Ouster, Inc.

standards, including ASIL-B functional safety certifications. This, again, is possible because all of our sensors share a common visual architecture. Another key differentiator for Ouster is our progress towards achieving automotive readiness, not just for our products, but also for our manufacturing supply chain. We selected a manufacturing partner in Benchmark four years ago, and together with Benchmark, we started production in Thailand three years ago and passed automotive OEM audits of our IATF 15949 certified Thailand facility starting two years ago. These are critical milestones for any LIDAR manufacturer in its quest to meet automotive grade specifications and another example of Ouster's lead within the industry. We are in the B sample phase now for our OS sensors with plans to move into the C sample phase in 2023. As far as our solid state roadmap, this past quarter we defined our full product portfolio, locked in the product specs, and we're now moving into the engineering design phase. In line with past guidance, we expect to have our first solid state samples ready in the fourth quarter of 2022. While other LiDAR companies are focused on delivering a single forward-looking LiDAR, Alstra is certifying its entire lineup of short, medium, and long-range scanning sensors and true solid state sensors. We believe that there will be a real market need for both sensor types, and as far as we know, Ouster is the only company invested in offering and certifying both. Now I'd like to turn to an ongoing and important trend that is a core driver for growth for Ouster, the adoption of automation technology across the worldwide supply chain. Every aspect of the industrial economy is moving to adopt greater levels of autonomy for improved safety, efficiency, and quality of life. In automotive, the core sub-markets driving this vertical are robo-taxis, robo-trucking, consumer ADAS, and a fourth sub-vertical that we've not called out before, which is shuttles and buses. Alster is already a top player in automotive today with significant revenue in auto compared with other LiDAR companies. We have the largest publicly reported binding production win for LiDAR sensors in this industry through our deal with PLUS, and we believe our future products will only extend our market lead. Take trucking, for example. There are approximately 12 million freight trucks in the world, of which approximately 10% need to be replaced annually. Even more, there is a near-term opportunity to retrofit existing vehicles. This is a business that has historically had races and margins, and autonomous driving technology is the first opportunity in years to drive a meaningful reduction in costs across the three core buckets, labor, fuel, and capex. Companies like Plus are taking advantage of this opportunity to reduce these costs not in five to 10 years, but today by retrofitting existing fleets with marquee customers like Amazon while pursuing midterm OEM integrations on new trucks. While a long-term goal of many robot trucking companies is to reduce operating costs by around 40%, the ability to save even 5% with driver-in systems today is still a potentially significant savings opportunity for companies like Amazon. With Ouster's manufacturing scale, our affordability and performance, we believe we're in a great position to be the volume ladder supplier for this next wave of trucking fleets. The core sub-markets driving the industrial vertical are mining, agriculture, construction, port and yard logistics, factory manufacturing, and warehousing. We think there are two key drivers for ladder adoption in industrial applications. The first is task optimization through automation, and the second is safety. And there's already a billion-dollar market for legacy 2D industrial LiDAR sensors, partially addressing these needs today. We believe we offer our customers an incredibly compelling value proposition by enabling them to simplify their system with fewer digital LiDAR sensors while increasing safety and efficiency. Just looking at the forklift market, there are millions of forklifts deployed around the world today and over 1.5 million forklifts sold annually. With less than 1% having any level of automation, there is a significant potential market opportunity to retrofit and build new machines with greater levels of intelligence using CMOS digital ladder that we believe could rival an automotive series production in unit volume. Our customer, Balio, a France-based leader in autonomous forklifts, is a great example of this. They're able to increase the forklift's productivity by up to 15% and availability by up to 30% through automation. Another example is the massive potential we see to automate distribution yards. We previously announced our customer outrider, which aims to replace over 50,000 diesel yard trucks with autonomous zero emissions vehicles that could feature our sensors. Over the road trucks wait on average one hour to pick up and drop off a trailer at human operated yards, resulting in roughly 12 million combined days waiting in distribution yards each year. If automating yard operations trims this wait time by just 10% to 20%, productivity would increase by an additional 1 to 2 million days per year. There's also potential to deploy six sensors in the distribution yards where the trucks operate, and there are over 400,000 yards in the U.S. alone. We're also working with the leading port automation customers like LASA, Kohn Cranes, and FME, which use our CMOS digital LIDAR on large crane equipment for anti-collision systems or to decrease loading times. If you take the world's 835 most active seaports and conservatively assume an average of 10 gantry cranes per port and six sensors per crane, there's an opportunity to supply over 50,000 sensors in this single use case. This type of industrial equipment can cost millions of dollars, and digital LiDAR sensors allow a more significant return on investment given the increased speed and reduced accidents after incorporating these systems. These are just a few examples of the value proposition and the market potential for digital LiDAR within industrial. And also as an opportunity to unlock even more market share through additional certifications like SIL2, which would allow us to display dedicated safety sensors on many of these systems. The core sub markets driving the robotics vertical are last mile delivery, defense, 3D mapping, and university research. While some of these applications are in pilot phase now, others are beginning to move to large scale deployments. Our customer serve robotics and other customers focused on last mile delivery are great examples of large scale opportunities in robotics. Last mile delivery is the most expensive part of the supply chain, often representing more than 50% of the overall cost. The cost per last mile delivery today is $1.60 via human drivers, but could drop to just $0.06 a mile as autonomous delivery robots proliferate. It's expected to be a quarter-billion-dollar market by 2027, with a 34% CAGR, and these delivery robots require small form factor, high reliability, and high-resolution LiDAR, with an average of one to two sensors per robot. CERV Robotics has already completed tens of thousands of contactless deliveries in major U.S. cities, with plans to scale its robotic fleet significantly over the next few years. Industry forecasts show this market could reach 200,000 units by 2035. In smart infrastructure, the core sub-markets driving this vertical are intelligent transportation systems, security, and smart places. Our CMOS digital ladder is already deployed on intersections, local streets, and highways around the world. New customers like Parafex are deploying our sensors across French roads for speed enforcement and analytics. AUSER also recently co-won the IDC Smart Cities North America Award for Transportation Infrastructure in Chattanooga, Tennessee. The project uses LIDAR to improve pedestrian safety in a way that was previously not possible using camera and radar alone. The latest data shows that there are over 1 million signalized intersections in the United States, and the top two legacy camera-based providers have installed some 600,000 units. Intersections today tend to use at least four traffic cameras at each intersection. Our CMOS digital LiDAR can reduce this number to two sensors for a lower cost than a four-camera system, in addition to providing better accuracy and durability. Per Gartner, there will be at least 85 million security surveillance systems installed in the U.S. by the end of this year, and nearly 1 billion globally. As we've said before, we believe that everywhere there is a camera or CCTV system today, there's an opportunity to augment or replace that system with a higher-performing digital LiDAR sensor, which can better preserve privacy than cameras. This past quarter, we announced that Ouster achieved Buy America and Buy American certifications for sensors manufactured in our San Francisco facility. This is a major milestone given that many U.S. state and local transportation projects depend on federal funding, which require Buy American certified products when available. These certifications further differentiate Ouster's products from other ladder companies and demonstrate our ability to scale with our federally funded customers. All of our verticals and each of their sub-markets represent significant market opportunities for digital LiDAR over the next few years. Winning just a fraction of these production deals could equate to a major automotive win each. These opportunities, coupled with our product market fit and exciting product roadmap, are why we believe so strongly in our multi-market approach. And with that, I'd like to turn it over to Ana to walk you through our financial performance for this quarter.

Thank you, Angus. Before I begin, I want to reiterate the three takeaways that separate Ouster from the rest of the LiDAR industry. Our differentiated technology, our diversified business, and our proven ability to execute. These are the reasons I am such a big believer in Ouster and why I'm excited to report that Ouster ended the second quarter with a record $7.4 million in revenue. This is our highest revenue quarter to date, up 11% from last quarter and up 72% over the second quarter of 2020. We also delivered positive gross margins of 26% up from 9% in the second quarter of the prior year. We shipped over 1,460 sensors in the second quarter, a 49% increase over Q1, and a 342% increase over the second quarter of the prior year. This means we have already shipped more sensors in the first half of 2021 than we shipped all of last year. This clearly demonstrates our ability to scale production with our contract manufacturing partner benchmark and to deliver on our projection to more than triple sensor production this year. Demand for Ouster's CMOS digital LiDAR has continued to grow as we have now sold sensors to approximately 600 customers over the last 12 months. And while we grow this pipeline, we continue to both add and convert pre-production and production-level customers to our Strategic Customer Agreements, or SCAs. To date, Ouster has signed 53 SCAs representing over $422 million in contracted revenue opportunity, up from 40 SCAs and $385 million at the time of our last earnings call. SCAs are a key financial metric for us. They establish a multi-year purchase and supply framework for Ouster and the customer and include details about the customer programs and applications where Ouster products will be used. They also include multi-year, non-binding customer forecasts, giving Ouster visibility to the customer's long-term purchasing requirements, mutually agreed upon pricing for specific Ouster products over the duration of the agreement, and in some cases include multi-year binding purchase commitments. Contracted revenue opportunity represents the sum of both binding and non-binding purchase commitments. For customers that provide less than a five-year forecast, no additional revenue opportunity beyond the term of the customer's forecast has been imputed. We are excited about our customer traction as we continue to sign additional SCAs. These SCAs provide us with long-term forecast visibility, manufacturing predictability, and enable us to move down the cost curve and drive customer stickiness. That being said, we are at the very beginning of the LIDAR adoption curve, and some customers are still learning their ramp rates, which can impact the timing of purchase orders quarter to quarter. As we grow our business, We expect to improve predictability into our customers' needs and timelines and expect the timing of orders will have a less notable impact on our quarterly results. We are proud of our positive gross margins and believe that CMOS Digital LIDAR is the lowest cost platform. Because SCAs include multi-year negotiated pricing, we expect to continue to experience some temporary downward pressure on margins from signing anticipated large multi-year deals in the near term. However, over time, as sales volumes over the term of the SCAs increase, we anticipate that our cost of goods sold will continue to decline faster than our average selling prices, allowing us to meet our targeted margins. Turning to our forward-looking opportunity, we expect the total addressable market, or TAM, for LIDAR across our four target verticals to reach $8.6 billion by 2025 and nearly $48 billion by 2030. We're already seeing this TAM take shape through our existing customers' growth. In automotive, for example, it was reported that one of our marquee customers, PLUS, won a contract with Amazon to supply autonomous driving systems for 1,000 trucks in its delivery fleet. In this quarter alone, we've brought on new customers like Parafex, BlueLight Robotics, and Valyo in smart infrastructure, robotics, and industrial, respectively. We believe these customer wins not only demonstrate that we have the ability to build our customer pipeline in each vertical, but that we are also capable of penetrating diverse sub-markets. And it is our belief that each sub-market represents a significant revenue opportunity for Ouster. Our multi-market approach allows us to take advantage of near-term opportunities across each of our four verticals, which we believe sets us up to achieve a stable long-term commercial run rate ahead of other LiDAR companies. It is our belief that capturing approximately 20% of the total addressable market for digital LIDAR by 2025 would generate close to $2 billion in revenue. And remember, we see very little competition for 3D LIDAR outside of the automotive vertical. Not only does our CMOS digital LIDAR technology unlock a larger multi-market TAM for LIDAR, it has also allowed us to outsource manufacturing, lower costs, and quickly achieve positive gross margins. and while other LiDAR companies are still working to manufacture at scale and reduce costs to make their products viable for the market, Ouster has an operational business, is ramping volume, and reducing cost of goods sold. Ouster is already a low-cost leader within the LiDAR industry due to our VIXL and SPAD technology approach, and we have continued to drive a steady reduction in cost of goods sold in line with our expectations. We reduced our cost of goods sold by 68% in 2021 as compared to the prior year quarter through reductions in our bill of materials across FPGAs, VIXILs, ASICs, and micro-optics, in addition to yield improvements and reductions in our value-added manufacturing, scrap, and overhead costs. Importantly, during this same period, our COGS have declined faster than our ASPs. And while in the near term, we may experience an impact on our gross margin for the reasons I mentioned earlier, we anticipate that as we find more SCAs and the customers already under SCA mature and ramp purchase volume, our cost of goods sold will continue to decrease and we will continue to meet our targeted margins. In spite of recent supply chain pressures due to the current macro environment, including increased lead times from suppliers related to the global material shortage, Ouster maintained positive gross margins in the second quarter at 26%. In fact, our margins would have been higher had we not experienced some unfavorable purchase price variance and situational expedite fees in order to meet production and delivery timelines. We expect the global material shortages to continue through the rest of the year, which could continue to put pressure on our margins. However, we are actively taking steps to mitigate the impact of this material shortage on our business. We closed the second quarter with approximately $240 million in cash. During our public debut, we announced a targeted capital allocation plan focused on three areas, building out our sales and marketing teams, strengthening investments in software development, and accelerating our hardware roadmap to expand Ouster's product offering. We are delivering on these goals and are proud of the progress we have made year to date. Ouster is investing to build a best-in-class and industry-leading commercial organization. Prior to our public debut, the majority of our revenue was driven by inbound interest. We are now focused on developing a mature sales organization geared toward ramping our sales pipeline through targeted outbound engagement and account expansion. To this end, we have grown our commercial team from under 30 employees at the end of 2020 to approximately 60 employees year to date across the Americas, EMEA, and Asia Pacific markets. Specifically, we have brought on experienced leaders for critical functions, including enterprise sales, sales operations, and customer success. As a result of these investments, our customer base increased by around 100 during the second quarter, with our overall customer count increasing from approximately 500 to around 600. This is all in line with our commitment to invest in building a larger multinational sales force to capture the massive opportunity we have in front of us. Additionally, we committed to invest in software. We are expanding our internal development team to build a rich software ecosystem, including taking our first steps to bring online a branch in Canada that will focus on this. The launch of our software developer kit in the second quarter was a critical first step in that direction. We are also partnering with leading solutions providers for each of our verticals to access new markets and accelerate customer adoption. We plan to continue to invest here and look forward to sharing more over time. Lastly, we're also investing significantly in our hardware roadmap. Angus highlighted some of our second quarter product developments, including our firmware update and progress on our L3 chip, which we believe will be a game changer for all of our verticals. We are fully committed to our multifaceted automotive product roadmap for both scanning and true solid-state sensors and have even more in development, which we are excited to share when the time is right. As we announced in March, we intended to use the initial proceeds of our public offering on these initiatives. And as a result, we increased OpEx to deliver on these initiatives such that our adjusted EBITDA loss increased from approximately 10 million in the first quarter of 2021 to approximately 14 million in the second quarter of 2021. In closing, I'm incredibly optimistic about our growing commercial organization, as well as our forward looking hardware and software solutions, which we expect will bring new levels of autonomy to thousands of applications over the next few years. As such, we are pleased to reiterate our full year 2021 guidance of 33 to 35 million in revenue and 25 to 27% gross margin. And with that, I'd like to turn the call back to Ingus for some closing remarks.

Thank you, Anna. Ouster is here to build a safer and more efficient world by delivering best-in-class LIDAR and software solutions that will transform industries and improve quality of life. Our digital platform is why we have a highly diversified business compared with other LIDAR companies. While others are betting on just a single application or vertical, Alster is executing on a multi-market strategy, which allows us to drive real revenue today while we continue to enhance our products, build solutions, and achieve certifications. By continuing to execute on our strategy, we expect to capitalize on our first mover advantage and lead in each of our four verticals for a long time. We now look forward to answering your questions.