Virgin Galactic Holdings Inc - Ordinary Shares - Class A Stock

Good afternoon. My name is Desiree and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's second quarter 2026 earnings conference call. [Operator Instructions] I will now turn the call over to Ken Michaels, Vice President, Finance. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to Virgin Galactic's second quarter 2026 earnings conference call. On the call with me today are Michael Colglazier, Chief Executive Officer, and Doug Ahrens, Chief Financial Officer. Following our prepared remarks, we will open the call for questions. Our press release and slide presentation that will accompany today's remarks are available on our Investor Relations website.

Please refer to slide 2 of the presentation for our safe harbor disclaimer. During today's call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions and as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements made on this call. For more information about these risks and uncertainties, please refer to the risk factors in the company's SEC filings made from time to time.

You are cautioned not to put 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, whether as a result of new information, future events, or otherwise. Please also note that we will refer to certain non-GAAP financial information on today's call. Please refer to our earnings release for a reconciliation of these non-GAAP financial metrics. I would now like to turn the call over to our CEO, Michael Colglazier, who will begin our discussion on slide 3.

I'm pleased to share our recent tranche of spaceflight expeditions has booked out ahead of schedule, demonstrating strong demand from a wide range of customer segments. The allotment we had held at the $750,000 price point was oversubscribed, and we have added over $50 million to our expected future spaceflight revenue. We've moved our first commercial spaceflight to this coming February to allow additional time to complete avionics and systems installations. No single issue is driving the schedule push. Rather, we have experienced modest time duration extensions across hundreds of relatively small but important installation tasks involved in the first build of our new spaceship.

Our teams bring disciplined urgency to their efforts, and they have made outstanding progress on both our first ship and the ship sets that are following. This progress required more time than we expected ahead of our integrated vehicle ground testing. But it was needed to complete the work with the thoroughness and precision we demand. This work is wrapping up in the next couple of weeks, and we expect to begin integrated vehicle ground testing later this month. We've incorporated the learnings from this first build into the schedule forecast for our second ship, which we now expect will join the fleet in New Mexico in March. That schedule continues to support the cadence of flight rate that we shared last quarter and we maintain our projections to deliver positive quarterly cash flow within 2027.

I'll share some insight on the sales process and the additions we've made to our astronaut community, followed by some detail into the build process for our first spaceship, our static test ship, and our second spaceship. I'll then pass it over to Doug for our financial discussion and further context into the unit profitability of our spaceships.

Turning to page 4 in the slide deck. We now have over 700 members within the Virgin Galactic astronaut community, and we're very pleased to welcome our most recent arrivals. This new group, like those who have been in our community for a while, are passionate about space. As a cohort, they represent a diverse range of organizations and individuals who broaden our target market.

One new trend we are seeing is an increase in multi-seat bookings. Approximately 60% of this new cohort is part of a group of some form or another, ranging from multi-generation expeditions of all sorts to research missions, to corporate charters, and nonprofit bookings. Many are adventurers, but most are joining the community for the deep, transformative experience that is enabled with our spaceflights.

Many of our new arrivals see space as a platform for broader initiatives, including science-based and nonprofit endeavors. Consistent with our prior statements, we have now closed active bookings as we onboard our new astronauts and engage them in the community. We have retired the $750,000 price point and we plan to open a new tranche of spaceflight expeditions this fall at higher price points.

Moving to page 5 to discuss spaceship progress. I'll start this section with one of the many fun facts around our spaceships. We have over 12 miles of wire running between the various computers, systems, and sensors throughout the entire ship. Every one of those wires is designed, fabricated, bundled, and connected with detailed precision. And the image on this page gives you a glimpse into the complexity of installation within the unique configuration of our spaceship. The progress our team has been making is incredible, and they are doing their work with thoroughness, precision and quality. As I mentioned at the outset, many of the hundreds of preparation and installation tasks have required more time to complete than we had estimated.

We will always take the time that's needed, and that has caused us to move our first spaceflight expectation to February. We take the time needed for on-ship work and related engineering and quality assurance processes. We also have added resources and improved process management to minimize the overall time impacts. We're operating with 2 shifts, 7 days a week and I'm very proud of and grateful for the massive joint effort of our team and the extended workforce we have brought in from California, New Mexico, Bell Textron, and partner agencies to complete the effort. But these added investments will show up as incremental spending in Q3 and to a lesser degree in Q4. These added expenses bring high return by helping us maintain our expected flight cadence in 2027.

On page 6, we're highlighting progress with our static test ship, which we use to verify our as-built structural configurations. The image on the upper left shows the wing assembly, and the images on the lower left show the fuselage structure in process of assembly. These will be joined together and shipped to the Southwest Research Institute for structural testing. Our feather assembly, shown in the image on the right, is already at the Southwest Research Institute and is being wired for testing, which will start in early September. As soon as the static test wing and fuselage are joined and shipped, we will pivot our manufacturing team to begin assembly of the second spaceship.

So let's turn to page 7. These images show major parts of our second spaceship as they move through the production and assembly process. The image on the left shows a wing skin. The image on the top right shows a cabin skin being fabricated. And the image on the bottom right shows our nearly completed feather assembly. It's exciting to see multiple spaceships being built at the same time.

With that, I'll turn the call over to Doug starting on slide 8.

Thanks, Michael. Good afternoon, everyone. We are very excited about the upcoming start of commercial service, which is fast approaching. Ahead of this transition, we've strengthened the balance sheet. We have our sights set on growth. Starting with our balance sheet, during the second quarter, we raised $134 million through our current ATM or at-the-market equity offering program, which is now substantially complete. We ended the second quarter with $286 million of cash, cash equivalents, and marketable securities, up from $251 million at the end of the prior quarter. Also, during the second quarter, we reduced the principal balance on our 2027 and 2028 notes by $93 million and further aligned the timing of future payments with the expected ramp in our spaceflight operations.

Specifically, we now have just $17.9 million in principal payments remaining for the 2027 notes. The 2028 notes have no required principal payments due until March 2028. With a higher cash balance and reduced debt obligations, we are ready to launch the exciting growth phase of our business.

Next, we'll do a quick recap of our financial results for the second quarter. Please turn to slide 9. Operating expenses were $65 million compared to $70 million in the prior year period. Capital expenditures were $41 million, down from $58 million in the prior year period, reflecting lower capital requirements overall as we progress through manufacturing our spaceships. Free cash flow was negative $91 million, a 20% improvement compared to the prior year period.

Let's move to our projections on slide 10. Revenue for the third quarter of 2026 is expected to be approximately $400,000 for future astronaut access fees and events. While quarterly capital expenditures have generally been trending lower since last year, given the recent increased time and labor to complete the systems installations for the first spaceship, we now expect to see a temporary increase in capital expenditures in the third quarter. Therefore, free cash flow for the third quarter of 2026 is expected to be in the range of negative $95 million to $100 million. While this represents a quarterly uptick in CapEx for this specific scope of work, we are very proud of the teams that are tirelessly and very skillfully building our spaceships.

The work must be done with meticulous attention to detail, and these assets are being prepared to provide extraordinary experiences to our customers with the goal of also providing extraordinary returns to our shareholders. More on these expected returns from our spaceships in a minute. We forecast the downward trend in capital expenditures to resume in the fourth quarter of 2026. We expect a corresponding improvement in free cash flow, which is projected to be in the range of negative $80 million to $90 million. Revenue recognition for spaceflights is now expected to begin with the start of commercial spaceflight operations in February 2027. Furthermore, with the start of commercial spaceflight operations, we expect to begin receiving cash inflows from customers ahead of their spaceflights.

These inflows represent the remainder of the purchase price for each spaceflight expedition, which is to be collected in connection with the customer signing the conditions of carriage prior to their spaceflight. With our second spaceship entering service, we continue to forecast that we will achieve a flight rate of 10 or more spaceflights per month by the end of the second quarter of 2027. This flight rate is an unprecedented achievement in human spaceflight, and this is made possible with our highly reusable spaceship design. Given these flight rate expectations, we continue to forecast quarterly positive cash flow within 2027, followed by rapid growth in revenue and adjusted EBITDA as we manifest our more recent and higher-priced spaceflight expeditions.

Let's turn to page 11 and circle back to the economic returns we project with each new spaceship. Our practical experience flying our first spaceship Unity and our design and manufacturing refinements in our new spaceships have yielded an elegant, purpose-built vehicle optimized for both repeatable production and repeatable operation. It's a beautiful machine with vast potential and now we are approaching the moment when we bring it all together with the ramp of commercial spaceflight operations. Let's do some quick math on what to expect in terms of unit economics for each spaceship. We've already created and refined the design for our spaceship, and we have invested in the tooling and manufacturing capability to make copies of that design.

Our projections have stayed consistent, and we expect each new spaceship to cost approximately $60 million to produce. Given a conservative lifetime estimate of 500 flights per spaceship with 6 astronauts per spaceflight, average pricing of $600,000 per spaceflight expedition and a contribution margin over 80% per spaceflight, each new spaceship has the potential to generate over $1.4 billion of lifetime contribution margin. In addition to turning the dream of human spaceflight into reality, it's clear that these financial returns are also expected to be spectacular.

These exceptional unit economics for our vehicles are what drive the economic model shown on slide 12. We've shown this model before, and it highlights the tremendous economies of scale that can be achieved as we build and operate multiple spaceships and expand to multiple spaceports. To reiterate the model, with our first 2 spaceships in service, we expect to achieve the economics shown in the first column by the time the average price reaches $600,000 for each spaceflight expedition flown.

Therefore, as higher prices flow through the flight manifests, we expect to achieve adjusted EBITDA during a quarter within 2028 that will result in an annualized adjusted EBITDA of $100 million, as shown in the first column of this page. As we noted at the start of today's call, we are pleased to report that we were oversubscribed for the recent tranche of spaceflight expeditions priced at $750,000. This strong demand indication, combined with the economies of scale from expanding our fleet, will make the tremendous economic return shown on this page possible.

As we continue to add spaceships and launch vehicles to the fleet, we can move to the right on this page and we see the potential flow-through of profit that we expect to achieve as we expand. While there is a variable cost component for each flight, much of our corporate cost structure does not need to grow materially as we increase the number of flights. Specifically, as we fully utilize 1 spaceport by doubling the size of our fleet from 2 spaceships to 4 and adding a launch vehicle, we project the adjusted EBITDA will more than quadruple to over $450 million per year.

That is just for one fully utilized spaceport, and we plan to keep going. With 2 fully utilized spaceports, we expect to be able to generate over $1 billion of adjusted EBITDA annually. These economies of scale are expected to continue as we expand into additional spaceports globally. With that, I'll turn the call back over to Michael.

Closing on page 13, here's an image of our first ship having its livery installed. Livery and window transparencies are some of the last steps before integrated vehicle ground testing, and it's exciting to see this ship getting ready for the next stage. We're thrilled with the market response to our latest tranche of spaceflight expedition bookings, and we're pleased with the progress we are making on all our ships. We will incur some added expense in Q3 and Q4 as we absorb the added time to our schedule, but the added efforts will help us maintain delivery of quarterly positive cash flow within 2027.

Our astronaut community is growing and very engaged. Today, we had a group of them together in Mallorca to see the eclipse. And we have exclusive activities planned as they prepare for their upcoming spaceflights, which are soon on the horizon. Let's open the call for questions.

[Operator Instructions] Our first question comes from the line of Oliver Chen with TD Cowen.

This is Julia Shelanski on for Oliver Chen. We have 2 questions for you this afternoon. First, regarding the commercial launch time line shift, can you help us distinguish between timing and scope? Has any material work been added since the 1Q update or is this primarily a de-risking decision to increase confidence in the flight test and the commercialization schedule?

And second, on demand durability, you've now had 2 consecutive tranches sell out ahead of schedule at very high prices. Do you see any natural ceiling to that demand curve and how are you thinking about pricing going into the next fall release?

Hi, Julia, it's Michael. Let's see, time line, you asked the question on scope. Let me answer it this way and see if it addresses what you're asking. Generally same scope, same work, same expectations in finishing the installation of all of our avionics and mechanical systems. And the work, which is hundreds, literally hundreds of reasonably short tasks and a lot of those tasks have taken us longer to complete than we had allotted in our estimates and schedule forecast.

And what are those things? It's not that it's a new scope per se. We put a picture in the deck. You'll look at kind of where the pilots would be sitting. There's a panel that's not installed. So you can see kind of the degree of wires and cables and connectors that are involved.

And a lot of these examples are taking the 3D designs, taking all the parts and the kit that need to go in, one of our technicians who are massively capable, does the work. And as they kind of put one wire harness in and another wire harness in and metal tubes for pneumatic systems in. Some of it starts to -- the whole, I'll call it height of those things going on top of each other may end up to be a few thousandths of an inch taller or shorter sometimes than our design had expected.

Sometimes that's not an issue. Sometimes that starts to get to a place where we have a requirement that we'll go and confirm through engineering analysis whether that needs to be adjusted or not. And whenever that happens, there's a whole process for it. Our quality inspectors look at every installation we do. They get the quality engineers. The quality engineers go find further engineers for assessment if necessary.

It all happens pretty quickly, but the number of those kind of, oh, we didn't expect this to not fit just perfectly coming in is higher than we had allotted for. And so that just has started to accumulate on us. It really picked up at the tail end of July. And for a bit, we thought we could manage that in, but the team just needed more time to do it the correct way. So what we've done is we flowed the time needed out so that we can finish the task correctly and do it the right way. And when you add that up, it means we will start our integrated vehicle ground test program almost a couple months later than we had assumed, and we've flowed that through our schedule.

So happy to give you more examples of what it is, but it's a collection of small items, each of which have taken longer than expected. And the kind of summary of all those, adding up all those extra durations is added to our time. So no different scope. We expect to wrap all this phase up later this month. We'll start our integrated vehicle ground testing efforts through there. We've done power on in our ship, and so we'll continue to be testing both the power and connecting everything in the correct way and all the mechanical systems are operating in the functions we like. And then we plan to send the ship out to New Mexico in October to begin our flight test program and that will carry on just the way we thought before.

So hopefully that gives you a little bit of insight into what's behind the push. I think more excitingly is what's behind getting closer to the finish line on this build and to the start of actually carrying our astronauts to space. So shifting to your demand question, yes, we expected to close this first tranche of bookings about the time of our flight test, so not this early. We were getting near the end and we sent the people that we were in conversation with still a note that we were going to close the booking.

A number of those came in and we were oversubscribed by a reasonable amount and that's great. And so we've closed this price point as we said we would do. And we're going to focus on bringing all these people into our astronaut community and making sure they are prepared for the journey ahead of them.

We expect this fall, we will reopen our booking opportunities, it will be at a higher price point. And so you asked for some perspective on that. We're really the only people that will be carrying humans to space beyond if you want to kind of do a $50-plus million orbital flight, which are very few in capacity and very expensive, the real comparison was probably what the Blue Origin folks were flying. They never published their prices.

Anecdotally, I think people are probably in the $1 million to $2 million range. So there's demand, I think for them at probably average that out to $1.5 million. I don't think we need to be driving our prices up that quickly, but there is strong and solid demand, and we do expect each time we release a tranche of tickets, it will be priced higher than the tranche before, and that's appropriate. So I think you'll see us do that for a little bit longer.

Our next question comes from the line of Michael Leshock with KeyBanc Capital Markets.

I wanted to start with the rocket production starting in 4Q. Just given that it's the same propulsion that was used on Unity, will there be additional labor needed to start that back up, or did the propulsion team shift to other areas for these new spaceships in development and are they going to be moving back to propulsion? And then maybe secondly, how long does it take to produce one rocket motor?

Thanks, Mike. The team we have in Arizona are multi-task capable. So right now they are finishing up the systems installation. You see a picture at the end of our deck, finishing up livery installation and will move the ship into the integrated vehicle ground -- integrated ground -- I can't even say, IVGT, Integrated Vehicle Ground Test. When we do that, a lot of the technicians that we have in Phoenix will pivot back over, finish out the static test ship, and when that is shipped out, we will then have all the parts coming in for our second production spaceship, and they will build that.

And as we get ready to finish that and ship that second -- send the second ship out for testing and off to New Mexico, then the majority of that team will shift over into the rocket production area. So we do not expect a big ramp up of labor for that. Most of the labor is currently there in Phoenix and we will move people from one set of tasks to the other as we go.

The pace we can do rockets is, with this new production line, quite rapid. We have -- we'll be testing out and ramping initially up to about a 3 motor a week capability, just to kind of keep up with the flight rate of our first 2 ships. The line itself and the equipment is built to handle more than that. And we can handle more of it with both adding extra shifts. So what I gave you is kind of a single shift across a week duration. So we could always add extra shifts. And there are only a couple, I'll call it equipment bottlenecks in that line, that when we're ready to have an expanded fleet at Spaceport America or a second spaceport, we can ramp the same infrastructure, this production line, to handle all of that. So; probably closer to 15 motors a week when we're ready to go.

We can also use that capacity for other things with rocket motors, but right now we're really focused on just supplying the fleet of spaceships that we'll be flying.

And then on the cash position, do you see the need to raise additional capital to get to that positive cash generation in 2027? I appreciate the color on the quarterly guide, but is there any reason we should expect a big step down in burn that in early '27 or just any way we should think about 2027's cadence once commercial flights resume?

Yes. Thanks, Mike. This is Doug. So we don't need to raise anything right now. We don't need additional capital at the moment. What we highlighted was what we already did with our at-the-market program. We raised $134 million during the quarter. So we have more cash at the end of the quarter than what we started with. We also managed our debt payments and created the time to get ramped on commercial service so we can time our operating cash flows with those debt payments. So as we get into kind of the near term, when we get into the start of commercial service in Q1, that's when we start to see inflows coming from the customers. So we timed that for February of 2027.

So with that, we get the remainder of the expedition price from the astronauts. And we actually start collecting ahead of some of the future flights. We start to get these inflows. And that changes the whole cash flow dynamics as we go forward. So we're getting down to kind of our cost base now as we finish up the -- I gave you the guidance towards the end of the year. But we get to our kind of cost base as we exit because we're done with the manufacturing, we're just moving into the operating stage. But Q1 is that point when it crosses over and the inflows change. So with that said, there will be a time when we want to drive a faster growth and that's when it would make sense probably to add some capital.

We can add more vehicles more quickly, expand the fleet, and that's why we spent some time highlighting these great unit economics for these spaceships. It can tie any future capital raises to some very attractive ROIs on additional assets that can be added more quickly with that capital. So, again, there will come a time, and we'll tie it to growth drivers, and the rationale will be great for shareholders in our opinion. I have nothing to do today with the capital raise.

Next question comes from the line of Sheila Kahyaoglu with Jefferies.

This is Ceara Perry on for Sheila. On a similar note, I was wondering if you could frame how we should think about the trajectory for CapEx third quarter into 2027 based on the updated flight schedule.

So, CapEx in particular is coming down significantly because what's driving that is the build of the spaceship. So as we're wrapping that up, we've done the heavy lifting, right, which was included the tooling and then all the parts fabrication and then all of the labor and everything that goes into the assembly of the ship, that's all CapEx. But that's moving along and with the first vehicle headed into ground test and then the second vehicle coming pretty close behind, you see -- we expect CapEx to be coming down quite a bit by the fourth quarter and then quite a bit more in 2027 because it's just not a CapEx-driven cost structure at that point. Now we're moving into more OpEx for the commercial spaceflight. So it's a shift. So you'll see a continued drop in CapEx after we get by the fourth quarter.

Next question comes from the line of Myles Walton with Wolfe Research.

This is Emilee on for Myles. I just had a question on VMS Eve, given it's the solo mothership for now, what is the current flight cycle or maintenance schedule that you're looking at for that? And are there any structural limitations on that ship as the Delta flight testing begins?

So I'll talk on flight schedules. So we have a very detailed maintenance program on Eve like you would see with most airplanes. And they're flight by -- kind of flight interval inspections. So some things are done on an every-flight basis, some a 3-flight basis, some 5, 7, 10, 30, things like that. And when you carry that across the course of a year, we've stated on these calls publicly that we expect Eve to be flying on a 3 times per week cadence.

Our maintenance schedules allow us to go at greater rates than that, than 3, just based upon how the stacking of the maintenance tasks are and how long they take to do. We're holding our stated efforts at 3 times per week. We think that's appropriate right now until we're into it, but the maintenance schedule would suggest we can go more frequently than that.

The way you asked the question was, are there structural limitations on Eve related to the Delta ships? So there are parameters on all of our ships that we don't exceed, how much weight can they carry, what are landing rates, sink rates that we have in tolerance, things like that, but nothing is different with our Delta ships than with our Unity ship or in plan. So Eve is an incredibly capable launch vehicle for these new ships that are coming off the line and it's going to be a workhorse of a launch vehicle for us and it's been adapted and upgraded over the last couple years to do that. So we're very excited for that ship.

Thanks, and one quick follow-up on that. Do you have a parameter for the CapEx commitment or time line for procuring and building the next mothership, or is that sort of paused at the moment until Delta gets into its operating cadence?

Not paused, but definitely the next launch vehicle is moving more slowly as we are putting all of our attention to finishing up the first spaceship, which is right around the corner. So as we finish that up, we will pivot that team back to the launch vehicle and move through both engineering and then as we get into deciding the full supply chain details, that will give us more clarity around the total CapEx.

So we have our internal estimates for that and we think they're pretty solid and reasonable. But we haven't shared those out at this stage. So next stage with our launch vehicle is to have the engineers come off our ship and really lean into the launch vehicle design. And then we'll start having kind of alternating production between spaceships, we'll build a launch vehicle, probably build a couple of spaceships, we'll match with another launch vehicle and grow the fleet in a balanced fashion like that.

Our next question comes from the line of Kristine Liwag with Morgan Stanley.

So I wanted to follow up on the economies of scale that you had laid out, right, for the initial fleet of 2 spaceships in operation, 1 in launch vehicles, you get to the adjusted EBITDA potentially at that run rate at $90 million to $115 million. I wanted to understand with that kind of EBITDA, what were the milestone payments already received? And so if that were to materialize, how should we think about the cash conversion of that EBITDA and operating cash, so taking away any potential impact of CapEx, just so that we understand that run rate and how you get to a positive free cash flow path.

Forgive me, just your phone got a little muffled there. So we got you through economies of scale and kind of repeating how we got to $90 million to $150 million. Would you mind repeating the question again, maybe just close to the microphone?

Yes. So if you could hear me now. So my question is you've received deposits from customers in the past. And then now with that EBITDA for that run rate, I was wondering what would be the operating cash conversion off of that EBITDA considering deposits you've already received in the past. And this is on operating cash, so no CapEx. So just understanding what the free cash flow run rate could be off of that EBITDA.

Okay, yes, Kristine, good question. So what we do see building into this is actually we're collecting cash ahead of this because the flights -- we're getting cash for flights that are in the future. So we actually have a little better free cash flow ahead of the EBITDA as we ramp into this. As we go forward though, it depends where we're at in the lifecycle of future vehicle development, right, how much we're putting into CapEx at any one time. But what this model reflects is that we have quite a bit of R&D going into vehicle development and there will be some conversion over to CapEx as we move through the development.

But what we're seeing is very high conversion ratios. So the cash conversion relative to EBITDA is very close, so the CapEx never becomes too high until we get out to about call it, 2029 when you're getting into the final -- the bigger lift on a launch vehicle development, getting into the assembly and so on with the vendors. So there's kind of a period there where we see a little more CapEx going on. But in terms of your overall modeling, it's a very high conversion ratio between the EBITDA and the CapEx. Did we cover your question?

Great. And then following up on that, when you look at the growth that you could get with more flights, you're going to need more spacecraft, and you talked about the $60 million spend per incremental spacecraft. So first question on that, is that $60 million number the run rate that you would pay for spacecraft number 3 and 4? Or is that a more mature production down the line? And then the second question I have regarding that growth is, how do you intend to balance growing EBITDA, which then requires investment in CapEx, versus generating more free cash flow and stability for the balance sheet?

On the first question, Kristine, that's what we're seeing for a spaceship cost going forward. So that's not like down the road, that's Delta 3 and 4 kind of time line based on our recent experience because we've already built a couple, we've closely measured the cost for the parts and the labor and all the components and so that's what we've dialed in. It turned out that our earlier estimates were quite accurate in that regard. So that's not far down the road, that's near term as soon as we start to get back into building additional spaceships. And then if you could please repeat the second question one more time, Kristine.

Yes, and apologies for my connection. My second question is more about understanding the balance between growth, right? Because in order for your revenue to grow and be able to service more customers, you're going to have to buy more spacecraft, which then is the usage of cash. How do we balance growth versus stability in generating positive free cash flow to create more of a bolster for the balance sheet?

I think the right way to think about this is why we've highlighted these amazing unit economics for these vehicles is the more we add, we rapidly expand the profitability, the revenue and the profitability that we can generate from them. And the payback periods on these is very short. If you look at a spaceship in particular $60 million, it pays for itself in less than a year of flight time because of the returns we get from flying it, the high contribution margin. So it's always going to make sense, right, to expand and put that cash back into the business and build more to meet demand as long as there's always demand to fulfill those. So it's going to be very clear that we should be growing at the fastest rate we can in terms of adding vehicles.

And I think just the way you asked the question, it's a bit of a both end, right? The company needs to be solid, the balance sheet needs to be solid, and we'll need to keep it in that place. We'll need to continue to demonstrate a backlog of demand that's very strong and growing. One of the things we were obviously very, very encouraged by today -- in today's announcement is closing our first tranche out early, even in advance of when we're flying. So that -- and in addition to just the timing of it, I'd say the broadening of categories of people within the demand we had.

So what are the things we want to do to not just bolster the balance sheet, but just bolster confidence in the business model, ongoing book of business, amazing results from the astronauts that we're flying so that you hear from the stories of them. Are they missionary for us? Are they out referring and recommending other people to us, which is already in place, but I think you'll see more of that. And then economically, we need to maintain a reasonable cash balance and manage our growth in a strong fashion. We have multiple options to do so, but those options are always stronger as we hit clear profitable operation, the flight cadence that we expect to be hitting and people see, oh my goodness, this is the solid business they've been telling us all the time. I think that opens up lots of doors to how to grow in a more rapid fashion.

There are no further questions at this time. Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.

Good afternoon. My name is Desire, and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's First Quarter 2026 Earnings Conference Call. [Operator Instructions]

I will now turn the call over to Eric Cerny, Vice President of Investor Relations.

Thank you. Good afternoon, everyone. Welcome to Virgin Galactic's First Quarter 2026 Earnings Conference Call. On the call with me today are Michael Colglazier, Chief Executive Officer; and Doug Ahrens, Chief Financial Officer. Following our prepared remarks, we will open the call for questions.

Our press release and slide presentation that will accompany today's remarks are available on our Investor Relations website. Please see Slide 2 of the presentation for our safe harbor disclaimer.

During today's call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements made on this call. For more information about these risks and uncertainties, please refer to the risk factors in the company's SEC filings made from time to time. You are cautioned not to put 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, whether as a result of new information, future events or otherwise.

Please also note that we will refer to certain non-GAAP financial information on today's call, please refer to our earnings release for a reconciliation of these non-GAAP financial metrics.

I would now like to turn the call over to our CEO, Michael Colglazier, who will begin on Page 3 of our presentation.

Thanks, Eric, and good afternoon, everyone. It's been a quick 1.5 months since our last earnings call. And I'm happy to share, we've been advancing the many efforts across the company in line with our plans and prior guidance.

We've delivered the first of our new spaceships from our assembly hanger to our test and launch hanger. Ground testing of that spaceship is underway, and we remain on track to commence flight testing in Q3 and spaceflight in Q4.

With commercial spaceflight operations continuing to draw closer on the horizon, we've accelerated efforts across the company to prepare for the ramp of activity. We're hiring our next group of world-class spaceship pilots as we prepare for flight test and ongoing spaceflight operations. We provided our roughly 650 founding astronauts who make up roughly a year's worth of advanced bookings with expected flight windows in 2027 and early 2028. We've received excellent reception and early booking response to the newly priced spaceflight expeditions we released to the market in April. And we began construction of our Rocket motor assembly line in Phoenix, which is expected to be operational in Q4.

In addition, we've also managed the financial strength of the company. Spending continues to decline quarter-by-quarter, debt retirements are being made on or ahead of schedule, and cash balances are being maintained at appropriate levels as we work through the final quarters of our pre-revenue phase.

Our agenda today will be relatively light, reflecting both the short term since our Q4 earnings call and the consistency of progress against our prior statements and objectives.

Turning to Page 4. Since our last call, we finished the major structural task with our first spaceship, and we were all pleased to reach the weight on wheels milestone in April as we move the ship from our assembly hanger to our test and launch hanger, which is co-located on the grounds of our Phoenix campus. Outstanding work by our entire team.

Structural assembly continues to progress as planned for both our static test article and our second spaceship, and the images on Page 5 showcase some of the larger parts of our static test article coming together.

As you saw during the build of our first spaceship, the final assembly process moved quite rapidly. This rapid assembly process continues with the static test article, which, as a reminder, is built for extensive use in our testing program, but which will not be flying.

Our second operational spaceship will we'll follow the static test article, and this ship has begun fabrication. We will again leverage the same rapid assembly process for the second spaceship, and we expect the second ship will enter service between late Q4 2026 and early Q1 2027. This timing keeps us on track with our plans to substantially increase the number of spaceflights per month during the first 2 quarters of 2027.

Turning to Page 6 to talk about our ground test efforts. At a technical level, our ground test approach is comprehensive and takes advantage of industry best practices with testing progressing in parallel across multiple locations.

We've made purposeful changes in our approach to ground testing versus the process that was used with our original spaceship Unity and the upfront investments we made in this area are now paying off.

We purposely invested in off ship testing infrastructure to significantly increase the number of systems test that can be accomplished prior to and during the final spaceship assembly.

Our Safety and Test Center in Irvine, California has been running parts of our ground test campaign for many months. The image on this page showcases our Iron Bird test platform, 1 of the many off ship infrastructure investments we've made.

These investments have enabled us to complete large amounts of the ground test program and dedicated facilities with purpose-built test rigs and equipment. This parallel off ship testing activity reduces expected time spans for the on-ship ground test elements with much of the on-ship testing focused on verification of systems installations rather than first-time checkouts of hardware.

At a practical level, this means we can now advance our new spaceships from structural assembly through on-ship ground testing and into flight test in much less time than what was required with our Unity spaceship while having a more robust ground test program overall.

Moving to Page 7. We I hope you've all seen our recently released episode of We Build Spaceships, which provides a great overview of our ground testing efforts. The link to the video is on this page. And I'll summarize by highlighting the various facilities where this important work is taking place.

First, at our Safety and Test Center in Irvine, we continue to conduct key qualification test of our hardware. Qualification testing puts the hardware components through the paces of the conditions they see in flight, including temperature and vibration as well as extreme conditions they could be subject to. This past quarter, we completed dozens of component qualifications, including our central computer. This computer is the heart of the digital flight control system which translates pilot inputs into command to move the flight control surfaces at the back of the space. We are also testing systems on our Iron Bird, a test platform that allows full system-level testing of how hardware responds in flight.

Second, at the Southwest Research Institute in San Antonio, Texas, we have completed testing of our flight control surfaces under loaded flight conditions and we're now preparing to structurally test our wing, fuselage and feather subassemblies. These tests are part of our overall structural testing effort, which is conducted to verify that our as-built configurations meet or exceed the design standards we have set out to achieve. These tests also allow detailed correlation of the various analytical models that we use to predict behaviors in flight test and commercial service.

Third, our team continues to qualify various software and avionics systems at our engineering headquarters in Orange County, California and at vendor facilities across the country. Software plays a vital role in our spaceship, especially in our new flight control architecture, and we are using industry best practices to ensure our code is ready and safe.

And fourth, in the test and launch here in Phoenix, our team is now completing installation of many electrical and mechanical systems that are embedded inside the ship while also conducting a range of on-ship production acceptance test on systems that have been put in place, verifying the quality of each system as it's installed. In June, the team will begin integrated vehicle ground testing, which is used to check out complete end-to-end performance of this patient.

Turning to Page 8. I'd like to talk briefly about our flight test program. When our ground test in Phoenix are complete, we'll carry the new spaceship to Spaceport America using our launch vehicle, Eve. Once we are in New Mexico, we will start the glide flight phase of testing. This will be akin to the glide testing we did with our Unity ship. However, the duration will be substantially shorter given the faster turn times of our new delta class vehicles. We continue to expect the flight test phase to commence with glide test in Q3, progressing to rocket-powered flights in Q4.

As I mentioned on our last call, 1 of the many ways we are preparing for the first flight test of our new spaceship is by bringing our prototype spaceship Unity back for an encore performance. Unity's glide characteristics and energy management profile provide an outstanding real-world proxy, which, in addition to extensive simulator training, will prepare our pilots to put our new space shifts through the required flight test points.

This image from earlier this week shows Unity in its preflight configuration with our launch vehicle, Eve. We are expecting Unity to be back in the skies later this month for the first of several glide flights above Spaceport America.

Moving to Page 9. Our key scheduled milestone dates remain consistent with the expectations we shared during our last earnings call, which is great news. As those who track the aerospace industry know, keeping forward momentum in line with expectations is notoriously challenging with these complex programs. And our ability to maintain consistent progress against our schedule is due to the massive effort, ingenuity and nimble adaptations from our Virgin Galactic team. Great job to all of you at VG who are listening in.

Page 10 highlights some of our preparations for commercial space flight operations. Talent is key to our business. And most of our hiring needed for commercial spaceflight operations will come in the third and fourth quarters as we continue to manage our costs prudently. A few key roles will be needed earlier, including the expansion of our truly world-class pilot core.

The licensing process for our new spaceships is well underway, and we are working closely with the FAA to ensure all elements are submitted according to plan and the licensing process moves ahead accordingly. We anticipate the various elements associated with the new Part 450 licensing regime will continue throughout the year, and we expect to receive our license prior to our first powered flight in Q4.

We have approximately 650 founding astronauts booked for Virgin Galactic spaceflight expeditions. They are an amazing group of people, and collectively, they represent around a year of advanced bookings for the business, which is a tremendous asset as we begin operations.

With clarity on flight windows growing substantially as we near the start of commercial spaceflight operations, we have given each of our founding astronauts a rough expectation of their flight window via a newly introduced Astronaut portal. We expect the majority of our founding astronauts will complete their spaceflight expedition during 2027 with the remainder flying space in the first half of 2028.

We recently opened a limited number of bookings for Virgin Galactic spaceflight expeditions, each priced at $750,000, with flight dates expected in mid-2028. The response has been strong and global in nature, and we've received qualified inquiries from customers across more than 20 countries. We're now actively progressing through the booking process with individuals, research organizations and government agencies.

As a reminder, booking of spaceflight expedition is a deliberate process that typically unfolds across several months, as customers move from initial engagement to in-depth conversations continuing through a detailed review of terms and conditions and ultimately to the booking of their expedition. This process is consistent with other high consideration high-value experiences.

With that said, many of the conversations we are having are moving to the contracting phase more quickly than we would typically expect. And we are very encouraged by the pace we see. We secured deposits for a meaningful portion of the available seats at this price point, and I expect we will close this limited tranche of space white expeditions at the $750,000 price during our glide flight program in Q3.

As we shared previously, once this tranche is allocated, we will pause new bookings and begin onboarding this next cohort of astronauts. Following that, we plan to open a subsequent tranche likely at a higher price point.

And finally, before I hand the call over to Doug, I am happy to share that construction has begun on our new rocket motor assembly line located adjacent to our spaceship assembly hangars at our Phoenix campus. We have a substantial number of motors already in inventory that will carry us through flight test and into the start of commercial spaceflight operations, but we plan to ensure a steady ongoing supply to support our growing spaceflight cadence. In this regard, we plan to have the new rocket motor assembly line operational in Q4. This timing aligns with the completion of our second spaceship, allowing us to shift our talented team in Phoenix from spaceship assembly to rocket motor assembly without missing a beat.

Doug, let me pass the call over to you for the financial update.

Thanks, Michael. I'll start with our financial results for the quarter just ended and follow with a few details about our recent capital market activities. Then I'll provide more color on our projected cash flows and the P&L as we move into commercial space line operations and scale the business.

With regard to our recent financial results and our projections, you'll notice the trend of continuous improvement in free cash flow because the peak spending for spaceship development is behind us. We've been moving through spaceship assembly and into testing, which results in a progressively smaller cost footprint.

Moving to Page 11. In the first quarter of 2026, we generated revenue of $200,000 from access fees related to future astronauts. Total operating expenses for the first quarter were $66 million, a 26% reduction from $89 million in the prior year period. This change reflects a continued shift from R&D to capital investments in production of our spaceships and lower overall spend as we move through the assembly phase of the first spaceships.

Our first quarter net loss improved by 23% to $65 million compared to $84 million in the prior year period.

Adjusted EBITDA improved by 24% to negative $55 million in the first quarter compared to negative $72 million in the prior year period.

Capital expenditures were $40 million, down from $46 million in the prior year period.

Free cash flow was negative $93 million in the first quarter, a 23% improvement compared to the prior year period.

Moving to Page 12. We ended the first quarter with $251 million in cash, cash equivalents and marketable securities, which includes $11 million in gross proceeds raised through our at-the-market or ATM equity offering program. Not included in that cash balance is $52 million in gross proceeds from the ATM during the month of April.

On April 30, we announced the potential redemption of $10 million of 2028 1st lien notes due in exchange for shares of common stock. This redemption is being made ahead of schedule and reduces the debt payments due in September of this year.

This is a great example of the flexibility built into our capital realignment transactions that we completed last December, and which we discussed during our last earnings call. We recognize that there's dilution caused by the ATM program and debt redemption I just described. However, we expect the dilutive impact will be far outweighed by the value created from assets being built with this capital. These assets are recorded in our property, plant and equipment on the balance sheet, which totals $427 million at the end of the first quarter.

Moving to our projections. Revenue for the second quarter of 2026 is expected to be approximately $100,000 for future astronaut fees. Free cash flow for the second quarter of 2026 is expected to be in the range of negative $87 million to $92 million, with slightly less than half being for capital expenditures as we continue to prepare our spaceships for commercial service.

We anticipate that free cash flow will continue to improve modestly in the third quarter of 2026. We will be growing various functions within space line operations during flight test and in preparation for the start of commercial service, but we expect this to be more than offset by larger reductions in capital expenditures as spaceship development progresses.

During the fourth quarter of 2026, we expect to see continued improvement in spending and also the beginning of revenue for space flight operations. We have been presenting the annualized business model shown on Page 13 during several of our recent earnings calls.

By the fourth quarter of this year, we expect operating expense, including variable spaceflight costs to be in the quarterly range of $70 million to $80 million. Notably, this level of quarterly spending aligns with the annualized view of the model as shown in the first column on this page. Our cost footprint is expected to be reduced to this level by the fourth quarter because we are progressing from spaceship manufacturing to the launch of commercial space line operations.

Next, I want to highlight the powerful unit economics, by which I mean the economics of a single flight that are now possible given the dramatic reductions in the cost of human spaceflight driven by our highly reusable system. Most importantly, reusability drives the cost of each flight down dramatically. This, combined with the high value of our spaceflight experience, which supports our pricing model results in a high contribution margin per flight. In other words, the revenue from each flight can far exceed the variable cost for that flight.

Given the low unit cost structure, even at historical $200,000 price points, each flight is expected to generate a positive contribution margin.

For illustrative purposes in the economic model on Page 13, at an average price of $600,000 per astronaut, we're expecting a very healthy contribution margin of over 80%. As we scale operations and given the baseline cost structure shown on this model, we begin to see the tremendous flow-through of profit to the bottom line.

Now let's circle back to expectations for early commercial operations. In January of 2027, we expect to fly 4 flights per month and reach 8 flights per month by Q2. Ahead of this, our cadence of spaceflights in Q4 of this year will be intentionally constrained to allow time for learning between flights. As we get closer to the launch of commercial space line operations, we'll provide more information on the expected dates for the first flight.

Additionally, we are modeling the majority of our early flights with average revenue per astronaut at $200,000.

In the fourth quarter, cash receipts are expected to exceed revenue as we begin to collect customer payments ahead of flights planned for early 2027. Given the strength in our balance sheet, our declining spending and our unit economics, our liquidity supports our transition to commercial space line operations.

Moving beyond 2026, we expect to achieve modest quarterly positive cash flow within 2027 as we fly a large percentage of astronauts with the reservations that were historically sold at lower prices. We forecast that we will achieve the adjusted EBITDA shown in the first column of the business model on Page 13 on an annualized basis sometime during 2028 as the average ticket price improves.

With that, I'll turn it back over to Michael.

Thanks, Doug. Finishing up on Page 14 for the picture of our first production spaceship in the test and launch hanger. Every time I view our spaceships, I marvel at both the engineering and artistry that underpin everything about Virgin Galactic spaceflight system.

Like all spacecraft built to handle the rigors of leaving and returning to the earth atmosphere, our spaceships are powerful, incredibly strong, durable and robust. Distinctively our spaceships are stunning achievements of industrial design with a grace, elegance and flat out cool factor that is unique to Virgin Galactic. Just wait until you see this ship with its new livery.

We're proud of our progress, and we've opened up tours of the spaceship factory for founding astronauts, prospective customers and invited guests. We expect to christen this first ship and send it out to Spaceport America around the time of our next earnings call. We're moving with momentum, and it's awesome to see.

Let's open the call for questions.

[Operator Instructions] And our first question comes from the line of Oliver Chen with TD Cowen.

Michael and Doug, nice to see all the progress. Regarding the early booking responses, Michael, that you spoke to and the encouragement there, what's the nature of what you've seen and also the implication for decisions on pricing?

Also, the second ship is pretty exciting as well. What have you learned from the first ship that will bode well for the process and the second ship and then future ships perhaps?

And Doug, on the ATM program, which helps fund the ROIC accretive actions. What should we know about your use of that program going forward and/or the framework?

Thanks, Oliver. I'll start it out. It's Michael here. I think the nature of who we're talking to is really interesting and encouraging. We have -- I'd say some of the people that are more prevalent in our founding astronauts as early 650 who are heavily people who have always thought about going to space, always had the dream of going to space and wanting to get there. So we see some of those. We see people who want to fly with their family members, parents or children. We're seeing people coming and saying, "I want to do this with my friends. I want to do this as a buddy trip. I want to do this as a girls trip." We're seeing people who are coming in and saying, "I have research that I've been wanting to do, how do I connect with your research program." We have governments that are -- not governments like the U.S. or China and Russia that are doing their own space programs, but governments who probably can't do that, but have an interest in their own space program reaching out to us. And it's just -- we have people who are more like corporate charters and wanting to book for a variety of corporate reasons.

So the diversity, I think, is fantastic, and I'm very heartened by that. And the general shift, I'd say, in tone from 6 years ago when I started, of, oh, why would you think about going to space? We aren't seeing that. I've been off in London and New York for, I'll call it, connecting with potential customer trips. And the tone is, this is amazing. I'm so excited by this. And then you see a range of people, right? Some people are like, I want to do this in a couple of years. I want to do this on my x milestone birthday. And some are like, "I just want to go do this right now," and we send them over to our sales team. So hopefully, that gives you a little bit of sense of the nature of the people we're talking to.

And so pricing, we will continue to just have the same purposeful pricing strategy. The value has to massively exceed the pricing which we charge. So that's our first premise. And we believe it's doing that and more so. So we expect we'll retire this first tranche at 750 and open up the next 1 higher. I don't think we're ready to kind of say where higher at this stage. But I do expect that it will be higher. And we'll probably continue that for a couple more clicks and then study out somewhere. So hopefully, that gives you some sense on the pricing.

I'll talk a bit on, Doug, on the first shift to the second and on and then hand it to you. There's a sizable shift between the first ship. The second structural parts are going into our static test article. And then the second spaceship is kind of the third 1 through our production line. One of the big things I'm noticing is the consistency in which the carbon parts that we're manufacturing are coming out as we get to our second spaceship, we've kind of figured out the recipe as we used to describe it, right? We've looked the manufacturing problems there. And that means they kind of come out clean and they're easy for us to take in and move forward. That's the primary piece.

The first assembly we went through was super smooth because we had used to determine an assembly process all the way through everything we've done. At the same time, the first time through you find the little things, small things that kind of clash when you try to put 2 things together and you didn't quite expect something that kind of is in the way and you had to kind of move it around. That's all cleaned up now.

So the net of all that is, going to the second ship, we expect it to come in functionally more cheaply and its set of parts because we won't have to redo a carbon part, they're coming out more consistently. The process will be more swift in the assembly and the net of that means it's quicker and less costly to build. And we expect that will continue probably more so as we expand our fleet over time. Doug?

Thanks for the question, Oliver. Regarding the ATM and our plans going forward. So we've used the majority of it, right? It was a $300 million program. We have $87 million left on it. So it's been a successful program. And that's built up our cash balance that really helps us get through this transition phase to the start of commercial service. And really going forward, what we're looking for is it provides additional growth capital for us. The example was we just expanded our rocket motor -- are expanding our rocket motor factory capacity so we can have a larger volume of motors running through for growth, and it also provides capital for us to continue working on a launch vehicle program. So those are good opportunities for additional growth capital. So it's there for us if we need it.

But I just want to point you back to these unit economics we were talking about earlier and what we're headed for. We're getting into a phase now where we've become stabilized and self-sufficient with the operations of the company. So that drives less reliance on things like ATMs going forward, that's positive as we get to commercial service.

Yes. Okay. And there's been a lot of general enthusiasm with SpaceX and space is at large. And you have a lot of partnerships or institutional ideas around governments and space ports as well. What are your thoughts on the evolution of more recurring revenue and also the nature of how you're different from SpaceX and what this may mean for your strategies or the industry at large with space being a big idea?

I'll start at the end, Oliver. Space is a big idea, has been and is getting a lot of momentum. You're seeing more of the ETFs coming out around space. And I think that's positive and well merited. Obviously, a lot of energy around the SpaceX IPO as that seems to be coming forward. And I think that will continue as you see a lot of articles to just generate more innovation within commercial space. So a lot of good things coming as SpaceX continues to mature goes forward. And I think we will benefit from that.

You talked about recurring revenue. I assume you're talking like things for us and where are we different. Well, 1 thing is we are clearly focused in this first business model on human spaceflight. That's part of SpaceX's offering. There's starts at $50 million up. Ours is starting at $750,000. So close to a couple of orders of magnitude less in cost. And that's obviously a focus and all of our focus on the experiential benefits are there.

But -- and then we'll take that as we talk to multiple space ports. We've built all the infrastructure now, those fixed costs are behind us, the nonrecurring engineering is behind us. And so now we're looking to scale that out. We continue -- we've talked publicly about Italy. We continue to be working with our Italian partners on how and when we want to bring that space port forward. And we continue with additional countries, and I'd say very excited about the potential to bring space ports in additional countries. That all just leverages all the infrastructure we've put in and you start to see the flow-through economics that Doug talked about with that.

There's also a lot of other interesting things as governments, U.S. government, in particular, but other governments look at what can be done with space. I think people are starting to recognize the frequency with which we will be going through the atmosphere and the ways we do has a lot of potential. So 1 of the things we're going to be exploring are what things we can do as almost ride-along efforts going forward. So that is intriguing to us. I think we shared in the past that we are qualified under the Golden Dome IDIQ. And so we continue to look at ways in which we can be supportive of the government in that regard.

And -- but I really think you're going to see expansion in the types of people and markets that can use these space vehicles going forward. So hopefully, that gives you a little bit of context on that.

Our next question comes from the line of Greg Konrad with Jefferies.

Maybe just start with 1 clarification question. I mean I think you mentioned $200,000. Was that per passenger? And how long do you expect that to be at that price level given, I think in the past, you talked about potentially filtering in some shorter cycle customers at a higher price point?

Thanks, Greg. This is Doug. So we do have a lot of early reservations that were priced at $200,000 to $250,000. These were sold years ago. And so we're, of course, prioritizing that for these customers that have been with us for a long time. So you'll see those at the front end of this because that's kind of on a FIFO basis. That's how that lands. But we do have opportunities to mix in other prices. We did specifically talk about an opportunity for some customers to come in earlier to be 1 of the first thousand astronauts to space. And so that comes at a premium price. And so that is a program as an example of how people can be mixed in at earlier price points or earlier flights. So that's something that would tend to filter in.

But then you start to see other ticket prices come in. We had other tickets at $450,000 and then $600,000 and now $750,000. So you'll start to see those plan in as the year goes on. But it's as those planned and the sequencing, and that's TBD about how that will happen. But we just want to kind of set expectations at the very beginning. You'll see the lower tickets. And then some of those ones that are moving up in the line, those -- to be in the first 1,000, they've got to be in the first 2 quarters of the year, if you look at our flight rate.

So that kind of tells you about when you'd see those start mixing in, and that will start elevating our price points.

And then I think in terms of like the new sales at $750,000, I think you talked about maybe that coming in mid-2028, if I heard correctly. And I mean, if we think about that target base model that you've laid out, assuming $600,000 per ticket. As you kind of get to that higher price point, I mean, does anything change on the cost side? Or should we think of that as largely incremental to that base margin that you laid out on the initial fleet?

Right. So that's all going to be incremental because the cost here would not change. So this -- as you pointed out, this model reflects average ticket price of $600,000. We put that in there a while ago. But as prices go above that level, that's all incremental and flows right through to the bottom line and adds to the EBITDA.

I'll leave it at 2.

Next question comes from the line of Myles Walton with Wolfe Research.

Michael, I think you talked about the Part 450 licensing regime, and I know that just went effective. How different is the license regime going forward? How much more effort you have to obtain that license. And then as you ramp flights, could you remind us of the -- basically the ongoing the recurring licensing? And is there any reason to think that, that will be an obstacle to getting up to space?

Myles, I think great news with the 450 work, we've obviously been working with the FAA for quite a while with this. We have turned in our application for our space operators license, and that's been accepted. So the FAA's received our application. We've got a letter back that's been accepted. And so that has a fairly structured process and understood time line going forward. And that process and time line we all expect to conclude before we go to space. So that's -- I think we're feeling very confident in our approach to getting our space with operators license in that regard. And we have a very focused team that's been working closely with the FAA all along. And of course, Mike Moses is our point on all of that as very well engaged.

You are well aware as we talk, each of our ships are experimental in nature. They must have experimental airworthiness certificates. Eve, our launch vehicle has that. Our first delta ship has to be airworthy to get that certificate, and that happens after we finish the construction and testing. So we expect our first delta ship will get its airworthiness -- experimental airworthiness certificate just ahead of us taking it over to Spaceport America before we kind of do a captive carry flight in the glide flights.

And then those experimental airworthiness certificates are on recurring renewals. We've been doing that with Unity and Eve all along. We expect that will continue. And hopefully, that answers your question on the licensing piece.

No, that's great. Go ahead.

Yes. No, no, please, if you could remind me on the ramp question.

Yes. I was just wondering, from a regulatory perspective, as you ramp, is there any ongoing recurring approvals you're going to need that in any way or risk to the recurring nature of flight. Obviously, for a month in January is not as quick as you want to be, but it's a heck a lot quicker than what you've ever done.

Yes. I don't see something in the licensing effort, of course. We expect to be completely close with the FAA, just like we did with all of our Unity flights throughout here. But nothing I would expect to see that would change in the basis. Our ability to turn the ships wasn't constrained by the FAA or licensing, it was our own inspections and maintenance process. And that's what's different with these new ships. So I don't think there's a licensing complication that we're expecting there. But we will be partnering with them on every flight as we go.

Okay. Great. And just 1 last one, if I could. Have you reached out to the administration from a perspective of investments. Obviously, they have expressed interest in lots of different areas. Your emerging area might be an interest of them as well. And just curious more from the investment side, if there's any conversation?

We are definitely in connection with the administration, especially some of the DOW departments as you'd expect, both in space, Air Force, FRL, things like that. And I think there's interest in lots of areas. You used the word investment, sometimes investment can come from sponsoring things that can help us add capabilities or help us expand capacity versus, say, a direct investment in the company. But there's also conversations with, I'll call it, other groups that would also be interested in partnering with us that we could always look to both for commercial business, but also investment to help us expand and grow more from a growth capital standpoint. So nothing to share or announce here.

But I do think as we are now getting very practical and real, the assets themselves are visible tangible. You can see them. The dates are closed in on the horizon. It gives us a wider opportunity to talk about what else might we be able to do with these assets, who might we be able to do them for and I think exciting to find value. We -- I think we shared last time, we have a new member of our executive team, Megan Prichard came in as our Chief Growth Officer. So a part of Megan's team obviously will be focused on the sales of spaceflight expeditions, but a part of it is broader growth profile that would include new business and government growth like you're referring to.

[Operator Instructions] And we do have our last question comes from the line of Kristine Liwag with Morgan Stanley.

This is Gaby on for Kristine. Last quarter, you shared encouraging progress on the Italy based part opportunity, including workaround airspace, potential flight path and infrastructure requirements. Could you provide an update on where that study stands today and what the key next steps are?

Thanks, Gaby. So I'll talk about Italy and then more -- a bit more broadly about second space ports. So the work continues. The main part of the effort we had done with ENAC, I'll call it similarly the FAA version for Italy, that structurally has been completed. We understand how and where the flight pass, the way we deconflict air space, the approach we would take and everything around that. So that's pretty solid. Our next steps are really going to be both on the business model to work with our Italian partners there and the timing in which we want to do that. And kind of what's the kind of public private partnership is likely to look like. So those will be the next steps that are there with Italy, but we remain incredibly excited about that opportunity in Spaceport. And I think the same is true for the Italians.

Kind of in parallel, I'd say, we continue to talk about other locations for space ports in other parts of the world. You've always heard us say we think there's probably 3 to 4 permanent spaceports and then potential for more partial year spaceports. And those conversations have been continuing and I think in a very, very positive way. So nothing to share, announce, on this other than I think the understanding of both the economic engine that is brought with a kind of fully functioning spaceport, the opportunity that spaceport brings to a government for its own potential interest to get into commercial space and the ability to bring lots of people to those countries. All those elements are meaningful. And we're looking forward to continuing those dialogues with the countries that we've been talking to.

Ladies and gentlemen, that concludes the question-and-answer session. Thank you all for joining. You may now disconnect.

Good afternoon. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's Fourth Quarter and Full Year 2025 Earnings Conference Call. pay [Operator Instructions].

I will now turn the call over to Eric Cerny, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone. Welcome to Virgin Galactic's Fourth Quarter and Full Year 2025 Earnings Conference Call. On the call with me today are Michael Colglazier, Chief Executive Officer; and Doug Ahrens, Chief Financial Officer. Following our prepared remarks, we will open the call for questions.

Our press release and slide presentation that will accompany today's remarks are available on our Investor Relations website. Please see Slide 2 of the presentation for our safe harbor disclaimer. During today's call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties.

Many factors could cause actual events to differ materially from the forward-looking statements made on this call. For more information about these risks and uncertainties, please refer to the risk factors in the company's SEC filings made from time to time. You are cautioned not to put 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, whether as a result of new information, future events or otherwise.

Please also note that we will refer to certain non-GAAP financial information on today's call. Please refer to our earnings release for a reconciliation of these non-GAAP financial metrics.

I would now like to turn the call over to our CEO, Michael Colglazier. Go ahead, Michael.

Hello, everyone. We've had a tremendously productive start to 2026, and the buildup to commercial space line operations is in full swing, 3 massive milestones to call out at the start. First, we've completed structural assembly of all 3 major components of our ship, the Wing, the Fuselage and the feather.

Second, the weight on wheels milestone for this first ship is expected in the next few weeks as the process of joining the wing piece to log and weather has been moving along even better than expected. This allows the ground test phase to begin in April with commencement of the flight test phase on track for Q3 as planned. And third, with the launch of our first base light on track for Q4. We have opened the sales window for Virgin Galactic space flight expeditions, and we are now adding people to our space fare community at new price points. We are very excited to share the progress made since our last earnings call and I'll start by calling your attention to the fantastic image on Page 3 of our presentation.

As you can see, we've wrapped up final assembly of all 3 of our major subassemblies, the wing, the fuselage and the feather and the process of joining these into our first complete space shift has begun. A structural assembly set to finish over the next week 2, we expect to bring this shift into ground testing in April, which has it on track for our first base flight in Q4 2026, amazing progress by our entire company.

With our first shift moving full steam ahead, we have released a limited tranche of Virgin Galactic spaceflight expeditions, each priced at $750,000. Our new website is now live and will report the information and application process for those interested in joining the Virgin Galactic base fare community. We've hired a new Chief Growth Officer, Megan Prichard, and she's joining at one of the most exciting times in our company's history.

Looking at the agenda on Page 4. Today, I'll offer insight into our sales plans for the year ahead, share expectations for ramping the cadence of Space light during the first month of operation. it highlights on progress of Cesar esports and provide a road map to expectations and catalyst as our first base ship is ready for its maiden spaceflight.

Doug will discuss our plans for cash management, capital structure support and revenue planning over the next 12 months as we place our ships into commercial service, drive meaningful revenue from spaceflight operations, protect our balance sheet, and target quarterly positive cash flows as early as 2027. He'll also review our fourth quarter and fiscal year 2025 results.

Let's get started on Page 5. With the outstanding progress the Virgin Galactic team has delivered with our first base. We've included a series of images on Pages 5 through 7 of our new ship of structural assembly nears completion. We're incredibly excited at how well the ship is coming together. During our last call, we highlighted some specific challenges we were having with elements of our fuselage and the piece of laws remains on the critical path for us throughout the build phase for this first ship.

With that said, we finished the fuselage assembly last week and joined it to the wing assembly shortly thereafter. Our weather assembly from Bell Textron has made its way across country to our factory, and we expect to connect the feather to the wing and fuselage, over the next week or 2 and then move this shift into its ground testing phase. I'd like to take a minute to call out why this enormous milestone is so important to Virgin Galactic's future.

We invested years designing this next-generation chip and the result is spectacular. That heavy lift is behind us. We then spent significant time and capital developing tools, both to build the carbon parts and also to assemble those parts into the final structure of the ship. These tools were built to exacting standards designed to last, and they will support the efficient production of many patients going forward.

Next, we spent time refining the process to produce a wide variety of carbon composite parts for our ships. As I mentioned with our fuselage, some components required a few iterations to get right, which is fairly typical of first yield parts. But we've adapted our processes and techniques and we can now repeatedly produce high-quality parts. All these efforts came together and are enabling us to assemble the ship structure and the span of just a few weeks. This final assembly time shaped month off our historical process, and we expect the sufficient assembly process to be replicated as we expand our fleet over time. In sum, we now have the infrastructure and capability to build and assemble spaceships efficiently, reliably and at scale. This provides an enormous competitive advantage as we grow our business.

Turning to exciting news on Page 8. Sales have begun with our first new spaceship preparing for its ground test phase, it's time to welcome more people into Virgin Galactic Space Fair community which already contains over 650 founding astronauts. To support the process, we have reimagined and rebuilt our entire digital presence to focus on informing and engaging aspiring astronauts. With a streamlined and purposeful approach to our new public website at virgingalactic.com. I hope everyone listening will take time to explore this new site as the life-changing aspects of our spaceflight experience really come through.

We've opened a limited tranche of 50 spaceflight expeditions, each priced at $750,000. These base lights will be slotted in our manifest immediately after we fly the current members of our founding astronaut community, many of whom have been anticipating their space flight for several years. As I've shared before, we expect our prices will rise in steps over the near to medium term. And once this initial tranche of space flight reservations is concluded, we plan to reach higher sales at the $750,000 level to focus on welcoming this new group into our space fair community in trademark virgin galactic fashion. We will then open our next tranche of availability, which we expect will be priced higher than $750,000.

We will also be offering a very limited number of reservations to join our earliest base flights on our new spaceship. To date, slightly less than 800 people have flown to space throughout history. And we expect flights from government agencies will leave fewer than 200 remaining slots to be one of the first 1,000 humans on space. We will be pricing these very limited opportunities substantially higher than our regular reservations.

With sales beginning and commercial operations on the horizon, I am extremely pleased to welcome our first Chief Growth Officer, Megan Prichard to Virgin Galactic. Megan joins us from Uber where she most recently led the U.S. mobility portfolio, including the luxury segment, Uber Elite. Megan's career has been spent in building commercial success and groundbreaking industries from to autonomous vehicles to expansive growth and category expansion in the rideshare industry. Her charter is to drive growth and scale across the company with an immediate focus on our initial sales and a broad remit that includes scaling our business at Spaceport America, establishing additional revenue streams for our existing and emerging technology, building brand partnerships and accelerating the development of new space ports.

Moving to Page 9. I'd like to share how we are planning to ramp our flight keeps during the early months of operation. We expect to begin commercial space flight operations with a cadence of approximately 4 space flights per month. We plan to have our space missions and maintenance teams trained and ready to turn the ships at a higher pace. But we want to take the time necessary to dial in our astronaut experience and incorporate any learnings and feedback we received during our initial flights.

Once we have the missions, maintenance and astronaut experience dialed in, we plan to progress to an average of 8 space flights per month. We will then ensure all parts of our operation are scaling appropriately before moving to 10 flights per month or more. Actual [ with cadence ] will be influenced by weather and other factors, of course. But our planning efforts are built with these flight rates in mind. Safety and operations and dedication to an unparalleled astronaut experience will drive the actual pace of this progression and we will only proceed with a step-up in flight cites when everything is fully ready. At this early planning stage, our goal is to move into a cadence of 10-plus flights per month sometime in the second quarter of 2027. And subject to vehicle and operational readiness.

On Page 10, we've recently been flying our launch vehicle [ Eve ], as part of our pilot proficiency training. This shift was given a very meaningful upgrade over the last year while we've been building our new spaceships and the improvements of Ready-to-Eve to target a launch support capability of up to 12 to 15 space flights per month, which is higher than our expected average commercial cadence. This additional capacity for me should be extremely helpful in allowing us to respond to weather-related flight delays, so we can generally stay on track with our flight dates and customer commitments on a week-to-week basis. Our engineering and maintenance teams, along with our pilot core have done an incredible job with this launch vehicle.

We expect the substantial upgrades we have made to Eve over the last few years, will support a service life into 2032 or beyond. But we also plan to expand our space flight capacity beyond what Eve can support. That will require additional launch vehicles to support the next set of space ships coming off the line.

Our new launch vehicle development program internally known as the [ LVX ] program, has been advancing modestly as we have kept most of our engineers focused on the delivery of our new space ships. We expect the majority of our engineers will pivot to the LVX program as our space ships move into flight test, and we currently are targeting commercial deployment of new LVX vehicles, along with additional space ships. In 2030, we coincide nicely with opportunities for a second port in addition to expanding operations at Spaceport America.

Speaking of huge Spaceports, on Page 11, I'd like to touch on progress with plans for our next base work. We are nearing conclusion of our initial study for Virgin Galactic client operations in Italy. We've had a very successful engagement with our partners in the Italian government, and we jointly sorted important efforts necessary to fly remote location within the [ Pulia ] region in Southern Italy. Key achievements include understanding how aerospace will be deconflicted, identification of probable flight paths and space flight trajectories, definition of infrastructure requirements of the Spaceport robust assessment of weather patterns across the year and positive investigations into both supply chain and hospitality availability within the local area.

Next steps will include specifics around licensing, timetables and business arrangements, and we are looking forward to continuing this effort with our Italian partners this year. In addition to the exciting opportunity in Italy, we also progressed discussions for a Virgin Galactic Spaceport with additional governments during the last quarter. I've been very encouraged by the interest and opportunity within each of these locations. And I look forward to sharing more around international expansion opportunities in addition to the substantial growth we expect from Spaceport America.

Starting on Page 12. I'd like to outline several upcoming milestones and expected catalyst opportunities as our first spaceship moves through ground testing, advances to flight testing and prepares to launch into commercial operation. First, up in April, our first spaceship will get a series of ground testing efforts, specifically known as production acceptance testing or PAT and integrated vehicle ground testing or IVGT Production acceptance testing will be done on every basic we produce and is conducted to ensure that all systems, including electrical, pneumatic and hydraulic are properly installed and function correctly in an integrated configuration.

After that's done, we plan to begin the IVGT process, a deep system-level integration test done on the first vehicle, which is conducted to validate and verify the overall system design and confirm that meets all performance and safety requirements. This thorough ground testing period should wrap up in July when we expect to open the hanger doors in Phoenix, Chris in this first ship with its new livery installed and transported to Spaceport America in New Mexico, where it will begin flight testing shortly thereafter.

Moving to Page 13. Next up in May will be some excitement at our operating base in New Mexico. The flight testing on our horizon, it's time to expand our team of pilots and accelerate proficiency training. To do that, we've been interviewing some of the world's best test pilots to join our elite base ship pilot core. Commencing in May, our pilots are scheduled to begin flying our original spaceship, Unity, on a series of glide flights about Spaceport America.

Our new space ships show the same outer mold line and energy management characteristics as our original ship, which makes Unity an outstanding training vehicle in advance of our first glide flight with our new patient. This series of glide flights with [ Unity ] also gives our mission control and maintenance teams, excellent preparation ahead of the new spaceship test flights. And it's going to be a majestic site when Unity delivers these Encore performances in the New Mexico skies.

Advancing to Page 14. The next milestone following ground testing in the Unity glide flight series will be the start of our flight test program, which we expect to commence in the third quarter. The flight test program will include a series of glide and rocket-powered test flights. We plan to have a partial burn test flight where we will ignite the rocket motor, but purposely stop short of the full duration burn. This will be followed by a full duration burn baseline. The full flight test program is expected to extend into the fourth quarter.

The main objective of our glide flights is to incrementally expand the flight envelope and evaluate overall vehicle performance, including tuning and validating the tuning of the fly-by-wire flight control system. Rocket-powered flights focused on validating the performance of the shift during key stages of light and validating predictive thermal models.

Other test points will include the evaluation of the cabin experience trading and customer operations procedures and maintenance and turnaround processes. The test program is ultimately designed to validate all systems, operating procedures and the astronaut experience before entering commercial service. Throughout this phase, our time line is driven by disciplined data collection, analysis and model refinement. We will be posting and publishing images from all these flights along the way and it will be an exciting spring, summer and fall as anticipation build for the star commercial operations.

On Page 15, a quick note on 2 additional milestones coming later this year. First, with production of space ships well underway, we are gearing up to begin rocket motor assembly within our Phoenix factory with production expected to begin in Q4 2026. We have a solid inventory of motors already on hand, but the new Rocket motor assembly line is planned to keep pace with rocket motor production needs as we scale flight at Spaceport America and the line is designed to support rocket production needs for a second space port as well.

Next, with our first spaceship entering the test phase, fabrication efforts are pivoting to support both static testing efforts, and also production of our second spaceship, which we expect will enter surface between late Q4 2026 and early Q1 2027, in line with our planned ramp in space like Cadence.

Turning to Page 16. We often receive questions from our retail shareholder base regarding production schedule, commercial service launch dates and cadence and cash management, including how we consider the benefits of cash inflows from our ATM program relative to its dilutive effects. I believe we touched on schedule and launch cadence already. But before I hand the call over to Doug, I'd like to spend a little time on our cash management and capital market strategy as we can clear pre-revenue phase and prepare to drive meaningful cash inflows with the launch of commercial space line operations.

First and foremost, we will be using cash to complete our first 2 spaceships and place them into service as those 2 ships enable the start of high-margin revenue operations and begin to unlock the tremendous value of our business model. As we bring these ships into service, we expect to generate significant cash from the current backlog of customers as their final payments become due in advance of this base light. To enhance our cash flows as we start commercial operations, we will be offering a limited number of higher-priced pace expeditions on our earliest flights for those who wish to be part of the first 1,000 people in space.

We plan to manage our flight manifest in a fashion that will allow modestly positive quarterly cash flow within 2027 with positive cash flow forecasted to scale in 2028 and beyond as we fly astronauts and researchers who have reserved their space flight at higher price points.

We entered into a series of capital realignment transactions last December and moved most of our debt maturity into 2028 and in alignment with our planned ramp in price and profitability. Doug will share more about the many benefits of these capital realignment transactions, including flexibility in payment terms. We expect to leverage opportunities with the $138 million remaining within our existing ATM program to support corporate objectives in the upcoming year. Utilizing an ATM program is dilutive. However, we expect the value created from the assets that are being put into service with support from this ATM use will substantially outstrip the potential dilutive impact. We are excited to move into cash-generating operations as we place our new spaces into service, expand our book of business with the addition of new astronauts and prepare for high growth in the years ahead.

I'll now turn the call over to Doug for the full update, including detail on our plans to leverage these aforementioned strategies to transition the company from a pre-revenue state to a profit-creating enterprise.

Thanks, Michael. Good afternoon, everyone. I'll start with the highlights of the capital realignment transactions we completed in December, and I'll share how this forms the landscape for us to realize the economic potential of our business. I'll follow with a recap of our recent financial results before providing an outlook for 2026 as we transition to commercial service.

Starting with the capital realignment transactions on Page 17, in December, we successfully executed an exchange with several of the holders of our 2027 convertible bonds addressing $355 million of the $425 million of convertible bonds originally due in February 2027. These transactions were done very intentionally and with capital preservation in mind. There were several key benefits to our business from executing these transactions.

First, we extended the final maturity date of the new notes to December 2028, and which better aligns with our planned ramp in cash flow from commercial operations with the 2 new spaces in service. Second, we eliminated $142 million of contractual debt payments representing a very substantial reduction in future indebtedness.

Third, we built flexibility into the new structure, giving us the option to settle portions of the debt obligations with either cash or equity, depending on future conditions. As part of the exchange, we also issued warrants, which are intended to align with shareholder interest given the warrant exercise price is more than double our recent stock price. Additionally, the warrants require cash payment as a company when exercised, further enhancing our balance sheet. These transactions were thoughtfully executed and are expected to support our ability to deliver shareholder value over the long term.

To recap, we have substantially extended the maturity of our debt, materially reduced the principal amount due, added flexibility for method of payment and with the inclusion of warrants, we have further aligned all stakeholders' interest with meaningful share price appreciation. Through the successful completion of these capital realignment transactions, we believe we have built a financial runway to launch and grow commercial space line operations.

I think it's important for us to take a moment and reflect on Virgin Galactic's financial life cycle and call out the extraordinary place we have now reached. The first phase of our financial life cycle was the development phase when we spent many years on research and development to optimize the performance of our unique space light system. Not only did we create an amazing human spaceflight experience, but we also built significant barriers to entry with our technology.

The next phase was the investment phase, when we put the infrastructure in place that enables us to build incredible spaceships. We have the factory capacity and tooling needed to repeatedly produce spaceships that are designed for manufacturability and maintainability.

With the first new spaceship nearing completion and the second ship in line, we are wrapping up the initial investment phase we are set up for cost-efficient scaling of the fleet going forward we have effectively converted cash into valuable assets on the balance sheet in the form of both factory capacity and new space ships.

As this initial investment phase concludes, and we head into commercial service, we expect to see further improvement in free cash flow each quarter of this calendar year. This brings us to the next and particularly exciting phase, the commercial phase. With our first spaceship nearing completion and preparing head into ground testing, we are now gearing up the start of commercial service in the fourth quarter of this calendar year.

Further emphasizing this incredible moment we are welcoming our new Chief Growth Officer and open up sales to new customers. With the start of the commercial phase, we plan to accelerate our flight rate and open the doors for sustained profitable growth. We're thrilled to have reached this extraordinary place on our journey.

Let's now shift to our recent financial results on Page 18. Starting with fourth quarter of 2025, we generated revenue of $300,000 of access fees related to future [ Ascom ]. Total operating expenses for the fourth quarter were reduced by 26% and to $61 million compared to $82 million in the prior year period as we reduced expenses and also continued to see the shift from R&D to capital investments in new spaceships.

Similarly, net loss improved by 18% to $63 million in the fourth quarter compared to $76 million in the prior year period. Adjusted EBITDA improved by 23% to negative $49 million in the fourth quarter compared to negative $63 million in the prior year period. Free cash flow was negative $95 million in the fourth quarter at the midpoint of our prior guidance and a 19% improvement compared to the prior year period.

Turning to Page 19. For the full fiscal year 2025, we generated revenue of $2 million from future access fees. Total operating expenses were $287 million in 2025, reflecting a 25% reduction from $384 million in 2024. We reported a net loss of $279 million in 2025, representing a 20% improvement compared to a net loss of $347 million in the prior year. Adjusted EBITDA for the year was negative $226 million, a 22% improvement compared to negative $289 million in the prior year. Free cash flow was negative $438 million in 2025.

Moving to Page 20. We ended the year with $338 million in cash, cash equivalents and marketable securities. In 2025, we generated $122 million in gross proceeds to an at-the-market or ATM equity offering program. For 2025, capital expenditures were $198 million, up from $122 million in the prior year. That growth in CapEx is reflected in property, plant and equipment, or PP&E on the balance sheet. We reported $389 million in PP&E at the end of 2025, an increase of 86% from $209 million at the end of 2024. This represents our significant investment in assets such as manufacturing capacity and space ships we expect to yield tremendous future economic returns.

Spending trends in 2025 played out as expected. Peak spending occurred back in the first quarter of 2025, we have reduced our cash spending quarter since then. Looking ahead, we expect continued reductions in cash spending each quarter this year. Although we plan to add resources in our space line operations and customer operations teams in anticipation of commercial service in 2026. These operating costs are expected to be more than offset by the reductions in manufacturing costs as we finalize the build of our initial spaceship fleet.

Continuing with our projections. Revenue for the first quarter of 2026 is expected to be approximately $200,000 for astronaut access fees. Forecasted free cash flow for the first quarter of 2026 is expected to be in the range of negative $90 million to $95 million. We expect free cash flow to show sequential improvement following Q1. By the fourth quarter of 2026, we expect to receive significant new cash inflows from customers as we initiate commercial service.

Commercial service is obviously the pathway to delivering the economic model that we first laid out for you in August 2024. And that model is shown again here on Page 21. We continue to see the economics of the model holding true. We plan to communicate 2 key metrics that drive the economics, flights per month and revenue flight.

The first metric flights per month is a powerful indicator of the success of our spaceflight system and is a key differentiator for us relative to a traditional vertical launch approach. Michael talked about our expectation of attaining a targeted flight rate of [ Enero ] flights per month, sometime in the second quarter of 2027. This translates to approximately the annual flight rate of 125 flights per year as shown in the first column on this page.

The second metric, revenue per flight is a function of ticket pricing. Michael also mentioned that our current price for a spaceflight expedition has increased to $750,000 per seat, plus we will offer a limited number of tickets at a higher price to fly on the earlier flights. Given we currently have approximately 650 future as not with tickets at various prices, revenue per flight will vary depending on how these tickets flow through the flight manifest.

Currently, we expect to achieve modest quarterly positive cash flow within 2027 as we fly a large percentage of astronauts with tickets that were historically sold at lower prices. We forecast that we will achieve the adjusted EBITDA shown in the first column of this business model on an annualized basis sometime during 2028. We are pursuing a high-growth trajectory and we are very excited to be approaching the growth phase of our business with the anticipated start of commercial service in the fourth quarter of this calendar year.

Let's take a moment to discuss how the accounting world reflects the stage of our company's financial life cycle. In our 10-K to be filed, we included a going concern disclosure and management's plans to resolve it. The assessment leading to this disclosure looks at cash, cash equivalents and marketable securities on the balance sheet as of the date of the filing of the 10-K and compares those amounts to our spending projections for the next 12 months. It also takes into account all contractual debt payments due within the next 12 months which are assumed to be settled in cash.

According to generally accepted accounting principles, this assessment does not yet allow inclusion of our expected future cash inflows from spaceflights, such as those we've highlighted today. It also does not include the potential of any additional capital inflows such as the $138 million remaining on the ATM.

Given this methodology, the going concern disclosure is to be expected. We are at this stage in our financial life cycle, where we are successfully converting cash into valuable assets in the form of manufacturing capacity and new space ships that can drive our economic model. We forecast the start of commercial service in the fourth quarter of this year, and we expect significant cash inflows in connection with that milestone. Throughout the year, we plan to maintain appropriate strength in our balance sheet and we are thrilled to be on the cusp of ramping commercial space line operations.

With that, I'll turn the call back over to Michael.

Thanks, Doug. I'll close on Page 22, which again shows the image of our new space ship finishing final assembly in our Phoenix factory. What an accomplishment. It's a shared success that was only possible with enormous effort and dedication from our partners at Bel Textron and carbon [ ERISA ] as well as a lengthy list of key suppliers. We stepped up to deliver a very lengthy bill of material that enabled fabrication of the ship.

Most of all, this ship coming together so well is a testament to talent, genius, grip and tenacity of our teammates at Virgin Galactic. We are on a bold endeavor, and this team is delivering day in and day out. I'm proud and inspired to see our team and our partners come together, and we can't wait to show this ship off to the world. when it is formally christened in just a few months.

We've reached pivotal milestones this quarter with the upcoming conclusion of our first pace ships assembly phase, the launch of sales and the impending start of ground testing of our space program. We'll be opening our factory to visits from our founding astronaut community in the next month. And I think this group is going to be over the moon with excitement as they see their space ship coming to life so briefly.

Let's open the call for questions.

[Operator Instructions]. And our first question comes from the line of Oliver Chen with TD Cowen.

Michael and Doug, regarding the Chief Growth Officer and what you see ahead with the consumer. What are your thoughts on our hypothesis on the opportunities and the workflow with much happening there? Also, as we think about the model going forward, what should we know about CapEx more quarterly? And then more broadly, the new space port sounds like a big opportunity. What's on the road map for that investment cost and how that may manifest? I know there's a lot of economic benefits you'll bring to a region. And then lastly, more specifically, the commercial space flight and fourth quarter is very exciting. Any parameters on that? What's embedded in your guidance for the revenue in that quarter.

Oliver, it's Michael. Why don't I take, I think, the first and third and let Doug take the second and fourth. But if you do me a favor, Oliver, just a little more clarity on your first question.

Yes, as we look ahead, I guess, the Megan, the announcement of Megan Prichard, what's on the road map for what you see as the growth framework? And thinking about the luxury and consumer side of the strategy.

Got it. I'm incredibly excited to have Megan join us. She's an amazing executive. She starts Monday. And as I kind of mentioned in the prepared remarks, there's, I'll call it, tactical and then there's strategic. So tactically, Megan will lead our team that is driving growth in sales during this year. that all that growth will be flowing through its base port America. So that's a focus on our suborbital space business with both private citizens and researchers. Megan's remit is much broader and the team and processes she'll build it much broader.

So that includes, I'll say, expansions of our suborbital business model. I'll jump ahead a little bit Oliver to #4. You talked about new space ports. So Megan will be heavily involved in the identification and kind of partnership development we do on new space ports. You asked about economics. Each deal will be different, and each partnership will be different to pending.

But broadly, these are likely to be joint agreements and joint venture agreements in the countries at hand. Broadly, we will look to bring from Virgin Galactic, our space flight system, our space vehicles and all the technology around that. and we would look for our partner countries to bring the physical infrastructure in those areas. So the [ Space4 ] runway aerospace, of course, is key from a government standpoint. And we would look to the community around for I'll call it, the astronaut experiences outside of flight. So hotels, food and dining beverages, activities to do both for the astronauts and for all the friends and the family who come. So that's kind of who's bringing what to the table and then a sharing of the economics through that. So hopefully, that gives you a little bit of clarity there.

I said, each country has different things to bring to the table. And so I imagine things will be unique depending upon each country's specific interest. On -- in addition then to growing our initial book of business further and managing the price, we think it will be price growth in the near term for that on Megan's play. And then looking to expand through additional space ports and get that underway because those are a number of years in development. We'll be looking to additional business models that we can leverage both with our existing and emerging technologies that we create. So nothing more to share out that one broadly. But I think we've been bringing someone in of Megan's caliber like I said, with a wider remit to help us grow and accelerate the growth of our company.

Doug, do you want to talk the couple of questions Oliver had, number 2 and 4?

Yes. So regarding the CapEx, we guided the free cash flow to be between $90 million to $95 million for Q1 -- negative. And then we said we continue to improve each quarter sequentially through the year. That's what we're expecting. So to put the CapEx in perspective, around half of the projections for the first quarter and into the second quarter as we finish up the work on primarily [ Delta One ], and we've got the Delta Two coming in, the -- all of that. So you'll see CapEx be around half. And then as the total spending comes down, the CapEx comes down even faster in the second half because now we're moving into more of an operating phase and our spending shifts to the commercial operations with the space port and all of that. So it's really more front-end loaded in the first half of the year and then it tapers off on the CapEx side in the second half.

Regarding the revenue, it's a little early to be giving revenue guidance 4 quarters out. But just to put it in perspective, we did say that we expect to start commercial service in that quarter. And we gave kind of a cadence to expect that in the beginning, we would be expecting about one flight a week and so 4 flights a month. And then when we're ready, we'll ramp up to 8 flights a month, and we give a time line getting to 10 or so flights per month by the second quarter of 2027.

So again, it depends a little bit on how we -- or exactly when we start in the fourth quarter. And then the other variable, of course, is to manifest the mix of ticket pricing. We talked about quite a variety of prices, and those will weave their way into the early manifest as we discussed today. You've got the legacy customers, and you've got some new opportunities there for people who want to be in the first 1,000 astronauts ever to go to space. So again, it varies on a few things there, Oliver, but I hope that gives you a little more color.

Okay. Last and a follow-up on the monthly flight to the 8 to the 10x. What are the variables in terms of reaching 10 sooner or reaching 10 later that we should consider in the sensitivities as we model that monthly flight cadence ramp?

Sure. It's Michael. If you think about it as almost balancing the line a little bit, we're super excited at the work that has happened with our launch vehicle Eve. And talked about Eve, we expect has capacity to support 12 to 15 launches, so better than 3 to 4 a week, if you want to think of it that way. And that's higher than what we expect we will average across the year, and that's important. That will help us do some catch up if we have a string of bad weather and other things.

But let's say Eve is running 3 weeks for conservative assumptions here. We've built each of these base ships with an expectation that they can fly twice a week. So having one space ship would theoretically let us fly twice a week, it has the capacity to fly twice a week. And that would get you to the 8 flights month capability with 1 spece ship and 1 mother ship when -- launch vehicle yet.

Now we have a second spaceship coming and we expect that to arrive late Q4 of 2026 in early Q1 of '27. And that also, we expect will be able to fly week. So at that point, Eve, depending upon how it does between 12 to 15 a month, Eve starts to become the bottleneck of our system, which is, of course, why we have our LVX program to expand our capacity overall.

So to go from greater than 8, we will need both Eve, obviously, but we will need our second ship to be able to move past 8 per month and into 10-plus per month. Hopefully, that gives you a good sense of how to think about that math.

Our next question comes from the line of Greg Konrad with Jefferies.

To continue with the last question. Just to verify, I think you talked about the next mothership. Did you say 2030 and then I think in the past, you talked about an expanded fleet scenario. Should we think about the third space ship not coming online or kind of reaching that model to that 2030 time frame or how do you think about what's next after the 2 space ships?

Yes. I think 2030 is the right timing for a next launch vehicle. And it's not a perfect match, but broadly, we want 2 space ships coming out for every launch vehicle that we bring out. That kind of brings a balanced set. So if the launch vehicle, which is the longer lead item for us is what's coming as we mentioned on the call, we now have the infrastructure to build spaceships efficiently, quickly and cost effectively.

If you haven't seen it if anybody on the call has not seen the Galactic 10 video that released shortly after market close, you'll see in there just kind of a quick time lapse of how we take a completed fuselage and completed wing and bring the joining of those together. And we expect over the next week or 2 at most, you'll see us into combining that with the feather that's already there.

So we are able to build spaceships in a very effective and efficient fashion. And we would want at least one of those space ships, if not 2, or call it ready to go by the time we bring the launch vehicle in 2030, and that's a fairly straightforward process for us to do now.

And then maybe just to follow up on reopening of ticket sales. I mean I think you're doing a limited first tranche and then talked about the other limited tranche and eventually a second tranche. Can you maybe just talk about timing, how you're thinking about like the metrics and balancing backlog and then I think also since last time we talked, there's been some changes like the competitive backdrop. I think there's been some discontinuation from competitors. I mean, how has that maybe materialized in terms of demand?

Go ahead. I guess we'll start with the competitive piece, just to ask, Greg. The Blue Origin made announcement that they are trying to focus on their Lunar program, which is very exciting and important to the country. We wish them the best. I think their stated piece was that they were out for no less than 2 years. So I think it's probably right for people who wish to take a space flight expedition and not go to the space station for $50 million to do so at a more manageable price point. We believe we're well positioned to be their company of choice in that regard. And I think that will help from a demand standpoint for us, for sure. So that's one.

Two, our the kind of amount of availability we're putting out is more for price strategy, pricing strategy than it is for picking a specific number. We think it is important to be clear that we're going to step our pricing up as we go, at least in the short and medium terms. And so that's why you see us with a fairly limited number of 50 at a $750,000 price point.

I think everybody knows this, but just for context in case anyone is new. We currently have 650 or so more founding astronauts and that's a meaningful group that will carry us from '27 into early 2028. So it's not that there's necessarily pressure on us to fill the backlog. But we do want to build our book of business at higher price points. And so that's why we're going to start at 50 spaceflight expeditions at $750,000. We'll retire that price point. We'll take a beat and bring those 50 people into our community because we want to do that in a world-class way. And then we'll open up again. We'll pick the number. We do expect the price point will be above $750,000. We haven't picked that yet. And I think we'll repeat that process a couple of times until we hit a steady state price point. And build our book of business going forward.

Now I may have missed one other part of your question, Greg.

No, no. That was perfect. I really appreciate it.

Next question comes from the line of Myles Walton with Wolfe Research.

So I was hoping you could touch on the post glide flight of new spaceship to commercial service. I think you mentioned Michael, that there's a parcel burn and then there's one full powered burn. Is that all there is prior to the first commercial operation being presumably the third power burn.

That is correct, Myles. And in fact, the second piece will be carrying research experiments on the second flight, we'll technically be our first. And we do have Mike Moses in house today. He's in from he's been back and forth in New Mexico and our factoring Phoenix bunch, but he's here. And Mike, of course, is our expert in everything to the flight test. So Mike, if you don't mind expanding upon that.

Yes, sure. Myles, happy to. And maybe just to clarify, so we don't talk past each other, so 1 rocket-powered flight that's not full duration will not take us to space just to get a supersonic and see how things behave in the MAC 1.5 region and then 2 space flights before we enter commercial service. The first with just pilots on board and research in the back. So through the NASA flight opportunities program, we've got a manifest of payloads to bring in revenue on that first test flight to space. And then another 1 with 2 pilots and 6 mission specialists in back. Those will be internal folks to validate the cabin experience and mostly our procedures and processes, like Michael said, and then we'll be ready for commercial service. The reason that we're able to only have a couple of rocket-powered flights unlike the Unity flight test program is we're not learning that envelope for the first time.

Our control system is different. We have some systems that are different. We certainly need to verify and validate the performance of the vehicle. But we're not learning exactly what stresses are put on the vehicle, exactly how hot it will get or exactly what happens in zero gravity as the ship maneuver. So we know all of that from the Unity flights. So we were able to very rapidly move through that program.

Of course, we will always operate with safety in mind and prudence. We'll take our time to analyze the data, make sure that the ship is actually behaving the way we thought it did and then we'll be ready to move. So a combination of not needing to do as many flights as Unity and a delta space ship that's designed to fly faster, so the turnarounds between test flights should be able to grow a little faster. It means that will be a fairly expeditious program as we move through test space lines. You'll see us focusing more on the glide flights. That's where the new handling flight control systems are -- and we want to spend the most time looking at that onto.

Got it. Makes a lot of sense. There was a -- so I'm just looking at the 10-K relative to the going concern, and there's a comment there about the management's plan for addressing and mitigating the condition and one of those points is partnering third parties to fund and accelerate the pace of future space vehicle development. Can you elaborate on that, Michael, what exactly is meant by the partner in the third party? Is this different than your current organization? Is this something you're already doing? Or is this something that is looked at as being incremental?

We have efforts that I'd say we're exploring miles both with governments for space ports as well as the opportunities perhaps with the U.S. government. And opportunities we may have with our launch vehicle and things we can do with our launch vehicle in those regards. I think there -- there's nothing to share at this point in either of those places, but as it pertains to our plans, which the way, as you know, this accounting is done is over the next 12 months, I think both of those categories become relevant and how we might partner with governments, be it the U.S. government or an international government around new Spaceport. The partnership model one could conceive would bring in economics to Alice to accelerate the development of the vehicles for those...

That makes sense. And Doug, just a quick one, just to clarify for me. the cash flow commentary about the quarterly positive cash flow in 2027, we're talking about free cash flow, right, not operating cash flow.

Specifically, I was using just the generic term cash flow for a reason. But let me just explain why. So we have all intents here to build our cash balance through 2027. So we would be spending less than we bring in from all sources. So the reason I chose the words cash flow instead of free cash flow, is there a scenario where if we brought in further investment, like we were just talking about with Michael, say it came in through the capital markets, then plowed that back into R&D. You don't get credit for those financing cash flows. And so free cash flow in that scenario, you could get a negative number, even though we're building for the future and not spending more than what we bring in.

So when I just say cash flow, that accommodates that. So Again, the intent there is to say that we spend less than we generate, and we're targeting individual quarters to cross that threshold in 2027.

[Operator Instructions]. We do have our last question comes from the line of Michael Leshock with KeyBanc Capital Markets.

Just following up on the 2026 free cash flow guidance and your expectations for the burn rate to improve sequentially through the year. Is there any 1 quarter where you would expect the biggest step-up? Is that kind of a 2Q event when you shift more from production into testing. But just curious if there's any milestones that you could talk about that might drive more of a step change in cash burn versus more gradual improvement?

It's really a gradual improvement until the fourth quarter. So we're expecting just quarter-on-quarter lower than the 1 before. And then by the fourth quarter, we see a big change because that's when we get cash coming in from customers as they pay for the rest of their flight reservation. That's the main driver in that quarter. So think of it as a continuous reduction in spending each quarter until the fourth quarter when you get a big shift in the other direction.

Great. And then is there any update you can provide on the potential use case of your technology for defense initiatives like Golden Dome? You've talked about that in the past, and you mentioned the need to potentially carry heavy payloads at high altitudes. Just curious if that's still a focus, if there's been any update on that front that you can share?

Nothing specific to here, Mike. We are, I'd say, accepted into the IDIQ for the Golden Domain so we are qualified as a supplier for that effort. And we are spending our time being clear on what are both immediate things, immediate-term opportunities that we may be able to support with both our existing launch vehicle Eve and with our new space ships as they come up as well as things that are, I'll call more developmental in nature, which are usually a little bit further in lead times, but nothing specific to share in that regard.

Ladies and gentlemen, that concludes the question-and-answer session. Thank you all for joining in. You may now disconnect.

Good afternoon. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to Virgin Galactic's Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

I will now turn the call over to Eric Cerny, Vice President of Investor Relations. You may begin.

Thank you. Good afternoon, everyone. Welcome to Virgin Galactic's Third Quarter 2025 Earnings Conference Call. On the call with me today are Michael Colglazier, Chief Executive Officer; and Doug Ahrens, Chief Financial Officer.

Following our prepared remarks, we'll open the call for questions. Our press release and slide presentation that will accompany today's remarks are available on our Investor Relations website. Please see Slide 2 of the presentation for our safe harbor disclaimer.

During today's call, we may make certain forward-looking statements. These statements are based on current expectations and assumptions and as a result, are subject to risks and uncertainties. Many factors could cause actual events to differ materially from the forward-looking statements made on this call. For more information about these risks and uncertainties, please refer to the risk factors in the company's SEC filings made from time to time. You are cautioned not to put 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, whether as a result of new information, future events or otherwise.

Please also note that we'll refer to certain non-GAAP financial information on today's call. Please refer to our earnings release for a reconciliation of these non-GAAP financial metrics.

I would now like to turn the call over to our CEO, Michael Colglazier, and the agenda for today's call that can be found on Page 3 of the earnings presentation.

Good afternoon, everyone. We have much to cover today with important progress updates on our SpaceShip program and a company-wide pivot toward operational readiness as we prepare to enter 2026. We remain full steam ahead, bringing our new SpaceShip into service. We continue to make excellent progress across the many elements of the program, and the number of outstanding items on our production checklist continues to decline with each passing week as we knock out the work.

I'll start the call highlighting progress within our SpaceShip program, including major milestones being crossed and proof points supporting our flight rate and reusability assumptions. I'll share insights on our preparation for the launch of commercial service in Q4 next year, which is just a short year or so from today. I'll then pass the call to Doug for updates on our Q3 financial performance and a look ahead.

Before diving into the details, I'm pleased to share the expected dates for Flight Test and our first spaceflight remain essentially unchanged from our prior forecast, with our Flight Test program expected to begin in Q3 and our first spaceflight in Q4 of 2026. I'll note that we are now using Q3 instead of summer and Q4 instead of fall as we've had feedback from customers and investors in the Southern Hemisphere who point out that fall in the U.S. is actually spring in other parts of the world. Shifting to quarters helps make this more clear.

Last quarter, we shared expectations for a modest extension of our critical path due to complexity in manufacturing a large part within our fuselage subassembly. That particular part, the lower skin of our forward fuselage, arrived in our SpaceShip factory earlier this month, well within the time extension we had expected, which is great news. Since last quarter, the fuselage has been and continues to be the pacesetting subassembly that drives the critical path of our SpaceShip program. Our team is focused intensely on resolving the manufacturing and supply chain needs of the fuselage with strong results, and we are currently forecasting the first fuselage to wrap up just a bit earlier than we expected last quarter.

Over the last 3 months, we have seen the expected completion dates of our wing and feather subassemblies shift modestly to the right. However, both of these subassemblies remain ahead of the critical path and the shifts, therefore, are not expected to have an impact on our flight dates. I'll share detail around the main issues we've been tackling, how we've resolved them and insights into remaining items on our watch list as we get into the call.

On Page 4, we've provided a link to the new Galactic 10 video that released this afternoon as well as links to our recent episodes of our We Build SpaceShip series. These short videos provide an excellent visual rundown of the program's latest accomplishments.

Let's start the program update on Page 5 with the structural parts that make up the SpaceShip. You'll recall our SpaceShips are built with 3 major structural subassemblies, the wing, the feather and the fuselage. This page highlights progress on the wing, shown here with our team in the SpaceShip factory fitting the wing skins onto our first shipset. This group of skilled technicians is excited and proud of the work they're doing, and they are showcasing how the investment we put into production tooling is paying off as the precision fit of the SpaceShip parts allows them to advance the assembly process smoothly.

The wing in this image, which is destined for our first SpaceShip, will wrap up this phase and come down from this tool in December. Even more exciting, parts for the second wing shipset have already arrived in the SpaceShip factory and will immediately start to load into this wing up tool as soon as the first shipset moves forward.

Moving to Page 6. I recently visited Bell Aerospace's facility in Fort Worth, Texas, to see the progress they've been making with our second major subassembly, the feather. Bell's rapid production team has done incredible work, leveraging their expertise in high-temperature composites and tilt rotor assemblies to deliver one of the most unique and important parts of the SpaceShip. The photos on this page show the large feather boom skins finishing assembly and undergoing detailed imaging inspections.

On Page 7, I'm very pleased to share the first complete shipset of feather boom skins have all been delivered to Bell's final assembly facility. This is a major milestone, and Bell's top flight manufacturing technicians are already hard at work building the feather assembly that will become part of our first SpaceShip. Just like I described with the wing, the parts that will make up the next feather assembly are fast following. So the second shipset can start assembly as soon as this first feather shipset is sent off to Phoenix, where we will combine with the wing and the fuselage.

Moving to Page 8. The major elements that comprise our third major subassembly, the fuselage, have also been making good headway, although as I mentioned before, this part of the ship is driving our critical path. Broadly speaking, the fuselage has 3 major sections: the oxidizer tank, which sits in the heart of the fuselage and carries the liquid oxidizer used by our hybrid rocket motor system to power the SpaceShip. The forward fuselage, which houses our pilots and astronauts and the aft fuselage, which houses the hybrid rocket motor itself.

On Page 9, I'm going to start with the oxidizer tank because our rocket systems team just passed a huge milestone by qualifying this new tank for the entire life of our ships. To give a bit of context on this achievement, in our original SpaceShip, VSS Unity, an earlier model tank had been built and qualified for 40 flights. While 40 flights is very impressive for first-generation space vehicles, the 40 flight limit would have imposed substantial downtimes and cost every time it needed to be swapped out, which would have limited our revenue generation capacity. The image on this page shows our next-generation tank during its qualification testing. We cycled this tank 4,000 times and it passed with flying colors. This new tank design is now qualified for the life of our Delta class SpaceShips, which we expect to be 500 or more spaceflights. This is an order of magnitude increase in reusability, and this tank is one of hundreds of parts where we have leveraged our years of R&D and engineering experience to build new SpaceShips with unprecedented durability and reusability.

Page 10 shows the first flight article of this new line of tanks in our SpaceShip factory, where it will be prepped and installed within the heart of the fuselage assembly. Big shout out to our rocket systems teams for delivering this major milestone on time for our overall production schedule.

Page 11 shows an image of the lower skin of the forward fuselage section. This is one of the largest parts on the SpaceShip. It has been the part driving our critical path, and it required a couple of rounds of process refinement to get right. This first fuselage skin arrived in our SpaceShip factory earlier in November and was unboxed with great excitement. Happily, work on the fuselage can now advance with this part located in the final assembly tool shown here.

For those on the call who aren't close to carbon part manufacturing, it's helpful to note that the need to resolve manufacturing challenges like we faced with this fuselage skin is fairly typical, especially when large complex carbon parts are produced for the very first time. While time extensions are not desired, they are not unexpected. And as I mentioned earlier, we had reserved schedule contingency for the part fabrication phase, and we have stayed within that contingency. As the premier company defining suborbital human spaceflight, we will always take the necessary time to work out whatever process or design changes are needed to produce safe, flight-ready parts, and that's what we did here.

Our partners at Bell had to resolve some similar manufacturing issues with the big feather skins that we discussed earlier back on Pages 6 and 7. Those challenges have been sorted by the Bell team and the time involved in sorting them extended the forecasted delivery date of the feather assembly to Phoenix from late Q4 2025 to the first half of Q1 2026. This push of the feather delivery into Q1 does not impact the timing of our flight test or our first spaceflight because the fuselage remains the driver of the critical path of our program.

On Page 12, I'd like to share a couple of the remaining items on our watch list. You'll see in the graphic, we have 2 skins that make up the forward fuselage, the green shaded upper skin where the windows are located and the orange shaded lower skin that we just spoke about. The oxidizer tank I mentioned earlier is located directly behind the pilot and passenger cabin that is formed by these upper and lower skins. You'll also see we have skins for the aft fuselage located behind the oxidizer tank. The upper skin and the aft skins are currently in production and are expected to arrive in the SpaceShip factory in December. We have applied all the manufacturing process improvements learned over the last several months to the fabrication of these remaining parts. Assuming these parts arrive as expected in December, we'd anticipate our first spaceflight to take place earlier in Q4 of 2026. If these parts need some extra time to resolve, we'd expect our first spaceflight to be later in Q4 of 2026.

Moving to Page 13. I'd like to highlight some of the areas within the company where we see additional economic potential beyond our suborbital space business. The first of these opportunities sits within our avionics team. Like the rocket systems team I mentioned earlier, these people are world-class and passionate, and their work plays a central role throughout both our SpaceShips and our launch vehicles. We recently released an episode of We Build SpaceShips that focuses on our avionics efforts, and I encourage you to watch it to better understand the scope of this team's capabilities.

We have strategically organized both our rocket systems and avionics teams to take advantage of potential opportunities within commercial space that could benefit from adaptations of our products and expertise. The primary near-term focus for both these teams is bringing our new SpaceShips into service. However, once we are cash positive and have refined our SpaceShip production process, we plan to pursue incremental business opportunities in these areas, leveraging our outstanding talent and IP.

The second opportunity I'd like to highlight is connected with our launch vehicle, Eve. An outstanding team of engineers, technicians and pilots were behind a terrific upgrade program for Eve, and they recently returned the ship to the skies above New Mexico, as shown on this page. This group executed on time and under budget while substantially improving Eve's flight interval and inspection program.

I'm excited to say our launch vehicle is now capable of flying SpaceShips on successive days, and we're planning to ramp to an average availability of 3 to 4 flights a week. We expect this enhanced capability will support excellent utilization of our first 2 SpaceShips as Eve's ability to launch on successive days provides us with great flexibility to handle weather and unexpected issues, so we can deliver our targeted rate of 125 space missions per year with our first 2 SpaceShips. With this upgrade, Eve will have potential to support additional missions that demonstrate the capabilities of Virgin Galactic launch vehicles. Hats off to everyone involved in this project.

I'll close out the program update with a final observation before shifting to our commercial readiness efforts. I continue to see the number of outstanding items on our production checklist decrease as we continue to lock in outstanding supplier delivery dates, resolve manufacturing issues and generally knock out the work. I'm also pleased to see the amplitude or range of potential impacts posed by remaining issues moderating as we get more and more of the work done. This is how almost all major development or construction programs go, and ours is no different. Everyone who has built or remodeled a house knows things get more predictable as progress advances. And everyone who has built or remodeled a house knows that sometimes a few elements take longer than expected, but the majority of work continues to progress while those lagging elements catch up.

One measure of progress we've been watching is how many of the structural parts needed to build the first SpaceShip have arrived on the dock in Phoenix. By mid-December, we expect to have approximately 90% of the carbon and metallic parts for the first ship in hand. That is super helpful, and it's allowing our procurement and project management teams to really focus on bringing in the final components and keeping us on track.

Moving to Page 14. I'd like to spend some time on our commercial readiness plans. I'm very encouraged to see teams across the entirety of our company begin to pivot to commercial operations. The progress with the shifts is exciting for everyone and the added energy that comes with operational planning is palpable. We're hiring a Chief Growth Officer to lead our consumer launch, our revenue development initiatives. We're interviewing the best of the best of the world's pilots to join our pilot core, and we're planning for the growth of our customer operations teams to take care of both our astronauts and their guests when they are on site at Spaceport America.

With all this happening, we remain on track to open in Q1 of 2026, our first tranche of sales opportunities for future space missions. In preparation, we have a full rebuild of our digital presence underway with a particular focus on sales funnel progression and a dedicated astronaut portal. We'll unveil our new digital presence in the new year, although the astronaut portal will always be a special and private experience reserved for those within our community of astronauts.

I hosted a customer event in Miami a few weeks ago with people coming in from Europe, Latin America, New Zealand and of course, from Florida and the Eastern U.S. The discussions I had with our customers that evening reminded me yet again how passionate and supportive this group is and how meaningful their journey to space will be in their lives. This group has been incredibly patient and loyal, and they fully appreciate our diligent approach to building their SpaceShips the right way. With that said, they are definitely ready for their space journeys to begin and excitement is building as that moment draws closer at hand. We expect most of our current customers will take their space journey during 2027 as these bolstered flight rate capability, combined with the quick turn time expected from our first 2 SpaceShips should allow us to ramp our capacity fairly quickly.

In addition to private astronaut space journeys, we continue to advance the space research side of our business, and you may have seen the recent announcement about our partnership with Purdue University. Scheduled for 2027, the Purdue 1 mission will carry a 5-person crew of Purdue faculty, students and alumni, along with a rack of research experiments. We are excited by the potential of these types of missions as they represent a meaningful opportunity for us to partner with world-class research universities and institutions.

Doug, I'll turn the call over to you.

Thanks, Michael. Good afternoon, everyone. I'll start with our financial results for the third quarter and a review of the balance sheet. Then I'll give a preview of our spending assumptions for 2026, leading up to the start of commercial service. I'll wrap up with a recap of our longer-term economic model.

Turning to Slide 15. Revenue in the third quarter was approximately $400,000 attributable to future astronaut access fees. Total operating expenses for the third quarter decreased 19% to $67 million compared to $82 million in the prior year period. Net loss improved by 15% to $64 million compared to $75 million in the prior year period. Adjusted EBITDA improved by 11% to negative $53 million in the third quarter compared to negative $59 million in the prior year period. Free cash flow was negative $108 million in the third quarter, within the range of our prior guidance and an 8% improvement compared to the prior year period.

Moving to Slide 16 and the balance sheet. We ended the third quarter with $424 million in cash, cash equivalents and marketable securities. During the quarter, we generated $23 million in gross proceeds through our ATM equity offering program. Our balance sheet remains strong in preparation for commercial service planned for later next year.

As we build our SpaceShips, spending continues to shift from significant investments in R&D expense to capital investment. For the third quarter, capital expenditures were $51 million, up from $39 million in the prior year period. As we have pointed out on prior calls, our growth in capital expenditures is reflected in property, plant and equipment or PP&E on the balance sheet. At the end of the third quarter, we reported $350 million in PP&E, increasing 67% from the $209 million at the end of 2024. This represents our significant investment in assets such as manufacturing capacity and SpaceShips that we expect to yield tremendous future economic returns.

Moving to our projections. Revenue for the fourth quarter of 2025 is expected to be approximately $300,000, primarily related to astronaut access fees. Forecasted free cash flow for the fourth quarter of 2025 is expected to be in the range of negative $90 million to $100 million, in line with our prior guidance.

Spending trends have played out as expected. Peak spending on tooling occurred back in the first quarter of 2025. Since then, we have reduced our cash spending each quarter. Looking ahead, we expect continued quarterly reductions in cash spending through the third quarter of 2026 until spending begins to rise with the anticipated start of commercial service in the fourth quarter.

We know that strengthen our capital structure is imperative to our success. We will continue to be very prudent with our deployment of capital, primarily for the completion of our new SpaceShips as we march toward commercial service. We also expect to receive cash inflows from customers ahead of their spaceflights. In addition, our ATM equity offering program remains available to further strengthen our balance sheet as appropriate.

We're making excellent progress towards delivering the powerful economic model that we have shared with you before and as shown on Slide 17. As we refine our operating plans for 2026 and 2027, we continue to see the economics of the model holding true. With the initial fleet of our 2 SpaceShips capable of an anticipated 125 flights per year in a steady state and using our most recent ticket price of $600,000 per seat, we expect to generate approximately $450 million in annual revenue at high margins and yield approximately $100 million in adjusted EBITDA.

Moving beyond that, we foresee significant economies of scale with the expansion of our fleet. By adding a second launch vehicle and 2 more SpaceShips, we expect to grow annual revenue to approximately $1 billion and yield approximately $500 million of adjusted EBITDA. We are very excited about the substantial progress we are making to achieve this highly profitable business model.

With that, I'll turn the call back over to Michael.

Thanks, Doug. Let's close on Page 18. It's been a big quarter for us. Strong progress is underway in our SpaceShip development efforts, and I'm very proud of how our team has made such a superlative effort to bring us to this point. Everyone at Virgin Galactic, along with the dedicated teams at Bell, Qarbon and our suppliers is hard at work to deliver the dream of accessible spaceflight. It's fantastic to see that dream becoming more tangible and more inevitable as each month goes by.

Let's open the call for questions.

[Operator Instructions] And our first question comes from the line of Greg Konrad with Jefferies.

Maybe just to start, I mean, you mentioned opening the first tranche of sales in Q1 2026. Any other initial observations on size of that tranche or how you're thinking about flight price on reopening?

Greg, it's Michael. Price, we haven't said it publicly, but I continue to expect it will be higher than the price -- our last published price, which was $600,000. And I think that is likely to be a trend you will see. So to your second question on volume, I used the word tranche of sales specifically. We'll put a quantity out. We'll sell that at a price and do that assessment as a good kind of yield management, revenue management group would and then reset the price for the next tranche, and I think we'll do that. Our expectations is that will likely stair step itself upward, but we'll do that tranche by tranche.

And then just as a follow-up, I think you also mentioned majority of the backlog of astronauts winding down in 2027. How are you thinking about the ramp in flight cadence and maybe implications for 2027, just given it seems like end of 2026, a lot of those flights will be moving forward?

So our -- in the -- we'll probably continue to use metrics we talked about a long time ago as we were preparing for our first flights. What's the flight per month that we achieve as a company and what's the revenue per flight. And so I'll focus on flight per month here to your question. The ships that we're bringing forward when they arrive at Spaceport America, I'd say the ships themselves and the status of the maintenance team will be prepared for them to meet the cadence we've talked about. So if it's 125 flights a year, roughly, we're talking a 12 flight per month metric.

So the machines will be ready to do that. We will choose to, I'd say, ramp our operations in a prudent fashion. So we'll probably start with 1 flight a week, and then we'll move to 2 flights a week, and then we'll move up to 3 flights a week. And I would expect that progression to take place around about over the first 2 to 3 months of operation from our first spaceflight.

Our next question comes from the line of Oliver Chen with TD Cowen.

Regarding the Q3 2026 flight test plan and also the Q4 commercial launch, how would you prioritize the different risk factors that you're looking at that could yield variability in your expectations given that you called out a few different items?

And then on the oxidizer tank and qualification of that, should we understand some implications for how that could positively benefit margins as well as cost savings?

And third question, I think you mentioned avionics. Would love your thoughts on what that opportunity may look like and why you could be well positioned there as well.

Thanks, Oliver. Doug, I'll start on some of these. So the -- let me go ahead and go phase by phase, Oliver. So I called out on whatever slide that was, the upper skin that is left on our fuselage and some of the aft skins are there. And what's nice is to be able to narrow down like there aren't that many carbon parts that we're actually waiting on to get into our factory. There are some smaller piece parts coming in, but those are the 2 big ones. And I flagged them and just try to be transparent to everybody. We expect those to roll into December and stay on path. We've put all the learnings we've had from our original spars a couple of quarters ago to the fuselage part a quarter ago. So we expect those to come out.

Until we've got them in our hands in the SpaceShip factory, we won't have all of that risk removed, but we feel comfortable enough in the variability of those parts to say one way or the other, we still expect our first spaceflight in Q4 of next year. So that's kind of on, I'll call it, the critical path of getting the carbon parts in.

We've been having amazing success as we have the parts in the fit and finish of these as they go into our tools are letting us move better and more efficiently than even we had hoped. So that's really good news for us at the assembly level. So I'm not flagging a high degree of risk in the assembly of those parts into the SpaceShip.

So that puts us moving towards getting to flight test in Q3. So between finishing the building of the ship and the start of flight test in Q3, we do a lot of ground testing. We are mostly checking all the systems as they integrate onto the ship, are they all working and performing as expected. And we do an important test called a ground vibration test that allows us to check kind of the harmonic resonance of the ship itself before we put it into flight. Those things have variability across each test, but we believe we've allotted enough time within that to handle the variability of any of the individual test or the system test. So we feel good and confident in our Q3 start of flight test.

For flight test, you may recall, Oliver, we are talking the primary thing we're looking to do here is dial in the fly-by-wire flight system that our pilots use to control the ships. That's a new upgrade for this class of ships versus our original ship Unity. And we've been doing all sorts of work offline to prepare for that. And we've given ourselves enough flights in the Flight Test Program to move through there. So we believe we are doing both the things off-line in test benches, offline in an integrated fashion in our Iron Bird facility, which we've talked about kind of building a SpaceShip without the skins that we are testing all the mechanical systems and electrical systems on that way ahead of time. Then we'll do a full integrated test in our factory in Phoenix ahead of time so that when we get to flight test, we want to be verifying that everything is working as expected, more -- that's really what we're doing as opposed to learning. Unity's flight test was all about learning. These ships flight test will all be about verifying. So hopefully, that gives you a sense of remaining risk and how we're managing them going forward.

You talked about the tank, one of many examples where we have reengineered kind of part by part of the ship to add durability, longevity, which together equals reusability and asset reutilization and takes down the cost, both the variable cost, but especially the fixed cost of creating these SpaceShips. So that tank is one of literally hundreds. One of our Galactic 10 moments, I don't remember 8 or 7, Mike Moses talks about a pneumatic pressure valve. That was qualified to allow us to have a part that now lasts for the life of the ship. Unity's version of that was not at all a life of ship piece, and it took a lot of maintenance and inspections between flights. Almost every carbon part has been rebuilt in this way.

So the total of that plays out economically is it allows us incredible reusability, right? You've heard us say 500 flights per ship. That's -- we think the structure of the ship probably will go beyond that, but we're calling it status now. These tanks and these pneumatic pressure valves, the carbon parts as they come out, each one is just kind of checking the box for us that we've designed this the right way. So I think you mentioned, does that give us cost savings? What it does is really validate the economic model that Doug was talking about. I think we put a version of that inside the deck again. But the cost assumptions that we put into that model more than a year ago now, I think, are really kind of validating as we move forward with things like this tank.

And lastly, Oliver, you talked about avionics. So these are -- I think you're aware, all the electronic systems that are there. A lot of times in -- these are very well done for aviation, the aerospace, the aero side of aerospace, and I'd say adapted to space. In our case, we are building these ourselves and they are optimized for a space environment. And that means -- when I say optimize, that means they are fit for purpose. They are incredibly robust. They're incredibly durable. They are -- the systems themselves are doubly, triply redundant and they're lightweight. And that combination is what's needed as people are trying to get high, whether that's high into space or very high altitude into things the government would want. I think there's opportunity for us to use our special expertise with that team. That team needs to stay focused on getting our SpaceShips built right now, but I'm excited for letting them loose once we get that done. Hopefully, that answers your question, Oliver.

Yes, it does. One quick follow-up, Doug, the operating expenses were better than we had expected. Was that in line with your expectations? And you have been on that process of capitalizing. Was that similar to what you were planning to do with capitalizing the expenses?

Yes. So yes, it is -- it's in line with our expectations because the guidance we gave was to be between $100 million and $110 million of negative cash flow for the quarter, and that included an assumption around CapEx that came in line with our expectations. And so yes, you've seen that conversion over time. There's been less OpEx and more CapEx as we've been building out the SpaceShips and we're capitalizing those costs, and that's the trend you're seeing. You'll see that continue for a little bit longer as we wrap up the work in manufacturing, and then you'll see a ramp down in CapEx happening out here in kind of the middle of 2026.

And I wanted to just come back to one more thing you asked about the economics of the tank, the oxidizer tank and how that helps us. One of the real benefits is by having a longer life tank, one that lasts the whole life of the SpaceShip is we don't have to replace it during the life of the SpaceShip. So before the tank we had, the previous design lasted about -- it was only qualified for about 40 flights. And this tank sits in the middle of the SpaceShip. So to replace it means opening up the SpaceShip, taking out that tank, putting a new one in, which interrupts commercial service. So it's not so much the cost of the tank, that's a factor, but being able to continue to operate and not have an interruption to do a major maintenance event like that is a big deal.

Our next question comes from the line of Michael Leshock with KeyBanc Capital Markets.

I wanted to ask on the competitive landscape and potential TAM for research flights. Of course, you have the ISS for microgravity research, but also more financially viable and accessible options like suborbital parabolic flights. Could you talk about the differentiators of your research offering versus peers? And how big do you think that market could get longer term?

There are a few things in that category of differentiation. One that's very meaningful, part of what is exciting for Purdue as an example is it's functionally a little laboratory where the scientists and researchers can go along with their experiments. So you can't do that on a sounding rocket, and it's super expensive to try to get up to the ISS on that. So the ability to fly and travel with experiments is very, very meaningful. So that's one.

The quality of microgravity environment is one of the things that has been a big differentiator from the scientists that have flown with us in the past, and that continues to be a huge attractive element, especially versus parabolic flights and things like that. It's just an entirely different level.

The opportunity for research to be done in a frequent and repetitive nature to build the data set is also incredibly important. And whether that research takes place on our SpaceShips as we go with unprecedented frequency to space or whether it's something that needs to get up to high altitude, which our launch vehicle does on every flight, the ability for us to put experiments and equipment on our ships to build a data set, we will have, I think, unparalleled capability to build those data sets up in ways that just haven't been possible before.

And so we think there's a really interesting opportunity for research institutions. So we're very excited about Purdue and dynamics like that where you're really combining not only the science and the research, but just the fascinating interest of alumni groups from an engineering organization like that. So that's a category that I think is very interesting.

But also just broadly, there's so many things that I think government research groups have the opportunity to do here. Hopefully, that gives you a little bit of sense there. I think the volume of this will stay in balance with our private astronaut capacity as it pertains to the SpaceShip. But I think our launch vehicles also have capability to do some really interesting testing as well.

Great. And then I just wanted to ask on weather. Is that a limiting factor for flight cadence? I know you've incorporated weather in all of your projections. But curious if you have any assumptions for how many days per year would be considered launch eligible days on average?

Yes. I may not have that number exactly. First, I'll start off one of the joys of flying from Southern New Mexico is it's sunny 85% of the days of the year. So -- and the conditions we need to fly really just need to be good for a few hours of the day. That's usually in the mornings, but we have a degree of flexibility there. So the very location we chose is the first thing that benefits us from weather. There will be weather. It will rain. It will be too windy, -- there will be a monsoon that blows through and we expect that.

And one way to give you context to your question, if you look at our flight capability expectations for each SpaceShip, right, we expect each SpaceShip to be able to fly twice a week, so roughly 100 flights a year per. And we have 2 of those SpaceShips. You can say, okay, we have SpaceShip capacity, that's 200.

We look at our launch vehicle. We've talked about the launch vehicle ramping up to 3 flights a week. We continue to do work on that vehicle with fantastic results. So we think there may be some upside there, but let's -- for this discussion, just keep it at 3 flights a week. So that the launch vehicle roughly has 150 flight a week capacity, and we've been sharing 125. So that difference there between, let's say, if we were limited to 3 flights a week on the mothership, and we may have upside there. We're giving ourselves 25 flights of yield loss across the course of time in an environment where weather is usually good along the way.

Now the real question here is, well, let's say you have a rainy day. So Mike, you're supposed to fly on a Wednesday and the next group is supposed to fly 3 days later, right, Thursday, Friday, Saturday. If it rains on Wednesday, we don't want to just scrub your flight. I'd rather have you go on Thursday or if it rains 2 days, I'd rather have you go on Friday or worst case, I'd rather have you go on Saturday and have the Saturday group go on Sunday.

And one of the things that we're so excited about with our launch vehicle Eve is while we believe it will average 3 to 4 flights a week as we ramp that up, we can't actually fly it back-to-back days. So if it is going to rain on a let's say, back to the Wednesday, Saturday piece, it may be that we choose to fly on Thursday and Friday instead of Wednesday and Saturday and then get our ships back on their general maintenance cycles. So we're giving ourselves a lot of flexibility with the capabilities of these ships to work around weather that will inevitably come up. Hopefully, that gives you some context of our stated targets.

[Operator Instructions] We'll take our next question from Louis Raffetto with Wolfe Research.

Can you guys hear me?

Yes.

Great. Maybe just a follow-up on that last question. So the Purdue research mission, is that sort of the typical research revenue? Or is there any reason that would be different from what we've seen previously?

No reason you should expect that to be different from our last stated pricing.

Okay. And then as we think about cash flow next year, I know you talked about the spend coming down through the third quarter, but then in the fourth quarter, sort of starting to go back up as you start commercial ops. Do you still see a path to positive free cash flow as those ops start back up or startup, excuse me?

Yes. So we've got this downward trend in our spending, which gets us through to the start of commercial service. And then the cash flow positivity will be a function of a couple of things, the timing of that. And the first is the flight rate and then it will be the ticket pricing of what's blended in the manifest. But the key is getting the commercial service, getting 2 SpaceShips in operation. And Michael mentioned that the second SpaceShip would be coming fairly soon after the first one, and we would be able to get to these flight rates that get us to the cash flow positivity within 2 to 3 months after the start of commercial service. And so at that point, depending on what we are doing with the ticket pricing, how the passengers are moving through because we have some tickets from the past that are more like $250,000, and we have more recent tickets at $600,000, depending on how those blend in and that progresses, that will define the exact timing of the cash flow positivity. But the key is the flight rate and it's looking good.

There are no further questions at this time. Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.