Ouster, Inc. (NYSE:OUST) Q1 2023 Earnings Call Transcript May 11, 2023

Ouster, Inc. misses on earnings expectations. Reported EPS is $-2.65 EPS, expectations were $-2.2.

Operator: Good afternoon and welcome everyone to Ouster’s First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After today’s presentation and remarks, there will be an opportunity to ask questions. [Operator Instructions] The call today call is being recorded and a replay of the call will be available on the Ouster Investor Relations website an hour after the completion of this call. I’d now like to turn the conference over to Sarah Ewing, Director of Investor Relations. Please go ahead.

Sarah Ewing: Thank you and good afternoon, everyone. Thank you for joining us for our 2023 first quarter earnings call. I am joined today by Ouster’s Chief Executive Officer, Angus Pacala; and Chief Financial Officer, Mark Weinswig. Before we begin the prepared remarks, we would like to remind you that earlier today Ouster issued a press release announcing its first quarter 2023 results. The company also published an investor presentation, which is available on the Investor Relations section of ouster.com. I’d also like to remind everyone that during the course of this conference call, Ouster’s management will discuss certain forward-looking information regarding the company, including forecasts, targets, statements from its press release, potential future customer orders, and shipments, near and long-term revenue opportunities, strategic customer agreements, market share trends, anticipated synergies from the company’s merger with Velodyne, ability to recognize the benefits of cost savings initiatives, future products, anticipated benefits and applications of new product releases, technological advancements and commercial paths, potential future market opportunities, customer traction and the company’s business outlook and first quarter 2023 financial guidance and trajectory are forward-looking statements that are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements.

There is no guarantee that such plans, estimates, and expectations will be achieved. Thus, while these statements represent management’s expected future results, and performance, Ouster’s actual results are subject to several risks and uncertainties that may cause actual results to differ materially from current expectations that we may share with you today. In addition to any risks highlighted during this call, you should carefully consider other important risk factors and disclosures that may affect Ouster’s future results as described in its most recent annual report on Form 10-K and other reports that the company files with or furnishes with the SEC. Except as required by law, rule, or regulation, the company undertakes no obligation to update any of these forward-looking statements for any reason after the date of this call.

Information discussed on this call concerning the company’s industry competitive position and markets in which it operates is based on information from independent industry and research organizations, other third-party sources and management estimates, which are derived from publicly available information released by independent industry analysts and other third-party sources, as well as data from the company’s internal research and are based on reasonable assumptions and computations made upon reviewing such data, and its experience in and knowledge of such industry and markets. By definition, assumptions are subject to uncertainty and risks, which could cause results to differ materially from those expressed in the estimates. During this call, we will discuss certain non-GAAP financial measures, which exclude the effects of events and transactions we consider to be outside of our operations as outlined in today’s press release.

These non-GAAP financial measures should be considered as a supplement to and not a substitute for measures prepared in accordance with GAAP. For a reconciliation of non-GAAP financial measures discussed during this call to the most recently comparable GAAP measures, please refer to today’s press release. I’d now like to turn the call over to Angus.

Angus Pacala: Good afternoon everyone and thank you for joining us today. Before we report on our first quarter 2023 results and business update, I want to share a few thoughts on the state of the lidar industry and Ouster’s strategic positioning. It’s clear that market perception of the lidar industry has taken a sharp turn since a number of companies entered the public markets through packs. Companies and investors alike have realized that products can be challenging to manufacture and audit time lines continue to be pushed out. This, coupled with a challenging macroeconomic environment has led to a sharp market correction. Ouster is not immune to these market dynamics, and I share the pain our investors feel. As CEO and co-founder and a large shareholder myself, I did not take this lightly.

But I also want to stress that I am immensely confident in the Ouster team, our strategic approach within this competitive space and the opportunity we see to make lidar ubiquitous across a myriad of industries. Ouster is in a strong financial and commercial position with significant cash reserves, accelerating revenues and bookings and then incredible product road maps spanning multiple generations of both scanning and solid-state digital lidar sensors as well as new innovative software products to serve the vast opportunities for lidar technology. Ouster is more capable and competitive than ever. Following our merger with Velodyne, we kicked off a large-scale effort to realign Ouster’s operating model to build a strong business that is both competitive and resilient and puts us on the path to profitability.

While we’re working through the short-term impacts associated with the integration and our operational realignment, the incredible demand for our industry-leading REV7 sensors gives us confidence that we’re gearing up for a strong second half of the year and are well positioned to capitalize on the growth opportunity associated with our differentiated multi-market approach. Ouster achieved strong growth in the first quarter, delivering over $17 million in revenue, including $6.4 million in revenues from Velodyne and booking $33 million in business from new and existing customers. Further, we shipped over 3,000 Ouster OS and Velodyne lidar sensors to customers worldwide. Our new software solutions business for Ouster Gemini and BlueCity drove expanded deals and new customer adoption within the smart infrastructure vertical.

Over the course of the first quarter, our team has been intently focused on realigning our cost structure, streamlining manufacturing and delivering on our product road map in order to build a competitive go-forward enterprise. We’ve identified four strategic priorities for the business in 2023 that we plan to update on each quarter: one, drive new business through targeted sales approach to deliver near-term growth. Two, execute on the Digital lidar road map for OS and DF-Series to expand our serviceable market. Three, develop a robust software ecosystem to accelerate lidar adoption, and four, build a financially strong business to support our long-term growth and deliver value to shareholders. We expanded sales of our new REV7 sensors powered by our next-generation L3 chip, shipping sensors to over 110 customers in the first quarter of 2023, including warehouse automation customers, like Vecna Robotics, Cyngn and Paleo as well as a number of large industrial trucking, bus and mining equipment OEMs. I am also excited to report that earlier today, we announced that Ouster was awarded a production win to be the exclusive supplier of long-range lidar promotional all-electric IONIQ 5 -based robotaxis.

The serial production agreement will see Ouster Supply Motional with our VLS-128 sensors through 2026. Motional is a leading AV company with large-scale deployments and strong commercial partnerships, and I’m thrilled to partner with them. I see digital lidar as the end of state technology for lidar, an approach that continues to be reinforced by broad commercial traction and direct customer feedback. By reducing the components of an analog system and integrating that complexity onto a powerful custom silicon chip that tracks with Moore’s Law, we can continue to drive significant performance gains with each chip tape-out without redesigning our products from the ground up. This also allows us to leverage economies of scale across our digital products and to quickly scale up manufacturing given our simplified architecture, while simultaneously marching down the cost curve faster than our analog peers.

Our REV7 OS sensor suite powered by the L3 chip, improved our overall competitiveness across markets and doubled our collective serviceable obtainable market or SOM, cementing our position as an industry leader for high-performance lidar. With REV7 sales, production and shipments now ramping, our engineering team is working on the next-generation custom silicon to power our OS sensors, the L4 chip, which is expected to tape out later this year. This is the power of digital lidar, continuous improvements that support new and existing customers across ever-expanding use cases and end markets. I look forward to providing the market with more information on our OS sensor roadmap as we move through the rest of the year. We are also on track to deliver early B samples of our solid-state digital flash or DF sensors, which are expected to be sampled by automotive customers for the first time in the second half of this year.

These early B samples represent the final form factor for our DF sensors for high-volume series production automotive programs. This is a critical milestone on our automotive roadmap and in our commercial engagements with automakers, including our strategic OEM partner. We will mature our B samples over time by replacing our current silicon chip, Godzilla, with our next-generation silicon, the Chronos chip. With Godzilla, our DF sensor is already operational today, producing rich point cloud data at long range and high resolution. The state-of-the-art Chronos chip will take our DF sensors to the next level, targeting improved performance across the board, including resolution, power efficiency, memory, dynamic range and detection accuracy. As the backbone of Ouster’s DF Series, the Chronos chip is designed to meet ASIL-B, automotive functional safety requirements according to ISO 26262 and AEC-Q100 automotive qualifications.

We intend to tape out the Chronos chip later this year and to integrate the chip into the first sample units early next year. I cannot wait to demonstrate the performance, cost and flexibility advantage of the DF product line in the second half of this year. Turning to our new solutions business built on our software offerings, Ouster Gemini and BlueCity, we’re seeing a fantastic customer response to the combination of our digital lidar hardware, including the OSDome combined with our new software solutions. As part of our plans to unify our software solutions for the smart infrastructure vertical, BlueCity will be underpinned by Ouster Gemini to add OS sensor compatibility, more features and better overall performance to BlueCity customers.

We currently have hundreds of active smart infrastructure deployments around the world for intelligent transportation systems, crowd and retail analytics and security monitoring. Each of these deployments presents an opportunity for our software, and we are also partnering with new system integrators to accelerate the deployment of our products into these markets. Ouster lidar will be included in six of the smart grant program deployments that we were awarded earlier this year as part of the funding provided within the US infrastructure bill. With millions of signalized intersections around the world and the global market for end system security cameras already estimated at $32 billion, there is a multibillion dollar market opportunity for lidar and smart infrastructure that Ouster is poised to capture.

Capturing a large and growing market for lidar requires more than high-performance competitive products. It requires a financially strong business that can support our long-term growth and deliver value to stockholders. Starting with immediate initiatives to support the ongoing integration, we are now targeting annualized merger cost synergies of $80 million to $85 million. These cost savings, including already $50 million on an annualized basis in the first quarter of 2023, combined with strong bookings and rebounded quarter-on-quarter average selling prices, position us well on a go-forward basis. We continue to identify new synergies and look forward to providing the market with a thoughtful and credible business model, following integration later this year.

As part of Ouster’s outsourced manufacturing strategy, we completed the transition of the VLP-16 sensors to Fabrinet in Thailand in the first quarter. We’re also on track to fully transition the VLP-32 by the end of the second quarter and VLS-128 by the end of this year. In addition to our ongoing efforts to strengthen the overall business and catalyze new growth, Ouster is also taking steps to enforce its intellectual property and ensure fair competition in the market. In April, we filed the patent infringement complaint with the US International Trade Commission against the Chinese lidar maker, Hesai. We also filed the patent infringement complaint against Hesai in the US District Court for the District of Delaware, seeking an injunction and monetary damages.

Hesai had multiple patent infringement claims filed against it, while Ouster holds one of the largest patent families in the latter industry and has successfully enforced and defended its patent portfolio previously. We intend to vigorously enforce our patents until the infringing products are barred. And with that, I’ll turn it over to our CFO, Mark Weinswig, to provide more context on our financial results for the first quarter and outlook for the second quarter as well as provide further details on our near-term integration progress.

Mark Weinswig: Thank you, Angus, and good afternoon, everyone. We made significant progress this quarter towards completing our merger integration efforts and realigning Ouster’s business model with our expected growth trajectory. Further, we saw increasing customer demand for our industry-leading REV7 sensors, driving strong bookings in the first quarter and a rebound in average selling prices over the fourth quarter of 2022. Starting off with our first quarter 2023 results, we recognized a record $17.2 million in revenue, which includes $6.4 million in revenue from Velodyne product sales since the closing of the merger on February 10, 2023. Industrial and robotics customers drove the majority of our revenue in the first quarter, accounting for approximately 60% of our sales, closely followed by sales in the automotive vertical.

This includes multiple large shipments for warehouse automation and material handling vehicles, autonomous shuttles and ground and aerial mapping applications. To provide additional color, we plan to report quarterly bookings, which we define as binding contract orders received from customers during the period. In the first quarter, we booked $33 million in business with new and existing customers. This represents a book-to-bill ratio of approximately 1.9% in the first quarter of 2023. As you may recall, we booked $70 million of business in fiscal 2022. This commercial traction is driven by increased demand for our REV7 sensors, which more than doubles our serviceable market by opening up new opportunities and increases our overall competitiveness.

We shipped over 3,000 sensors in the first quarter, a 95% increase over the first quarter of 2022, inclusive of Velodyne product shipments after the merger. We also shipped our new REV7 sensors to over 110 customers in the first quarter of 2023, up from 29 customers in the fourth quarter of 2022. We believe Ouster is in a strong position as we move through 2023 with the most performant family of sensors on the market over 850 customers across over 50 countries and a strong balance sheet with $257 million in cash, cash equivalents and short-term investments as of March 31, 2023. Ouster saw lower gross margins in the first quarter of 2023, recording a negative 2% gross margin. These lower gross margin levels incorporated certain non-recurring or unusual items, including excess and obsolete expenses and purchase commitment losses of $3.6 million associated with the consolidation of product lines and transitioning manufacturing from the REV6 to REV7 OS sensors.

Ouster’s non-GAAP gross margins were 25% in the first quarter of 2023. Given the extraordinary nature of integration-related activities over the next few quarters, we plan to break out merger integration product transition and other non-recurring expenses in an effort to provide a clear delineation between non-recurring or unusual impacts and the fundamentals of the business to help baseline future operating performance. Despite these near-term impacts, we were bolstered by increasing demand and higher ASPs for our REV7 sensors in the first quarter of 2023, leading to a quarter-on-quarter rebound in Ouster’s ASPs from approximately 3,600 per sensor in the fourth quarter of 2022 to approximately 5,700 in the first quarter of 2023. The significant improvement in our ASPs over the prior quarter illustrate the value of our next-generation sensor and the ability to demand a premium price in the market.

On our goal to expand long-term gross margins, we made significant headway in our efforts to transition all Velodyne sensor lines to an outsourced manufacturer in Thailand. We completed the full transition of the VLP sensor in the first quarter. We remain on track to transition the VLP-32 by the end of the second quarter of 2023 and the VOS-128 by the end of the year. This outsourced manufacturing strategy is critical to help us meet customer demand and reduce costs. The combination of our accelerated time line to outsource the manufacturing of all Velodyne products as well as the increasing demand for our high-performance REV7 sensors provide us with a road map for improved gross margins in the second half of 2023. Turning to our merger integration activities.

We have taken significant steps to achieve the cost synergies necessary to build a business that aligns our cost structure with the lighter industry’s estimated growth trajectory. Exiting the first quarter, we reduced our annual run rate costs by over $50 million baseline against the stand-alone cost structures of the two companies as of the third quarter of 2022. These implemented cost reductions primarily focus on duplicative R&D programs, general and administrative activities and the creation of a joint operations team. Merger integration activities included an announced reduction in force that impacted approximately 190 employees as of the end of the first quarter and resulted in a one-time cash expense of approximately $10 million. We are now on track to exceed our previously announced cost synergies target of $75 million, increasing our estimate to between $80 million and $85 million in annualized cost savings exiting the fourth quarter of 2023.

We expect these efforts to acquire up to an additional $3 million in one-time cash expenses. Our success in realizing these cost savings gives us confidence that we can make further improvements to our cost structure. By our third quarter earnings call, once the key integration activities are completed, we expect to present a long-term business plan for the business as well as greater detail on our combined company cost structure on a go-forward basis. We are working to position Ouster for long-term success and are taking the necessary steps to grow top line revenues while also containing costs. We made significant progress in the first quarter, and we’ll continue to update the market on future activities as we work through the integration and develop our long-term plan.

Now turning to guidance. For the second quarter of 2023, Ouster is targeting between $18 million and $20 million in revenue, which will include sales of all combined company products for the entire period. Similar to the first quarter, we expect the second quarter of 2023 to experience continued margin pressure due to the merger integration work, ongoing efforts to outsource manufacturing for Velodyne lidar sensors as well as the manufacturing transition from the REV 6 OS sensors. That said, as we continue to make progress on these activities, we do expect our GAAP gross margins and our non-GAAP gross margins to start to converge in the second half of the year. Ultimately, our financial results need to speak for themselves. We believe we have the right technology and diversified market approach but must put in place a business model that is both resilient and competitive and puts us on a path towards profitability.

We remain confident in our long-term outlook. And with that, I would like to turn the call back over to Angus.

Angus Pacala: Thanks, Mark. Just about every automotive and industrial OEM, autonomy upstart and transportation expert agrees that Lidar is critical for the future of automation and smart technologies. Ouster has an incredible team, a diverse set of over 850 customers and an exciting product road map that is solidifying our position as a long-term market leader. Our scale first-mover status cash position and especially our technology gives us significant competitive advantage in this maturing industry. And with that, I’d like to open it for Q&A.

Q&A Session

Operator: Our next question comes from the line of Tristan Gerra from Baird. Please go ahead.

Operator: Our next question comes from the line of Brian Dobson from Chardan Capital Markets. Please go ahead.

Operator: Our next question comes from the line of Kevin Garrigan from WestPark Capital. Please go ahead.

Operator: Our next question comes from the line of Richard Shannon from Craig-Hallum Capital Group. Please go ahead.

Operator: Our next question comes from the line of Itay Michaeli from Citi. Please go ahead.

Operator: Our final question comes from the line of Andres Sheppard from Cantor Fitzgerald. Please go ahead.

Operator: And this does conclude our question-and-answer session. I’d like to turn the conference back over to Angus Pacala, for closing remarks.

Angus Pacala: Thanks. And I want to thank everyone for spending the time to get on the call and asking questions. And with that, I’ll sign off. Thank you all.

Operator: Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time.