In its Q1 2024 earnings call, Terran Orbital Corporation (NYSE: LLAP) disclosed a revenue of $27.2 million, a 3% decrease year-over-year, attributed primarily to unfavorable EAC adjustments on a particular program. CEO Marc Bell outlined the company's path to profitability, expected by Q4 2024, and detailed the strategic review process following Lockheed Martin (NYSE:LMT)'s withdrawn acquisition proposal. Terran Orbital's gross loss stood at $6.2 million for the quarter, with a backlog of $2.7 billion, and remains focused on executing contracts efficiently and progressing in the commercial market.
Key Takeaways
- Terran Orbital's Q1 2024 revenue declined by 3% YoY to $27.2 million.
- Gross loss for the quarter was reported at $6.2 million.
- The company's backlog is robust at $2.7 billion, with $2.4 billion related to Rivada's contract.
- Lockheed Martin proposed to acquire Terran Orbital at $1 per share, a 6.5% discount, later withdrawing the offer.
- The company expects to reach profitability by Q4 2024, with a focus on increasing yield through automation and addressing subcontractor issues.
- Terran Orbital has a strong liquidity position, with a minimum cash balance requirement of $20 million.
- The company is in the recurring revenue business, with satellites needing replacement every five years.
Company Outlook
- Terran Orbital anticipates profitability by Q4 2024.
- The company plans to increase yield through automation and resolve subcontractor challenges.
- A focus on efficient execution of contracts is central to the business strategy.
- Marc Bell emphasized the recurring revenue potential in the satellite industry.
Bearish Highlights
- Q1 revenue saw a 3% decrease due to unfavorable EAC adjustments on a single program.
- Gross loss for Q1 2024 increased compared to the previous year.
- The strategic review process is ongoing without a definitive outcome after Lockheed Martin's proposal withdrawal.
Bullish Highlights
- The company's backlog, excluding Rivada, is fully funded, primarily by Lockheed Martin and the Department of Defense.
- Terran Orbital is confident in its manufacturing capabilities and product offerings, especially the small set GEO satellites.
- The company is competitive in price and schedule in the commercial market, with several potential customers in the final negotiation stages.
Misses
- Revenue and gross loss did not meet expectations due to the single program's EAC adjustments and challenges with a subcontractor.
- The all-cash acquisition offer from Lockheed Martin was retracted.
Q&A Highlights
- CEO Marc Bell deferred valuation discussions to the special committee of the Board.
- The company's liquidity position is comfortable, and they are well-positioned to meet the minimum cash balance requirement of $20 million.
- The financing of Rivada's satellite array is not a concern, as Terran Orbital has other customers and orders in place.
- Bell highlighted the importance of recurring revenue and expects significant revenue growth as more satellites are launched.
Terran Orbital's first quarter of 2024 presented mixed results, with a slight decrease in revenue but a strong backlog promising future revenues. The company's strategic review remains a key focus, as it explores options following Lockheed Martin's withdrawn proposal. With a path to profitability on the horizon and an expanding commercial presence, Terran Orbital continues to navigate the complexities of the satellite industry.
InvestingPro Insights
Terran Orbital Corporation's financial health and market performance have been areas of investor focus, especially following the Q1 2024 report. According to real-time data from InvestingPro, the company's market capitalization stands at $202.05 million, reflecting investor sentiment and market valuation of the firm's total outstanding shares. Notably, the company's revenue has grown by 23.45% over the last twelve months as of Q1 2024, demonstrating its ability to expand its top-line figures despite the reported quarterly revenue dip.
InvestingPro Tips suggest that Terran Orbital operates with a significant debt burden and may have trouble making interest payments on its debt. This is particularly relevant as the company navigates towards profitability, expected by Q4 2024. With a gross profit margin of just 2.82% over the last twelve months as of Q1 2024, the company's ability to convert sales into profit remains under scrutiny. The stock has also experienced high price volatility, with a 28.37% decrease in the one-month price total return as of the 137th day of 2024, which aligns with the company's recent bearish highlights.
For investors looking for deeper insights into Terran Orbital's financials and market performance, InvestingPro offers additional tips that could be critical for making informed decisions. There are currently 15 more InvestingPro Tips available, which can be accessed through a subscription. For those interested, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
These insights and tips can help investors weigh the potential risks and opportunities as Terran Orbital strives to improve its financial standing and secure its position in the competitive satellite industry.
Full transcript - Tailwind Two Acquisition (LLAP) Q1 2024:
Operator: Welcome to the Terran Orbital Q1 2024 Earnings Call. My name is Carla, and I will be coordinating your call today. [Operator Instructions] I would now like to turn the call over to Jon Siegmann, Senior Vice President of Corporate Development of Terran Orbital to begin. Please go ahead.
Jon Siegmann: Thank you, Carla. Good morning, everyone, and thank you for joining Terran Orbital’s first quarter 2024 earnings call. With me this morning are Marc Bell, Co-Founder, Chairman and Chief Executive Officer of Terran Orbital Corporation; and Matt Riffel, Acting Chief Financial Officer, Corporate Controller, Terran Orbital. Marc will provide a business update and highlights for the past quarter, and then Matt will review the quarterly results. Terran Orbital’s executive team will then be available to answer your questions. During today’s call, we will make certain forward-looking statements. These statements are based on our current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from forward-looking statements made on this call. For more information about these risks and uncertainties, please refer to the company’s filings with the Securities and Exchange Commission, each of which can be found on our website, www.terranorbital.com. Readers are cautioned not to put any undue reliance on forward-looking statements, and the company specifically disclaims any obligation to update the forward-looking statements that may be discussed during this call. Please also note that we will refer to certain non-GAAP financial information on today’s call. You can find reconciliations of these non-GAAP financial measures with the most comparable GAAP measures in our earnings press release. With that, I will turn it over to Marc.
Marc Bell: Thank you, Jon, and welcome, and thank you, everyone, for joining our first quarter 2024 earnings call. In light of the company’s strategic review, management decided to cancel the previously scheduled fourth quarter and full year 2023 earnings conference call. Although the strategic review is still ongoing, we are hosting today’s conference call to keep our stakeholders up to date on recent events and first quarter results. I’m going to go a little off script here for a minute, if you don’t mind. I don’t think people are realizing, we have Rivada, which is this amazing program that we won last year. But people are realizing we have $400 million of signed backlog, which becomes revenue, and it becomes revenue over the course of the next 18 to 24 months. So that’s money that will build, the bulk of it is from Lockheed Martin, and we’re very appreciative of our relationship with Lockheed Martin and it continues to grow stronger every day. We are rapidly – we’re changing our workforce here a little bit, and so we’ve gone from only 675 to 695 people, yet our throughput has gone up dramatically and where we’re able to produce and our workforce is changing, is now just under 20% of our workforce is now cleared as we’re going to be moving more and more and to do more classified work, more and more work for the government and the DoD. And I think these are important metrics to see how that $400 million becomes revenue. And I don’t think people are quite grasping that because we realized it looks like revenues were down this quarter, but we’ve just under 50 space vehicles that will be delivered in 2024 alone. With that, I’m going to get back to the script, but I just want to make some quick points upfront that hopefully give you some context to the rest of the conversation. Let me remind you that the critical mission of Terran team is pursuing. Historically space domain of which we all know a few nation states with the capital in time to build bespoke billion-dollar satellites that took 5 to 10 years to manufacture. Today, Terran Orbital strategic investing and manufacturing capacity to enable production at a mass scale, with the efficiencies and significant improvement in speed. And that efficiency comes without a significant headcount expansion. So we dramatically increase the amount we can manufacture with only increasing our headcount just 20 people over the course of the past three months. We are utilizing modular design, automation, component standardization, to drive synchronized improvement in speed, cost and quality. Our automation has expanded beyond satellite components to satellite assembly and integration. We are realizing both cost savings and quality improvement from our recent investments in production, auto capacity and automation. A proof of our success was clearly our early delivery of 10 satellites for Transport Layer Tranche 0 to our customer and partner, Lockheed Martin and supported the Space Development Agency. It took only 26 months from contract award to delivery of our space vehicles from our facility in California. While 26 months is significant improvement relative to the years that traditionally would take to complete a new satellite program, we are not stopping here. We have plans to further reduce manufacturing time to just weeks and have announced plans to be able to accommodate 30-day lead times for standard space vehicles. The successful for collaboration, which we turn over to Lockheed Martin has blossomed into a significant relationship. We are proud to announce additional contracts following our initial success, including the award contract we announced last night, this is just the beginning, as we see a vast opportunity set as the part of event increasingly relies on commercial space companies for national security missions. As of March 31, we have over $25 billion of identified pipeline, over 140 programs across a globally diverse customer set, end-use markets include defense, intelligence, remote sensing, broadband communications, 5G, direct to handset and span orbits from LEO, GEO to [indiscernible] and beyond. Our current capacity, we are positioned to execute on multiple mega-constellations of space vehicles such as the SDA, and Rivada and many others, and maintain the ability to flex our resources to rapidly match customer demand. Equally important, our design and manufacturing capabilities uniquely positioned Terran Orbital to deliver highly engineered space vehicles and high volume within compressed time frames to meet each other’s mission needs, and we do this at a fraction of historical costs. Disrupting an industry has its challenges, a key pillar of our strategic vision has been vertical integration. As I have always said, if you control your supply chain, you control your destiny. The benefits of vertical integration are best evidenced by our recent replacement of a propulsion subcontractor to protect the program schedule. I am proud of our team’s proactive decision to pivot to alternative propulsion solution. Matt will provide further detail on the accounting impact of the first quarter, but I want none of our shareholders to doubt our long-term consequences of this decision. At the end of the day, our goal is to deliver customers’ missions on time and on budget. And unfortunately, with the supply chain as today, 85% of our supply chain we manufacture in-house, 85% in terms of modules are manufactured in-house. We have our own CNC shafts, printed board circuit assembly facilities, our testing facility, shaker tables, TVACs. We have our own torque rod assembly, harnessing shop, but the reality is anything we have to outsource, we’re at the mercy of subcontractors. And that, unfortunately, is getting more and more difficult in this environment, which is why we continue to bring things in-house. We realized over the past few years, we’ve invested hundreds of millions of dollars in building and designing our own components and modules, bringing things in-house, but the future of the next $400 million of orders that we’re delivering and beyond, the impact of that will be significant on our financial statements as we drive to become EBITDA positive. But other challenges have been the timing of orders in difficult capital markets, which have constrained available capital for our customers’ constellation plans. Our customers have to raise money on the commercial space, not the DoD space, and we are very cognizant of that. We share our shareholders’ frustration with some delays our company and industry have experienced. With that, we are steadfast in our confidence in long-term prospects of the industry and our company’s positioning. As a result of these delays, our team responsibly throttled back capital expenditures, tightened discretionary expenditures, the intent was to flex appropriately to the delays, while preserving the option to ramp capacity as demand for these pending mega constellations may acquire. I would like to talk about some specific operational highlights. We did make substantial investments in our design and manufacturing capabilities over the past few years. We just completed our 60,000 square foot addition to our original manufacturing facility. As we speak, we have well over 40 space vehicles in the final stages of assembly on manufacturing floor and we expect to launch just under 50 space vehicles this year. That would be a – that is a record for us. Late last year, we opened our advanced Printed Circuit Board Assembly lines. We now have capacity to assemble over 5,000 printed circuit boards per month. Yields have exceeded our original optimistic expectations, and we are thrilled with the progress we are making. We are seeing an estimated 30% reduction to certain elements of our standard satellite bus costs and PCBA lines alone are yielding almost 100% every time. Our next capacity addition, which we previously announced is our new 94,000 square foot facility here in Irvine, which we expect to be handed over to us in the coming months as physical construction is nearly complete. The facility offers us the ability to scale and add capacity on the frequency of magnitude of new customer awards. We are actively pursuing other constellation opportunities that would depend on this capacity, and we expect to open this facility no later than Q1 2025. I am proud of the progress Terran Orbital has made in building the infrastructure to supply space vehicles that mass scale with the speed, quality and pricing that our customers desire. I’m also happy to update you the progress in support of the Space Development Agency programs. Yesterday, we announced our selection by our partner, Lockheed Martin, to build 18 space vehicles for Transport Layer Tranche 2 of the – Tracking Layer Tranche 2 of the SLA Proliferated Warfighter Space Architecture, sorry. 16 of these satellites are planned to be wide field of view missile warning, missile tracking space vehicles with infrared sensors and the remaining two space vehicles will carry missile defense, infrared sensors. This award expands our participation to an entirely new layer of the SDAs mission architecture, our team near-term priority is completed the 42 space vehicles of the Tranche 1 Transport Layer, which is aimed to deliver as many as vehicles this month then 10 vehicles per month thereafter. I am proud of our nimble supply chain management to protect our customer schedule by being able to pivot quickly to replace contractors were unable to deliver. Regarding the company’s program with Rivada, we continue to execute on the program, although it was a modest contributor to our first quarter revenue, we have agreed in principle on a payment schedule that we will believe will keep the program on track and make the launch timetable. For further information, we – please contact Rivada’s directly at the customer’s request. Now I’d like to provide an update on our strategic review process. On March 1, we received an all-cash proposal from Lockheed Martin, one of our largest stakeholders and partners, Lockheed who already owns or has the right to acquire approximately 27.7% of Terran shares proposed by all Terran shares of price at $1 a share, which represented a 6.5% discount to the then current market price of $1.07. In response, Terran Orbital adopted a shareholder rights plan. The shareholders’ right plan was intended to encourage anyone seeking to acquire the company, including Lockheed Martin, to negotiating the Board but prior to attempting to oppose a transaction that is not in the best interest of such stakeholders. A special committee of the Board was diligently evaluating the Lockheed Martin proposal as part of the company’s ongoing strategic review alternatives, including direct engagement with Lockheed Martin. On April 30, Lockheed Martin withdrew the proposal. However, the strategic review is still ongoing and allows us to explore all options. There is no guarantee, however, this will result in any transaction or a strategic alternative. The special committee does not provide – does not intend to provide any updates on the review unless and until it deems further disclosure is appropriate. We value Lockheed Martin as a customer, investor and strategic partner, and we look forward to continue our collaboration under our strategic cooperation agreement, which runs through 2035. I would believe this continuing partnership with reinforced by this week’s Tranche 2 tracking award, which shows that we are still working together on programs across the board. Overall, I am proud of what we’ve accomplished and where we are heading. With that, I’ll hand the call over to Matt to review our financial performance in the quarter and the year-end. Matt?
Matt Riffel: Thank you, Marc, and good morning, everyone. Now on to the financial results for the quarter. Revenue for the first quarter of 2024 was $27.2 million down 3% relative to the same quarter in 2023. The decrease in revenue was primarily driven by unfavorable EAC adjustments on a single program due to challenges with a subcontractor, partially offset by an increase in revenue due to the continued and increased level of progress made in satisfying our customer contracts. As a reminder, EAC adjustments represent net changes during the period in our aggregate program contract values estimated cost at completion, program estimates and changes and include the cost overruns and recognition of loss reserves. As disclosed in our third quarter 2023 earnings call, our team made a strategic decision to arrange for an alternative subcontractor as a contingency plan. Unfortunately, our intuition proved correct as evidenced by ongoing challenges by the subcontractor in 2024. The majority of our $13.1 million negative EAC adjustments to the first quarter revenue reflects our complete pivot away from the initial subcontractors. This event ultimately added a significant amount of estimated cost to the program, negatively impacting our cumulative revenue recognized on a percent completion basis to the program, though this revenue will be recognized in future reporting periods. While we are disappointed with the negative impact on this quarter’s results, the proactive decision last year has at least helped mitigate this program schedule and financial impact from being worse. Gross loss for the first quarter of 2024 was $6.2 million, compared to $1.4 million in the prior year. Excluding share-based compensation and depreciation and amortization included in cost of sales, our adjusted gross loss was $3.4 million for the first quarter compared to adjusted gross profit of $2.3 million in the same period in 2023. EAC adjustments primarily related to the subcontractor discussed earlier, negatively impacted gross loss and adjusted gross profit by an estimated $13.6 million during the period. Selling, general and administrative expenses were $28.3 million in the first quarter of 2024, compared to $32.5 million in the same period in the prior year. The decrease in selling, general and administrative expenses was primarily due to a decrease in share-based compensation expense and a decrease in research and development activities. These decreases were partially offset by an increase in administrative labor and benefits due to the increase in head count on a comparative basis. Overall, we’re at a point where our selling, general and administrative expenses should be materially stabilized compared to our historical growth trends. Adjusted EBITDA was negative $28.2 million for the first quarter of 2024, compared to $22.6 million in the same quarter of 2023. The decrease in adjusted EBITDA was primarily due to a decrease in our adjusted gross profit. Our backlog at the end of the quarter was $2.7 billion, of which $2.4 billion was related to our contract with Rivada and approximately $300 million was related to non-Rivada programs. As of today, backlog is estimated to be over $2.8 billion, inclusive of approximately $400 million of non-Rivada programs due to our second quarter awards, which have exceeded $100 million so far. Our programs generally take 18 months to 24 months to complete, and our backlog is expected to be fully recognized as revenue by the end of 2026. Capital expenditures were slightly down during the first quarter of 2024 and primarily related to our finishing touches on 50 Tech. Our capital expenditures going forward will largely be related to our new facility and the timing and extent of our capital expenditures is flexible in relation to the addition of new awards that require the level of increased capacity that facility can offer. Finally, as of March 31, we had approximately $43.7 million of cash on hand and approximately $316.7 million of gross debt obligations. We remain excited about building on our success from 2023, into a strong 2024, as we have numerous large opportunities we are actively working on or waiting to hear back on. Efficient and successful execution of our new and existing contracts and becoming adjusted EBITDA positive in 2024 are our top priorities for our team. As highlighted in our previous calls, the exact timing of execution of our new contracts is an important variable impacting near-term results. Given this timing uncertainty as well as our ongoing strategic review, we are withholding from providing guidance for the current year. I will now turn the call back over to Marc for his concluding remarks.
Marc Bell: Thank you, Matt, and thank you, everyone, on the call for your continued support of Terran Orbital. The future space is responsive, and Terran Orbital is at the forefront. We are not just driving growth. We plan on shaping the future of the space economy. We are committed to becoming the undisputed leader in responsive space solutions. I now look forward to taking your questions, and I’ll turn it over to the operator.
Operator: Thank you. [Operator Instructions] Our first question comes from Erik Rasmussen from Stifel. Your line is now open.
Erik Rasmussen: Yes. Thanks for taking the questions and good to see the step up in the backlog. Maybe on the new – maybe on the new contract with – that you signed with Lockheed for the 18 satellites, the value for satellite for Lockheed when we looked at it, it was almost 3 times what it was awarded per satellite for the transport layer. How should we think about your value on this latest award given you were at roughly $3.5 million per satellite on the previous awards?
Marc Bell: So the tracking layer is a far more sophisticated solution than what you would see on the transfer layer. There are different kinds of satellites. The buses that we provide have some similar components and some unique components on that. So we’re not allowed to go into the detail on price for bus that we’re selling it for.
Erik Rasmussen: Okay. But you’d say it would be higher than what we saw previously just because of the content and it’s a little bit more sophisticated.
Marc Bell: And it’s higher, as it’s more sophisticated as you have more stability needed for the payloads that are on board for them to do their mission.
Erik Rasmussen: Okay. And I appreciate it’s probably difficulty and complexity around Rivada and given sort of guidance. But – is there any color you can provide to help sort of structure the revenue ramp this year? We know the backlog was $2.7 billion. I think the disclosures in the queue suggests 80% realized by the end of next year. And then the remainder in 2026, but I’m not really sure how this will layer into sort of this year and next. So if any sort of commentary you could give would be helpful.
Marc Bell: Well, think about it we have only just under 50 space vehicles being delivered this year alone. So you’ll probably see the revenue ramp up, Q2 is it going to – you’ll see a little bit, but really Q3 and Q4, especially as we will see the big revenue ramp will start to hit – because we’re delivering the solid through the end of the year.
Erik Rasmussen: Okay. And part of that is also the T1 that’s sort of been pushed out, if you were to think about – the delays you talked about.
Marc Bell: We expect all the T1 to be delivered by August of this year, the absolute list. If we can make some contracts move faster, we’ll move faster. But the August, and that’s 42 space vehicles right there alone.
Erik Rasmussen: Okay. Great. And then maybe just on Rivada, you received several milestone payments, I think it was a smaller amounts thus far. Are you still in the PDR stage? And then maybe what’s holding things up for Rivada and Terran at this point? And then maybe just with that, what sort of payment would you need from Rivada to begin the next steps? And what is that next step? Is it the beginning of the design phase?
Marc Bell: Well, first and foremost, we have to finish PDR. We’re still in the PDR stage. And once we complete PDR then that will trigger the next payments, we expect PDR to be done by the end of this quarter.
Erik Rasmussen: Okay.
Marc Bell: And remember, hopefully, there’ll be substantial payments made over time in order to make sure they keep schedule.
Erik Rasmussen: Okay, I’ll jump back into the queue. Thank you.
Operator: Our next question comes from Scott Buck from H.C. Wainwright. Your line is now open.
Scott Buck: Hey, good morning, guys. Thanks for taking my questions. Marc, since it’s been a minute or two since we’ve had a call like this. I was hoping you might be able to kind of update us on your thoughts around path to profitability. It sounds like with the ramp in the second half, maybe even by Q4 we could see something on a quarterly basis. Is that fair?
Marc Bell: I think it’s fair. I think you’re looking at Q-on-Q, we’re thinking of Q4. We’re looking at maybe a little bit beyond. It all depends on when these other programs coming in. But the goal is Q4 to be there. You’re seeing as our head count ramp has slowed dramatically, but our yield is increasing dramatically. And this has to do with all the automation. We still have to deal with some subcontractor issues, as we’ve talked about earlier. But once – as we bring new subcontractors on board and we bring some more components and modules in-house, we see no reason why we wouldn’t be the goal to get EBITDA positive before the end of the year. That is the goal.
Scott Buck: Great. I appreciate that. And then I just want to double check. The delayed revenue, you’re expecting to receive 100% of that, right? There’s not any kind of loss there?
Marc Bell: That’s correct. The $400 million of backlog, excluding Rivada, is fully funded backlog, that is almost all Lockheed Martin or DoD work.
Scott Buck: I was referencing the EAC adjustments in – that took place this quarter that you’re expected to kind of recoup here in the third quarter?
Marc Bell: No. Matt, do you want to tackle that?
Matt Riffel: Yes, sure. So yes, it’s just a timing issue. In our accounting model, it’s effectively percentage completion. And so the percentage just changed because we’re – we now have additional cost of program. So we just had to have a clawback of revenue, which will be recognized in future periods. But fortunately, the total contract value that we are getting paid on is fixed. So we’ll eventually rerecognize that revenue.
Scott Buck: Okay. Perfect. And then last one for me. Given it’s an election year, I’m sure you guys have kind of handicapped potential outcomes. Any programs you’re working on or bidding on that could potentially be at risk given election outcome?
Marc Bell: We’re lucky to be in this space. I mean – I mean, NASA, of course, is always at risk as they’re spending a lot of money on very few things. They put a lot of eggs in one basket. And we have bid on a number of NASA programs. But our core DoD work, we think is pretty solid and safe. This is the stuff that’s necessary and it’s very low cost compared to other programs that are out there. So the proliferated warfighter architecture is something that DOD is committed to. We are working on ways to diversify our pipeline going forward. We have a very diverse pipeline. We historically have done it, but now we’re reorganizing ourselves to help that pipeline convert into revenue. We haven’t done a very good job historically, we have converting pipeline into revenue, and we’re making some adjustments internally to ensure that that pipeline for us to convert into revenue.
Scott Buck: I appreciate color guys. Thank you.
Marc Bell: Thank you.
Operator: And our next question comes from Josh Sullivan from Benchmark. Your line is open.
Josh Sullivan: Hey, good morning. Just to follow-up on that – yes, just on that $400 million of non-Rivada backlog convert over the next 18 to 24 months. What do you think the cash flow conversion of that looks like?
Marc Bell: It’s – it’s all milestone-based, so it is very lumpy as cash converted on these programs. Some of our programs are front-loaded, some of are in the back loaded. For example, like Transport Layer Tranche 1 is a very backloaded program, really upon delivery, actually 30 days net after delivery versus other programs are very – have a lot of cash up front. So it’s lumpy per program depending on the type of the satellite that we’re building.
Josh Sullivan: And then just a question on headcount. You mentioned some progress on the cleared personnel. Do you have enough clear personnel to execute on that $400 million of non-Rivada backlog at this point? Or is there a number you still need to get to?
Marc Bell: Well, if you ask my guys, we never have enough. But that said, we are – we have enough – more than enough to complete those programs. It’s the work that we’re going after now, as we’re going after more and more – cleared more and more for classified programs. We feel we can be hypercompetitive in the classified marketplace.
Josh Sullivan: Got it. Thank you for the time.
Marc Bell: Thank you.
Operator: Our next question comes from Robert Spingarn from Melius Research.
Robert Spingarn: Hey, good morning everybody. I don’t know, Marc, if this is for you or for Matt, but it’s sort of a follow-on to the prior question on free cash cadence. And I understand why it was asked before, we don’t have a lot of visibility into Rivada. So ex Rivada, what should be the free cash flow cadence as we look out maybe over the rest of this year and into next year?
Marc Bell: I’m going to turn it over to Matt. How’s that?
Robert Spingarn: Fair enough.
Matt Riffel: Yes. No, fair question. Yes. So our liquidity and cash flow, it’s really dependent on customer programs, us managing our expenses and then to the extent necessary to make up the difference, we have capital transactions. So, our path to profitability and free cash flow is dependent on having these larger programs coming online. So that’s the best way to think about it.
Robert Spingarn: Okay. So moving away from that, but related, you’ve got a debt covenant that requires you to be EBITDA positive on an LTM basis by the end of this year. But if that doesn’t happen, it sounds like you might inflect at the end of the year. So how do you deal with that particular covenant, can you get a waiver?
Matt Riffel: Yes. So in our – disclosure in our SEC filings, there’s a couple of mechanisms that we could explore to either get waivers or extended deadline for one way we have to be EBITDA positive. Unfortunately, we can’t make any guarantees that any of those solutions are achievable. But we do have several options.
Robert Spingarn: Okay. And then just going back to this program, the fixed price program, the one that’s delayed, is that strictly due to just changing the propulsion supplier? Or are there any other issues kind of asked before, but are there any other issues popping up during testing that might have contributed to the delay?
Marc Bell: So the propulsive has been another one problem, Charles [ph] here. It’s been – unfortunately we pick the propulsion manufacturer who was unable to deliver the product, that caused us to do some redesign to accommodate a new propulsion manufacturer, and that and we are well on our way. So we’ll receive the first eight units by the end of this month, and then we should steady cadence from them going forward. We obviously are pushing them to move faster as we will be done with our space vehicles long before the propulsion guys were done. But there was no issue with testing of the vehicles.
Robert Spingarn: Okay. Great. Thank you, Marc and Matt.
Operator: And our next question comes from Tassos Recachinas from Sophis Investments LLC.
Tassos Recachinas: Yes. Good morning. Congratulations on the Tranche 2 Tracking Layer contract. Just wondering, in the past, when you announced some of these contracts, sometimes they come with down payments of cash or maybe an upfront cash payment. Just wondering, if you believe that will come with an upfront cash payment and perhaps if you can talk about maybe where your cash levels are as of today or anticipated around this time this week?
Marc Bell: I mean, we don’t normally disclose payments, but every program comes in what’s called an ATP, authorization to proceed. And usually, we get an ATP payment within the first 30 days of getting a contract. And that those payments can vary dramatically depending on the program and long lead items that have repurchased for the program versus things that we manufacture in-house.
Tassos Recachinas: So in terms of looking at your cash balances at the end of the quarter and then maybe doing some math on what they might be around now, it would be safe to assume that you’re comfortable with your liquidity position in-part due to the ATP?
Marc Bell: Yes. We feel very comfortable with our liquidity position as it stands today.
Tassos Recachinas: And then just a question on Rivada. So understanding that there’s a small number of satellites that Rivada needs to launch by the end of this year to kind of stay on track on their program. Just wondering if you’re actively working on those or if there’s – that Rivada would do those without Terran or if everything is on track with that?
Marc Bell: As of right now, everything is on track. We’re on the precursor satellites with Rivada, they have asked that all detailed questions Rivada go to them. They want to be able to control their own narrative on this. But right now, we’re tracking based on the schedule we have.
Tassos Recachinas: And then with regard to the pipeline and commercial customers, is there anything that you can share with regard to any visibility, any near-term opportunities that you’re working on, on the commercial…
Marc Bell: So I can’t – I will say that we have a number of commercial customers. We’ve made it to the final round. So our commercial customers are not like DoD customers, where DoD gets the budget every year, commercial customers tend to move much slower. Believe it or not, that’s even possible than the DoD. But that said, when they move – when they start to move, there’s a lot of inertia. We have a number of commercial partners we’ve been working on for – over a year. Starting with the with RFIs and RFPs and then we got a co-engineering phase, which we’re in now with some, which means we’re in the final round. And we continue to aggressively work on those customers to get them from co-engineering into a contract. And it is a competitive marketplace on a global basis, but we feel we are very much price competitive, and we’re very much scheduled competitive, which are two very big deals out there. Essentially all these people were looking at 5G, direct to handset, Internet of things, there’s a lot of place companies around. We’re talking to our customer base is getting geographically immensely diverse in terms of foreign telephone companies, foreign Internet providers. Everybody – people used to buy GEOs from other people are not talking to us. We have one customer, for example, who’s been buying the entire time buying satellites from China are now looking to pivot to United States to by satellites for our small set GEO offering. So we’re very – we know we have the right products at the right time. And people are finally – as they come over to Irvine to see what we’re doing. They develop a huge amount of comfort in what we’ve built here in our manufacturing capabilities, which hopefully will lead to contracts later this year and beyond.
Tassos Recachinas: The final question, so I appreciate all that color. Thank you. Just the final question would be, so Lockheed Martin offered $1 of share. The company essentially rejected that offer based on presumably its belief that intrinsic value is higher than the offer that was made. And just kind of wondering, if you could talk a little bit about your views on intrinsic value or value of the company is. Clearly, you didn’t believe the dollar properly reflected the value of the company. So just kind of wondering where the Board believes fair value would reside? And how do you think about that?
Marc Bell: So there’s a special committee of the Board that does this. It’s a great question. I am out of the process. Myself and my partner have recused ourselves from the process. So it’s a – the committee is made up only of independent directors in order to maximize share of the value and make sure there’s a fair decision being made. That said, we are looking – in our comments we made earlier, we said the social committee is going to be the once talking about it. And I have been told that the social community is the only ones who will talk about it. So I have no comment, unfortunately. And whatever my personal opinion is irrelevant. It’s all about the social committee.
Tassos Recachinas: All right. Thank you.
Marc Bell: Tassos, thank you very much. Appreciate it.
Operator: [Operator Instructions] And our last – next question is from Phil Boswell, a private investor.
Unidentified Analyst: Yes. I have a question about the recurring income. Is there anything like SaaS type income or any other income that will – that you’ll be receiving as each satellite is deployed over the next several years?
Marc Bell: I mean the only recurring income we get from satellites is if we do the mission operations for the satellite, we have six satellites currently in orbit, that we do mission operations for. But the real thing that people missed and you actually asked a great question here. What the real thing that people miss is we’re in the recurring revenue business. So every satellite that we build, and launch has to get replaced in approximately five years on average. That is a huge opportunity for us. So if we have "$400 million" of backlog today that we’re fulfilling, five years from now, we’re going to have that same $400 million plus more coming from new customers. So everything we built gets replaced over and over again. So our revenues will continue to climb as the satellites we build will get replaced, things – and that’s the beauty of low-earth-orbit is on one hand, they’re very low cost. And – but they have a very short life span, but it means always current technology is being used versus the big GEOs that cost billions to build that will functionally obsolete the day they were launched, that take 10 years to build. They last 25 years in space, they were around when the rotary telephone was around, is when they were built. So it is – it’s a – and then the new SEC regs, are talking about now new every five years to do it the low earth orbit. So we’re in the recurring revenue business, and that’s where we will get lots of recurring review down the road. That’s a great question. Thank you.
Unidentified Analyst: So as more satellites are put in the orbit, the more the revenue will increase as time goes on?
Marc Bell: That’s right, sir.
Unidentified Analyst: Fantastic. Thank you.
Marc Bell: Thank you, Phil. Appreciate it. Thank you for your important [ph] interest.
Operator: And our next question comes from Sean Hollander, a private investor.
Unidentified Analyst: Hi, Marc. Thanks for taking the call here. Congratulations on the performance for Q1. Can you throw some light on the – the required cash balance at the end of quarter two? That is part of the requirements under SEA agreement.
Marc Bell: Matt?
Matt Riffel: I’m sorry, what’s the question again?
Unidentified Analyst: Can you throw some light on the required minimum cash balance?
Matt Riffel: Minimum cash balance. That’s not – so we have financial covenants that require minimum cash balances from our debt arrangements, which is $20 million effectively, as of quarter end.
Unidentified Analyst: And you think Terran will be okay to meet that requirement?
Matt Riffel: We do not have any concerns about that covenant at this time.
Marc Bell: The answer is yes. We’ll meet the requirements; we’re well positioned to do this.
Matt Riffel: Yes. Yes.
Unidentified Analyst: Perfect. Awesome. That’s good to know.
Matt Riffel: Thanks for your time.
Operator: And our next question comes from [indiscernible] from Personal Wealth Management.
Unidentified Analyst: Hi. Good morning everyone. This is a Rivada question. Evidently, they do not have all their financing in place to build the 600-satellite array that you will be constructing. That’s my understanding. So therefore, are there concerns that this whole thing could fall apart, and have a major impact on your business operations in the future because the capital is not available to pay for the build-out of the satellites for which you’ve contracted?
Marc Bell: And so there are really two different questions there. As far as Rivada goes, I can’t comment on what they have or don’t have. That’s a question for Rivada. On – but I can comment on, does it affect us? And no, it doesn’t have any impact on us going forward. We have lots of other customers as you could see with this way, Rivada’s for the 300 space vehicles with us, Lockheed alone has already placed orders for over 100 space vehicles with us. So it is – it’s just upside for us at the end of the day.
Unidentified Analyst: Thank you.
Marc Bell: Thank you. Thank you very much. I think – we don’t have any other – well, go ahead.
Operator: We currently have any further questions. I will hand back over to Marc Bell.
Marc Bell: Great. Well, I want to thank everybody coming today. I’d like to thank some of the new people asking questions today. I really appreciate more the interaction. I encourage people on the call to ask as many questions as they’d like and participate. We think it is wonderful that we want more participation, and we appreciate everybody’s support, and we look forward to the quarter ahead. Thank you very much.
Operator: And this concludes today’s call. Thank you for joining. You may now disconnect your lines.
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