Virgin Orbit shares are plunging
this morning after the company ditched its latest mission to
launch a satellite into orbit from UK soil. Virgin Orbit is ceasing operations
for the foreseeable future after failing to secure a funding
lifeline. Richard Branson's Virgin Orbit
filed for Chapter 11 bankruptcy protection as it fails to secure
the funding needed to recover from a January rocket failure. Virgin Orbit started out as a
program at Virgin Galactic in 2012 before being spun off into a
separate company in 2017. While the former focused on the
space tourism market, Virgin Orbit's goal was to build rockets
capable of blasting small satellites into space. At the time, this was still a
largely untapped market. They were looking at the third and
smallest category of satellite delivery into orbit. And what that looks like is
satellites that are maybe the range of like a microwave or an oven
that are trying to get into orbit at low cost or at high speed. Virgin Orbit had a lot of promise,
yet ultimately couldn't deliver, despite making quite a lot of
progress over the years. Virgin Orbit was one of the most
well-capitalized launch companies in existence, especially amongst
startups in recent years. They are one of only two to have
raised over $1 billion, the other being Relativity Space. CNBC explores what went wrong with
the Richard Branson-backed company that once held so much promise. Virgin Orbit was founded by
billionaire Richard Branson, who held a 75% stake in the company. Emirati sovereign wealth fund,
Mubadala, held the second-largest stake in Virgin Orbit at 18%. Virgin Orbit targeted the small
satellite launch market, catering to customers whose satellites
weighed up to 500kg or 1,100 pounds like small satellite maker Oneweb. Virgin Orbit signed their largest
ever customer in 2015 with Oneweb before spinning out,
and that was for 39 launches, with an option for up to 100 more. That's when the company was riding
high. They had a major customer,
significant backlog, engineering strength and it looked like
everything was going in their favor. And that's when Virgin
Galactic sought to spin them off and let them stand as their own
company. Virgin Orbit touted its unusual
method of launching its rockets, known as 'air launch,' as more
flexible than launching from a traditional launch pad like
competitors Rocket Lab, Astra and SpaceX among others. The method involved using a
modified Boeing 747 jet that Virgin Orbit called, Cosmic Girl, to
carry the company's LauncherOne rocket to about 35,000ft of
altitude before dropping it. From there, the rocket would fire
its engines and continue into space. By launching from an aircraft,
Virgin could take off from almost any airport around the world and
turn these airports into spaceports. Their last launch was
from the United Kingdom. They were also in discussions with
Japan and a launch site out of Brazil. So they were offering two
different countries the ability to, in a sense, have a sovereign
launch capability because the rocket would take off from their
home soil. From the government's point of
view, if satellites got lost in any conflict in the future, God
forbid, you know, we're about the only company in the world that
could replace them within 24 hours. So they won't have to wait six
months for a land-based rocket to take off. Air launching satellites was not a
completely novel idea in the space industry. Orbital Sciences, now
owned by Northrop Grumman, has been launching its Pegasus rocket from
a plane since 1990. But Virgin Orbit promised to do
this for cheaper. In the summer of 2021, Virgin
Orbit successfully completed its first commercial mission,
launching seven satellites into orbit for customers, including the
US Department of Defense, the Royal Netherlands Air Force and Polish
company SatRevolution. Management was feeling confident
and began planning to take Virgin Orbit public. We have a pipeline that is
currently at about $4 billion that spans through about '24 or into
'25. So there's an enormous market that
is growing in the small satellite market. We've got $300 million in
active contracts and LSAs, MOUs and letters of intent. So with that, we're seeing huge
momentum. Unfortunately for Virgin Orbit, its
trajectory was about to change for the worse. On December 28th, 2021,
Virgin Orbit closed the deal with special purpose acquisition
company NextGen Acquisition Corp II to go public. Lots of tech startups were using
special purpose acquisition companies as a means to quickly
get to market, have an IPO and raise hundreds of millions
of dollars in the process. This, at the surface looked like a
great deal for Virgin Orbit and arguably would have been had
they raised as much money as they set out to raise. Virgin Orbit's goal was to raise
around $480 million, but they ended up raising just shy
of $230 million. The result was disappointing for
Virgin Orbit, especially considering the fact that sister
company, Virgin Galactic, made a much bigger splash when it went
public in 2019. The space tourism company went
through the SPAC process much earlier, and the market dynamics,
as well as the appetite for risk at the time was very different than
the point at which Virgin Orbit went public when the SPAC craze
had really started to mature and people were becoming much more
wary of these kind of risky, low revenue ventures, and as a result
raised much less capital than Virgin Galactic did. The market for rockets that
launched small satellites is also getting crowded. Experts estimate
that there are between 100 and 120 small rockets in various stages of
development around the world as of late 2022. And when you disregard the demand
from broadband mega-constellations like SpaceX's StarLink and Oneweb,
which almost exclusively launch on much bigger rockets, demand for
launches of small satellites has remained relatively stagnant since
2017. From 2012 to present, the average
size of a communication satellite, or any small satellite,
has grown considerably. Communication satellites like
Kuiper or StarLink, those are so big that they would
at best be able to fit one satellite or none on a
LauncherOne. This trend has led many of Virgin
Orbit's competitors to skew towards making larger rockets. Henry says it's an approach that's
proved beneficial for SpaceX, which retired its small Falcon 1 rocket
in favor of the larger Falcon 9 rocket, which it uses for
rideshare missions where small satellite companies can hitch a
ride with other customers as a more affordable launch option. An advantage of small rockets over
larger ones used to lie in their ability to insert satellites into
their precise orbits. But space tugs are changing this
dynamic. These vehicles can be launched on
a large rocket alongside satellites, and thanks to their
own propulsion systems, can drop each satellite into its exact
orbit, making the prospect of rideshares even more appealing. Launch delays also dogged Virgin
Orbit. The company originally hoped to
launch its debut mission in 2018, but didn't manage a launch until
May of 2020. The demonstration mission failed
shortly after the rocket was released. In total, the company
launched six missions, four of which were successful and two of
which failed, including the latest in January of 2023. Welcome back, everyone. It appears that LauncherOne has
suffered an anomaly which will prevent us from making orbit for
this mission. Each Virgin Orbit launch costs
between $12 and $15 million, though individual customers could pay
less if they were launching alongside other companies on the
same rocket. While reaching orbit multiple times
was a great technical accomplishment, the company was
never able to close the business case, both because they needed
about a dozen or more launches a year to actually generate
meaningful revenue and get close to profitability, as well as start to
reap the benefits of actually seeing that marketplace that they
were promising come to fruition. Customers grew impatient. Virgin Orbit has had a backlog of
business for years, dating back to when they spun out from Virgin
Galactic. But a series of delays with
getting LauncherOne in service resulted in a lot of those
customers falling off. Virgin Orbit even sued its largest
customer, Oneweb after the company canceled its launch contract with
Virgin Orbit, citing frustration over the high cost of launches. A challenge for the company and for
any launch company is having an anchor customer,
somebody who you can depend on to routinely buy a decent number of
launches. Virgin Orbit did not have an
anchor customer. In the absence of a large customer. Virgin Orbit had to depend on
smaller players like Spire Global, but these were not enough to keep
up with the company's mounting expenses and the rate at which it
was burning cash. One of the more damning details of
the past two years has been the amount of money
the company spent on SG&A costs. If you look at their annual
reports, you'll notice a steady climb in the amount the company
spent on personnel and headcount. They were adding staff to their
payroll at a rate that was much, much faster than the revenue they
were bringing in. And when you see these two trends
paired with a underwhelming launch rate, it did
look like a recipe for disaster. Henry says that Virgin Orbit did
try to diversify its revenue stream. The company made
investments in several space ventures, including satellite
businesses, Hypersat, SatRevolution and Horizon Technologies, among
others. But they were all too early stage
to meaningfully contribute to Virgin Orbit's needed launch
volumes and revenue. Virgin Orbit's latest financial
results seem to be the last nail in the coffin for the company. It reported an adjusted EBITDA
loss of $42.9 million for the third quarter of 2022 compared to a loss
of $32.8 million for the same period the year prior. Virgin Orbit's cash reserves were
also dwindling, fast. The bad news seemed to snowball
from there. Virgin Orbit is furloughing nearly
all of its employees and pausing operations for a week as it looks
for a funding lifeline. Shares tumbling on that news. For the next two weeks, Virgin
Orbit sought out investment that would help it survive, but to no
avail. With Richard Branson refusing to
finance the company any further after injecting 25 million in new
funding in November, Virgin Orbit was desperate. Virgin Orbit's
stock had been on a steady decline ever since the company signed its
deal to go public via SPAC on August 23rd, 2021. On April 4th, 2023, Virgin Orbit
filed for bankruptcy. In a statement, Virgin Orbit CEO
Dan Hart said, "We believe that the cutting edge launch technology
that this team has created will have wide appeal to buyers as we
continue in the process to sell the company. At this stage, we believe
that the Chapter 11 process represents the best path forward
to identify and finalize an efficient and value maximizing
sale." If somebody looks at this and
chooses to buy them out of bankruptcy, they might look at it
as $1 billion asset gone on sale. Perhaps a company
that is not interested in spending a billion of their own dollars
will instead be willing to spend tens of millions of dollars to get
what would essentially be a discount launch services provider. Experts see particular potential
for Virgin Orbit in the defense space, as Virgin's air launch
system allows for a quick tactical response, something that's a
national security priority, according to Henry. Finally, if
Virgin Orbit were to reemerge, it could be with a new focus on
hypersonics. LauncherOne reaches speeds of Mach
5, or about 3,800mph and could help with weapons systems
development, including acting as a target for hypersonic missiles. But even if Virgin Orbit were
bought out of bankruptcy, experts say it would be tough for the
company to regain its talent in a space market that's becoming ever
more competitive. I think that this will be a warning
sign to other launch companies to avoid the same mistakes. They're going to need to be
aggressive in terms of hitting their launch schedules, in keeping
their costs under control. Virgin Orbit's legacy within the
space industry is a story that's too often told where there are
exciting or even innovative new technologies. But that does not
make necessarily for a smart or financially sound business. And that's going to be the
resounding message that people should take away from the story of
this company.
