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spk01: Hello and welcome to the third quarter 2023 Septim, Inc. business update and earnings call. All participants will be in listen-only mode. Should you need assistance, please signal 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. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Holzu, Chief Financial Officer. Please go ahead.
spk07: Thank you and welcome to SEPTOM's third quarter 2023 earnings call and the business update. With me today are Junpei, Co-Founder and the Chief Executive Officer, and Mitch Hortini, Chief Commercial Officer. 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 statements relating to the forward-looking statements containing 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 U.S. SEC. We are 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 the slides that accompany this call, as well as the webcast replay of this call at investors.steptown.com. Now I'd like to turn the call over to Jun.
spk03: Thank you, Hall, and good afternoon, everyone. Thank you for joining SEPTOM's third quarter 2023 earnings call. We will provide you with a business update and review our third quarter financial results with you. Before that, I'd like to congratulate Mish on his promotion to Chief Commercial Officer. He has been a critical part of our business development efforts and we look forward to his continued contributions in his new role. For the second straight quarter, I'm proud to announce that we have delivered a new company record for quarterly product revenue. This quarter, we shipped the highest number of LiDAR units to our automotive end customers as we continue to deliver our milestones to prepare for startup production. For the second straight quarter, we met our internal production targets. We're beginning to see our scale production efforts translate into revenue as we demonstrate our capability to meet demand of our customers. I'm proud to report that we have passed the final software milestone for launch of series production, fully integrating AUTOSAR and cybersecurity software under one of the most rigid set of requirements in the automotive industry. We're proud to be one of the first LiDAR companies in the industry that is series production qualified. While SEPTON stands ready to meet startup production volume requirements, our lead OEM customer has experienced some recent automotive industry headwinds that was publicly known, which resulted in some vehicle launch delays. We're working through these and are confident our efforts in preparing for the anticipated production volume will be fully appreciated in the near future. On the smart infrastructure side, we have seen the smart tolling application flourish with the addition of a new towing operator customer while we continue to fulfill our existing smart towing contracts. In addition, we continue to support application for smart airports in partnership with the indoor labs. We expect these projects to mature into production orders for commercial deployment in the next few months. Moving on to technology, our software development work has become increasingly important matching our hardware development work with our customers. Through extensive collaboration with our automotive OEM customers, our software teams have developed the best-in-class automotive software validation suite for Ethernet-based sensors. In automotive applications where our LiDAR is a key sensor modality, our domain expertise enables plug-and-play software solutions that can integrate into the broader ADAS stack. Our software development capabilities extends our domain expertise to both the manufacturing production line as well as the quality control processes, so we have visibility in all stages of a sensor's lifecycle. As we have discussed in prior quarters, we're continuing to build our business and delivered yet another record-setting quarter for revenue. Septon remains steadfast in pursuing opportunities in automotive industry and remains in good position to win additional series production award with sourcing decisions on the horizon. With that, I'll turn over to Mitch for details on our efforts with customer programs.
spk05: Thank you, Jun. With our lead OEM customer, Septon has continued to deliver on software development. meeting software release milestones, and fine-tuning software validation tools for production readiness. The delay in launch of certain contracted vehicle models was a result of the OEM wanting to fine-tune products at the system and vehicle level. Additionally, our partner, Coedo Manufacturing, has publicly unveiled their automotive manufacturing line in Japan to support the production of our Vista X90 automotive grade behind the windshield LIDAR. Thanks to our continued development and scaling efforts, our LIDARs are ready to go as we await further instructions from our OEM customer on vehicle rollouts and pursue new customer programs. On our RFI and RFQ activity, we remain in the final sourcing discussion for another major OEM's LIDAR sourcing decision for our long range LIDAR. the same as we have reported last quarter. This decision is expected by the end of the year and has been delayed somewhat as a result of macroeconomic headwinds in the automotive industry. We've also entered final sourcing discussions with a major trucking OEM for our short-range LIDAR, with a decision also expected by the end of the year. We hope to share more details in the upcoming months about production sourcing awards. On the smart infrastructure side, as June mentioned, we continue to ship against our largest commercial contract in the tolling application. This quarter, we added a new tolling operator customer, expanding our geographic reach of septon lidars into new U.S. states as well as internationally. We are also happy to announce continued maturity of projects in the airport application with our partner, The Indoor Lab, with design wins at Tampa, New York's JFK, Denver, and San Francisco airports. The initial use case of our LiDAR sensors will be security and passenger traffic management, but we'll be expanding into operations optimization and efficiency improvement for both indoor and outdoor applications. We started shipping sensors to fill these orders this quarter, and we expect several other airports to enter the decision and deployment phases both domestically and internationally in coming quarters. I'll turn it back to Hull now.
spk07: Thank you, Mitch. Starting with our third quarter results, total revenue for the quarter was $3.8 million, an increase of 112% compared to the prior year period and up 38% compared to our previous quarter. Product revenue was $3.8 million. a new record for the company this quarter, an increase of 114% compared to the prior year comparable period, and up 37% compared to our previous quarter. Our strong product revenue growth was driven by an increase in shipment volumes to the automotive OEM customers. There was minimal development revenue this quarter. We achieved a positive gross margin of 13% on a GAAP basis, primarily driven by revenue mix shift between automotive and smart infrastructure customers and fixed cost leverage on a record level of unit shipments. Third quarter gap net loss was $11.3 million, or $0.71 per share, basic and diluted. Non-gap net loss was $9.2 million, or $0.58 per share, basic and diluted. As a reminder, we completed our previously announced 1.410 reverse stock split this quarter, so all historical per share metrics have been adjusted for comparative purposes. Third quarter non-GAAP adjusted EBITDA was negative $9.9 million. As of September 30, 2023, we had approximately $61 million in cash and short-term investments and no debt. As a result of our lead OEM startup production delay, we are revising our four-year guidance to reflect the impact on our business. We now expect our four-year revenue to be between $9 million and $11 million, and we expect our non-GAAP operating expenses for the year to be below $15 million, driven by higher operating efficiencies and increased discipline on expenses. And with that, I'd like to open up the call for questions.
spk01: Thank you very much. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.
spk08: Today's first question comes from Tom Narian with RBC Capital Markets.
spk01: Please go ahead.
spk02: Hi, thanks for taking the question and congrats, Mitch. The first question is on, I guess, the major OEM they called out with the delay there. Just curious, I mean, that OEM has also talked about pushing out their, I think, their EV schedule as well. And I guess the question is just understanding what their ambitions are in light of issues they've been having also with their robo-taxi business and delays there. How convicted are you that that business is just a matter of a delay as opposed to something more serious? That's the first question.
spk05: Yeah, thanks, Tom. This is Mitch. I can speak to that. So we can't get too far out in front of the OEM in terms of details, so we'll defer to them on specific vehicle and feature details for the launch. The information we have now is it's a few months delay. This was indicated in GM's earnings release on October 24th. They talked a little bit about the new software organization led by Michael Abbott and the fact that they're going to be doing some software fine-tuning at the vehicle and system level.
spk04: And we've reflected that in our Q4 revenue update today.
spk07: Tom, this is Hal, just to add to answer your question. You're asking how committed we are in terms of that program. from Septon's point of view, we are very committed to supporting GM in that program. So nothing on that has changed.
spk02: Okay. And there's, I mean, there's no indication on your end that there was a risk to that. You know, it's more of a delay is the point, not a cancel, not like an about phase completely, right?
spk03: Yeah, it's true here. That is correct. And you can refer to GM's
spk02: earnings call transcript for that it's really meant to be a delay yes okay and then the other OEM Mitch you talked about any anything just to give a sense of what order of magnitude or anything we can understand about about that OEM you know potential there
spk05: Yeah, it's relatively the same size as our initial, maybe even bigger than our initial OEM series production win. We advanced even further through the process through the quarter. I indicated there's been some small delays on the final decision because of some of the headwinds out in the market that you're aware of.
spk04: But we still expect a favorable decision before the end of this year.
spk02: Okay. And my last one, you know, on that macroeconomic backdrop, you know, obviously EV slowdown and there is a narrative that OEMs might, you know, if the price mix falls in addition with higher labor costs, that they may try to reduce content per vehicle. What is your sense of the appetite for, you know, LIDAR, you know, in the vehicle? Like, Is there some concern, is it more of a, I mean, it's kind of a narrative of what I've been asking before, is like more of delays as opposed to outright cancellations, it sounds like. I mean, how do you see this macro backdrop impacting, I mean, how committed do you think OEMs will be to LIDAR and those sorts of technologies?
spk05: Yeah, thanks, Tom. That's a good question. We're still very engaged with all of our target OEM customers. We believe this is more of a transitory impact, these delays, as they reorg and figure out how they want to launch. I mean, let's remember, LIDAR is part of the safety suite. There's no ending appetite for safety. So with that comment, it's not tied strictly to EVs. Some of our contracted vehicles are also ICE vehicles. So the need for increased safety is real, and the investments by the OEMs continue to increase. And we don't see that going away. We think this is a delay as they reorganize and figure out how to launch.
spk07: Yeah, and I'll add, Tom, here, since we're talking about the macro and the whole automotive industry trend, right? On the EV side, OEMs are definitely going into a price war led by Tesla. And margins are going to compress because that ASP is coming down and also the labor cost is going up. So if you think about where they make money is actually on the optional equipment. And for LiDAR, safety is a necessity. But initially, those are going to be optional equipment, right? So that's actually where they could make some profit margin.
spk09: Got it. Okay. Thanks a lot. Thanks, Tom.
spk08: Thank you. As a reminder, if you have a question, you may press star, then 1.
spk01: The next question comes from Kevin Garrigan with West Park Capital. Please go ahead.
spk06: Yeah. Hey, guys. I appreciate you taking my questions, and congrats on the progress. So in your previous answer, you had mentioned that you're seeing delays a lot with EVs. Are the companies that are developing internal or the car OEMs that are doing more internal combustion engines, are they not nearly as delayed as automotive OEMs that are kind of focusing more on EV platforms?
spk09: That's a good question, Kevin.
spk05: This is Mitch. Yeah, so the traditional OEMs have both, right? They're transitioning from ICE to EV, but they're going to maintain the ICE vehicles. And Mary Barra talked about it in the GM earnings release about the traction they had gained in the luxury segment. And that expands across ICE and EVs. So I wouldn't say one way or the other there's been delays on ICE versus EVs or traditional companies versus up-and-coming companies. I think this resorts back to the megatrend Hull was talking about.
spk03: Yeah, and it's also just the macro events associated with the automobile industry that is pretty obvious in the last couple of months that it's finally resolved, as you may be aware of. And all of these are not EV specific. So it's kind of across the board. So it's not one way or the other. It's really a macro effect here.
spk07: Yeah, and I'll add that EV Although, it does kind of changes the OEM's priorities. EV has been the priority for quite some time, maybe a couple of years, and the recent headwind on EV, having some of the OEMs refocus their attention on ICE vehicles and bring those vehicles up to technology standard. So that internally would take some time. And the good thing with our award is that we are awarded both ICE vehicles platform and also EV platforms.
spk06: Okay, perfect. No, I appreciate that color. And then you mentioned you're fully integrating cybersecurity software. How big of a talking point is cybersecurity in dealing with LIDAR systems and perception software?
spk05: Yeah, I mean, cybersecurity is table stakes for launching a LIDAR for automotive. I mean, it's similar to radar, cameras. Any element of perception that could pose a threat if it was accessed externally goes through very rigid cybersecurity requirements. Our lead OEM, General Motors, has a notable requirement on that front that's one of the most rigid in the industry.
spk04: And that's what we talked about today, finally integrating all those requirements.
spk09: Okay, perfect. I appreciate the color. Thanks, guys. Thanks, Kevin.
spk01: Thank you. The next question is from Matthew Golinko with Maxim Group. Please go ahead.
spk09: Hey, thanks for taking my question.
spk08: Can we, I guess,
spk10: With respect to the delay to your primary automotive customer, does that change or does that delay any further decisions on new vehicle platforms or programs at that OEM?
spk09: Or can you talk about how those conversations and decisions are progressing? Yeah, Matt, good question.
spk05: This is Mitch. We have to defer to the OEM in that case. We can't get into too many specifics on vehicles. We've been concentrated on the contracted and awarded vehicles, of course, and we're still engaged with General Motors. We're still engaged with our target customers, so we're constantly talking about additional vehicles, additional programs, features. I think I have to just leave it at that.
spk03: And the communication we have been getting from GM is really these few months of delay based on basically their release, and there is no discussion on the further vehicle platforms one way or the other. Mm-hmm.
spk09: Got it.
spk10: Okay. I guess two quick follow-ups. One being, I guess, past the automotive decision that you expect between now and the end of the year, are there any other programs that you're far along in that you expect to be decided in 2024? or is that sort of the end of the decisioning process for the time being?
spk05: Yeah, this is Mitch. There's one other major opportunity we've been working on, major European trucking OEM. That's for our short-range LIDAR called NOVA, and we're in the final phase of that RFQ and expect a decision before the end of the year.
spk09: Got it, okay.
spk10: But for just automotive, the non-truck, in 2024, that's pretty much all you're able to talk about today.
spk05: Okay, you're asking other automotive long-range LiDAR sourcings in 2024? Yep. Yeah, there's always OEMs in the pipeline. There's some in the RFI phase right now. I don't think there's anything as immediate as...
spk04: you know, the couple we talked about today, but there will be additional sourcings next year for sure.
spk10: Got it. All right. And last question for me is just on the smart infrastructure opportunities. You know, it sounds like you're building off that base and expanding out with it. Can you give us a maybe preliminary sense of what you have in the pipeline, what that means as a maybe baseline looking out to 2024 just you know given delays on the automotive side and i assume you know you're not really in a place to talk about about that side of the business at this point but on the infrastructure side can you give us kind of a preview of what we should expect for um for 2024
spk05: I think one comment I can make is, you know, we talked about our tolling customer that we landed earlier in 2023, a multimillion-dollar contract that we've been fulfilling this year. Today we updated. We have another major customer in the tolling space. We see the airport, you know, we're offering more details on the airport installations. I'll just say the size of the contracts are all in that multimillion-dollar range. And we expect to be fulfilling, you know, multiple contracts in 2024, whereas we just basically filled one major contract in 2023.
spk09: Got it. All right. Thank you.
spk08: Thank you. The next question comes from Richard Shannon with Craig Hallam.
spk01: Please go ahead.
spk11: Well, thanks guys for taking my questions. Um, jumped on the call late here. So, um, during the Q and a, and I want to follow up on an answer that I don't think I heard the question very clearly. Sorry if I'm repeating this, but, um, I think you talked about, um, a, an award here, and I think it's referring to the one you listed in the, uh, on the front page, your, your press release here about final social decisions for another major vehicle OEM award. Is that the one that you're referring to when you said it's, uh, perhaps a bigger size at the initial start of RAMP than your current one, and is that the one you expect to be decided before the end of this calendar year?
spk05: Hey, Richard, this is Mitch. Yeah, you're exactly right. That's the one we were talking about.
spk11: Okay. And are you aware of whether you are the only one at this stage, or there's still competition present?
spk05: I can't comment on... If there are others, we know it's down to the final stage. We've been in this process for six months now, so at this stage, there's likely no more than one or two companies.
spk11: Okay, fair enough then. I want to follow up on an industry dynamic here in terms of software integration on the broader sensor suite, including LiDAR, that seems to be presenting some issues across the industry and wondering if you're – seeing any further signs of that and of those issues that have come up here, those generally been solved, and are you seeing any delays in sourcing decisions because of this dynamic?
spk05: Yeah, I think one thing June talked about today is the integration of Ethernet-based sensors. So most LIDARs have an Ethernet output. A lot of the newest radars have an Ethernet output. So we've developed a suite of software validation tools working on the GM program that's really state of the art. But that's a big challenge to overcome. Outside of that, there's the perception software side, which we're not taking care of for this particular OEM contract. So I think that's another area that's challenging. I think what you're seeing today isn't much different from some of the other news that you're talking about from other OEMs over the past year.
spk03: The ADAS software integration is indeed challenging, but it's not really specific to LiDAR. In fact, Septon, we make LiDAR, and we try to make our LiDAR with these Ethernet-based tools, validation procedures, to make it certainly not the bottleneck of the entire stack of ADAS. And we actually very much shine in that. But there are certainly challenges in the entire stack integration, as you can see in the industry. But it's part of the growing pain, and it will be over in a few months.
spk11: Fair enough. One last question for me, and I'll jump out of line here. Another interesting passage here in your press releases about technology, the fact you're on track to launch your next-gen long-range LIDAR, what's your time frame for launching and assuming everything stays on track here? What would be the first time you'd be like in C sample and then getting to production? Is this something that could happen in calendar 26 or is it farther out than that?
spk05: Yeah, the next-gen sample will definitely be ready for calendar year 26 and beyond. We're already starting to demonstrate to to some of the lead candidate OEMs, and we'll continue that process through the first half of next year, and even working with Coedo on some of their customers on that.
spk09: Okay, fair enough. That's all from you guys. Thank you.
spk01: Thank you. The next question is a follow-up from Tom Narion with RBC Capital Markets. Please go ahead.
spk02: Hey, guys. Thanks for taking the follow-up. I actually just had a follow-up on something Paul was saying about safety. And I was just wondering if – right now it's an optionality you were talking about, but I wonder if you could kind of flip the script maybe, and is this something that maybe you guys could lobby or maybe the greater LIDAR industry could lobby regulators to potentially mandate something like – you know, use of LIDAR in addition to radar camera, but just like level two plus, level three, even further offerings. Is that something that you guys do, lobbying regulators, or do you see that as a potential catalyst for you guys down the road? You know, we've all seen the numbers on safety. You know, Tesla FSD notoriously gives those stats. I think their product is like five times safer than the regular car on the road. So yeah, just on that greater topic of lobbying regulators to make this mandatory, is that something that you think could happen? Yeah, thanks.
spk07: Yeah, definitely. Thanks for the question. That's a great point. In fact, I did have a meeting with the Department of Transportation officials maybe a couple of months ago about some of these topics. It's broader. But all centered around safety, whether it's vehicular service safety or infrastructure safety. But absolutely, we do see LiDAR taking the path of cameras and seat belts and airbags in the safety of vehicles over time. And that's exactly what we're driving toward. And the prerequisite of that also, you know, is one of economics too, right? So, you know, the cost has to come down over time. And that's exactly what we are working on. You know, performance goes up, cost goes down over a period of time.
spk09: Got it. Thanks a lot. Of course.
spk01: Thank you. This concludes our question and answer session. And I would now like to hand the call back to CEO Junpei for closing remarks.
spk03: Yeah. Again, thank you very much for joining us summarizing this record revenue quarter. We look forward to meet again next time to tally up this exciting year of 2023 and share more exciting news. Thank you.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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