By now you've heard the news: On Dec. 22, 2023, small rocket company Rocket Lab (RKLB 3.29%) won its biggest contract since its foundation -- and it wasn't for launching rockets at all.
For a grand total of $515 million, the U.S. Space Force hired Rocket Lab to design, build, and operate a total of 18 satellites for its Proliferated Warfighter Space Architecture program, the PWSA. Comprising two separate but related systems, PWSA is designed to encircle the globe in a network of small satellites able to track the launch of intercontinental ballistic missiles and then transport data on those missile launches down to command centers in the U.S.
Rocket Lab's contract concerns the second of these two systems, and even more specifically, the second "tranche" of transport-layer satellites, dubbed Transport Layer Tranche 2 Beta (TLT2B).
Welcome to the club, Rocket Lab
Rocket Lab joins two other, much larger defense-contracting companies that have already won TLT2B contracts, namely Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC), each of which is considered a "prime contractor" on the project. And one of the things Rocket Lab seemed especially proud of (in its Monday conference call with analysts discussing details of the contract) is that Rocket Lab, too, is now considered a prime contractor for Space Force.
More broadly, the PWSA universe includes at least four other companies that have been hired since this project got underway in 2020. RTX (NYSE: RTX), SpaceX, and L3Harris (NYSE: LHX) have all won contracts to build "wide field of view" tracking-layer satellites for the system (Northrop is actually building both transport and tracking-layer satellites). And York Space Systems, like Lockheed Martin, Northrop, and now Rocket Lab, was hired to build transport-layer satellites.
Dollars and cents
Beyond the broad outlines of the contract Rocket Lab just won, there are at least two details of particular interest to investors here. The first involves precisely what Rocket Lab is being paid for.
The December contract award for $515 million covers "the design, development, production, test, and operations of the satellites" -- which would appear to mean that it does not cover the cost of launching the satellites into orbit. In that case, there could be even more revenue available to Rocket Lab's rocket-launch business once these satellites are ready.
As for the $515 million that is covered by this contract, fully $509 million goes to building and getting the satellites ready for launch by 2027, plus "schedule-driven profit incentives." (In other words, if Rocket Lab beats its deadline, it may earn a bit more cash.) As for the remaining $6 million, Rocket Lab revealed in its conference call this week that this amount may be earned if Space Force exercises an option to have Rocket Lab support its satellites beyond the initial 2027 to 2030 period and into 2033.
In other words, for supporting the operation of its satellites for three additional years, Rocket Lab will be paid...a whopping $6 million -- or $2 million per year.
That's a curiously small number for the work involved. I'm honestly not certain what to make of it, other than that...well, it's curiously small.
David versus the Goliaths
The other observation I'd make here goes back to the company Rocket Lab is keeping.
According to an Air and Space Forces.com report from late last year, Space Force has already awarded contracts to build some 373 (now 391, with the Rocket Lab award) satellites for PWSA. And having covered this program over the past several years, I've established that the average price paid per satellite is about $20 million.
In that regard, Rocket Lab's price of $28.6 million per satellite is a bit of an outlier. It's especially interesting seeing as $28.6 million to build a satellite is about three times more than what Rocket Lab usually gets paid to launch one. (And according to data from S&P Global Market Intelligence, Rocket Lab earns significantly fatter profit margins building rather than launching its satellites.)
It's also impressive that Rocket Lab has been able to break into such an exclusive club even though its arrival is coming toward the tail end of the program. Air and Space Forces notes that unless plans change, there are only about 92 more satellite contracts left up for grabs before PWSA wraps up and Space Force has all that it needs.
That being said, this probably isn't the end for Rocket Lab. Satellites aren't immortal after all. Over time, they break down and need to be replaced. Now that Rocket Lab has become a prime contractor within this program, it will be able to bid on -- and perhaps win -- some of those replacement contracts. For that matter, there's no reason to think it won't bid on -- and perhaps win -- some of the 92 contracts for first-wave PWSA satellites still available.
I have to say: The future is looking pretty bright for this up-and-coming space company...to keep coming up with more wins.
