Virgin Galactic projects rapid growth and profitability after going public
CAMBRIDGE, Mass. — With an $800 million infusion thanks to a merger with a public investment vehicle, Virgin Galactic expects to rapidly build up commercial operations and be profitable as soon as 2021.
Virgin Galactic announced a merger July 9 with Social Capital Hedosophia (SCH), a special purpose acquisition company, whereby SCH will take a 49 percent stake in the merged company. That deal will allow Virgin Galactic to become publicly traded on the New York Stock Exchange, where shares in SCH are currently listed.
In an interview with SpaceNews, George Whitesides, chief executive of Virgin Galactic, said the merger with SCH allowed the company to gain the benefits of an initial public offering (IPO) of stock with less expense. A special purpose acquisition company is an entity that raises money for the express purpose of acquiring a company, usually within a limited timeframe.
“It offers certain advantages over doing a conventional IPO in the sense that it essentially has already raised the money itself, and so the time commitment for the management is somewhat reduced,” he said. “Shareholders can have liquidity and the company can take advantage of public markets.”
Whitesides said the company decided to pursue this deal, after being approach by SCH several months ago, to take advantage of the progress the company had achieved with a series of SpaceShipTwo flight tests, including two that went beyond the 50-mile (80-kilometer) altitude the company defines as the boundary of space. “There was a great sense of momentum moving forward,” he said.
Another factor, he said, was the growing investor interest in commercial spaceflight. Outside of venture capitalists and angel investors, though, many people have few ways to invest. “Commercial space is at the top of everyone’s minds, but there are very few, if any, ways to make investments,” he said.
Whitesides said he looked forward to working with Chamath Palihapitiya, the founder of SCH who will become chairman of the merged company, and Adam Bain, lead independent director of SCH. Both have extensive business experience outside of space, with Palihapitiya founding venture capital firm Social Capital after serving as an executive at Facebook, while Bain was previously chief operating officer of Twitter.
“They’re both incredibly successful businessmen,” he said of Palihapitiya and Bain. “We’re looking forward to having both of them on the board.”
Palihapitiya is contributing $100 million of his own money into the deal, in addition to the $708 million from SCH. Of that total, $300 million will be used to purchase shares from existing shareholders, and $460 million will be set aside for “continued growth and commercialization,” according to an investor presentation filed with the U.S. Securities and Exchange Commission July 9. The remaining $48 million would be used for transaction fees.
That presentation showed that Virgin Galactic expects significant growth over the next several years. The company now expects to begin commercial service in the first or second quarter of 2020, performing 16 flights by the end of 2020 carrying 66 customers and producing $31 million in revenue from those customers and other sources.
In 2023, the company projects carrying out 270 flights carrying 1,565 customers, with five vehicles in service. That would produce $590 million in revenue. While the company expects a $104 million loss in 2020, it breaks even in 2021 and reaches $274 million in earnings on 2023.
The investment from the merger with SCH will fuel that growth. “This is really growth capital, so it will sustain our plans as we continue to build out the fleet,” Whitesides said. Besides VSS Unity, the SpaceShipTwo vehicle currently in flight test, two more SpaceShipTwo vehicles are under construction. Once the first of those is completed, Whitesides said the company will move ahead with construction of a second WhiteKnightTwo carrier aircraft.
While the investor presentation mentioned flight operations beginning in the first half of 2020, Whitesides didn’t commit to a specific schedule in the interview. SpaceShipTwo has not flown since February as the company outfits its interior, while also working on the move of its operations to Spaceport America in New Mexico, including finalizing the customer facilities there.
“I think we have some work to go before we transfer SpaceShipTwo and WhiteKnightTwo down” to New Mexico, he said. “We’re just methodically going through our program as we make the transition to New Mexico.”
While ticket sales will be the primary source of revenue, the presentation noted the potential for “ancillary” revenue sources. Those include “premium products and services” for customers, experiences for the family and friends of customers, and corporate partnerships and sponsorships. Whitesides noted in the interview Bain’s experience from Twitter with “ancillary revenue models that can be added to our core product.”
Another key to profitability will be lowering costs. The presentation notes that Virgin has plans to reduce its operating costs once it ramps up commercial operations through measures like high-rate production of the vehicle’s hybrid rocket motor and decreased maintenance requirements. It also hints at the possibility of using a “liquid rocket motor,” presumably in place of the existing hybrid motor, as a cost-saving measure.
While the near-term business plan for Virgin Galactic is focused primarily on space tourism, the presentation states that the “ultimate application” of the technology will be for high-speed point-to-point transportation. A “Virgin Hypersonic Jet” could travel at Mach 5, enabling trips from Los Angeles to Toyko in just two hours, versus 11 hours in conventional aircraft today. That, the presentation argued, could provide a “significant global revenue opportunity” in a commercial aviation market currently valued at $900 billion a year.
Whitesides said in the interview that the deal “could start to enable some investment in a future vehicle.” Asked what kind of “future vehicle” he was describing, he said that meant “not future copies of SpaceShipTwo but a SpaceShipThree.”