Otonomo Technologies Ltd. (NASDAQ:OTMO) Q3 2022 Earnings Call Transcript

Otonomo Technologies Ltd. (NASDAQ:OTMO) Q3 2022 Earnings Call Transcript November 16, 2022

Operator: Good morning, ladies and gentlemen. My name is Keith, and I will be your host operator on this call. Everybody, please note this event is being recorded. I would like to turn the meeting over to your host for today’s call, Miri Segal, CEO of MS-IR. Please go ahead, Miri.

Miri Segal: Thank you, operator, and thank you all for joining us today. Welcome to Otonomo’s Third Quarter Financial Results Conference Call. Before we begin, I would like to remind you that our discussions today will include forward-looking statements and are subject to risks and uncertainties relating to future events and the future financial performance of Otonomo. Actual results could differ materially from those anticipated in the forward-looking statements. Forward-looking statements made today speak only to our expectations as of today, and we undertake no obligations to publicly update or revise them. For a discussion of some of the important risk factors that could cause actual results to differ materially from any forward-looking statements, please see the Risk Factors section of Otonomo’s Form 20-F filed with the SEC and other documents filed by Otonomo from time to time with the SEC.

If you have not received a copy of the earnings press release, please download one from the Investor Relations section of the company’s website. Today’s call will be accompanied by a PowerPoint presentation. You’re welcome to view the presentation on Otonomo’s Investor Relations website. Following the call, a replay of this webcast will be available on the Otonomo’s Investor Relations website. Please also note that we will present non-GAAP operating loss on today’s call, which is a historical non-GAAP financial measure. Because this financial measure is used in Otonomo’s internal analysis of financial and operating performance, Otonomo believes that it provides increased transparency to investors of management’s view of its economic performance.

Otonomo also believes the presentation of this measure allows investors to more effectively evaluate and compare the performance of Otonomo to that of its peers. Although, Otonomo’s presentation of this non-GAAP measure may not be comparable to other similarly titled measures of other companies. A reconciliation of this measure to its most directly comparable GAAP financial measure is included in the Q2 release. Today, we are joined by Ben Volkow, CEO, Director and Co-Founder of Otonomo; Bonnie Moav, CFO of Otonomo. Ben will begin the discussion with an update on the current state of the market and the business. Next, Bonnie will share an overview of the company’s financial results. We will then open the call for the live question-and-answer session.

With that, I’d like to turn the call over to Ben Volkow, Otonomo’s CEO. Ben, please go ahead.

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Ben Volkow: Thank you, Miri. Hi, everyone, and thank you for joining Otonomo’s third quarter 2022 financial results conference call. Q3 continued our run of strong quarters, with all of our key performance indicators reaching new high watermarks. We did see some softness in our top line growth, primarily due to macro-related headwinds we encountered in the market, but we still saw positive growth on the quarter-over-quarter basis. Even as we continue to see growing demand across our focus areas in the mobility sector, we recognize that our rate of adoption in sub-segments and services we offer continues to be challenging. Accordingly, in Q3, we continue to evaluate and adjust our investments in line with our strategy. We will continue to be conservative in our cash management.

Our highlights in Q3 include new product releases, customer adoption success and key strategic alliance announcements. To start, we’ve build FloowFusion, a breakthrough capability that marries slows leading smartphone-based solutions with connected vehicle data. We think that FloowFusion will be a catalyst to accelerate the transformation of the way in the insurance sector to meet growing demand for usage-based insurance. With FloowFusion insurance providers can easily leverage mobile and vehicle telematics data to create new connected insurance policy offerings as well as bolster existing offerings with additional highly accurate data sources to deliver a competitive advantage. Since the announcement in September, we have received very positive market feedback and have had a number of meaningful discussions with large insurance carriers that continue to progress.

In Q3, we also saw significant progress in the fleet sector for Otonomo. First, the number of fleet vehicles on the Otonomo platform increased 4.5x. In one particular example, we work closely with a partner to onboard more than 10,000 vehicles to the Otonomo platform. This process would normally take thousands and thousands of hours using hardware-based telematics. However, our partners through the use of our system was able to onboard vehicles in one day, all the while compiling with privacy regulations and achieving operational revenues. This is a fraction of the time and cause fleet operators currently have to set aside for hardware telematics installation and maintenance. This level of automation via software-defined telematics clearly demonstrates the economic value Otonomo can bring to the fleet sector and why we continue to see interest and demand from fleet operators.

We also continue to develop and scale our go-to-market in the fleet sector via our strategic partnerships. In July, we announced an update to the Otonomo app for sales force and provided a key technology that is powering the new Salesforce OTO cloud products. As a Salesforce launch partner, we are providing the dramatic were to empower Salesforce solution with connected car data. We are targeting dealerships, fleets and the financial mobility ecosystem and are super excited about this close partnership. The latest version allows customers to build upon workflows, trigger specific actions, access distance and dispatch data, execute the geofencing and enhance driver safety capabilities. The Otonomo app enables customers to extract reach vehicle data insights and monitor the location and status of entire fleet.

Utilizing software-based telematics from OEM connected car data, customers can enjoy a solution without costly and expensive hardware. Finally, we also recently announced the integration of our Otonomo Smart Mobility Data Platform with SAP Digital Vehicle Hub. The integration with that enables clients derive new insights for fleet management and maintenance based on connected vehicle data and generate new value and revenue streams. The SAP Digital Vehicle app is a central cloud-based repository for vehicle-related data. The solution with the companies show vehicle data, between relevant stakeholders and enables collaborative business models and value streams going with the automotive and mobility value chain. By combining vehicle data with SAP Digital Vehicle Hub we offer new insights for clients that, in turn, can create additional value or new revenue streams for their businesses.

I would just close on Q3 highlights by mentioning that we continue to be active both on the OEM and strategic alliance fronts and hope to have exciting news in the coming weeks and months. As I indicated earlier, we continue to see momentum in attributes that are key to our business. Some of the highlights recurring revenues for the third quarter of 2022, grew by 24% quarter-over-quarter and reflects 83% of autonomous revenues for the third quarter of 2022. Bookings for the third quarter grew to $2.2 million, of which 90% is generating recurring revenues. Backlog as of September 30, 2022, was $4.8 million. Annual recurring revenue was $6.7 million, an increase of 11% quarter-over-quarter. And we signed 19 new customer agreements in Q3. Those are remarkable results and show the strength of Otonomo business and our continued growth in the market.

We had a record number of new customer agreements during the third quarter as we continue to see interest and demand for our core market of connected car use cases increase. For example, mobility syncing, a research and analytics firm that uses historical and current floating car data for modeling purposes to understand the impact of infrastructure development in Sydney, Australia. Jua, an AI company developing weather prediction models, shows Otonomo operators sole connected vehicle data stores due to the wide geographical coverage and GDPR compliance we provide. In addition, yesterday, we announced our latest press release, Ramboll, a global leading consultancy delivering integrated and sustainable solutions is creating value for clients by using historical and real-time data from Otonomo to improve safety, accessibility and efficiency for users.

In the fleet segment, we are seeing tremendous momentum with new customer agreements. Some of these includes Legentic, a fraud detection company that shows Otonomo as its connected vehicle data platform provider to enable product offering such as vehicle recovery across the EU. And to aim a fleet management provider that selected Otonomo to support its transition away from hardware-based telematics to better support hundreds of fleet customers using the power of software. And finally, GPS tracking a fleet and asset management company, which turned to Otonomo for our expertise in working with OEM and connected car data. As you can see, it was yet another strong quarter across product development, customer adoption, strategic alliances and new customer wins.

Now for more detail on our Q3 financials, I’ll hand it over to Otonomo CFO, Bonnie Moav.

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Bonnie Moav: Thank you, Ben. Revenues for the third quarter 2022 reached 2 million compared to 162,000 for the third quarter of 2021. The growth was primarily driven by growth in our core connected vehicle data and contribution of the flow revenue. Before I move further into the numbers, I want to remind you that our non-GAAP items consists of stock-based compensation expenses, depreciation, amortization of acquired intangible assets, contingent liability expenses related to The Floow acquisition and impairment of intangible and goodwill. Non-GAAP information is presented excluded these items. Our GAAP financial results along with the reconciliation between GAAP and non-GAAP results can be found in our earnings release. I will now turn to the detailed financial results for the quarter.

Our GAAP operating loss for Q3 2022 was $37 million, compared to $9.9 million in the third quarter of 2021. The operating loss includes $26.3 million impairment charge of goodwill and intangible, offset by a decrease in contingent liability, which created an income of $6.2 million. In addition, the increase in the GAAP operating loss was mainly driven by operational expansion, acquisition of new companies and related amortization of new intangible assets. In the third quarter, non-GAAP operating loss was $13.4 million compared to $9.1 million for the third quarter of 2021, driven by operational expansion and acquisitions. Our cloud infrastructure expenses consist primarily of costs related to third-party cloud services which increased by 71% from $786,000 in Q3 2021 to $1.3 million in Q3 2022.

The increase is attributed to our growth in the amount of data the company ingest, process, and stores and the amount of data used by our data customers. In addition, the cost increased as a result of the acquisition of Neura and The Floow. Cost of revenues include purchasing of data of $0.6 million, an increase of 158% year-over-year, which reflects the cost we paid to the OEMs and other data providers for their data used in our products. In addition, $0.4 million is related to the cost of services provided to The Floow customers. Our research and development expenses and our sales and marketing expenses for the third quarter of 2022 were $5.8 million and $5.4 million, which increased by 98% and 120% respectively year-over-year, mainly due to the workforce growth of 232% and 129% respectively, including the acquisition of Neura and The Floow.

General and administrative expenses for the third quarter of 2022 were $4.4 million compared to $3.7 million in the same period a year ago, representing an increase of over 21%, mainly due to headcount increase. In Q3 2022, the company performed an interim goodwill and intangible impairment test, which was triggered by the recent decline in market capitalization. Management considered this recent decline along with other possible factors affecting the assessment of the company’s reported unit. The outcome of the impairment test resulted in a non-cash charge of $26.3 million, which was recorded in the consolidated financial statement for Q3 2022. The non-cash charge completes a write-off of the full amount of the goodwill and intangible assets previously recorded in our balance sheet.

Turning to the balance sheet, we ended the quarter with $155.5 million in cash, cash equivalents, short-term investment, restricted cash, and long-term deposit, a decrease of $52.5 million from year end 2021. This was mainly driven by $11 million cash investment in The Floow and $41.5 million cash used in operating activities. And now, I will turn it back over to Ben.

Ben Volkow: Thank you, Bonnie. As highlighted in today’s call, Q3 was a strong quarter for Otonomo, with continued growth despite larger economic headwinds in play and the uncertain rate of adoption, which comes with any new market creation or transformation. We continue to be prudent with expenses and expect that the actions taken this year to reduce costs will come into play over the course of 2023. Our acceleration in recurring revenues and bookings signal that we are poised to have continued strong growth in the coming quarters. In the last three quarters, we have accelerated from about 35% recurring revenues in the end of 2021 to more than 80% today. In the same period, we have grown revenues to 3x of 2021 we expect this momentum to continue and translate into a strong Q4.

We are equally excited about the product development and go-to-market progress in the business and we see our focused strategy is beginning to pay off. In the insurance segment, with new products and a unique position as the main player onboarding connected car data in the fleet segment, with growth of 4.5x quarter-over-quarter in the number of cars connected and in the broader connected vehicle data segment, where we see persistent demand for our curated derived data sets, ranging from traffic planning to road safety. Operator, now we are ready to take the questions.

Q&A Session

Operator: Thank you. At this time, we will begin the question-and-answer session. And the first question comes from Josh Nichols with B. Riley.

Josh Nichols: Yes. Thanks for taking my question. I was wondering if you could provide a little bit more detail, right, we’re about halfway through the fourth quarter on what the outlook was. I know at the beginning of the year, you were targeting a higher level of revenue with the flow and that, that was going to be back half weighted. But clearly, there’s been some softening in the broader economy. Is 4Q expected to be up materially from 3Q? I’m just curious what the cadence is expected to look like at this juncture.

A €“ Ben Volkow: Josh, it’s a good question. We are not providing a forecast for the — until the end of the year, Definitely, we see challenges in the market. But at the same time, we wrapped up a strong quarter. We just shared the stronger backlog and bookings that we have, so we are very encouraged of what we anticipate from Q4. But at this time, there won’t be any forecast or not that we can share in terms of expectation, how to finish the year. All I can add is we are very excited, and we believe that will continue the strong growth that we had in previous quarters.

Josh Nichols: Yes. I guess where you’re not willing to give guidance for the quarter, is it fair to say like first half of the quarter, or is it like similar to last quarter or what we’ve at least seen like for quarter-to-date?

A €“ Ben Volkow: You just figure if the first half of Q4 was like Q3 or stronger or weaker? Yes, is this exclusion — so again, we are limited in what we can say. We’re definitely very encouraged from what we see in the market. It’s not that the macro is not affecting us like everyone else. But I think a lot because of the work and the strategy of building recurring revenues, focusing not just on revenues, but also on booking, we feel that we got the right revision in the chamber to continue and provide growth. We cannot comment yet how strong the quarter will be, compared to the previous ones, but we are very bullish on the quarter.

Josh Nichols: Fair enough, right? So you are admittedly more focused on those KPIs like bookings that you’ve talked about previously, as opposed to near term revenue. Can you talk a little bit about being more prudent about the cash balance? I think, that’s probably a good decision, given the macro backdrop that we have. So non-GAAP operating loss of like around $13.5 million that we had for 3Q, is that a good baseline to use as a go-forward basis? Is that going to come in a little bit, or what’s your expectation in terms of the cash burn going forward?

Bonnie Moav: Yes. So this is Bonnie. Hi. Thank you for the question. So, yes, you can see that this quarter, we managed to decrease the burn rate. We always say that our non-GAAP is pretty good indicative for our cash burn rate. We did do some cost cutting initiatives that started in Q3 and will start to play in the next quarter with additional infrastructure cutting that we are looking now to save, also that those will help us cut the cost in early 2023. We believe that the full impact of the reduction in force that we did in Q3, as well as some third-party labor cuts, will flow in full early next year and not this year. And we will see savings some cost in the single digit range of 5% to 8% per year, but the non-GAAP continues to be the indicative factor for cash burn rate.

Josh Nichols: Great. Thank you for providing the detail on the trajectory there. I guess, if these new agreements that the company signed, are these kind of more exploratory earlier partnerships, or is there a real revenue opportunity for any of these? And if you could touch on the one or two agreements that you think provide the most near-term revenue opportunity over the, say, the next six to 12 months, that would be helpful.

Ben Volkow: So — hi. This is Ben. I’ll try to address it. The two partnerships that we covered in today’s call with Salesforce and SAP, the real thing. The partnership with Salesforce is a new product that they announced in October that is addressed to the automotive industry. And Otonomo is really the software telematics partner inside, powering the platform with connected car data. I can share that the trials ongoing. I can share that we are very, very excited and we definitely see real revenue opportunity within the six to 12 months here. Similar feedback also on SAP. SAP with the newly announced DVH – Digital Vehicle Hub is approaching organizations and enabling them to get better transparency and value out of the connected vehicles and connected vehicles data.

Also here, there are pilots ongoing — paid pilots ongoing, I should say, and here also, we anticipate revenues in the timeframe discussed. So those are the real things. Not always all partnerships materialize to real business and revenues. In this case, this has started on the right foot and we are very excited for — to what we predict that this will bring in terms of revenues in the coming year. I hope this answers the question.

Josh Nichols: Yes. I don’t want to hog the Q&A. So just a final question for me. If you look at the company’s revenue, but on a gross profit basis once you adjust for the cost revenue, but also those cloud infrastructure storage costs, you’re getting close to being breakeven. I think you were down negative $400,000 or so this year. I know that the cloud storage costs are going to continue to go up a little bit. But at what revenue level are you expecting to be positive on a cost to goods sold adjusting for both, like I said, the COG, but also the cloud storage basis revenue infrastructure costs.

Bonnie Moav: So I think we’ve shared in the past that it will take us around two years to three years to breakeven. I think we can stand up behind this years as we grow. I can’t share with you at what point revenues will — what is the number of revenues that will make us a breakeven, depends on a lot of other things and a lot of other products that we have on the road map. So I can’t give you an accurate answer to that question.

Josh Nichols: Okay. Thank you. I will hop back in the queue.

Bonnie Moav: Thank you.

Ben Volkow: Thank you.

Operator: Thank you. And the next question comes from Harry Wilmerding with Needham & Company.

Ryan Koontz: Hi, sir. Sorry, this is Ryan Koontz with Needham. Can you hear me?

Ben Volkow: Hi, Ryan.

Ryan Koontz: Hi, Ben. I wanted to ask about the Salesforce relationship. It sounds like this is a new market for Salesforce to penetrate in terms of the dealerships. Is that correct?

Ben Volkow: I agree. I think that they are doing some business there, but I think it was much more limited compared to what they are planning to get going in the next few months.

Ryan Koontz: Got it. So hopefully your data gives them a much more powerful product to go after that market. That’s great. And with regards — I think not the big picture here and your kind of agreements and near-term pipeline, I assume that fleet insurance remain your prime focus for the company and between those two, which one do you think could be more material to kind of the next 12 months revenue as you look at your pipeline?

Bonnie Moav: So the insurance segment, obviously, more matured. We acquired the flow its more mature company that already have existing and ongoing relationship with insurance companies. So obviously, this remains our most significant generating revenues in the coming year. And for the fleet, this is like a new market for us. We do see an increase in the numbers of connected beams we have from fleet and we will see them growing in a very drastic percentage throughout Q4 and 2023. So it will continue to grow that I think insurance continues to lead in 2023 and our fleet is definitely there to bring and generate the growth that we are anticipating in next year results.

Ryan Koontz: Got it. That’s helpful. And lastly, kind of circle back on your commentary around cloud costs there. I assume you’re not keeping like a history of all the data you’re ingesting. You’re basically processing — you’re focused on process and the data that your customers are paying for rather than collecting the history of all data on all cars, which would really probably wouldn’t be very financially advantages for you. Is that correct?

Ben Volkow: No, that’s not always the case. In some scenarios, we maintain the data for longer. Historical data for some use cases is a more value than real-time data. For example, cities or DOTs that want to understand what changes they need to do, they usually like to go not just in what’s happening today, but also what happened six months ago or nine months ago. Having said that, the historical data, we maintained in a much lower cost archive in the cloud, because it’s not real time, it can take a fee. It’s okay. The access to the data will take out of second and not millisecond. So we maintain historic data in some cases, but we maintain it in a way that the cost associated to it is low and not impacting in a current way our costs. I hope it answers the question.

Ryan Koontz: It does very much. So, thanks. That’s it for me. Thank you.

Bonnie Moav: Thank you.

Operator: Thank you. And this concludes the question-and-answer session. I would like to return the floor to Ben Volkow, CEO, for any closing comments.

Ben Volkow: Thank you, everyone, for joining us today. We look forward to seeing you in our next call. Thank you.

Operator: Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.