Last week was supposed to be a good one for Virgin Galactic (SPCE 3.15%), as the company reported its first-ever quarter with a revenue-generating commercial space flight included in the results. As it turned out, the week was anything but good.

From their highs Monday, shares of the world's first pure-play space stock dove more than 13% over the course of the week, closing at a lowly $3.72 per share and falling more after hours. Yet Virgin Galactic's earnings results weren't entirely unexpected.

Virgin Galactic by the numbers

Just ahead of earnings, I warned that things were not looking great for Virgin Galactic's chances of "beating earnings" in Q2. Wall Street was looking for the company to report $2.7 million in Q2 revenue -- but Virgin Galactic's Galactic 01 spaceflight, conducted during Q2, sold only three tickets at a reported $200,000 each.

It was always going to be hard to make those three $200,000-tickets help the company reach $2.7 million in revenue. As it turned out, Virgin Galactic didn't do $2.7 million in revenue.

But it came close.

Between ticket revenue and "membership fees related to future astronauts," Virgin Galactic ended up with $2 million in revenue for Q2. The company still lost $0.46 per share for the quarter, which was more than Virgin Galactic lost in Q2 2022, but less than the $0.51 per share that Wall Street thought it would lose this time around.  

The big reveal

Long story short, Virgin Galactic beat earnings for the quarter, which was a pleasant surprise. But the company still lost a lot of money, which was no surprise at all. Virgin Galactic also missed on sales, which we kind of all expected it might.

What really seems to have shocked the stock market, though, is what Virgin Galactic told investors about what will happen over its next couple of quarters.

Recall that the good news about Virgin Galactic this year is that it has successfully begun commercial spaceflights, carrying tourists to the edge of space in exchange for the price of their tickets. Management has promised a second such space tourism flight, called Galactic 02, in August, and says it plans to fly at least once per month from here on out -- and accelerate its rate of flight as it builds new spaceplanes to carry passengers.

Well and good. But here's the thing: Virgin Galactic's first 600 tickets, presold at prices ranging from $200,000 to $250,000 a seat, were supposed to generate revenue of as much as $1.5 million per flight. (Each Unity-class spaceplane has six seats.) Over the course of a three-month quarter, therefore, investors were expecting Virgin Galactic to be reporting quarterly sales of about $4.5 million -- not a lot of cash for a company that's spending more than $140 million per quarter on operating costs, but still, better than nothing.

Yet in giving updated guidance last week, Virgin Galactic advised that "revenue for each of the third and fourth quarter of 2023 is expected to be approximately $1M."

Again, that's $1 million, not $4.5 million. And it's happening not just in Q3, when Virgin Galactic is probably going to launch only twice, but also in Q4, when Virgin Galactic will presumably launch in all three months of the quarter.

So what's up with that?

Here's what's up with that

Assuming the ticket prices we've been told are correct, only two possibilities suggest themselves, neither of them good news for Virgin Galactic stock. Either (1) Virgin Galactic will not, in fact, fly one space tourism flight per month, or (2) those flights that Virgin Galactic does fly will not be carrying the full complement of six paying passengers per flight.

That's really the only way to get to $250,000 per ticket times X tickets equals $1 million per quarter in revenue. "X" must equal four tickets or fewer sold, per quarter.

In fact, to reach the answer of "$1 million" in revenue per quarter, you kind of have to assume that both possibilities are correct. To me it sounds as if Virgin Galactic will both be flying less frequently than planned and carrying fewer passengers per flight.

Any way you slice it, the surprising answer to this math problem is that Virgin Galactic will be generating a lot less revenue per flight than investors have been led to expect. And that, in a nutshell, is why Virgin Galactic stock is going down.