Shares of Virgin Galactic (SPCE 3.15%) soared as much as 33% early Thursday after the space tourism stock announced solid quarterly results and -- more importantly -- a cost-savings and capital-reallocation plan designed to shift resources toward building out its fleet of next-gen spaceships, which it is calling "Delta class."
Virgin Galactic's third-quarter 2023 revenue more than doubled year over year (albeit from a small base) to $1.7 million, translating to a net loss of $103.6 million, or $0.28 per share. Most analysts were expecting a wider net loss of $0.44 per share on revenue of just over $1 million. What's more, Virgin Galactic provided strong guidance for fourth-quarter revenue of roughly $3 million, again above consensus estimates for $2.7 million.
On Virgin Galactic's "strategic realignment"
The market is most excited, however, about Virgin Galactic's astute decision to simultaneously implement a "strategic realignment" of its resources to support production of its next-generation spaceships. Unfortunately, the move will include selective layoffs to support the shift.
But why, exactly, should a company enjoying such seemingly strong tailwinds -- ending the quarter with $1.1 billion in cash on its balance sheet and around 800 remaining spaceflight reservations, and having just completed its sixth successful spaceflight in as many months -- need to lay off staff in order to continue growing?
The answer: Virgin Galactic's current cash-burn rate and spaceflight cadence simply can't coexist if the company hopes to survive for more than a few years. To be sure, Virgin Galactic's free cash flow last quarter was negative $105 million, and the midpoint of guidance calls for the metric to be around negative $130 million (give or take $5 million) in the fourth quarter. Without taking action -- be it through reducing cash burn, scaling back operations, or raising additional capital (an uncertain option, given the current capital environment and macro uncertainty) -- Virgin Galactic would run out of cash in a little over two years.
Meanwhile, even after last year's extended "enhancement period," which meaningfully reduced required maintenance between flights, Virgin Galactic's current VMS Eve Mothership and VSS Unity spaceship are not capable of completing more than one flight per month. At that rate -- and assuming it continues to fly "only" three new paying astronauts to space with each monthly flight -- it would take more than 22 years for the company to work through its current reservation backlog. Considering the vast majority of those reservations were sold at prices between $200,000 and $250,000 -- before Virgin Galactic raised its price to the current $450,000 in 2021 -- it's obvious the resulting revenue wouldn't be sufficient to achieve sustained profitability.
What's next for Virgin Galactic shareholders?
That's where the next-gen spaceships become so important. Virgin Galactic has previously stated its Delta-class motherships will each be capable of flying up to 200 missions per year, while its Delta-class spaceships should be able to fly once per week. So a single Delta-class mothership and four Delta-class spaceships would effectively multiply Virgin Galactic's potential flight cadence by more than 16.
Even further down the runway, Virgin Galactic has also signed agreements for additional spaceport locations in the UAE and Italy which could supplement its current Spaceport America location in New Mexico. Recall in 2020, CEO Michael Colglazier teased that each of these spaceports could generate annual revenue of $1 billion by supporting up to 400 spaceflights per year.
To that end, Virgin Galactic elaborated in its latest earnings press release that its spaceship factory in Phoenix is already on track to open in mid-2024, while production for its Delta Class spaceships remains on track for commencing revenue-generating flights starting in 2026.
In the meantime, according to management during the subsequent earnings conference call, Virgin Galactic is currently planning its next spaceflight mission, dubbed "Galactic 06," for January 2024. After that, Virgin Galactic will move to a quarterly flight frequency starting with its "Galactic 07" flight early in the second quarter. Colglazier added that company hasn't yet decided whether it will fly a third mission around the middle of 2024 -- before it reallocates personnel and other resources toward the Delta Class initiatives.
The bottom line: While I'm sure Virgin Galactic would have preferred to avoid losing any of its talented employees, this strategic realignment appears to be the wisest way forward for the company to maximise its chances of surviving and thriving over the long term. If all goes as planned, this leading space stock should should ultimately continue to follow suit.
