Q&A With Space Research Analyst, Caleb Henry

For this week’s newsletter, I chatted with space research analyst and former space journalist Caleb Henry.

Caleb Henry. Source: APSAT

Caleb is a Senior Analyst at Quilty Analytics, which is a financial research, investment banking, and strategic advisory boutique exclusively serving the Satellite & Space industry. Caleb started his career in space as a journalist, first at Via Satellite and later at SpaceNews, before joining Quilty Analytics where he publishes research reports on the space industry. Caleb was kind enough to sit down with me to chat about factors driving M&A activity in the space industry, market expectations for LEO broadband, what area of the space industry is under-observed, and much more.

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Now let’s begin the interview!

Your current role is as a Senior Analyst at Quilty Analytics. What is Quilty Analytics and what services does the organization provide in the space industry?

Caleb: Quilty Analytics is a research and advisory firm that is specialized in the space industry. Our exclusive focus is all things that pertain to space. The company is essentially split into two halves. One half does investment banking and strategic advisory. There they help with activities like brokering merger and acquisition deals, IPOs, divestitures, and those kinds of strategic level transactions.

The other half is research, which is where I’m involved. Part of that is focused on writing reports about specific companies, we follow about eight or so publicly traded companies within the space industry. We also have thematic reports where we dive into particular topics. For example, we’ve written reports on smallsat manufacturing and flat-panel antennas, as well as a series on various LEO constellations such as OneWeb, Starlink, and Telesat. Just recently we published a report on the Space Development Agency’s national Defense Space Architecture constellation as well.

Those are our two primary research types and we occasionally do some consulting as well. A lot of that comes from companies that are not in the space industry but are interested in being a part of it, so they come to us to learn more about the industry.

Last year you made the switch from being a journalist with SpaceNews to joining Quilty. Can you talk about your background in becoming a space journalist and then what led to that transition from journalism to now being on the research side?

Caleb: I sort of fell backwards into the space industry. I say that because my fields of study were political science and astronomy. I didn’t quite know what I wanted to do with that and just always hoped that I would end up in the space industry. With that combination, I thought that I might end up somewhere like NASA since I was principally aware of government-led space activity. In college, I learned more about the private sector of space. I landed a job with Via Satellite because I was looking at journalism jobs and found an opportunity where I could combine the writing skills that I had obtained in college as a political science major, merge them with the science skills from my experiences in astronomy, and apply them to journalism.

Then I joined Quilty Analytics about a year ago, looking to shift away from the daily deadlines of news journalism but still be involved in the space industry. I decided to work in research where I’m still learning a lot and am still able to operate from a neutral standpoint while sharing my findings with a community.

We’ve seen a growing amount of M&A activity in “New Space” in recent months. A few examples are SpaceX acquiring Swarm, Rocket Lab acquiring Sinclair Interplanetary, and Astra acquiring Apollo Fusion. Do you think we’re going to see more of this going forward and what do you think this trend might mean about the state of the space industry?

Caleb: I think broadly you’re seeing exits in a couple different ways: M&A activity and SPACs. The space industry was notoriously slow at exits, and that was one of the challenges for VC’s and for startups who were starting to see more money flowing into the industry. People would get excited and then you weren’t seeing the exits, so that created a sort of disconnect.

SPACs have provided a meaningful way to have exits that justify venture capital going into the industry. SPACs really picked up after some initial hesitancy around the COVID-19 pandemic. Since then, we’ve started to see SPAC activity slow but not stop. I would expect to see a few more SPAC deals announced next year in the first half of 2022. However, I really think that the bigger impact that you’re seeing now is that those SPACs are now under pressure to justify the claims that they made during their IPO process. A lot of them put up really high valuations and really large total addressable markets that they said they could pursue, as well as really aggressive revenue figures. In order for them to meet expectations, a lot of times it means that they are going to have to grow inorganically.

You see that with companies like Astra and Rocket Lab that have described themselves as being more than launch providers. They want to be turnkey solutions that can build your spacecraft, launch it, and even help beyond that. In order for them to do that, they have to acquire companies to gain those skills and resources faster than they could by building them up internally.

Another factor driving M&A activity is a big drive across the industry for scale. That’s something a lot of private equity firms have led, where you see roll-ups of a bunch of small companies. For example, even before they SPAC’d, Redwire was one of the top buyers of small to medium enterprises. Others doing that include Voyager Space, Amergent Technologies, and BlueHalo. You’re seeing a lot of these companies that have realized they can do more together than they could separately.

So that is fueling this consolidation amongst all of these smaller players, some of which were household names, some of which weren’t. That’s creating a more robust mid-tier layer of space companies in the US that wasn’t really present before.

Henry interviewing NASA Administrator Bridenstine for SpaceNews in 2018

You mentioned that there has been, understandably, a focus on exits from the investment community. Do you think the exits we’re seeing, either through M&A or SPACs, are within the range that will keep early-stage investors interested in the industry?

Caleb: Well we have noticed an increase in the size of large early-stage rounds. You regularly see companies that are raising over $100M rounds. If you look at venture capital investments in the space industry, excluding LEO broadband like Starlink or Kuiper, the amount of investment has steadily grown. In 2016, there was less than $500M invested in space. It has been over a billion every year since and in 2020 it topped $2B. So there’s been absolutely no slow-down. We haven’t compiled numbers yet for 2021, so I can’t quite say what the near-term impact has looked like but in terms of venture deals there hasn’t been a slowdown, and if anything the rounds have only gotten bigger. Which speaks to even higher levels of confidence by the VC community in the space industry.

You touched upon the LEO constellations and there’s debate around the scale of the market demand for these services. Do you have thoughts on the size of that demand and whether there’s room for all of these competitors to survive and even thrive? Or do you expect some consolidation in that market?

Caleb: If you went to industry conferences around the late 2010s, the average person would tell you that two, maybe three LEO constellations would survive. Now when you ask people, the average answer that I hear is four, maybe five. Which is about all that are out there. So that’s essentially saying that the majority will succeed, at least for those that have been announced. However, there are surely constellations that have not been disclosed.

A couple of factors will influence which constellations are successful. One is money. Part of the reason that the confidence level increased is because Amazon emerged and Amazon has no shortage of cash, so that constellation is all but guaranteed to be constructed. If they can get the technology to work, they have the money and the distribution to go forward. Elon [Musk] has shown an incredible ability to raise large sums of money for SpaceX, which keeps Starlink healthy. OneWeb already went through its Chapter 11 process and essentially emerged as a discount constellation. Eutelsat got in on that by investing in OneWeb. It seems that they didn’t want to help fund a $6B constellation but they were fine with funding a $2B-$3B constellation. When you cut all that happened prior to Chapter 11, it made much more economic sense.

The second factor is with respect to what markets those constellations will serve. Not all constellations are created equal. We’re seeing a divide between which constellations are pursuing the consumer broadband market, which is arguably the biggest, and which are designed to serve higher paying customers in mobility. That’s usually broken down into inflight connectivity, maritime, and mobile land vehicles such as trains, trucks, or military vehicles. Those higher paying customers also include enterprise businesses that need connectivity such as oil rigs, cloud data centers, or things of that nature.

What we’re also seeing is a real shift towards a multi-orbit future, what is sometimes referred to as a hybrid architecture. It’s probably not going to be favorable to have service from just one orbit. Even if you have LEO operators like SpaceX and Amazon go forward, I think lots of customers are planning networks around using satellites in LEO, GEO, and even elsewhere like MEO or highly elliptical orbits. That looks like it’s very much going to be the future, people want to combine the advantages of each one. They want the low-latency from LEO, the density of capacity that you can put down from GEO, polar coverage that you can get from LEO or GEO, and the ability to dynamically steer capacity quickly across large geographies that you can get from GEO.

So that’s probably the future that we anticipate. It’s less about who wins and who loses and more about what the broader future of satellite communications looks like. That future is likely not principally defined by a single architecture.

Is there anything in the industry that you’re particularly excited about in the coming years?

Caleb: You know it’s hard to point to one single thing. What excites me is that the industry is finally moving at speed. The space industry is a really high-tech industry and because of that, it gets a lot of people excited. Historically though it has moved very slowly. It has moved slow for one because it’s risk-averse. If you are spending two or three years building a spacecraft and then it has to last for fifteen years or more, you don't want to do things that might cause it to break. The second reason it moves slowly is that, particularly in broadband, it was principally a service of last resort. Satellites were great for TV, you had some advances in technology that made it so you could handle more channels with less capacity, but that wasn’t really that revolutionary nor was it particularly fast-paced.

Now though, because the satellite industry is trying to get in on providing connectivity everywhere, the standard for innovation is the same for the space industry as it is for terrestrial companies. The industry is not used to moving at iPhone speeds or having any sort of regular iterative design where every year you see something newer or better. However, the industry is learning that it has to meet those speeds of innovation. So how do you progress in a way that assures that you don’t disappoint customers?

Beyond those newfound customer expectations, the industry is also moving faster because newer technologies allow it to do so. These include 3D printing, cloud computing, onboard processing, and software-defined spacecraft. Those technologies have allowed the industry to move at a much quicker pace. That means that we can see a lot more change in a lot shorter period of time and that’s exciting.

I think that the space industry is going to look radically different ten years from now. Not only that, I think the changes ten years forward are going to be more than than they were looking twenty years back.

What do you think isn’t getting enough attention in the space industry right now?

Caleb: Well, there’s nothing that I would personally seek to draw any attention to. If you’re going to ask about one area of the industry that is under-observed, it’s always the ground segment. It’s the least shiny of the things that the space industry does, but the two have to go together. You can’t launch a massive satellite constellation with terabits of capacity and expect to actually get that down unless you have a strong and capable network of teleports, gateways, and access nodes on the ground. There are some really interesting technologies that are moving forward there too. You’re seeing for example the shift to the cloud. On the Earth observation side, you can see more downlinking directly into cloud data centers and that has truly accelerated the speed at which we can get images of the Earth or weather data from satellites.

I think you’re also seeing more network virtualization. The smallsat teams have led this. If you used to visit a command center of an Intelsat or an Iridium, they would have people staffed twenty-four seven watching and flying the satellites. I recently talked to a smallsat operator who actually told me he monitors satellites from his phone. Things are changing.

A few other things that come to mind include using higher frequencies, more geographic diversity of sites, and then Ground as a Service where you see companies building their own networks of ground stations and just going to satellite operators and saying “we can get all of your data down for you and we can even fly your satellites for you if you don’t want to do that.”

The ground segment is a very tech-heavy part of the space industry, but it’s often not looked at because a rocket is not involved in making it happen. However, it’s equally important for the success of the industry going forward.

Want to hear more from Caleb? Follow him on Twitter here.

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