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Rocket Lab
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== Growth accelerating, underpinned by robust backlog == With industry launch demand continuing to outpace supply, Deutsche Bank believes Rocket Lab is well positioned for growth given its strong track record of reliability and diverse streams of business. Backlog (contracted revenue) exited September worth >$170m vs. just $60m at the end of 2Q20. Rocket Lab can turn around a launch in about 2 weeks at LC1 in New Zealand, constrained mainly by staffing/procedural limitations and more recently, COVID-19 lockdowns. Recent prominent wins include a 5-launch deal with Kineis to deploy a fleet of IoT constellations beginning in 2023 and a 3 Photon spacecraft tie-up with Varda Space where internal components will also be used. Customer mix is split 50% commercial, 20% civil, and 30% national security. Looking ahead, management sees a $4.4bn active pipeline opportunity across a broad range of customers and verticals, up significantly from just $2.2bn in March. === Near-term financials constrained by COVID-19, but Deutsche Bank sees upside to midterm outlook === Deutsche Bank believes Rocket Lab was on track to beat initial 2021 management forecasts set out in March before the very stringent COVID-19 lockdowns in New Zealand halted launch activity. However, this should set up 2022 to mechanically outperform and Deutsche Bank expects 2023-24 to demonstrate solid growth as launch activity and component wins pick up momentum. '''Revenue''': Deutsche Bank expects Rocket Lab's revenue to ramp up in 2022 as the company's manifest gets executed and backlog rolls on; Deutsche Bank forecasts +$180m in sales, up >200% YoY. Beyond that, Deutsche Bank forecasts nearly $800m in sales by 2025 (>90% CAGR), above management’s forecast of $749m, driven mainly by a higher number of Electron launches. Deutsche Bank assumes an average launch price of >$7m with some small declines progressing forward to account for a higher number of bulk discounts given out to multi-launch customers. In conjunction, Deutsche Bank assumes Space Systems tracks roughly in line with management's outlook considering it should be naturally more predictable based on contracts and orders (i.e., launches can be delayed due to weather or issues with payloads). '''Gross margin''': Deutsche Bank expects gross margin to improve materially in the coming years, growing to 30-40% in 2022-23E vs. just ~10% in 2021E (Non-GAAP basis, excludes SBC), and nearly 50% by 2025E. Management is aiming for a 55% gross margin in the long term. For an Electron launch, Deutsche Bank thinks the normalized economics at 1 launch per month suggest a c.20% gross margin, assuming a $7.5m price, $2m bill-of-materials, $2m fixed overhead ($24m spread over 12 rockets), and $2m in direct labour. When increasing to 2 launches per month likely around 2H23, this overhead declines to $1m per rocket, labour to $1.5m, while BoM likely declines by c.8% per year, implying a ~40% gross margin. Ultimately once Rocket Lab is at 3 rockets per month, the gross margin should be closer to 50% with upside as vertical integration increases, quality/yields improve, and reusability of the rocket's first stage gets incorporated (driving costs to ~$3.5m per launch vs. 2019's $8.2m). The larger Neutron rocket could be initially dilutive but should be accretive longer term considering it was purpose-built for reusability and leverages past learnings. For Space Systems, gross margins are already quite high on a relative basis, averaging 65% in 1H21. Management believes this should trend downwards somewhat from elevated levels as it prices more aggressively to garner higher volumes. {| class="wikitable" |+'''Figure 23: Gross margin breakdown<ref name=":1" />''' !($000) !2022E !2023E !2025E |- |Launch price |7,500 |7,200 |7,100 |- |Fixed overhead |2,000 |1,000 |667 |- |Bill of materials |2,000 |1,840 |1,557 |- |Direct labor |2,000 |1,500 |1,500 |- |Gross profit |1,500 |2,860 |3,376 |- |Gross margin |20% |40% |48% |} '''Opex''': Deutsche Bank expects both R&D and SG&A as a % of sales to trend downwards toward management's long-term target of 15-20% and 10-12%. In terms of capital intensity, Deutsche Bank believes Rocket Lab has raised enough cash as part of the SPAC listing to achieve its main business objectives, getting nearly $780m in gross proceeds (before transaction fees and management redemption). The company has been extremely cash efficient, having reached orbit multiple times with minimal spending. Looking ahead, the company will need to spend on developing Neutron ($60-70m of anticipated capex with some portion potentially shared by local government similar to the Virginia/Wallops situation), and expanding capabilities in Space Systems, which management has indicated would likely involve M&A. Depreciation is expected to about 4-5% of revenue. {| class="wikitable" |+Figure 24: Segment summary<ref name=":1" /> ! !2021E !2022E !2023E !2024E !2025E !2026E !2027E |- |Launch <nowiki>#</nowiki> of Electron launches |6 |17 |22 |30 |38 |40 |42 |- |avg revenue ($000) |7,013 |7,250 |7,250 |7,200 |7,200 |7,100 |7,000 |- |# of Neutron launches | | | |1 |3 |10 |16 |- |avg revenue ($000) | | | |30,000 |44,000 |40,000 |38,500 |- |Launch revenue |42,080 |122,018 |157,905 |244,770 |404,586 |682,290 |908,180 |- |Space systems Photon/engineering services |8,563 |40,000 |65,000 |97,500 |120,000 |130,000 |126,500 |- |Component sales |5,392 |20,000 |60,000 |120,000 |240,000 |360,000 |540,000 |- |System revenue |13,955 |60,000 |125,000 |217,500 |360,000 |490,000 |666,500 |- |Data & analytics | | | | |10,000 |20,000 |30,000 |- |Gross margin Launch |<nowiki>-22.1%</nowiki> |17.5% |32.5% |37.5% |37.5% |40.0% |42.5% |- |Space systems |30.3% |52.5% |55.0% |57.5% |60.0% |60.0% |60.0% |- |Data & analytics | | | | |30.0% |50.0% |70.0% |- |Gross margin |<nowiki>-9.1%</nowiki> |29.0% |42.4% |46.9% |47.9% |48.4% |50.3% |- | | | | | | | | |- |Total revenue ($000) |56,035 |182,018 |282,905 |462,270 |774,586 |1,192,290 |1,604,680 |- | | | | | | | | |- |Gross margin (GAAP) |<nowiki>-9.1%</nowiki> |29.0% |42.4% |46.9% |47.9% |48.4% |50.3% |- | | | | | | | | |- |Ebitda (Non-GAAP) |(43,187) |(17,077) |30,174 |111,505 |237,099 |393,212 |569,076 |- |margin |<nowiki>-77.1%</nowiki> |<nowiki>-9.4%</nowiki> |10.7% |24.1% |30.6% |33.0% |35.5% |- |EPS (Non-GAAP) |(0.29) |(0.09) |(0.00) |0.16 |0.39 |0.64 |0.89 |}
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