Berkshire Grey, Inc.

Good morning and welcome to the Berkshire Gray Q2 2022 earnings conference call. Today, all participants will be in a listen-only mode. Should you need assistance, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. If you would like to withdraw your question, please press star then 2. Please note that today's event is being recorded. At this time, I would like to turn the conference over to Sarah Buda, Vice President, Investor Relations. Please go ahead.

Great. Thank you. Good morning, everybody, and thank you for joining Berkshire Gray's second quarter 2022 earnings conference call. Earlier today, we issued a press release announcing our financial results. The release is available on our investor relations website at ir.berkshiregray.com. Leading today's discussion will be Berkshire Gray's founder and chief executive officer, Tom Wagner, and our chief financial officer, Mark Fidler. Following management's prepared remarks, we will open up the call to questions. Before we get started, we would like to inform you that certain statements made during this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Future operating performance and financial results of the business may differ materially from those expressed or implied in any forward-looking statements provided on this conference call due to various uncertainties and risk factors. Information concerning these uncertainties and risk factors is contained in our filings with the SEC. Forward-looking statements included on this call are based on information currently available to us and represent the company's current view as of the date these statements are made. We do not commit to update these statements. As a reminder, we will be referring to some non-GAAP financial measures during today's call. A detailed reconciliation of GAAP and non-GAAP measures can be found in our earnings press release today, which will be furnished to the SEC and is available now on our IR website. These non-GAAP measures are an addition and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP and should not be considered as an alternative to any performance measures derived in accordance with GAAP. With that, I'll turn the call over to Tom Wagner, our CEO.

Thank you, Sarah. Good morning, everyone. Welcome to our second quarter 2022 earnings call. Today, Mark and I are going to update you on our quarterly performance, our operational execution, our long-term strategic alignment with customers, and the continued favorable macro environment driving the need for automation. First, let's talk about the quarter. In the second quarter, we delivered revenue of over $23 million, growth of almost $19 million year over year, and well ahead of expectations. Through July, we secured $23 million in new orders this year, of which approximately $20 million were secured since our last earnings call. We've made good progress with winning new orders and expect more to come in the second half, which is consistent with what we've shared previously. As we increase our deployment activities and grow our order book, we are focused on execution. During the second quarter, we actively deployed our solutions with eight customers across 16 sites throughout the United States and Canada. Deployments will continue to scale in the second half. We continue to prove ourselves and our technology is driving tangible value for customers. In fact, most of the orders we've received this year are follow-on orders with existing customers. Our deployment teams are executing and our technology continues to exceed customer expectations, which is important for us to meet our growth goals. Continuing the execution theme, we're making progress on improving product margins. Mark will provide more color shortly, but we have achieved cost improvements for all of our products, which will be realized for deployments in 2023. The end result is that we're well positioned for overall significant gross margin improvement next year and beyond. Now I'd like to discuss a strategic matter involving one of our major customers, FedEx. As many of you know, we've been deploying our RPSI solution at FedEx sites for a couple of years now. The RPSI solution, which stands for Robotic Product Sortation and Identification, takes in small packages like those produced by e-commerce, and with one system, singulates, scans, and sorts these items so they can make their way through the FedEx network. Our RPSI handles everything from padded mailers to boxes to tubes to envelopes to polybags with one system. Based on the success of RPSI last year, we have also secured orders for other BG technology solutions within different operating units at FedEx. Due to our technology and execution, we built a foundation of trust and partnership with FedEx. Last week, we announced a significant expansion of this important relationship. First, we secured an order from FedEx to develop a new AI robotic automation solution to help improve the efficiency of their package handling operations globally. This order means we will build on our technology platform and create a new incarnation of these technologies embodied in a new system. Most importantly, the new system will address a significant need, as we believe there is no other solution available today to automate this process. Once the initial development program is complete, we expect it will lead to additional commercial orders. Further, the solution can be sold to many others, since it addresses an issue that is commonplace for retailers and logistics companies alike. In fact, we estimate that there's a multi-billion dollar global market for this application alone. So by doing this work with FedEx, we build on our relationship and create a new differentiated solution for them while expanding our market opportunity over the long term. Because this arrangement is very strategic in nature, we also entered into an agreement to grant FedEx a warrant to purchase Berkshire Gray common stock. Specifically, Berkshire Gray has granted FedEx a warrant to purchase approximately 25 million shares of our common stock, which vests incrementally. The full vesting of all 25 million shares occurs upon the ordering of or payment for at least $200 million of our goods and services prior to December 31st, 2025. You can refer to our SEC filings on August 2nd for the details. Finally, last week, we also announced that we in FedEx intend to finalize a master system purchase agreement this year, which will streamline and expedite the procurement process for Berkshire Gray solutions across all FedEx operating companies globally. Having this in place can potentially accelerate our follow-on order process. As evidence of the importance of our relationship to FedEx, John Smith, CEO of FedEx Ground, commented about our announcement on LinkedIn, stating, FedEx announced it's extending its strategic partnership with Berkshire Gray to develop extensive AI robotic automation solutions throughout all stages of the global supply chain. He also went on to state, I'm especially excited to continue the work that initially began at FedEx Ground, integrating robotics into our operations to safely and effectively integrate sort the increasing number of small packages entering our network through e-commerce. John's commentary underscores the value of Berkshire Gray to their organization, and we're delighted with the strong relationship between our companies. As we stated on our last earnings call, one of our goals is to build on our success of repeat orders with customers and move our customers into long-term strategic relationships. The agreements with FedEx certainly marked progress in achieving that goal, and we continue to work on others. Now I'd like to talk about our perspective on the current macro environment. As we've described, we make industry-leading AI-enabled robotic systems that fill e-commerce and retail orders and handle e-commerce packages as they make their way to your door. We automate difficult, labor-intensive tasks within fulfillment operations, including picking, sorting, packing, moving, and organizing. Due to our patented, differentiated hardware and software, we believe respectfully that we automate these tasks better than any other company in the industry. Our solutions deliver upstream and downstream operational efficiencies, broad skew coverage, maximum throughput, and high accuracy. In fact, one customer recently commented that they were able to more than triple their productivity per square foot by implementing BG in their distribution centers. We deliver the value and return on investment our customers need. The follow-on orders we've received from customers affirm this. When it comes to the macros, the environment continues to be favorable. Our customers continue to be under tremendous pressure to meet consumer expectations and maintain their competitive advantage. One only needs to touch the cell phone in one's pocket to relate to consumer expectations. We, as consumers, demand fast fulfillment of orders, fast and efficient shipping, and if we go to a retail store, we want to find the items we're looking for in the store. Now, when it comes to competitive advantage for our customers, recall nearly every retailer and e-commerce company competes for consumer dollars. At Berkshire Gray, we offer operational improvements and competitive advantage. In parallel, when it comes to staffing warehouse operations, it continues to be hard to hire and retain people. Our automation allows our customers to redeploy existing employees to perform higher value-add functions, which further improves operational costs, particularly when inflationary pressures persist. In short, the tailwinds for our business remain strong. As such, our commercial teams are busy as ever working with existing customers and prospects to offer real solutions to real problems. In summary, we're delighted with our Q2 revenue growth, recent orders, and our strategic agreements with FedEx. The macro environment continues to be strong, and we continue to execute operationally. We are well positioned for growth. Now let me turn it over to Mark to give some details on the quarter and our outlook for the year.

Thanks, Tom, and good morning, everyone. I'd like to start off by discussing the results of our second quarter. Revenue for the quarter was $23. million, an increase of over 400% year-over-year and well ahead of consensus estimates. Deployments with customers ramped substantially in the second quarter, and since we've become more efficient with our deployment processes as we've installed more systems, we've been able to realize revenue on some projects sooner than anticipated. These efficiency improvements are an important part of our efforts to improve gross margins, which I will address further shortly. Moving to orders, since our last earnings call, we secured new orders of $20 million through July, including the new order from FedEx that Tom talked about, as well as orders from other customers. We expect to realize revenue for that order over the next 12 months or so. Clearly, we're excited about the overall strategic relationship we've established with FedEx and the growth opportunity it represents. Our backlog is approximately $100 million, including the orders we received in July. So far this year, most of the orders represent follow-on orders from existing customers. Our commercial teams continue to be very busy, actively engaged with existing customers and new prospects, and we expect orders in the second half to be higher than the first half, as previously communicated. Moving to gross margin, we continue to implement the margin improvement initiatives we have previously outlined. We're seeing three positive trends with these efforts. First, our mature products, which were already generating positive margins, are improving further as we realize efficiencies with each new deployment. Quite simply, we are reducing deployment costs with each new site. Second, we're making excellent progress on all of our product cost reduction initiatives. Let me highlight two examples. As you'll recall, one of our new products we announced late last year realized negative margins, which impacted overall gross margins last year and this year. We recently implemented several design changes and improved deployment times that will result in lowering this product's overall cost by 10% so far, and we expect further improvements this year as well, which will all be in place for deployments for next year. Another example relates to our most recently released product, which is being deployed for the first time this year. We have already implemented design changes and have improved deployment time substantially, which will reduce costs by over 20% for those systems to be deployed next year. We continue to make progress reducing the cost of all of our products and we're encouraged by our efforts to date. Finally, we've been raising prices for future orders for many of our products, which will also help bolster margins as well. So we're pleased with the progress we're making to improve margins in the future. While overall gross margin is still expected to be slightly negative for 2022, we're on plan to achieve overall positive gross margin in 2023 and beyond. And we remain confident in our ability to achieve our run rate operating metrics of approximately 50% gross margins in the long term. Moving to operating expenses, total OpEx for the quarter was $28.5 million excluding stock-based compensation. As we've matured as a company, we've become more efficient as an organization Additionally, we recently have taken some other measures to reduce our cash burn. We expect all of these initiatives will reduce our annualized cash burn by about $20 million, and we will start to see that benefit toward the end of the third quarter. Adjusted EBITDA, which is defined as loss from operations, adjusted primarily for depreciation, stock comp expense, and changes in the fair value of warrants, was negative $30.3 million in the second quarter, a modest improvement from Q1. A reconciliation of our net loss to adjusted EBITDA is included in our price release. On the balance sheet, we ended the quarter with over $108 million of cash and no debt. Looking ahead, we remain confident in our growth trajectory. As mentioned since our last call, we secured $20 million in orders, and with the July orders, we have a backlog of $100 million, providing good visibility for revenue. Included in that backlog is the remaining deployment of a large system with targets, one of our strategic customers. We have been working with them over the last several months to expand the scope of our project, which has the potential to increase our opportunity with them, not just on this existing project, but for new facilities as well. As a result of these discussions, the current project schedule has shifted, which will have a short-term impact on revenue this year, but has the potential to increase our overall opportunity with them next year and in the future. As such, we're updating our revenue forecast for 2022 to be between $70 and $80 million. We have strong conviction in our growth potential. Our commercial teams are as busy as ever, our pipeline continues to grow, and our recent activities with FedEx and other strategic customers further bolsters our growth prospects. So, to reiterate some key points, we continue to be in strong position to execute. Our technology is proven, in production, and driving tangible ROI for Fortune 100 customers. We continue to expand our commercial relationships. The recent agreements with FedEx is an example of this. Macro tailwinds continue to drive the need for automation. Inflationary pressures exacerbate the need for companies to become more efficient with their processes. And our backlog, combined with our growing pipeline, provides us with either greater conviction about our long-term growth prospects. Now, operator, we'll turn it over for Q&A.

We will now begin the question and answer session. As a reminder, to ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then two.

At this time, we will pause momentarily to assemble our roster.

Today's first question comes from John Walsh with Credit Suisse. Please proceed.

Hi. Good morning, everyone. Morning.

Hey, John.

Hi. I wondered if we can first touch on, I guess since you named this project with Target, can you give us a little bit more around what kind of is pushing this to the right, and then you talk about potential for a larger opportunity. I mean, is this something where we could see similar to how you announced with FedEx over time? Or can you help kind of help us dimensionalize what the opportunity could look like beyond 23? Sure.

Let me actually answer a segment of that and so forth. When it comes to Target, you're aware they've deployed our technology. They feature our mobile systems in one of their recent earnings calls. Another deployment of our technology was slated to start this year in the second half. We are in discussions with them on a change in scope, which means the deployment could be larger long term, but it's not expected to deliver revenue this year as originally anticipated. In general, our work with them is exciting. We appreciate their high-level engagement.

And I would add for sort of the long term, you know, Target has been a very strategic customer for us. As we've talked about on prior calls, that we are working with all of our strategic customers and other customers to, you know, expand relationships. The fact that we've done projects with them already, we've proven the technology with them, We've made the progress that we've made. They've seen our capabilities. These are, you know, we're getting into much deeper conversations with Target and others about what our opportunity with them could be long term. And, you know, the goal is to, as Tom remarked in his comments, to ultimately move folks to long term, you know, relationships. And, you know, so we're right in the middle of that now with Target and with others.

Great. And then maybe one more question around growth. You know, great to see that you've got 14 partners here in the partner alliance. Can you maybe help us understand how that's a lever for growth, maybe targeting more new logos through that partnership alliance? Or, you know, is that also for existing customers as well to scale greater with them?

Sure. The partnership program actually has a few different elements. From a growth perspective, for some of our partnerships, and we have named partners, for instance, like Swisslog, they have their own go-to-market engine, their own customer base where they have established relationships. And for relationships that are like that with Swisslog, then we will do go-to-market sharing and do pursuit and help customers together as a joint activity. And so that expands, if you will, our go-to-market strength and our sales energy. Some of these other partnerships, though, also include things like systems integrators who are helping us to install systems and make them operational and so forth in a cost-effective fashion. And others are Technology Alliance. We've recently mentioned ABB. is an illustration, and we also have some partnerships that are in the WMS and software space. Generally, there's an element of go-to-market in many of those, an element of efficiently deploy solutions in those, and then technology-centric relationships as well, like ABB.

No, that's great. And then maybe one last one for me, and then I'll pass the baton, but just You highlighted some of these cost, well, I guess you'd say cash-saving initiatives, I think to the tune of $20 million annualized reduction to your annual cash burn. You're at $108 million cash, no debt. Any update or view on kind of the capital requirements or needs of the business near term? I know we've been talking about that the last couple of quarters. Thank you.

Yeah, short answer is there's no change. You know, we do expect that we still need to raise capital in order to fully execute our business plan, and we remain confident that when the time comes for us to do that, that we'll be able to do so.

All right. I will pass it along. Thanks for taking the questions.

Thank you. Thank you.

The next question comes from Greg Palm with Greg Hallam Capital Group.

Yeah, thanks. Morning, everyone. Congrats on the continued progress here.

Morning, Greg.

Morning, Greg. I guess starting with the target news, I'm curious, in terms of the change there with the scope, is your understanding that it is a change in the size of the project itself, or is it a change in the number of facilities that they may want to outfit with automation? I'm cognizant of how much you can and can't say, but can you go into a little bit more detail in terms of what actually changed?

It's a little bit of all the above. Again, if we go back to what I said before, which is we've deployed systems with Target. They see what the technology can do. They see the benefit. They see what our capabilities are. As they look to see what the needs are within not only the existing facility in which we're currently deploying, but also with facilities into the future, they're seeing what we could do for them. And that, in turn, is really potentially changing the scope here, both in size and in what it is that we will be doing for them to automate their facilities. So these are all positive, very positive discussions that we're having with Target. And by the way, it's not just with Target that we're doing this. We're doing this with all of our customers with whom we've been working with and had repeat deployments with. As we deploy and we are very successful with the deployments, the customers are actually seeing the benefit. They're ordering more. As evidenced by all the orders that we've had this year so far, almost all of them were repeat orders. And they're also now looking at where else can our technology benefit them throughout their networks.

Understood. And do you imagine that any future orders, deployments, you know, from them would then be under some sort of master purchase agreement or long-term arrangement? Or are they just, you know, holding off for a little bit until, you know, I don't know, you figure things out until you get this, you know, delayed one, you know, out the door?

We're going to continue to work with all of our strategic customers and other customers towards these sort of long-term relationships, whether they're through master purchase agreements or multiple facility rollouts. That's the goal with all of them. We've made progress with the FedEx announcement, and we're continuing to work the others as well. And we expect that over time that we will be successful in that regard.

Got it. Okay. And then shifting to FedEx, I'm curious if you can give us any more, you know, details on, you know, the new product, the new solution that you're working on, you know, with them. It doesn't sound like it's a product line or a solution that you are, you know, fulfilling today. So can you give us, you know, some sense in, you know, what exactly it is? I think you're Tom, you talked about a couple billion dollar TAM. It sounds like it's not just logistics, but maybe it's applicable to your entire customer base. Is that right?

That's right. Greg, the public points, we have an order to develop a new solution. Once it's deployed, we expect that FedEx will be eagerly consuming it as well as it is marketable and addressable to everybody else who does retail and e-com. The underlying problem is a very commonly occurring problem. The other pieces that we've publicly shared is the intent to execute the master system purchase agreement and the warrants and so forth, along with the $200 million in goods and services prior to December 31st, 2025, in order to enable those fully. The details of the new solution and what it automates, I need to keep close hold for the time being.

Okay. And just to be clear, is the $200 million, I mean, do you have line of sight of $200 million of orders for just RPSI orders? meaning that if this new solution that you're working on, if it's deployed successfully, then the $200 million could, you know, grow to some other level over time?

Well, so, yes, of course. The number is we expect to be much greater over the long term with FedEx. The way that we've structured the vesting schedule for the warrants is based on, you know, a $200 million – sort of expectation that that's what's going to be purchased by the end of 2025. Now, what we can say is that the existing products that we sell today to FedEx are likely going to make up the lion's share of that, at least within the next couple of years, because we still have to develop the system under this development agreement. So for at least the next couple of years or so, it's going to be the existing products. that will be sort of credited towards that, if you would.

Okay, and then just last one, just can you quantify development cycle? I mean, are we talking quarters? Are we talking years? How long should we expect for the new product?

Yeah, as I mentioned, we expect to realize revenue under that arrangement over the next 12 months or so.

Okay. Okay. All right. I'll leave it there. Best of luck. Thanks.

Thank you.

Thank you.

As a reminder, if you do have a question, please press star then one. Our next question comes from Andrew Obin with Bank of America.

Hey, guys.

Good morning. Morning, Andrew. Good morning. Just to go back to Target, just to make it clear, you know, investors have a lot of concerns. We've been hearing a lot of things about e-commerce related revenues being pushed out across the industry. And it actually, it sounds that, you know, given the nature of your relationships with your customers, right, that everything you are doing, you're on track, right? Just want to confirm that. your growth trajectory is, in fact, somewhat different from the rest of the industry, given the nature of what you're doing. Is that a fair way of saying it?

Yeah. Andrew, we haven't really heard our customers pausing on their automation plans. Interest is high. Macros are still there. The customers all have that pressure, which is they have to become more efficient and reduce operating costs. We haven't heard our customers pausing.

And just how do you think about it? We had a dinner recently with one of your partners, I guess, and labor costs are hitting a 40-year high. At the same time, I think it does take just the inertia for these companies to implement these projects. It seems like well over 18 months, 18, 24 months to implement something meaningful. You had supply chain issues for the industry earlier. Can you just give us more color how this sort of for lack of a better term, is playing out in the industry, right? Labor costs continue to hit multi-decade high. Probably you need more automation, probably more picking product. Yet, you know, there's this natural delay as to how these organizations implement these large-scale solutions and changes to how they do business. And as I said, if you can throw in supply chain in there as well. Thanks.

Yeah. If I understand your question, Andrew, you know, I think, yes, the inflationary pressures from, you know, due to labor as well as labor shortages have really, you know, we've seen what it's been doing to the bottom line for a lot of these businesses in the industry. And this is the reason why they haven't paused their automation plans. And while it does take time for them to plan, particularly on a large scale, the rollout of the technology, you know, from what we've seen, they're still doing that. And I think, you know, sort of the proof points are the expanded kind of increased conversations that we're having with Target around their projects, what we've recently sort of signed with FedEx, and not just the products that we're selling to them now, but addressing a real problem, a real need of theirs. You know, the repeat orders that we're getting from really all of our customers, including strategics, So I think, you know, those are kind of the proof points that they're still feeling the pressures that we've been talking about for a couple of years now, even before COVID. So these are the kinds of things, you know, and they're all thinking big. They're all thinking big, and we're right there with them. And it takes time to plan these things out, you know, as we've seen, like, with what we're talking with Target. But we haven't seen a pause, and, you know, so we expect that things will continue to accelerate over time.

And just the last question for me, the cash impact of this push out of Target. So is there a working capital associated with less deployment at Target this year? Is that part of $20 million in cash burn savings? And then for next year, as the scope of the project seems like there is a chance that it will increase materially, does that mean that you will require more working capital next year to just serve as this large opportunity? Thanks.

So the short answer is no. We typically have favorable payment terms from our customers, Target included, where we're, you know, receiving significant upfront payments. You know, sometimes on the order of 30% to 50% of the total project can be paid upfront. So we typically have not seen nor do we expect large working capital requirements to execute projects.

Great. Thanks so much.

Thank you. Thank you.

At this time, we are showing no further questioners in the queue, and this concludes our question and answer session. At this time, I would like to turn the conference back over to Tom Wagner for any closing remarks.

Thank you, everybody, for spending time with us today. We'll talk to you again soon.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.