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spk16: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Symbiotics' third quarter 2023 financial results conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Jeff Evanson, VP of Investor Relations. Please go ahead.
spk03: Good morning, everyone. Jeff here, and Olivia, thank you for the introduction. Welcome to Symbiotic's third quarter 2023 financial results webcast. Our press release and discussion today will include forward-looking statements based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements, including as a result of the factors described in cautionary statements and risk factors in Symbiotics financial release and regulatory filings with the SEC, by which any forward-looking statements made during this call are qualified in their entirety. In addition, during this call, we will discuss certain financial measures that are not recognized under U.S. generally accepted accounting principles, which the SEC refers to as non-GAAP measures. We believe these non-GAAP measures assist management in planning, forecasting, and evaluating our business and financial performance, including allocating resources. Reconciliations of these non-GAAP measures to our most comparable reporting GAAP measures are included in our financial press release, which is available in the investor relations section of our website and is on file with the SEC. These non-GAAP measures may not be comparable to measures used by other issuers. Today we will provide guidance for the fourth quarter, including revenue and adjusted EBITDA. We are not providing guidance for net loss today, for profit, which is the most comparable GAAP financial measure to adjusted EBITDA. We are not able to provide reconciliations of adjusted EBITDA to GAAP financial measures because certain items required for such reconciliations are outside of the control and cannot be reasonably predicted, such as provision for stock-based compensation. On today's call, we are joined by Rick Cohen, Symbiotics Founder, Chairman, and Chief Executive Officer, and Tom Ernst, Symbiotics Chief Financial Officer. These executives will discuss our third quarter 2023 results and our outlook followed by Q&A. And now with that, I'll turn it over to Rick for some opening remarks.
spk09: Rick? Thank you, Jeff. Good morning, everyone. Thank you for joining us to review our third quarter financial results. Since we spoke last quarter, we have demonstrated our ability to successfully do at least two important things at once. First, we achieved record quarterly results. And second, we launched the Greenbox joint venture. We were able to report strong third quarter results, in part because our outsourcing strategy related to deployments. We are pleased with these partnerships, and they are beginning to bear fruit, and our supplier ecosystem continues to ramp. Tom will talk more about the quarterly details. So instead, I want to emphasize how excited we are about our green box joint venture with SoftBank. Greenbox is the realization of a vision I've had for many years to bring A1 AI-enabled automation to companies of all sizes. We're excited about Greenbox because it adds more than $500 billion per year to our total addressable market by bringing automation to all customers. Warehouse costs for these customers are typically two to three times higher than they are for large customers. This means Greenbox can offer small and medium-sized businesses a great value proposition while capturing more of the value of our technology, and we already have interest from potential customers. We capture this value three ways. One, through a large, higher-margin system contract that is backed by SoftBank. Two, by securing three times the level of recurring revenue streams that we get today, and three, we get to own 35% of a highly profitable Greenbox business. We were fortunate to have SoftBank join us as a partner in Greenbox to help us with capital, to help drive our Go Big, Go Fast strategy. In fact, in the early years of CNS, if I had had more capital, I could have grown CNS to a much larger company than even it is today. So I made the decision early on to adopt more capital from Greenbox into the Semotic network. Semotics also wanted higher pricing, more recurring revenue, and a way to capture more of the value stream from our technology. SoftBank wanted a larger stake in Semotic. As negotiations advanced, I decided we could get to consensus by agreeing to sell about 4% of my family's 78% ownership stake down to about 74%, and that we sold at about $28. And I was happy to do so because I am quite confident Greenbox will create much more value for Symbotic than what I gave up. And I was able to do it with no dilution to shareholders. The launch of the Greenbox joint venture was demand-led, so we know these services will be attractive to prospective customers. While we are anxious to bring Greenbox to market, like Symbotic, we intend to infuse the Greenbox culture with the same North Star of creating brand-new happy customers. Therefore, a customer launch will not come before the business operations are ready sometime in 2024, which is when we anticipate securing the first green box customers. We won't lose focus on our existing customers who help us get to this point, who continue to take care of all our large customers and scale up for Walmart and all the rest of our customers. I would like to thank all these customers as well as our associates, shareholders, partners, and suppliers who have made this quarter such a well-rounded success. Now Tom will discuss our financial performance and outlook. Tom? Thank you, Rick.
spk06: We grew our third quarter revenue 78% compared to a year ago to $312 million. The strong growth was driven by solid execution on existing deployments and new deployment starts. We continue to see acceleration in the rapid pace of installation of deployments to standardize our platform and streamline our deployment processes. Our backlog at the end of the third quarter was about $12 billion. The Greenbox joint venture we completed last week adds another approximately $11 billion to backlog, bringing our total backlog now to about $23 billion. The $11 billion from Greenbox is backed by the capital of Greenbox's investors, led by SoftBank. We initiated six new system deployments during the quarter and advanced one system to full operation. As of the end of the third quarter, we have 10 fully operational systems and 33 systems in the process of deployment with multiple customers, an increase from 28 systems last quarter and 13 systems in the third quarter of last year. Our sales and deployment progress for platform purchases continues at a rapid pace. Each quarter, we add new deployments from multiple customers. For example, progress with Walmart continues to plan and we recently started deployment of the second of five warehouse facilities with UNFI. Recurring revenue continued to grow sequentially as deployments moved to production. We now have 10 systems operating at customer sites. As system completions increase, our recurring revenue should continue to grow and have a much higher gross margin than systems revenue. This quarter, we posted strong improvement in recurring gross margin, and in time, as recurring revenue becomes an increasing share of our revenue mix, it can provide a powerful operating leverage to our business. Our third quarter adjusted gross margin was consistent with last quarter. These results still reflect significant costs associated with lower margin innovation projects the burden of elevated pass-through steel costs, and costs associated with rapidly scaling our operations. Operating leverage improved again sequentially as we achieved a 1% adjusted EBITDA loss rate compared to 4% last quarter and 12% last year of loss rates. This was driven by a rapid revenue growth and gross profit growth along with slower operating expense growth Gross margin was consistent with last quarter as we maintained our focus on rapidly scaling deployment capability. Our cash and equivalents, including marketable securities and restricted cash, grew $48 million sequentially to $513 million. Turning to our outlook, for the fourth quarter of fiscal 2023, we expect revenue of $290 to $310 million and to report our first profitable quarter with adjusted EBITDA between zero and $3 million positive. Finally, I'd like to address some topics related to our green box joint venture announcement. As Rick mentioned, the way we have structured the green box joint venture allows us to rapidly transform a very large segment of the supply chain in a very capital efficient way to harvest significant returns for shareholders. Symbotic has a non-cancellable committed contract with Greenbox for the purchase of $7.5 billion in Symbotic systems. This contract allows for a visible deployment schedule and is backed by the investment partnership of SoftBank and Symbotic. We believe that Greenbox is a great opportunity for Symbotic shareholders and are very excited about its future. In all scenarios and at all times after our initial $35 million funding, Symbotic's cash flow from Greenbox will be positive, net of any incremental capital needed to support Greenbox growth. This means that Symbotic shareholders are protected such that even in the remote scenario where no systems are ordered, a net cash payment is due to Symbotic for approximately $2 billion, backed by SoftBank. We're confident and excited about the launch of this joint venture as we're responding to market demand signals. In addition to the large committed order for systems, sales, and recurring revenues that follow it, we believe Greenbox can generate strong returns. Thus, we expect Symbotic's 35% interest in Greenbox subscription business will yield a strong cash flow stream to Symbotic. In conclusion, we are continuing to scale our business and innovating rapidly to deliver for our customers. We look forward to speaking with you again next quarter to provide an update on our progress. We now welcome your questions. Operator, will you please open the Q&A?
spk16: Certainly. Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Please stand by while we compile the Q&A roster. Now, first question coming from the lineup. Andy Kaplowitz with City. Your line is open.
spk14: Hey, good morning, everyone.
spk06: Good morning, Andy.
spk14: Tom, can you talk about your adjusted gross profit margin and what you'd expect moving forward as we go into FY24? obviously remain relatively steady, as you said, despite higher sales. So how do you look at gross margin from here? And why didn't it inflect a bit more, as I think you said last quarter, that steel would be a tailwind, at least in Q4? And I think last quarter you mentioned innovation-related tailwinds could diminish a bit.
spk06: Yeah, thanks for the question, Andy. So gross margin, we continue to expect that, particularly when you're watching us track over time, so over an annual basis, we expect to see our gross margin expanding. On a given quarterly basis, there can be some variability to that expansion, as we're seeing here in this Q4 where we're sequentially flat at 18.3%. Continues to be the same factors that we've been seeing, Andy, where we see that expansion coming as the impact of a handful of things abate over time. We continue to see those abating over time. As you mentioned, steel continues to be a headwind when we look relative to the 10-year average. We do think that we've seen a modest benefit in this quarter and last quarter, continue to expect to see a modest benefit relative to where we were three and four quarters ago. However, the steel index actually has been going up over the recent few months and seems to be still at a relatively high elevated level to the 10-year average. So we think that there's potentially a longer-term opportunity for that to abate over time. And then finally, recurring revenue margins are expanding. We had a significant expansion of recurring gross margins now to 6% loss rate versus where we were a year ago in the 32% loss rate. However, we see a lot more power as we continue to waterfall recurring revenues on and gain scale in that business to where we see long-term north of 60% over the long term. So, again, as we look over an annual basis, you should expect to see expansion.
spk14: Very helpful. And then, Tom, maybe just on the revenue side, it's You know, revenues obviously stepped up nicely here over the last few quarters. You know, we see your guide for Q4. You see sort of where the street is for FY24. I'm sure you don't want to give, you know, a ton of guidance. But, you know, does your backlog and maturation of your outsourcing strategy support the kind of growth the street is projecting at this point for FY24? Any sort of initial thoughts would be appreciated.
spk06: Yeah, thanks, Andy. So we are looking forward to fast growth in 2024. And you're right, we are providing guidance, specific guidance for revenue on a quarterly basis. But our growth next year is going to be underpinned by the ramping sites and deployment we have. So we do anticipate seeing healthy growth as we look into next year. And we expect that... We expect that... A little commentary on our Q4 and your question as well. Our Q3 really did exceed our expectations significantly. We saw some timing benefits just in speed of our deployments picking up that perhaps also creates a little bit of a sequential compare to Q4.
spk14: Tom, just a quick thought there. Like six systems initiated, you would continue to see that continue to rise from here, right? Because it's been a little bit stable over the last few quarters.
spk06: You can see some lumpiness here as well, Andy, so it has been kind of consistent. I think over the long run you'll see growth there, but it won't be surprising if we have quarters where we're actually down sequentially. Timing on those system deployment starts does depend on Thank you.
spk16: Thank you. And our next question coming from the line of .
spk05: Thanks. Just a couple quick questions. Back to the gross margin kind of topic, Tom. Can you maybe parse out some of the headwinds and tailwinds from a quantification standpoint, whether or not you've seen any tangible benefit from the restructuring actions taken last quarter and what lies ahead in that regard as we think about how to kind of model this?
spk15: To be free and flexible and creative was really essential to what I wanted to make and I didn't find a platform that did that other than Wix. Hi, I'm Liv. I run Double Brush, a print and design studio in Brighton, UK. I chose Wix for my business because of its massive scope for functionality and freedom of creation. Everything I create at Doppel is visual. So for me, those customisable elements like the hovers and the little animations, the additional bits of coding, the physicality of the actual process of printing really reflects Doppel. From a business perspective, it was really exciting directing people to that site. It was going to give them everything that they needed.
spk06: Yeah, thanks for the question, Matt. We did see some benefits in the quarter. We continue to see, though, that our outsourcing initiative leaves a lot of opportunity for us to continue to see expansion over time. So we're only seeing the earliest of those benefits. And then finally, just the rate of speed at which we're growing, kind of that redundant cost. I think you take those in kind of that order, and that's a magnitude of expansion opportunity we see as we look forward over the coming couple of years to expand.
spk05: Got it. And I was wondering if you guys could maybe talk a little bit qualitatively with the green box. JV formally announced. What has inbound early potential customer feedback been? And then, Tom, I wanted to make sure I understood. Can you just go over the situation that would drive that $2 billion inbound payment to Symbotic with respect to Greenbox? I want to make sure I heard you correctly. Thank you, guys.
spk06: Sure, Matt. So we have received from numerous channels interest in Greenbox. First, this has been demand-led, and as Rick mentioned in his prepared remarks, his vision for the company has been to be able to provide warehousing as a service. There's a huge opportunity to just provide much higher quality at lower cost services to end customers, and so this vision hasn't been new, and the interactions we've had business model. And since the announcement, although it's only a week old, we've received inbound expressions of interest in hearing what it's about. I'll remind you of what we said last week and what Rick said today as well, that our first goal here is to get this business up and running and then stand up to go to market and management, and then we'll bring it and then the progress. On the $2 million question, so as we think about Greenbox, we have structured this business such that in all scenarios, including the base growth scenarios along with the more aggressive growth scenarios as we think about the execution of the business, we've structured it not only such that we have control and visibility over that scheduling to make it... but to also be cash flow positive at every interaction we have with Greenbox. So that means that the payments that are due to us precede the payments that go out the door, including any capital requirements that are necessary in the faster growth scenarios of Greenbox where we're actually funding capital in support of our 35% ownership position. And as we thought about every scenario that's possible, we thought about reason had to cancel. Well, in that case, we have a sizable payment that's due to us for all the profit that would have been received on that entire $7.5 billion order, plus a first recurring annual commitment. So that nets to us over $2 billion. I just wanted to highlight the level of capital investment that our partners and we are taking on here and the belief in the business. Thanks, Tom. Thank you, Matt.
spk16: Thank you. And our next question coming from the line of Mike Latimore with Northland Capital. Your line is open.
spk04: Great, thanks. Yeah, impressive results there. I guess as you think about the fourth quarter, should we think about cash flow exceeding EBITDA again here? That's been a trend the last couple of quarters.
spk06: Yeah, thanks for the question, Mike. We continue to expect to be cash flow positive for the year, and we can have cash flow variability, so I tend not to guide on the cash flow line. But generally, you should expect that our trend will be that the dynamic you're describing where our working capital is a net production above and beyond our EBITDA will be the case. Cash flow can be a little bit lumpier than our revenue can because is percentage of completion and a little bit more atomically spread, whereas sometimes the cash flow from customers can be just a couple or three invoices per system purchase, so they can concentrate a little bit. Got it.
spk04: And then, Tom, in the past, you've given some general color on, you know, number of deployments that are hitting kind of their biggest rev rec phase. How would you characterize that dynamic in the fourth quarter?
spk06: Mike, the dynamic continues as to what we've seen in the past, and that is that while we are percent complete on a rev rec basis, those systems that have gotten about a year into the deployment schedule where the most extensive part of the physical installation phase is occurring is where the strongest revenue generation is. So I think if you think about what we've disclosed in the past about number of systems and deployment, those systems that were in deployment in say, by the end of Q2 and start in Q3, those 9 to 13 are the ones that are generating the strongest revenue contribution here in our fiscal fourth quarter.
spk12: When your task takes a toll on your lips, that's a job for O'Keefe's Lip Repair. Guaranteed relief for extremely dry, cracked lips. Good. Thank you.
spk06: Thank you, Mike.
spk16: Thank you. And our next question coming from the line of Nicole DeBusford, don't you think you'll let us open? Yeah, thanks. Good morning, guys.
spk06: Good morning, Nicole.
spk17: Just on the backlog now being $23 billion, I guess are you guys a little bit less focused on going after sales to new customers similar to what you announced with UNFI earlier this year, or is that still a focus for management?
spk06: So our first focus has always been, in Rick's words, frighteningly happy customers. So it's making sure that everything we're deploying in that, you know, what was $11 billion or $12 billion and is now $23 results in really happy customers. In addition to that, we do intend to bring in our new customers by the ones or twos per year here in the near term. And so, you know, we've already brought on So it's a pretty big year for us. I think we're a little bit above that one or two. But I think as you look forward, you should expect to see us first and foremost focused on execute the backlog and then where it makes sense to have that right incremental customer or two.
spk17: Okay, got it. Thanks, Tom. And then SG&A took down a bit queue on queue in this quarter. I guess like is this level of SG&A sustainable or anything to highlight there?
spk06: Well, we do continue to see project and other variable activity at a pretty significant run rate basis in our fiscal Q3 as we saw in fiscal Q2. Slight downtick there, but I think as you look forward, we actually see some of that abate a little bit more. This is partially being offset by we have expanded our hiring a little bit. Our headcount is up about 100 heads to about 1,300 people quarter on quarter. I think as you think about that moving forward, our expectation would be that you should expect moderate OPEX expansion looking forward, kind of consistent with what we've thought as we've framed out the near-term future over this year. But that's moderate headcount expansion to get strong revenue growth, so we continue to see some strong operating leverage.
spk00: Thanks. I'll pass it on.
spk16: Thank you. I'm on for next question. And our next question coming from the line of Greg Palm with Craig Howell Meehan is open.
spk02: Yeah, thanks. Congrats on the continued progress. I guess just looking back in the quarter in terms of the upside, I think you mentioned speed of deployment. So what exactly is outperforming? I mean, are you deploying more systems than maybe what you initially thought? Are you deploying faster, meaning you're able to capture or recognize more revenue within the quarter, just a little bit more thoughts on the progress would be helpful.
spk06: So what we're seeing, Greg, is that with each new system, as it goes through phases, we're able to shave off some marginal time here or there. And the new systems we're starting, we're putting a slightly faster target time on. This is consistent with what our goals were, not what we needed to do to execute the business plan, from that launch and deployment till we get that deployment completed and the customer begins the ramp of the full production use. Our goals over the long term are still to materially cut that time through both technology and process and partners, where over the long run we look to move to take that to six months if we can.
spk02: Got it, okay, that makes sense. And then just a little bit more on gross margin. So if we look at it based on segment, at least sequentially, you did see a bump in systems margin, but you saw a pretty significantly higher loss on software maintenance support and operation services. So I'm just kind of curious how you sort of view that looking forward in terms of the gross profit loss by segment.
spk06: I think if you, Greg, if you look at it on a non-GAAP basis, you'll see more consistent. You'll see actually expansion in the recurring line and more static, a little bit more static in the system line. So you're seeing a little bit of an effect of accounting treatment on stock-based comp that's created a difference to the GAAP results.
spk02: Do you know off the top of your head stock-based comp by segment in terms of the mix or proportion?
spk06: I think we have that in the reconciliation table in the release.
spk02: I can follow up with you offline, too.
spk06: Yeah, we'll follow up with you. It is on the table in the release, though.
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spk02: Okay, sounds good. Thanks. All right, thank you.
spk16: Thank you. Our next question coming from the line of Chris Snyder with UBS. Your line is open.
spk11: Thank you. Maybe starting with the green box, JV, can you just talk a little bit about the plan for managing these facilities? Is this something that SoftBank will be doing? And I ask because it does seem that the commercial burden for managing these multi-tenant facilities could be pretty high. Thank you.
spk09: Yeah, so this is Rick. So Symbiotic will run the systems as we do with many of our customers. The commercial relationship is being developed between SoftBank, Symbiotic, and quite frankly, there are three PL operators today that would like to partner with us on some of the customer acquisitions. So to think of it this way, the Symbiotic will sell a system to Greenbox, and Greenbox will be just another traditional customer for Symbiotic. Then there's a management team that Greenbox will have to develop, which is we have inquiries now, and so we're developing that management team as we speak, and it could be a combination of some of our partners, who, for instance, a port operator could be a partner who has customers but would hire Symbotic to be the operator of the system. So there's a couple of relationships here. There's the commercial relationship, which we're going to have to scale and build a sales force. But outside of that, we think we're not going to be in the construction business. We think we'll go into probably existing businesses or have real estate partners who have already built buildings. So it's not as complex on the outside as it might seem. And SoftBank and Zobotic have been working on this for well over a year, talking to various different customers. But yes, we will have to develop a sales force and a commercial focus, and that will be on Greenbox, and the reason we set up the structure the way we did is we did not want to burden Symbotic with that overhead. We wanted to keep Symbotic as a pure play, and then Greenbox will be a commercial Salesforce-driven 3PL kind of operator finding the right partners, and they will simply buy the systems from Symbotic. Symbotic will run the systems, but Symbotic will not be involved in getting the commercial customers.
spk11: Thank you, Rick. Really, really helpful. Another kind of steady question that we're getting on the deal is that, you know, on the conference call last week, you said that Symbotic will not need to contribute any more capital outside of the original 35. But Greenbox will be taking on more capital, presumably from SoftBank. Will that come through Greenbox in the form of debt to SoftBank? Will it be incremental equity that they're getting? What are they going to get as they continue to put more capital in to grow Greenbox? Thank you.
spk06: Yeah, thanks for that, Chris. So we do anticipate that Greenbox will require capital, and that's because we anticipate a very strong growth profile for the business. So now that capital is going to come in the form of It'll be netted against cash flow that is due to Symbotic for the purchase of the system. So we will be funding, we anticipate we will be funding capital, but as I mentioned, it'll come out of the cash flow we get. SoftBank will be putting capital in directly to support the growth. Now, over time, we anticipate that we will be able to bring on debt capacity as well. We anticipate that in the growth phase ahead of Greenbox being cash flow positive on its own right with its own subscription customers, that that debt capacity can begin to supplant some of the capital calls that are necessary to support the growth.
spk11: I appreciate that. If I could just squeeze one last one in because it's another kind of common question. I think right now there's 33 systems under deployment. Greenbox will start ordering next year. Where do you think, I guess, you know, the capacity for units under deployment could be, you know, say 12 or 18 months from now? Just trying to get a sense for, you know, kind of how that green box growth can layer in. Thank you so much.
spk06: So, Chris, we've been building our supplier network and our outsourcing partners in our operations. is to ensure that we build that whole supplier network to more than support the $23 billion we have in backlog, along with, as I mentioned, we want to create additional capacity slots for our existing customers and for those potentially one to two new customers per year we're bringing on. So we do believe that the outsourcing progress that we've made to date gives us the visibility to do that already today. And what we're looking to do is harden and deepen that supply chain so that we can create more capacity beyond that.
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spk06: Thank you.
spk18: Appreciate it.
spk06: Thank you.
spk16: Thank you. And our next question coming from the lineup. Rob Neeson with Bayer. Dylan is open.
spk07: Yes, good morning. This is maybe just to follow on to the last question. I am curious how far out you can secure your partner resources for the deployment of these systems and also thinking about what steps you're taking to insulate, I guess, a stronger pull on industry resources. If you look out two or three years, the warehouse automation market is stronger than it is today, which there's been some step back by some of the larger players in the industry. If they were to come back, how do you insulate against pull on those resources?
spk09: Okay, so this is Rick. So I've spent a lot of time on this over the last six months, and there's two things that we're doing. So we continue to find new partners that want to build systems for us. We're also continuing to find new suppliers that may have, as you said, seeing their backlog greatly cut down. And so we're developing a different kind of relationship with these suppliers. So we're developing, this is what I did in my past life with CNS. These are real partnerships. So these are going to be long-term partnerships. And quite frankly, we're going to be a very large customer to a lot of suppliers, but we are not single sourcing anything. Um, and we're finding suppliers around the world. So I think we're feeling pretty good about the ability to keep our supply chains running. One of the things that is, as I think the whole community has seen, but the supplier community has seen, is how predictable. I mean, we really, there are very few times where these kinds of suppliers actually have visibility to a five or six year backlog. And so that's what we have. So we're very excited about the suppliers. The question you were asking before, as the suppliers build higher and higher quality into their products, the installation times go down faster, and then we can buy more systems and install more systems. So we're very, very aware. of what happened in the last couple years about supply chains breaking, and we're very, very focused on making sure that doesn't happen to us.
spk07: Very good. And just to follow up with respect to Greenbox, it sounds like they'll pursue or secure some customers early on before you launch your systems into them. But as you think about this going forward, would you expect that they would deploy systems on spec or would they need to have customers under contract before they would place an order with you?
spk09: I think they're going to do both. I mean, one of the reasons that in my prior – one of the reasons that we did this deal with Greenbox is that I spent – I went to Japan a couple times, spent a lot of time with MASA. Vakas, who's on our board from SoftBank, has been a great champion of this idea, but I believe that if we create a network, and so some of these sites will be speculative, and that's a risk that SoftBank was willing to take. The returns should be great, and so it's worth it, but it's not a risk that I think Symbotic should have taken. as a public company that started out as a warehouse automation company. So that's why we partnered with them. But I think there will be facilities that we will build and wait for it to come. And then I think there will be other facilities that we will build, as we are talking right now, where customers are saying, we have a demand for this. We didn't know that you could. What Greenbox does that is so special It's very, very hard for 3PL operators to put multi-tenants in a single facility, and we're hearing that over and over from 3PL operators. And the reason is because they have mispicks, they have errors, and it's very hard to keep the inventory under control. Symbiotic, and this is what we're seeing over the last six months, I mean, if a customer orders a million cases, we ship a million cases, we might have one error, but we might not. we don't even know why we would have that so we're we're nearly perfect inventory accuracy perfect shipping accuracy and that enables a whole new industry and a whole new way of of creating these 3pl operations that we're really really excited about and softbank's really excited about and even some of the 3pl partners and operators who are talking to us about could they buy our systems they're excited so we think this is this is a new market that i don't think people fully understand And it's a very, very big market. Very good.
spk17: I appreciate it. Thank you. And our next question coming from the lineup.
spk16: Jojo O'Donnell with TD Colony on the cell phone.
spk08: Hey, good morning, guys. Good morning, Joe. Just a lot of operational questions have been asked. Maybe I can kind of go through a couple of things that have been coming to us from clients over the last couple of days since Greenbox because there definitely seems to be some confusion about kind of how this works. Rick, a company that comes out of the SPAC and now does a JV that in a way is kind of self-funding its own revenue to some extent. I think that's driving some confusion. Can you maybe talk to us about like, if Symbotic didn't go this route, if you were not going to do Greenbox, but you still wanted to accomplish what Greenbox is doing, like you wanted to do this all organically, what would you have had to do at Symbotic organically to stand up this organization? What would that have meant in terms of capital, in terms of management bandwidth, if you were to do it yourself instead of through this mechanism?
spk09: Yeah, so great question. So obviously, I thought long and hard about doing it ourselves, but what I realized was with the backlog that Symbotic has, the startup costs for Greenbox or for outsourcing and building these spec buildings would have all fell onto Symbotic. It would have been very, very confusing to our investors. So what we did is we separated it out, and the pricing that Symbotic has to Greenbox because we understand what a big value creation is, we're getting a very large percentage of the profits both through software and through margins to Symbiotic while still offering great returns to SoftBank. So the lesson that I learned is at CNS, which I still own 100% of and it's a large business, I never took outside capital because I liked owning 100%. And if I had taken outside capital earlier, we would have done a couple of massive acquisitions, which we didn't get done because we wanted the capital just at the right time and not give up any shares. And so I think that really hurts CNS in the long run. So one of the things I've thought about with Greenbox is, We're going to create a whole new infrastructure market. We need to get the capital early, but we also need to keep Symbotic as a pure play. And so what we get is we get very healthy software license fees out of Greenbox, very healthy margins, higher than we get today. And then because it's really, we created this business with the help of SoftBank, but a lot of it was something why SoftBank invested in Symbotic early on. We talked about this with them when we first looked for a partner for the SPAC. So our 35% of the profit of Greenbox will come back to Symbotic as a distribution. So when you add those three profit streams, it's not as good as if I did it myself, But I think in the long term, it's going to be a lot more profitable in the early years than if I had waited to do this. And I think it would have taken five or six years to do it. And I think there would have been a lot of confusion at Semotic. So that's why I chose to do it now this way. And so I hope I answered your question.
spk08: That's great, Collar. I appreciate it. And then maybe just last one. Because I think there was also some confusion that the shelf registration happened at the same time, and maybe there was, like, the initial response suggested that maybe people were worried about a liquidity event. Can you talk about what that registration did and what the actual near-term capital needs of legacy symbolic are at this time? I mean, given your cash position, it doesn't seem like a primary share issuance is really necessary.
spk06: Yeah, thanks for that question, Joe. We did file a... as you saw, S3 registration. This was our first opportunity to do that. So you have the anniversary, your public listing per year, and then the subsequent month is when you can file that. So we felt like it was good governance to have that shelf in place should we want that streamlined process to any future either debt or equity capital raise. And you're right, as we look at our business, we are cash flow positive. with expanding margins looking forward. And then that's the business before green box. Add green box on top, and we expect that it actually will be margin enhancing on a cash flow basis. So we don't really see a core general operational need for the business at this point as we look forward to our cash generation.
spk08: Perfect. Thanks, guys.
spk06: Thank you.
spk16: Thank you. And our next question coming from the lineup, Mark Delaney with Goldman Sachs. Your line is open.
spk19: Yes, good morning. Thanks very much for taking my questions. First, I was hoping you could please provide an update on how BreakPak development is progressing and how feedback has been on that capability.
spk18: No one flavors like we flavor. Grillmates.
spk09: Yeah, sure. So the BreakPak is – progressing quite well there's been a lot of issues starting up a whole new basically it's a whole new business it's a whole new product line for us but I'm spending a lot of time down there the whole team is spending a lot of time down there it's on track it's going to be a great product we're already starting to work with Walmart on the learnings that we have from the first system and what the second system would look like, which will be better, faster, and cheaper. So I would say we're very happy with BreakPack, and we think it's going to be a very good product for us to roll out to the whole marketplace.
spk06: And I'll add to that, Mark, that we continue to expect that. We'll likely do one more proof of concept before making it generally available, but just add that I agree with Rick that the feedback we get from interest in this product.
spk19: That's all helpful, Collar. I appreciate that. And my second question was on the system's gross margin. I believe the company has articulated the potential for that to eventually reach the high 20s, if not even 30% over time. So could you comment in more detail on what the key factors would be to get to that sort of a gross margin relative to the current level, and then any rough sizing of how much the various factors could add to margins? Thanks.
spk06: Yeah, thanks for the question, Mark. So we do continue to see that as we think about the backlog here pre-green box, that we have a structural gross margin that over time, so over the coming years, that we can begin to approach that high 20s to closer to 30% type of structural gross margin on a systems basis. I'll emphasize as well that as you layer on recurring revenues, which have a higher structural gross margin over the long run that we think we can, you know, on that pre-existing backlog, take our blended gross margins higher than that. You know, as we're bringing on new business, our new business is coming in at margins that are higher than that. So that's providing continued support for longer-term gross margins. The factors really are unchanged as to, you know, where some of that margin power comes from. Those are lower margin revenues as they flow through our income statement on the COGS line, just the nature of we're delivering that as a product. So the significant portion of the innovation costs actually flow through our COGS, along with the second biggest factor is just how fast we're moving and moving with outsourcing partners. So we continue to have significant redundant costs, startup and shutdown. going to continue in the near term, but we anticipate that as quarters roll out, those redundant costs abate over time and help provide us with an expansion.
spk16: Thank you. Thank you. And our next question coming from the line up, Derek Soderberg with Cantor, Fitzgerald, Neal, and Sopran.
spk10: Yeah, hey, guys. Thanks for taking my questions. Wanted to clarify some earlier remarks around the outsourcing model. You know, just looking at the backlog, very sizable for you guys to fulfill over the next five or six years or so. Can the existing outsourcing model supply that backlog today? Do you need to continue to build that out? How much more work do you have left getting that outsourcing partner list to the point where you can fulfill that backlog? Or do you feel like you can deliver on that with your list of outsourcing partners today?
spk06: It can, Derek. Short answer is it can. We have stress tested this network as we have it today. Now we're continuing to work to get that network efficient and hardened and expanded even further. But as we enter the green box contract, we're confident that our outsourcing partners and our plan as we have it now is more than adequate.
spk10: Got it. That's great. And then as my follow-up, and maybe this one's for Rick, just on Greenbox, I'm curious who wins with this business model. Is this better for smaller firms or large firms? Does this in any way change your priority selling to sort of the other big box retailers sort of laid out in your growth strategy? Can you talk about sort of the size of the firms? Anything on that? That'd be great. Thanks.
spk09: Sure. So, first of all, we're continuing to sell the big box guys, the wholesalers. UNFI just announced that they're our second system with them. And we have a lot of those type of customers still in the pipeline. which will get announced when we sign deals with them. But there's a lot of that in the pipeline. So one of the things I wanted to do is I really didn't know, quite frankly, a little bit surprised how big this market is, considering that I thought I was just going to do automation for CNS 10 years ago and find out how much in demand this product is. So we still have in the big box and we continue to talk to existing customers about even more projects. So that's one thing. The green box, let me give you an example.
spk01: So green box could be... We help individuals and organizations better lead and manage change, and now we're excited to offer the Cotter Change Certification Program. Each course is presented by a Cotter expert. To learn more and register, please visit our website.
spk09: as small as Mama Brown's spaghetti sauce that makes something that you might buy online or you might buy at a Whole Foods, a small supplier, and they're warehousing products before they're shipping somewhere. So that could be somebody that takes 50,000 case positions in a building that holds a million. So that would be a small customer. It could be a lot of small customers. On the other hand, One of the things that we've talked to SoftBank about, which is one of the reasons why we're excited them as a partner. So the sovereign wealth funds, all of them, whether it's Singapore or UAE or the Saudis, they're all very large owners of ports. And the way the ports work is that they basically build warehouses for people and then they have operators. So if you automated all the ports in the world, that would probably be the world's largest customer. So, so they're both big customers and small customers. So who would go into the ports? Everybody that's unloading containers has got to store that stuff somewhere. And so you could have big customers that today only do that themselves. And now we could offer somebody like some of the big shoe companies. Instead of having six warehouses where they put their shoes, they might want to have 20 warehouses that are much more efficient freight-wise. They can't do that today because they have these massive warehouses with massive warehouse management systems. And so we could say you could store 200,000 boxes instead of 2 million boxes in our facility and spread around the country. So the concept that we're talking about, the way I describe it, is it's a combination of Iron Mountain, which created a whole business for secure storage. And of course, that's not a great business anymore because of everything going online. But when it started, it created a business that nobody really understood because everybody stored their records themselves. So there were small customers and big customers. You have that extreme And then the other thing that I focus on is all these storage sheds that are being built around the country, they never stop building them. Every time they build an apartment building, they build these more storage units. Nobody had any idea how big that business was 20 years ago. If they had, they would have built them all out. So we're offering both small customers and large customers a whole different supply chain flexibility that they never had before.
spk00: Awesome. Thanks, guys. Thank you, Derek.
spk16: Thank you. I'm showing no further questions in the queue at this time. I'll turn the call back over to Jeff Evanson for any closing remarks.
spk03: All right. Thank you, everyone, for joining our call today. We appreciate all your interest in Symbiotic, and we look forward to seeing many of you at investor conferences, on facility tours or when we talk again next quarter. Thanks again. Goodbye.
spk16: Ladies and gentlemen, that's our conference for today. Thank you for your participation. You may now disconnect.
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