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spk01: Greetings and welcome to the Q2 2023 Septon, Inc. Business Update and Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Huell Hsu, DFO. Thank you, Hugh. You may begin.
spk03: Thank you and welcome to SEPTOM's second quarter 2023 earnings call and business update. With me today are Junpei, co-founder and chief executive officer, and Mitch Ortini, senior vice president of business development. During the call, we may refer to our unaudited GAAP and non-GAAP measures in our earnings release. The non-GAAP financial measures should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. Reconciliations for non-GAAP measures are included in our earnings release. I'd like to remind everyone that comments made in this conference call may include forward-looking statements regarding the company's expected operational and financial performance for future periods. These statements are based on the company's current expectation and are subject to the Safe Harbor Statement. relating to the forward-looking statement contained in our earnings release and the slides that accompany this call. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks, uncertainties, or other factors including those discussed in the earnings release or during today's call and those described in our filings with the US SEC. We're not undertaking any commitments to update these statements as a result of future events, except as required by law. As a quick reminder, this call is being recorded, and you can find the earnings release and slides that accompany this call, as well as the webcast replay of this call, at investors.zeptown.com. Now I'd like to turn the call over to Jun.
spk02: Thank you, Hall, and good afternoon, everyone. Thank you for joining SEPTOM's second quarter 2023 earnings call. We will provide a business update and review our second quarter financial results with you. Starting off, I'm proud to announce that we have delivered a new company record for the quarterly product revenue and gross margin. This quarter, we shipped the highest number of LiDAR units to both of our automotive and the smart infrastructure end customers since our inception. In automotive, we expect our shipment volumes to be more than double for each sequential quarter for the remainder of this year as our OEM customers look to launch the start of production at the end of this year. On smart infrastructure, we're executing our multi-million dollar contract from our largest tolling customer. This is the largest commercial deployment of our LIDARs to date for the tolling application. We have discussed with you our expected growth this year over the past few quarters. This time, I will let the results speak for themselves. Our record-setting quarters reflect the hard work and dedication put forth by our teams executing our current programs. We expect this trend to continue for the remainder of the year as we continue to ramp unit volumes for automotive series production as well as for smart infrastructure projects. On series production execution, we remain on track to fulfill orders for OEM start-up production at the end of this year. We shipped the highest number of pre-production units this quarter in support of our lead OEM program resulting from our continued commercialization efforts to increase our production capacity. This quarter, we internally developed and deployed automated manufacturing equipment to our contract manufacturing partners in order to meet series production order volumes. Automation of our manufacturing processes is an increasing priority for our hardware and software teams as unit volume continues to increase. This quarter, our development efforts have expanded into testing and calibration equipment. LiDAR sensors are highly sophisticated instruments that require the expertise of our engineering teams to maintain the required level of precision in all manufacturing steps. By investing our time and resources, our custom manufacturing solutions are scalable across different products, maximizing production efficiency, and minimizing physical footprint. We remain confident in meeting our production milestones for the remainder of the year. Last quarter, we announced our point cloud processing ASIC that we developed in-house specifically for our LIDARs. This quarter, we completed the engineering validation of this ASIC into our near range NOVA product. We have successfully integrated new ASIC into our NOVA B samples and began shipping units to our lead autonomous ground vehicle OEM customer. We expect our new X90 product line to start shipping with this ASIC by the end of this year. Across our automotive OEM customers, we're seeing increasing interest in perception solutions and we are developing automotive perception software by leveraging our proven smart infrastructure software solutions. LiDAR sensors vary in many different dimensions, from scanning patterns to point cloud density. This has created the need for a plug-and-play solution that can easily integrate into the broader ADAS software stack. In addition, automotive OEMs have the unique challenge of synchronizing multiple sensor types. We're proud to be one of the core building blocks providing valuable input data to help save lives. Please stay tuned for our further progress. Our accomplishments this quarter are certainly worth highlighting, but the record quarters like this one are just the beginning of our company. We will continue to scale our business throughout the remainder of the year. This year, there are a number of automotive programs up for grabs. We believe our extensive LiDAR portfolio of short, medium, and long-range LiDARs in combination with our experience in executing automotive production program positions us to win additional series production awards. With that, I'll turn it over to Mitch for details on our efforts with our customer programs.
spk05: Thank you, Jun. This quarter, our lead OEM production customer revealed the third contracted vehicle model planned to incorporate our LIDAR, and you'll see a few more details in a few days. Recent announcements such as this one has led to accelerated interest from major car OEMs competing in the US market. The race for safe autonomy is really front and center now, especially here in the US market. Outside of China, the U.S. market continues to be the biggest for the Level 2 Plus and Level 3 ADAS feature set. This quarter, we received an RFI from one of the largest automotive OEMs in the world. This RFI was specifically driven by the U.S. arm of this OEM. Another strong indication that the U.S. market competition is pressuring international automakers to consider their U.S. offerings to include LiDAR for their next-gen Level 2 Plus and level three ADAS systems. For our existing RFIs and RFQs, we completed multiple onsite technical reviews this quarter with several top 10 OEMs. Specifically, we are in the final round discussions with what we believe to be the largest open automotive OEM series production award this year. Echoing June's comments earlier, We are uniquely positioned to win because of our experience launching at a North American OEM, General Motors, and our strong partnership with Coedo Manufacturing. Our industry-leading form factor for behind-the-windshield integration, coupled with our multi-year journey down the cost walk path, affords us the opportunity to really be in the final sourcing conversations across multiple OEMs. When we get to this final point in major sourcings, I remain confident that we really have built everything from our technical prowess, to our commercial strategy, to our tier one partnership, the strongest in this industry, to match what these customers are striving for and result in positive outcomes for Septon, for the OEMs, and ultimately, for the consumers that will become safer and more comfortable by these Septon LiDAR enabled features. I'm very hopeful that in the near future, we will be announcing our LiDAR will be used on even more American cars and trucks. On the smart infrastructure side, we had record level shipments to our largest commercial contract in the tolling application, which we believe to be the largest for this type of LiDAR application. In tolling, our LiDAR sensors enable free-flow tolling without the need for human-assisted tolling lanes. Our sensors are also used to measure traffic data and incorporate road usage data for predictive analytic applications like road maintenance optimization. The biggest advantage of why LiDARs work better than cameras is that traffic data can be measured at night and during inclement weather conditions. Further, our LIDAR has the ability to detect the number of axles of vehicles passing through, as well as taking detailed height measurements. These features help systems integrators improve on billing and improve safety in areas where there are height clearance requirements, such as bridges and tunnels. Our LIDARs are currently being deployed across the U.S., and we're in discussions to expand into additional states and countries over the next 6 to 12 months. Finally, I'm happy to report that we recently received our first production order for LiDAR installations across multiple airports in the U.S. This is an emerging application for our products, and we look to share more information with you in future announcements. Next, I'll turn it over to Hall.
spk03: Thank you, Mitch. Starting with our second quarter results, total revenue for the quarter was $2.8 million. an increase of 9% compared to the prior year period and 88% compared to our previous quarter. Product revenue was $2.8 million, a new record for the company, an increase of 92% compared to the prior year period and 123% compared to our previous quarter. Our strong product revenue growth was driven by an increase in our average selling price for commercial deployments and the product mix shift more in favor of smart infrastructure. There was minimal development revenue, which is based on timing of completion on outstanding projects. We achieved record gross margin of positive 15.6% on a gap basis, primarily driven by revenue mix shift between automotive and smart infrastructure customers and fixed cost leverage on a record level of unit shipments. As our sales volume shifts in favor of automotive OEM customers for the remainder of the year, our ASP is expected to decrease as incremental production milestones are met and we begin to sell at production volume prices. As a result, we expect gross margin to decrease in the short term, followed by a rebound as unit volumes grow and economies of scale is achieved. Second quarter gap net loss was $14.2 million or $0.09 per share, basic and diluted. Non-gap net loss was $11.8 million or $0.08 per share, basic and diluted. Second quarter non-gap adjusted EBITDA was negative $12.6 million. As of June 30, 2023, we had available liquidity of approximately $168 million. Total available liquidity consists of approximately $70 million in cash and short-term investments and a commitment to purchase up to $98 million in equity from Lincoln Park Capital.
spk09: And with that, I'd like to open the call for questions.
spk01: Thank you, we will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from Matthew with Maximum Group. Please proceed with your question.
spk07: Hey, thanks for taking my question. I wanted to touch on, you know, you talked about kind of the gross margin dynamics we should expect through the balance of this year. In terms of gross margin scaling back up as automotive volumes ramp up. Are you sort of able to get there on your existing OEM relationship or do you expect you need, you know, more volume from additional wins to sort of get to, you know, sort of high volume expected gross margin? And, you know, to the extent that you could What kind of margin range can we expect at maturity?
spk03: Hey, Matt, thanks for the question. Yeah, the short answer is that, yes, we can get there from our existing contract with GM. Obviously, more units will be helpful. But we do expect to get to the mid-40s gross margin somewhere around 2025-ish.
spk09: It depends on volume, obviously. Got it. Okay. That's helpful.
spk07: And then in terms of the outstanding decisions that you're expecting to be made, I guess, through the balance of this year, can you give us some sense of, you know, Do you feel you have a leading position in some or a number of them? You know, how many are you working towards? Just any more color you could provide on what you're working on today.
spk05: Yeah, Matt, this is Mitch Hortini. So I made some comments on that earlier. So we're in the final round at what we believe to be the biggest automotive opportunity to be sourced this year. Yes, of course, we are hopeful we're in a leading position because of our experience on the General Motors project, working with Detroit OEMs, and our partnership with Coedo. So we're in good shape. And then, yes, we are in, you know, final rounds at multiple OEMs is what I mentioned. And I think... You know, I think the comments are the same there. Everyone values the relationship with Coedo, the technology evolution from our lead program at GM, and we're going to be one of the leaders in this space the next few years.
spk07: Got it. That's helpful. And maybe last question for me on the smart tolling contract that I think we've talked about over the last quarter. I think we talked about there being potential for expanded scope within that contract. It sounds like it's progressing relatively well from your comments, but just curious if there's If there's opportunity for expanding that scope in 2024 or how we should be thinking about timing of that.
spk05: Yeah, good question. We did recently meet with the executives from this lead customer. We only have a small fraction of their available market share, even in the U.S. So we did talk about those expansion opportunities, both in the U.S. And abroad. There's some opportunities in Eastern Europe and Southeast Asia that should be coming in early 2024 as well. So we think that business can be four or five-fold the current contract in the short term.
spk09: Great. Thank you. Thank you.
spk01: At this time, there are no more questions. I would like to turn the floor back over to Huel Zhu for closing comments.
spk03: Actually, it looks like there's a question.
spk01: Apologies. They just joined in. All right. Our next question is Richard Sannin with Craig Hallam Capital. Please proceed with your question.
spk06: Well, thanks, guys, for taking my questions. I guess you have to signal a few times to get one in, but I guess I just needed one.
spk03: So glad I could do that, guys.
spk06: Hi. Let's see here. A couple questions from me. I may have missed the comments, and I can't remember if it came from you, Phil, or Mitch, but I think you talked about units doubling here in the next couple of quarters. Was that specific to the automotive, Tam, or to the total business?
spk05: Yeah, I believe it was. Hey, Richard, this is Mitch. I think it was in June's commentary about doubling our automotive volume shipment each sequential quarter the rest of the year. So that's specific to the automotive OEM business that we have.
spk06: Okay. And you've talked about in the past related to your early first major automotive win here. You've talked about kind of having 10,000 plus units in the order book here. Would you update that number? Does that sound like it's going to be more like 20,000, or do you want to update us on how we should think about that number?
spk03: No, we're going to keep that number for now.
spk06: Okay. All right. Fair enough. So you did update us on the yearly guidance number, which I'm assuming you still want to keep in place, I think, 15 to 20. So with a fairly good number for the second quarter in automotive doubling, What does that say about the smart infrastructure business? Was this a large order you're fulfilling in the second quarter and then waiting for some of these new orders to come in, airports or tolling? Or how do we think about the progression of that automotive segment here?
spk03: So we're not changing any guidance for the year, first of all. The smart infrastructure shipments, that is largely from the tolling contract, which we had since the very end of last year. Most of that contract will be shipped this year. I think two-thirds of it will be shipped this year and one-third will be next year. The automotive units are going to increase in Q3 and Q4 as we ramp up the current program. Okay. All right.
spk06: Fair enough. And then you talked about, I think this is the first time you talked about an airport opportunity, which I think I have some familiarity with there. But if you think, you know, especially mentioned relative to your comments about the tolling opportunity, having a four to five X multiplier effect, if you can get more share or get more international business there, how do we think about the total airport opportunity over a couple of years period of time relative to the opportunities you have in tolling? Are they commensurate or one much larger than the other?
spk05: Yeah, good question. I think at the beginning they're commensurate with the tolling application. There's probably one to two dozen major airports that are strongly considering adopting LIDAR technology, but then there's probably also a dozen applications within the airport itself. So it's going to start off in the few thousand unit range here at the beginning.
spk06: Okay. Fair enough then. One last big picture question for me just related to your large automotive customer, GM. I think there's a well-known contract out there with another smaller OEM with a public lidar company that's had a delay in deploying its lidar due to some software, you know, somewhere in the system there. I wonder if you could make some comments about how you see General Motors dealing with, you know, the software and integration of all the other sensors. You're coming up with a cohesive system. And to what degree are you seeing any issues that they may be having or seem to avoiding? I think it'd be great to hear, please.
spk05: Sure. Yeah, I think there's a couple different approaches out there amongst the OEMs. One is they do all the sensor fusion and perception software in-house, which is the case for General Motors. Some smaller OEMs opt to buy pieces of the perception software from the sensor providers, like is the case with a few of our competitors. And I do think that that creates a bit of a risk when there are software issues. They can't be solved in-house by the OEM. They have to be solved together with these smaller supplier companies. So I think that's what we've witnessed in that case that you're talking about. In regards to General Motors, Again, they do all of the sensor fusion and perception software in-house, so they have a lot more control, a tighter grip on the end results. So I think that's maybe why you haven't seen similar issues publicly from General Motors.
spk09: Okay. Fair enough. I appreciate all the detail. That is all from me, guys. Thank you very much.
spk01: Thank you. Our next question comes from Gus Richard with Northland. Please proceed with your question.
spk08: Yes, thanks for taking my question. Could you give us the mix between infrastructure and auto in the quarter in terms of revenue?
spk03: Yeah, hi, Gus. This is Hal. The unit mix, it's about two-third, one-third, two-third automotive, one-third smart infrastructure.
spk08: Okay, got it. And then you had a couple site visits. You know, I know your potential customers are going through their process. Can you give us a little bit of a sense of, you know, sort of what they need to do to sort of come to a conclusion and, you know, sort of what do you think the timing of decisions are for the people you're talking to?
spk05: Yeah, that's a good question. Gus, this is Mitch. So the timing for the biggest opportunity is probably the quickest. I would say within the next couple of months there will be a decision. It's quite a lengthy process inside the OEMs. There's nothing unusual this time around. I think we experienced a similar timeline with our initial contract, so we kind of know the process. And again, CoETO is part of this process as well as our preferred Tier 1 partner. Some of the other opportunities could be closer to the end of the year for their decisions. Again, nothing out of the ordinary on the processes.
spk04: These typically take six to 12 months.
spk08: Got it. In terms of your ability to ramp output, do you see any constraints? You know, in the near term, are you getting everything, your ducks in a row, to ramp as your volume increases?
spk05: Yeah, I think we, of course, we've had challenges. That's the fortunate position we're in is we have Coedo helping us with the supply chain. So they're really helping us put everything in order. We've met all the deliveries to the OEM at this point. And, you know, we're not very high on their concerns list. If you look at things like Ultium battery packs, I think those are a lot higher concern than anything like Septon LiDAR.
spk02: Yeah, and because of June here, just to supplement what Mitch said, you know, I did mention that a lot of the engineering effort within the company is is slowly but surely emphasizing the production efficiency, production tooling, manufacturing automation. All of these efforts are actually ongoing and will continue to go as the volume cranks up. So all of those are very fortunate for us to be taken care of. Got it.
spk09: Thank you.
spk02: That's very helpful. I think that's it for me.
spk04: Thanks, Gus.
spk01: Thank you. Now I believe that there are no further questions at this time. I would like to turn the floor back over to Jun P for closing comments.
spk02: Yeah, again, thank you everyone for attending this call. It's quite a meaningful quarter for us and an exciting time for SEPTOM. So as I said, this is just the beginning. There will be more, a lot more to come. So have a great day, everyone. Thank you.
spk01: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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