Ouster, Inc. (NYSE:OUST) Q4 2022 Earnings Call Transcript

Ouster, Inc. (NYSE:OUST) Q4 2022 Earnings Call Transcript March 23, 2023

Operator: Hello and welcome everyone to Ouster’s Fourth Quarter 2022 Earnings Conference Call. And just a reminder, today’s 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 Ms. Sarah Ewing, Director of Investor Relations. Sarah, please go ahead.

Sarah Ewing: Thank you and good afternoon, everyone. Thank you for joining us for our 2022 fourth 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 fourth quarter and fiscal year 2022 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. Finally, please be advised that we will only cover historical Ouster financial results as well as forward-looking statements for the combined company. We will not report on nor provide standalone results for Velodyne. I’d now like to turn the call over to Angus.

Angus Pacala: Good afternoon, everyone and thank you for joining us today. To start, I want to recap Ouster’s mission to improve quality of life by building safer, more efficient assistance, automation and autonomy technology for diverse end markets. We aim to do this by evolving from a market leading lidar manufacturer to a category-defining autonomy provider through delivering best-in-class digital lidar hardware that spans markets, creating a robust software ecosystem to accelerate lidar adoption and deepen customer relationships and releasing vertical-specific autonomy solutions, all of which increases Ouster’s value to customers and shareholders. We made meaningful strides towards this goal in 2022, particularly in the fourth quarter.

Last year, we released our first A samples for the solid-state DF series, introduced the industrial OS sensor lineup for high-volume production programs and launched the most performance sensor suite on the market, our new REV7 OS sensors powered by the L3 chip, which increases our competitiveness across each of our target markets. Even more, we built and pre-released our first subscription software, Ouster Gemini, a cloud-backed digital lidar perception platform for smart infrastructure applications, which will expand and accelerate opportunities for digital lidar. As a result of these product developments and in combination with our multiyear customer agreements, Ouster delivered nearly $11 million in revenue in the fourth quarter of 2022 with 17% gross margins and achieved our full year 2022 guidance with $41 million in revenue and 27% in gross margins.

We sold a record of over 2,950 sensors in the fourth quarter and over 8,650 sensors in 2022, bringing our total number to more than 18,500 units shipped to-date worldwide. Furthermore, we booked $70 million in business in 2022. Finally, we announced our merger with Velodyne in the fourth quarter, which we completed on February 10, 2023 ahead of our initial timeline. As one consolidated company, we have an even stronger team, a healthy balance sheet, new channel partners and a wide selection of positive margin products to serve a diverse set of customers that position us to win more deals than ever before. We expect our innovative digital lidar roadmap amplified by exciting new software solutions to further expand our serviceable market and catalyze growth across the business.

In addition to Ouster’s digital lidar, OS and DF centers, we will continue to manufacture and support the VLP-16, VLP-32 and the VLS-128 product lines. As we continue to support existing customers using the Velodyne products, which bolsters our revenue base, we believe our digital approach is the end state for lidar due to its simplified architecture, superior price-to-performance ratio and alignment with Moore’s Law, which ultimately offers a longer term advantage for customers. We will continue to focus and invest R&D in our digital lidar roadmap, along with the Ouster Gemini and BlueCity software to drive product adoption and new high-margin revenue streams. Over time, we aim to transition customers to exclusively digital products. As part of the ongoing integration, Ouster also announced a new management team and Board, inclusive of executives and directors from both companies.

We brought on Velodyne’s CFO, Mark Weinswig, to lead finance at Ouster and promoted Ouster’s Deputy GC, Megan Chung, to General Counsel. Each company designated 4 directors to the Board, all with valuable experience and perspective to offer the company, including former Velodyne CEO, Ted Tewksbury, who will lead the Board as Executive Chairman. We aim to form a management team and Board that not only understands our products, our team and our history, but also has experience in growing a public company in a complex and competitive market. I am excited to work with this strong team to scale the development of digital lidar and evolve Ouster from a market-leading lidar manufacturer to a category-defining autonomy provider. Turning to merger activities, we are currently focused on immediate initiatives to support the ongoing integration and achieve announced cost synergies.

Prior to merging, Velodyne had started the process of outsourcing the manufacturing of its products to Fabrinet, a contract manufacturer in Thailand, to bring meaningful improvements to the cost structure. We have accelerated these efforts as a result of the merger and are on track to complete the transition of all maintained product lines this year, starting with the VLP-16 sensors in Q1, the VLP-32 in Q2 and the VLS-128 by the end of the year. As products are successfully transitioned, we remain focused on improving yields and quality and optimizing BOM cost, with the goal of improving the margin structure of the Velodyne sensors. Immediately after closing the merger, we took action to integrate our sales organization and engineering teams to both support existing Velodyne customers and execute on our strategy for our digital lidar hardware and software roadmaps.

We developed a plan to integrate the Ouster Gemini and BlueCity Smart Infrastructure Software Solutions under a single umbrella, which is already underway. Additionally, we are streamlining our G&A and IT operations under consolidated team and platform to realize a cost-efficient structure to drive value creation for Ouster and its shareholders. Following the integration, we expect to retain approximately 350 employees. The new Ouster is a lidar powerhouse, offering a comprehensive suite of incredible lidar sensors, two novel smart infrastructure software solutions, a comprehensive patent portfolio spanning analog and digital lidar and global commercial reach with over 850 customers spanning the automotive, industrial robotics and smart infrastructure industries in approximately 50 countries.

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Ouster has three strategic priorities for 2023: execute on our digital lidar roadmap; develop a robust software ecosystem to accelerate lidar adoption; and build a financially strong business to support our long-term growth and deliver value to shareholders. Our differentiated digital lidar technology supports a uniquely diversified business model with the ability to drive near and long-term revenue growth and scale across multiple markets. In the fourth quarter, we released our new REV7 sensors, the highest performing family of sensors on the market, delivering dramatic improvements in range, precision and accuracy across our entire OS lineup. Our OS0 delivers 1.5x more range and 6x higher resolution than competitors. Our OS1 delivers 2x more range and 4x higher resolution than competitors.

And our OS2 not only achieved a greater than 200 meter range on 10% reflective objects, but now has a maximum range of over 400 meters. Additionally, the OSDome Hemisphere 180-degree field of view delivers 4x higher resolution than competitors. The REV7 sensor suite improves our overall competitiveness across markets, opens up new opportunities and cements our position as the industry leader for high-performance lidar. The early feedback from customers has been extremely positive. We closed new and expanded deals for REV7 sensors shipping to 29 customers in the fourth quarter. We also booked orders with customers such as Cyngn and Vecna for warehouse automation; Parafix for speed enforcement; torque robotics for trucking; and RYSE for aerial drone inspection as well as a major mapping customer, a large European OEM and another European OEM using REV7 on mining trucks.

We believe the REV7 sensors will more than double our serviceable market driven by new opportunities for long-range and mapping applications. As such, we expect REV7 to be a major growth catalyst for Ouster in 2023. Looking forward, we also expect the Digital Flash or DF Series for high-volume series production automotive programs, to also be a major catalyst for growth. We released our first A samples in 2022, which demonstrated that our solid-state digital flash architecture could achieve the stringent performance requirements of the automotive industry at a competitive cost. In the second half of the year, we plan to release final form factor early B samples of our DF sensors. This is a critical milestone on our automotive roadmap and in our commercial engagements with automakers, including our strategic OEM partner.

For the first time, we will be placing DF sensors in OEM hands to represent the final size, shape and performance of the DF product line. I can’t wait to demonstrate the performance, cost and flexibility advantage of the DF product line. Turning to software. Building a robust software ecosystem remains an important part of our product roadmap to catalyze new growth. This includes best-in-class development tools to simplify development for customers as well as our new software solutions business built on Ouster Gemini and BlueCity targeting the smart infrastructure vertical. The market for lidar across smart infrastructure applications is fast and growing, driven by government initiatives to build safer, more sustainable cities by modernizing public infrastructure and transportation systems as well as emerging opportunities for lidar in security and crowd analytics to enhance the guest experience, boost revenue and simplify operations.

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. As lidar technology becomes increasingly prevalent on critical infrastructure across the U.S. from airports and shipping ports to our country’s most populated cities and traffic roadways, Ouster is proud to be one of the few companies offering By American certified centers. To build on this momentum, we recently released the Ouster Gemini Smart Infrastructure Perception Platform and added the BlueCity Traffic Management Solution. With the successful early rollout of Ouster Gemini in the second half of 2022 and after closing deals with more than 10 companies, we officially released Ouster Gemini in January 2023.

A handful of these customers are already using Ouster Gemini in live deployments across the U.S. and Europe to improve retail operations, security and roadway safety. BlueCity is a turnkey lidar-based solution for intelligent transportation systems with over 100 active deployments in 2022. 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 under compatibility, more features and better overall performance to BlueCity customers. With the launch of our game-changing REV7 centers, new software solutions for smart infrastructure applications and early B samples for the DF series as well as key benefits from our merger with Velodyne, including an expanded team, customer base, product portfolio and partner ecosystem, we believe Ouster is more competitive and poised to close exciting new deals in 2023.

In order to position the company for stable, near- and long-term growth, we are building a business model that is both competitive and resilient. I’m happy to introduce Mark Weinswig as our new CFO to lead us through the integration with Velodyne to help us align our cutting-edge technology and market growth with a solid business foundation to support Ouster now and into the future. And with that, I’ll now turn it over to Mark to update on our financial results for the fourth quarter and full year 2022 as well as provide further details on our near-term integration plans.

Mark Weinswig: Thank you, Angus, and good afternoon, everyone. I am excited to be a member of the Ouster management team and look forward to aligning our differentiated digital lidar technology and diversified market approach with a business model that is in line with the lidar industry’s estimated growth trajectory. Starting off with our fourth quarter 2022 results, we recognized nearly $11 million in revenue. Our industrial and robotics customers accounted for a combined 62% of sales in the fourth quarter which included substantial shipments for port automation, material handling vehicles, drone inspection and warehouse automation applications. A key highlight of the quarter was the number of units shipped, reaching a record of 2,950 sensors in Q4, or a 23% increase over the fourth quarter of 2021.

This includes the first commercial shipments of our new REV7 sensors to 29 customers. Further, we shipped sensors to nearly 90 new customers in the fourth quarter of 2022. Ouster is entering 2023 in a great position with the newly released platform over 850 customers worldwide across all of our key markets and a strong balance sheet. Ouster continued to deliver positive gross margins in the fourth quarter of 2022, recording 17% gross margins. Gross margins were lower in the fourth quarter, primarily driven by some large unit volume sales to certain commercial customers with lower ASPs as well as higher expenses associated with the manufacturing transition to the REV7 sensor platform and overhead underutilization from our lower build plan as part of the product transition to the REV7.

We expect to deliver higher margins over time after we complete the Velodyne integration and ramp up our manufacturing of the REV7 sensors. This transition to REV7 is a major catalyst for growth as this suite of sensors more than doubles our serviceable market opening up new opportunities and increasing our overall competitiveness in 2023. Moving on to our full year results. We are very pleased with our progress over the past year. Ouster achieved both our revised revenue and gross margin targets for 2022, recording approximately $41 million in revenue and 27% gross margins for the year. In total, we shipped over 8,650 sensors in 2022, which amounts to over 18,500 sensors shipped to date. Across our target markets, Ouster saw strong traction in the industrial and robotics verticals, accounting for 35% and 34% of our sensors shipped in 2022, respectively, with strong demand for automation technologies across the supply chain continues from mines of farms to shipping ports and warehouses.

The automotive vertical accounted for 22% of sensors shipped primarily from robotaxis, robotrucking, shuttles and buses. Finally, 9% of sensors were shipped to customers in the smart infrastructure vertical in 2022. This remains an area of significant opportunity with over 210 new programs awarded in 2022, representing demand for thousands of sensors, which will be deployed over the coming years as well as with the release of the Ouster Gemini software product in January 2023 and our new BlueCity offering. In 2022, Ouster recorded $70 million in bookings with new and existing customers, demonstrating our growing traction across verticals even in the near-term. Bookings represent binding contract orders from customers, which we believe is a more meaningful metric than strategic customer agreements or SCAs as the bookings metric captures orders from all customers.

Ouster ended 2022 as a leading lidar company amongst our public lidar peer set based on both revenues and gross margins. We believe this momentum is only strengthened by the merger with Velodyne, which showcases Ouster’s maturity in the industry and allows us to build a business model that can sustain near- and long-term growth. Turning to the Velodyne merger integration activities. We are taking strategic steps to achieve the cost synergies that allow us to build a healthy business. The company is well capitalized with a combined approximately $315 million in cash, restricted cash, cash equivalents and short-term investments as of December 31, 2022. We remain on track to exceed previously projected annualized cost synergies of $75 million within 9 months.

The synergy estimate is baselined against the stand-alone cost structures of the two companies as of the third quarter of 2022. We closed the merger with Velodyne on February 10, earlier than expected, and took immediate steps to significantly reduce costs. By the end of the first quarter of 2023, the company expects to have removed approximately $50 million in annual run rate costs compared to the third quarter of 2022. We expect the first phase of integration to require one-time cash costs of approximately $12 million to $14 million with the majority paid by the end of March. These implemented cost reductions primarily focused on duplicative R&D programs, general and administrative activities and the creation of a joint operations team. These activities include a headcount reduction of approximately 200 employees along with the closing of Velodyne’s facility in India.

We expect to retain approximately 350 employees following the completion of our integration efforts. We’re keenly focused on positioning the company for long-term success, and we will continue to identify additional cost synergies as we work through the integration. Through these activities, we are taking the first steps to realign our operating model to build a healthy, scalable business that can deliver value to our shareholders. We look forward to providing further details over the next couple of quarters as we continue to develop and execute on our plan. Going forward, at this time, we plan to only provide quarterly guidance for revenue. For the first quarter of 2023, Ouster is targeting between $15 million and $17 million in revenue. We expect the first quarter to experience some margin pressure due to the merger integration work including the ongoing work to outsource manufacturing for Velodyne sensors as well as the manufacturing transition and start-up costs from the REV6 to REV7 OS sensors.

That said, we remain highly confident in our long-term trajectory and continued traction in the market. With a strong balance sheet, increased scale and new product offerings, we believe 2023 will be a transformational year for this company. And with that, I would like to turn the call back over to Angus.

Angus Pacala: Thank you, Mark. 2023 is going to be a major year for Ouster driven by new hardware and software solutions that we believe will accelerate lidar adoption and the new operating model aimed to put us on a path to profitability in line with our long-term growth plans. lidar is quickly becoming an essential technology on our roads, across our supply chain and throughout our critical infrastructure. Ouster is well positioned with the technology, team and strategic approach to make lidar ubiquitous to build a safer, more efficient future. With that, I’d like to open it up for Q&A.

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Q&A Session

Operator: Thank you, Mr. Pacala. We will take our first question this afternoon from Andres Sheppard at Cantor Fitzgerald.

Andres Sheppard: Hi. Good afternoon, everyone. Congratulations on the quarter and thanks for taking our questions. Maybe to start off, I just wanted to see if you could provide a little more color on gross margins, right? So Q4 margin came in a little bit lower than historical numbers. I realize you don’t provide guidance for 2023, but can you give us a sense of whether this last number is a bit of an outlier or whether we should expect similar gross margins over the €“ in 2023? Thank you.

Angus Pacala: Thank you very much for the question. So looking at the fourth quarter, we did see lower gross margins. It was primarily driven by three areas: number one was higher start-up costs associated with the manufacturing transition from the REV6 to REV7 sensors, which we do believe will deliver higher margins over time. Number two was some large volume, lower ASP deals with key commercial customers; and then number three was a reduced bill plan, which led to lower manufacturing absorption and a reduced operating leverage. Those were some impacts for the fourth quarter. Looking at the first quarter, obviously, we’re going to have some additional opportunities or pressures related to the merger integration with Velodyne.

That will include some ongoing work to outsource manufacturing and for the start-up costs associated with manufacturing those products over in Thailand. We will continue to see some additional manufacturing transition costs associated with the move from the REV6 to REV7 sensors and then potentially some one-time merger-related costs, including items such as purchase accounting step-up relating to inventory. But we do believe that the REV7 sensors will help us drive higher margins as we move through the rest of this year.

Mark Weinswig: Yes. And I would also add that we do expect ASPs to be stabilized back at historic levels, not the lower levels of Q4, and that’s what we’re seeing in Q1. So I think overall, it was absolutely the right call to invest in the REV7 lineup, and there were costs associated with that, that did obviously impact the Q4 margin. But the early response from the REV7 customers, we shipped to 29 customers in the quarter. We’ve had immense positive reaction from those products. And it set us up extremely well looking into 2023 on where we’re going with the business. So just a little helpful context on why we made that investment.

Andres Sheppard: Got it. No, that’s very helpful and insightful. I appreciate that color. Maybe as a quick follow-up. Can you mind just reminding us on your capital needs, right? So the $315 million in liquidity, that includes the merger with Velodyne. And so what does that mean going forward? Do you anticipate there being a need to raise additional capital? Or is that aggregate liquidity sufficient to give you significant runway? Thank you.

Mark Weinswig: As you mentioned, as of December 31, we had a very healthy combined balance sheet if we take into account the cash that we received from the Velodyne merger with roughly $315 million. One of the key things is that we made €“ we took action on day 1 after the merger to reduce our cost structure. We had committed to, as part of the merger, to exceed $75 million in cost synergies. As we mentioned in our prepared remarks, we’ve already removed $50 million exiting the first quarter. There was some one-time cash costs associated with that with about $12 million to $14 million, but we do feel very good about the early-stage success of the integration. We see significant opportunities in the lidar space, and we do believe that our technology and products should enable us to win significant share in the future.