impressive sight when all the pieces come together, like you see in the photo on the slide as well. Over to Neutron infrastructure. So supporting infrastructure for Neutron has also scaled quickly over the past few months. Groundworks are being completed in Virginia, where our Neutron pad will be.

Test facilities and support services will be based there as well, and we're ready for construction to begin at a launch site located close to our key government customers, which will enjoy the benefits of a less congested launch site than obviously the Cape. In Q4, we opened our new Engine Development Center in Long Beach that will support the development and production of the Archimedes engine. And once the engines are completed at the EDC, they'll go to testing at our stand at NASA Stennis Space Center, where the Neutron team has been busy with site improvements to accept the engine for hot fires. And then finally, Neutron timeline.

You know, all of these achievements across Q3 and Q4 that I've mentioned, and several others are shown here, have, you know, been great to, to tick off along with the, along the Neutron timeline. We've completed second stage tank testing, printed key Archimedes engine parts and components, had success with our combustion testing devices. Completed qualification testing of our composite overwrapped pressure vessel, run through separation lock deployment testing and stage pusher system testing, completed our actuator motor controller testing. Finished tests on our power management module, confirmed Neutron's engine and stage controller functions as it should. Completed avionics controller testing, successfully tested the vehicle's thermal protection system, set up the test rig for the incoming Neutron canard and canard system testing.

The team is obviously working hard to keep our ambitious schedule for the rest of the year and into 2024, with some of the next year milestones to look out for, including first stage qualification tank test completed, Archimedes engine testing campaign, and the first simulated flight orbit with our hardware connected to our flight computers. Now, we will continue to provide updates on how Neutron is tracking outside our quarterly reviews. Beyond Electron and Neutron, our hypersonic test vehicle, HASTE, has seen significant amounts of interest from new and returning government customers looking to further develop the nation's hypersonic testing capability. We've actually booked seven launch contracts in the six months since our HASTE program was introduced, including our latest mission announced today. A HASTE launch from Virginia from the U.S. Department of Defense Innovation Unit.

This mission will demonstrate HASTE direct inject capability by deploying its payload during ascent while still within the Earth's atmosphere. A long sought after capability for the nation's strategic defense and civil needs at a fraction of the cost of the current full-scale tests. On to space systems now, and we have a new spacecraft order on the books for a confidential constellation customer that builds on a strong demand for our satellite products. This particular spacecraft will include a full suite of our own satellite components and subsystems, including star trackers, reaction wheels, solar panels, S-band radios, flight software, and so on and so forth.

This contract in particular speaks to the popularity and configurability of our spacecraft bus, but the confidence also in our satellite components in the market and our ability to grow as an end-to-end mission partner for the space industry. Now, importantly, we'll also be managing the mission's operations and a further demonstration of our end-to-end business model of building and operating satellites that we build for our customers. Continuing with space systems, to our largest space system contract now, the $143 million contract we have with MDA Globalstar. We're getting close to the delivery of our first of 17 spacecraft for the program by the end of Q1 next year.

Having cleared significant milestones in the contract in the past few months, the spacecraft critical design review and delivery of a structural thermal model for the customer. We expect to recognize revenue from those invoice payments to MDA in the fourth quarter of 2023. This sets the stage for a more meaningful revenue contribution from this contract as we enter 2024. We continue to pursue increasingly complex and financially needle-moving space system opportunities and are encouraged by progress being made in this part of our business. We believe that these pursuits position us to continue scaling as an end-to-end space solutions leader. Lastly, in space systems updates, we're proud to have directly supported the success of NASA's groundbreaking Psyche mission, launched in October, with our solar panels powering the spacecraft on its six-year journey into deep space.

These solar panels we provided to the mission hold the record for being the largest solar panels ever installed on a NASA JPL satellite, which we're immensely proud of. And then finally, into post-quarter achievements. I'm thrilled to welcome retired U.S. Space Force Lieutenant General Nina Armagno to Rocket Lab's board of directors. Lieutenant General Armagno served more than 35 years in leadership positions across the U.S. Space Force, including the U.S. Air Force and U.S. Space Force, including being the first lieutenant general officer appointed to and director of staff for the Space Force, where she established America's first new military branch in 72 years. She's had an accomplished and distinguished career in the military and will be an invaluable asset to the board. And now, over to Adam for the third quarter financial highlights.

Adam Spice (CFO)

Thanks, Pete. Third quarter 2023 revenue was $67.7 million, which is near the high end of our prior revised guidance of $66 million-$68 million. Third quarter 2023 revenue reflects sequential growth of 9%, the result of three launches and continued growth in our space systems business. Our launch services segment delivered revenue of $21.3 million in the quarter from three launches, and is in line with post-anomaly revised guidance of $22 million, with a slight underrage due to timing of revenue under a launch study contract. The resulting average revenue per launch came in at $7.1 million, below our target average selling price of $7.5 million for 2023, and the result of less favorable mix in the quarter.

Our current backlog continues to reflect our target average revenue per launch, with variability tied to LSA volume commitments, launch location, and unique mission assurance requirements. Our space systems segment delivered $46.3 million in the quarter, which was up 17% sequentially and modestly above the high end of our prior revised guidance range of $44 million-$46 million. Driven by a step up in our MDA contract revenue, offset somewhat by a reduction in our components business, which is poised to rebound in the fourth quarter guide that we'll discuss later.... Now turning to gross margin. GAAP gross margin for the third quarter was 22.1%, above the high end of our prior revised guidance range of 18%-20%.

Non-GAAP gross margin for the third quarter was 29.5%, which was also above our prior revised guidance range of 26%-28%. GAAP and non-GAAP gross margin improvements relative to our revised Q3 2023 guidance reflect continued efficiencies in both our launch and satellite manufacturing businesses. We ended Q3 with production-related headcount of 816, up 49 from the prior quarter. We also note that non-GAAP gross margins reflect a 430 basis point improvement versus Q2 2023, when adjusting for Q2's one-time $4.1 million release of a loss reserve related to a legacy launch contract. We're encouraged by the trend in gross margin improvement and expect this trend to continue into 2024 as we return to launch and resume growth in Electron's launch cadence against our strong and growing launch backlog.

Turning to backlog, we ended Q3 2023 with $582.4 million of total backlog, with launch backlog of $250.7 million and space systems backlog of $331.7 million. Relative to Q2 2023, total backlog was up 9% sequentially, or $48.1 million, thanks to healthy bookings in our launch business, partially offset by declines in space systems. For launch, specifically, backlog was up 55% sequentially, or $88.8 million, as Electron continues to benefit from return orders of both commercial and HASTE customers.

For space systems, backlog was down 11% sequentially or $40.7 million, as we continue to work through our larger satellite manufacturing contracts, and the timing of additions to space systems backlog are lumpy due to the increasing complexity and magnitude of these contract opportunities. We expect approximately 57% of current backlog to be recognized as revenues within 12 months, and expect continued meaningful growth in our backlog as we exit 2023 and progress through 2024, thanks to continued demand for our Electron platform, as well as anticipated orders for significant satellite manufacturing opportunities we've aggressively been pursuing over the last year or so. Turning to operating expenses. GAAP operating expenses for the third quarter of 2023 were $53.8 million, modestly above the high end of our original and unrevised guidance range of $51 million-$53 million.

Non-GAAP operating expenses for the third quarter were $39.8 million, which is at the high end of our original and unrevised guidance range of $38 million-$40 million. The decreases in both GAAP and non-GAAP operating expenses versus the second quarter of 2023 were primarily driven by contra R&D credits related to Neutron upper stage development from our U.S. government partners, partially offset by higher Neutron development spending, increases in headcount, and higher depreciation and amortization expenses. In SG&A, GAAP expenses decreased $1.5 million quarter on quarter due to a change in contingent consideration related to our PSC acquisition due to a lower average stock price in the quarter.

Non-GAAP SG&A expenses increased by $700,000, primarily due to increases in headcount, along with a step-up in depreciation and amortization, primarily related to additions to corporate IT and security infrastructure to further enable efficient scaling of the business. Q3 ending SG&A headcount was 236, representing an increase of 8 from the prior quarter. In R&D, specifically, GAAP expenses were down $4.4 million quarter-over-quarter due to increased contra R&D credits related to the previously referenced Neutron upper stage development, partially offset by a step up in Neutron development spending. Non-GAAP expenses were down $4.3 million quarter-over-quarter, driven similarly to GAAP expenses by Neutron-related contra R&D credit and development spend. Q3 ending R&D headcount was 520, representing an increase of 2 from the prior quarter.

In summary, total third quarter headcount was 1,572, up 59 heads from the prior quarter. Purchases of property, equipment, and capitalized software licenses was $21 million in the third quarter of 2023, an increase from $10.6 million in the second quarter of 2023. The sequential increase was due to our continued investment in Neutron research, testing and production infrastructure projects, along with the expansion of our satellite production and space solar solutions capacity. Cash consumed from operations was $25.2 million in the third quarter of 2023, compared to $6.1 million in the second quarter of 2023.

The sequential increase of $19.1 million was driven primarily by timing of receipts and payments associated with our satellite production programs, which, for some of our larger programs, have significant periods between milestone achievement, invoicing, and ultimately, collections, which, at the end of the day, are purely timing related. More specifically, Q2 was a quarter that benefited from a working capital dynamic, where we collected on material milestone invoices that were invoiced in the prior quarter, where payment terms are more lengthy than our target, 30-45 days. Cash consumed by asset acquisition and business combinations was $800,000 in the third quarter of 2023, a decrease from $16.1 million in the second quarter of 2023.

The sequential decrease of $15.3 million was driven by the majority of our Virgin Orbit select asset acquisitions being realized in the second quarter. Overall, non-GAAP free cash flow, defined as GAAP operating cash flow, reduced by purchases of property, equipment, and capitalized software in the third quarter of 2023, was a use of $47 million compared to $16.7 million in the second quarter of 2023, or a more apples-to-apples comparison of $32.8 million when including the impact of our acquisition of select Virgin Orbit assets, most of which were classified as PP&E.

The material step-up and negative Non-cash free cash flow was, as noted in my earlier GAAP operating cash flow commentary, a result of lumpy timing of payments and receipts associated with our space systems manufacturing operations, and we expect a reversal of this negative working capital cycle in early 2024. The ending balance of cash, cash equivalents, restricted cash, and market securities was $374 million at the end of the third quarter of 2023. Reflecting on the past four quarters, we have made meaningful progress towards our long-term financial model. We have delivered consistent revenue growth, and when adjusting for the one-time release of a loss reserve in Q2, gross margin expansion, and shrinking adjusted EBITDA losses each quarter. With our strong launch manifest and greater contribution from space systems contract execution in 2024, we expect this trend to continue.

Overall, we expect gross margin trends will continue to improve over time, thanks to the same factors that have helped drive improvement we've seen this year. In terms of when we can get to Adjusted EBITDA breakeven, well, Neutron investment, especially R&D spend, continues to be the pacing item to achieving this critical milestone. Although we view that Rocket Lab has demonstrated that its existing businesses are on a trajectory to offset the weight of this Neutron investment spend. With that, let's turn to our guidance for the fourth quarter of 2023. We expect revenue in the fourth quarter to range between $65 million and $69 million, which reflects $48.5 million-$52.5 million of contribution from Space Systems and $16.5 million from Launch Services, which assumes two launches.

As referenced earlier, based on our manifested launch backlog, we now expect 11 launches in 2023 and 22 launches in 2024, with an expectation that our average selling price that continues to trend towards our current target of $7.5 million through the remainder of 2023 and into 2024. We expect fourth quarter GAAP gross margin to range between 24%-26% and non-GAAP gross margin to range between 30%-32%. These forecasted GAAP and non-GAAP gross margin improvements reflect a favorable mix between Launch and Space Systems, along with a favorable mix within Space Systems. We expect fourth quarter GAAP operating expenses to range between $61 million and $63 million, and non-GAAP operating expenses to range between $50 million and $52 million.

The quarter-over-quarter increases are driven primarily by having recognized a substantial amount of contra R&D credit related to our Neutron upper stage development agreement with the U.S. Space Force in the prior quarter, along with increases in staff costs, prototyping, and material spend as we continue ramping our Neutron development program. We expect fourth quarter GAAP and non-GAAP net interest expense to be $2 million. We expect fourth quarter adjusted EBITDA loss to range between $23 million and $27 million and basic shares outstanding to be approximately 487 million shares.

Additionally, the unique situation created by the anomaly and related pent-up impacts to the launch manifest as we prepare to return to flight and head into 2024, combined with better visibility on space systems program execution and revenue recognition as we prepare to ship the first spacecraft against the MDA Globalstar program in the middle of the first half of 2024, provides us with the visibility and confidence to estimate Q1 2024 revenue to range between $95 million and $105 million, putting in sight our first $100 million revenue quarter. This forecast would be the result of 4-5 launches in the quarter, yielding between $30 million and $37 million of launch revenue and $65-$68 million of contribution from Space Systems.

This would represent a significant milestone for the company and we believe, a strong endorsement of the end-to-end space solutions business model we're delivering on. With that, we'll hand the call over to the operator for questions.

Operator (participant)

Thank you. At this time, I would like to remind everyone in order to ask a question, please press Star, then 1 on your telephone keypad. Your first question comes from the line of Edison Yu with Deutsche Bank. Please go ahead.

Edison Yu (Director and Senior Equity Research Analyst)

Thanks for taking our questions, and I appreciate the level of detail you provided on the investigation. First question on the manifest for next year, can you give us a sense of your confidence level on the 22? Is that sort of your base case, or in other words, the ranges are 20-24, and the midpoint will be 22? Or do you need kind of everything to go right to hit that 22 target?

Peter Beck (Founder and CEO)

Well, hey, Edison. As with any launch contract, right, we are always somewhat susceptible to, you know, factors that we can't control. Like, you know, customer readiness is always a big one. You know, the customers need to turn up with their satellites on time. You know, weather and of course, you know, as I mentioned in my commentary, we have to execute from a manufacturing standpoint. But I think the key takeaway there is, you know, we have a completely sold-out manifest for next year, you know, at a number that is, you know, really solid.

You know, I would say that we have to execute, and there's always some uncertainty from some things that we don't control, but you know, that's certainly what we're targeting.

Edison Yu (Director and Senior Equity Research Analyst)

... Understood. And then just a follow-up to that, can you give us a sense or maybe a bridge on the margin in launch? You had a very, very good quarter, actually, in Q3. How does that margin trajectory look if you can get to that 22 launch cadence?

Adam Spice (CFO)

Yeah, I'll take it, I'll take a pass at that, Pete. So as in, yeah, I mean, we've long stated that when we get to our target model for non-GAAP gross margins of around 50%, that requires launching 24 times a year. So, you know, we're gonna make significant progress towards that as we launch, as we kind of strive to hit that 22 number next year. So, you know, and if you look at any given quarter, if we have, again, six launches in the quarter, that should be, you know, at or very close to our long-term 50% non-GAAP gross margin target.

Edison Yu (Director and Senior Equity Research Analyst)

Got it. If I can just sneak one more in on Neutron. Correct on the milestones, do we feel comfortable with the timeline? Should we interpret that as, you know, you guys feeling comfortable with the timeline on next year?

Peter Beck (Founder and CEO)

Well, look, there's still a lot of work to go, and the year's not finished yet. So, we're pushing hard, but at this stage, we're not making any adjustments, you know, to our predicted timeline. But I'd just highlight there are, you know, still some really significant tests to, you know, to be completed. But, you know, right now, we're not making any major changes.

Edison Yu (Director and Senior Equity Research Analyst)

Got it. Thank you very much.

Operator (participant)

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

Matt Akers (Senior Equity Research Analyst)

Yeah. Hey, hey, guys. Good afternoon. Thanks for the question. I wanted to ask on Neutron, you know, after that first launch, what sort of rate do you envision doing Neutron launches? And what rate are you kind of capacitized to support now? At what point would you need to sort of add capacity there?

Peter Beck (Founder and CEO)

Yeah. Hey, Matt, it's a good question. So, we're not trying to do anything Herculean on Neutron. You know, we've lived through the pain of creating a launch vehicle and standing it up and bringing it into production. So it follows a pretty similar cadence profile to what we were able to achieve with Electron. So, you know, we'll do a test flight or a couple of test flights and then move into sort of three or four a year, and then, you know, continue to bootstrap and grow that. And really follow the same model that we followed with Electron, where we launch a little bit, we generate some revenue, and, you know, we make improvements to the vehicle, and we make improvements to the infrastructure.

And we found that to be by far the most cost-effective way, rather than going out and building a giant factory to do huge volumes from day one, and just consuming tremendous amount of capital. We've kind of always bootstrapped our way along, and increased, you know, flight rate and cadence, along with that and facilities along with that.

Matt Akers (Senior Equity Research Analyst)

Got it. Thanks. Thanks, that, that's helpful. And then if I could ask on, I guess, free cash flow. How much sort of additional expense was there around kind of the investigation in Q3 and maybe into Q4, and sort of how are you thinking about free cash flow into 2024?

Adam Spice (CFO)

Yeah, you know, Matt, we didn't see a tremendous amount of, you know, I would say, resource diversion. A lot of these kind of anomaly investigations take, you know, a select group of very capable people to dive in and do the analysis and investigation. There's not a lot of capital spend associated with it, and, you know, we continue to, you know, keep our foot on the gas when it came to production of Electron. So, you know, the anomaly investigations themselves really won't have any kind of noticeable material effect on cash flow in the fourth quarter. You know, I think the biggest thing for us for cash flow is really around timing for these big space systems contracts.

I mean, if you, if you look at our, you know, our, our launch business, you know, people, you know, the typical model is, you know, you get the people pay a 10% deposit at contract signing, and then there's milestone payments along the way. And typically, you know, there's only 10% left to collect at the time that we, we actually launch the mission. So that's always been a good cash flow model. It's just all about that, getting that business to scale, which, again, we're making great strides at being able to do. You know, when it comes to space systems, they're large contracts. You know, I mentioned lumpy a few times in the prepared commentary, and that's really, really true because, you know, you can have the achievement. You have some delays of achievement of critical design milestones.

You got to get through those gates before you can turn that over into, you know, the AIT phase of the program, where you're doing the assembly, integration, and test side of it. And so you can have periods, depending on what your payment terms are with your customers, and, you know, on our largest space systems contracts, you know, we're dealing with pretty sophisticated organizations that, you know, had pretty tough terms. It was, you know, we were chasing our first, you know, large and meaningful space systems contract, so we weren't necessarily in the best position to negotiate those types of terms to our advantage. So it leads to some, you know, I would say, a little bit of interim to near-term pain on that side. And we've experienced that in 2023.

We expect that dynamic from the operating parts of our business to turn around and be much stronger from a cash flow perspective in 2024. Now, we'll continue to see consumption when it comes to Neutron, particularly around, you know, prototyping, you know, and particularly around infrastructure, because we still have, you know, infrastructure investments that we need to do to prepare for that first launch at the end of 2024.

Matt Akers (Senior Equity Research Analyst)

That's great. Thanks for the color.

Operator (participant)

Thank you. Your next question comes from the line of Cai von Rumohr with TD Cowen. Please go ahead.

Cai Von Rumohr (Managing Director)

Yes, thanks so much. So, first quarter, it looks like you have a target price of $7.5 million. Is that the price likely to be for the entire year?