Terran Orbital

Live Long and Prosper with Lockheed Martin’s Frenemy in Space.

Summary

· Lockheed Martin is currently the largest owner, customer and lender to Terran Global.

· Terran has a large backlog of satellites, more than $2.8B, much of it to be delivered by YE 2026.

· The future biggest customer has funding concerns, which have weighed heavily on LLAP’s stock.

· Currently bidding on half a dozen similarly large contracts, with two expected to read out by YE.

· Structural cost advantages to competitors mean Terran is very well positioned to win new customers.

Introduction

Terran Orbital is a leader in the development of small satellites, a sector that has recently gained significant attention due to the success of Starlink and its constellation. The effectiveness of Starlink during the Russia-Ukraine war, where it was quickly deployed and operated in environments where traditional geospatial satellites were ineffective, has further highlighted the value of small satellites.

Although the market was already trending towards small cube satellites, this event solidified their importance. Consequently, there is now enormous demand from various government and commercial customers eager to develop and launch their own distributed small satellite constellations. We believe that Terran Orbital is exceptionally well-positioned to benefit from this growing adoption.

Terran went public via a SPAC, and like many of its peers, its share price has fallen more than 90% from the $10 SPAC price. Initially, the company planned to be both a satellite manufacturer and a constellation owner, but it has since scaled back to focus on being the leading partner for manufacturing small satellites.

In a conversation we had with CEO Marc Bell, we asked him what he considered his biggest mistake with Terran Orbital. Without hesitation, he replied, "Going public via a SPAC." This assessment is likely accurate, as very little of the capital raised in trust for the SPAC converted into shares. As a result, Terran immediately faced the costs and scrutiny of being a public company without the capital needed to execute its business plan. To make matters worse, the declining share price made subsequent capital raises highly dilutive to early investors.

The lack of capital converted from the SPAC forced the company to make several difficult decisions. The first was to abandon its plans to launch its own constellation—not due to a lack of capability, but because of insufficient capital. Instead, the company decided to focus on becoming the manufacturer of choice for satellite buses and, ultimately, complete satellites for the growing small satellite industry. Over the last 18 months, we believe Terran Orbital has positioned itself as the leading small satellite manufacturer in Low-Earth Orbit space.

However, achieving this position required additional difficult choices, specifically, dilutive financing. This included a convertible note with Lockheed Martin and a secondary offering in September 2023, which raised $32.5 million at $1.40 per share, with warrants priced at $1.50. Additionally, the company recently announced an ATM (At-the-Market) filing, allowing them to sell up to 15% of its shares in the open market, potentially raising up to $98 million.

To be clear, we do anticipate further dilution ahead. However, assuming the company can continue to access cash, we believe the potential upside for the shares is far greater than the incremental dilution from here.

Before writing this article, we reached out to the company to inquire about the use of the ATM. We were satisfied with the response we received and wanted to share some highlights with investors:

“Terran Orbital will not be accessing the ATM immediately. The recent ATM was primarily established to give our government, civil, and commercial prospects confidence in our liquidity and ability to fulfill contract award obligations. While we may access the ATM in the short term, if we do, we will be very mindful of dilution and stock price sensitivity.” - Derwin Wallace (Investor Relations)

Derwin also highlighted a key point in our investment thesis for Terran Orbital:

“We are very optimistic about winning future contract awards, due to the fact that we are vertically integrated, have significant manufacturing capacity, and our design and manufacturing capabilities uniquely position us to deliver highly engineered space vehicles in high volumes, within compressed timeframes, at a fraction of historical costs.” - Derwin Wallace (Investor Relations)

One interesting takeaway from this commentary is the focus is on prospects and new award obligations, rather than current customer obligations. The reference to building high volumes in compressed timeframes is likely an indirect reference to the Rivada project, which we will discuss in more detail later. However, it is the emphasis on new awards and customers that we believe is most important—read on to see why.

Vertically Integrated, Automated & (Un)Unionized

Terran Orbital is one of a handful of public companies in the space industry, but what sets it apart is the relentless drive to insource as much component production as possible. We believe that combining vertical integration with automation will prove to be the key to success in this business. Ultimately, we expect this approach will improve launch reliability, reduce costs, and drive revenue growth, margin improvement, and asset efficiency—the three key pillars we look for in disruptive growth investments.