Ouster, Inc.

Hello and welcome everyone to Ouster's fourth quarter 2022 earnings conference call. All lines have been placed on me to prevent any background noise. After today's presentation and remarks, there will be an opportunity to ask questions. If you would like to ask a question during this time, simply press star followed by the number one on your keypad. And if you would like to withdraw your question, press the pound key. And just a reminder, today's call is being recorded and a replay of the call will be available on the Ouster Investor Relations website. an hour after the completion of this call. I'd now like to turn the conference over to Ms. Sarah Ewing, Director of Investor Relations. Sarah, please go ahead.

Thank you, and good afternoon, everyone. Thank you for joining us for our 2022 Fourth Quarter Earnings Call. I'm joined today by Alistair's Chief Executive Officer, Angus Bacala, and Chief Financial Officer, Mark Weinswig. Before we begin the prepared remarks, we would like to remind you that earlier today, Ouster issued a press release announcing its fourth quarter and fiscal year 2022 results. The company also published an investor presentation, which is available on the investor relations section of Ouster.com. I'd also like to remind everyone that during the course of this conference call, Ouster's management will discuss certain forward-looking information regarding the company, including forecasts, targets, statements from its press release, potential future customer orders, and shipments, near and long-term revenue opportunities, strategic customer agreements, market share trends, anticipated synergies from the company's merger with Belladine, ability to recognize the benefits of cost savings initiatives, future products, anticipated benefits and applications of new product releases, technological advancements and commercial paths, potential future market opportunities, customer traction, and the company's business outlook and first quarter 2023 financial guidance and trajectory, are forward-looking statements that are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. There is no guarantee that such plans, estimates, and expectations will be achieved. Thus, while these statements represent management's expected future results and performance, Aster's actual results are subject to several risks and uncertainties that may cause actual results to differ materially from current expectations that we may share with you today. In addition to any risks highlighted during this call, you should carefully consider other important risk factors and disclosures that may affect OUSER's future results as described in its most recent annual report on Form 10-K and other reports that the company files with or furnishes with the SEC. Except as required by law, rule, or regulation, the company undertakes no obligation to update any of these forward-looking statements for any reason after the date of this call. Information discussed on this call concerning the company's industry, competitive position, and markets in which it operates is based on information from independent industry and research organizations, other third party sources, and management estimates, which are derived from publicly available information released by independent industry analysts and other third party sources, as well as data from the company's internal research and are based on reasonable assumptions and computations made upon reviewing such data. and its experience in and knowledge of such industry and markets. By definition, assumptions are subject to uncertainty and risk, which could cause results to differ materially from those expressed in the estimates. During this call, we will discuss certain non-GAAP financial measures, which exclude the effects of events and transactions we consider to be outside of our operations as outlined in today's press release. These non-GAAP financial measures should be considered as a supplement to and not a substitute for measures prepared in accordance with GAAP. For reconciliation of non-GAAP financial measures discussed during this call to the most recently comparable GAAP measures, please refer to today's press release. Finally, please be advised that we will only cover historical ouster financial results as well as forward-looking statements for the combined company. We will not report on nor provide standalone results for Velodyne. I'd now like to turn the call over to Angus.

Good afternoon, everyone, and thank you for joining us today. To start, I want to recap Ouster's mission to improve quality of life by building safer, more efficient assistance, automation, and autonomy technology for diverse end markets. We aim to do this by evolving from a market-leading ladder manufacturer to a category-defining autonomy provider through delivering best-in-class digital ladder hardware that spans markets, creating a robust software ecosystem to accelerate ladder adoption and deepen customer relationships. and releasing vertical-specific autonomy solutions, all of which increases Ouster's value to customers and shareholders. We made meaningful strides towards this goal in 2022, particularly in the fourth quarter. Last year, we released our first A-samples for the solid-state DF series, introduced the industrial OS sensor lineup for high-volume production programs, and launched the most performance sensor suite on the market, our new Rev7 OS sensors powered by the L3 chip, which increases our competitiveness across each of our target markets. Even more, we built and pre-released our first subscription software, Alster Gemini, a cloud-backed digital LiDAR perception platform for smart infrastructure applications, which will expand and accelerate opportunities for digital LiDAR. As a result of these product developments and in combination with our multi-year customer agreements, Alster delivered nearly 11 million in revenue in the fourth quarter of 2022 with 17% gross margins and achieved our full year 2022 guidance with 41 million in revenue and 27% gross margins. We sold a record of over 2,950 sensors in the fourth quarter and over 8,650 sensors in 2022, bringing our total number to more than 18,500 units shipped to date worldwide. Furthermore, we booked $70 million in business in 2022. Finally, we announced our merger with Velodyne in the fourth quarter, which we completed on February 10th, 2023, ahead of our initial timeline. As one consolidated company, we have an even stronger team, a healthy balance sheet, new channel partners, and a wide selection of positive margin products to serve a diverse set of customers, that position us to win more deals than ever before. We expect our innovative digital LiDAR roadmap, amplified by exciting new software solutions, to further expand our serviceable market and catalyze growth across the business. In addition to Ouster's digital LiDAR, OS, and DF sensors, we will continue to manufacture and support the VLP16, VLP32, and the VLS128 product lines. As we continue to support existing customers using the Velodyne products, which bolsters our revenue base, we believe our digital approach is the end state for LiDAR due to its simplified architecture, superior price-to-performance ratio, and alignment with Moore's Law, which ultimately offers a longer-term advantage for customers. We will continue to focus and invest R&D in our digital LiDAR roadmap, along with the Ouster Gemini and Blue City software. to drive product adoption and new high-margin revenue streams. Over time, we aim to transition customers to exclusively digital products. As part of the ongoing integration, Ouster also announced a new management team and board, inclusive of executives and directors from both companies. We brought on Velodyne's CFO, Mark Weinswig, to lead finance at Ouster and promoted Ouster's deputy GC, Megan Chung, to general counsel. Each company designated four directors to the board, all with valuable experience and perspective to offer the company, including former Velodyne CEO, Ted Tewksbury, who will lead the board as executive chairman. We aim to form a management team and board that not only understands our products, our team, and our history, but also has experience in growing a public company in a complex and competitive market. I'm excited to work with this strong team to scale the development of digital LiDAR and evolved Alster from a market-leading ladder manufacturer to a category-defining autonomy provider. Turning to merger activities, we are currently focused on immediate initiatives to support the ongoing integration and achieve announced cost synergies. Prior to merging, Melodyne had started the process of outsourcing the manufacturing of its products to Fabrinet, a contract manufacturer in Thailand, to bring meaningful improvements to the cost structure. We have accelerated these efforts as a result of the merger and are on track to complete the transition of all maintained product lines this year, starting with the VLP16 sensors in Q1, the VLP32 in Q2, and the VLS128 by the end of the year. As products are successfully transitioned, we remain focused on improving yields and quality and optimizing BOM costs, with the goal of improving the margin structure of the Velodyne sensors. Immediately after closing the merger, we took action to integrate our sales organization and engineering teams to both support existing Velodyne customers and execute on our strategy for our digital LiDAR hardware and software roadmaps. We developed a plan to integrate the Ouster Gemini and Blue City smart infrastructure software solutions under a single umbrella, which is already underway. Additionally, we are streamlining our G&A and IT operations under a consolidated team and platform to realize a cost-efficient structure to drive value creation for Alster and its shareholders. Following the integration, we expect to retain approximately 350 employees. The new Alster is a LiDAR powerhouse, offering a comprehensive suite of incredible LiDAR sensors, two novel smart infrastructure software solutions, a comprehensive patent portfolio spanning analog and digital LiDAR, and global commercial reach with over 850 customers spanning the automotive, industrial, robotics, and smart infrastructure industries in approximately 50 countries. Ouster has three strategic priorities for 2023. Execute on our digital ladder roadmap, develop a robust software ecosystem to accelerate ladder adoption, and build a financially strong business to support our long-term growth and deliver value to shareholders. Our differentiated digital ladder technology supports a uniquely diversified business model with the ability to drive near and long-term revenue growth and scale across multiple markets. In the fourth quarter, we released our new REV7 sensors, the highest performing family of sensors on the market, delivering dramatic improvements in range, precision, and accuracy across our entire OS lineup. Our OS0 delivers 1.5 times more range and six times higher resolution than competitors. Our OS1 delivers two times more range and four times higher resolution than competitors. And our OS2 not only achieves a greater than 200-meter range on 10% reflective objects, but now has a maximum range of over 400 meters. Additionally, the OS dome's hemispheric 180-degree field of view delivers four times higher resolution than competitors. The REV7 sensor suite improves our overall competitiveness across markets, opens up new opportunities, and cements our position as the industry leader for high-performance LiDAR. The early feedback from customers has been extremely positive. We closed new and expanded deals for REV7 sensors, shipping to 29 customers in the fourth quarter. We also booked orders with customers such as Syngin and Vecna for warehouse automation, Parafix for speed enforcement, Torque Robotics for trucking, and Rise for aerial drone inspection, as well as a major mapping customer, a large European OEM, and another European OEM using REV7 on mining trucks. We believe the REV7 sensors will more than double our serviceable market driven by new opportunities for long-range and mapping applications. As such, we expect REV7 to be a major growth catalyst for Ouster in 2023. Looking forward, we also expect the digital flash or DF series for high-volume series production automotive programs to also be a major catalyst for growth. We released our first A samples in 2022, which demonstrated that our solid-state digital flash architecture could achieve the stringent performance requirements of the automotive industry at a competitive cost. In the second half of the year, we plan to release final form factor early B samples of our DF sensors. This is a critical milestone on our automotive roadmap and in our commercial engagements with automakers, including our strategic OEM partner. For the first time, we will be placing DF sensors in OEM hands that represent the final size, shape, and performance of the DF product line. I can't wait to demonstrate the performance, cost, and flexibility advantage of the DF product line. Turning to software, building a robust software ecosystem remains an important part of our product roadmap to catalyze new growth. This includes best-in-class development tools to simplify development for customers, as well as our new software solutions business, built on Ouster Gemini and Blue City, targeting the smart infrastructure vertical. The market for LIDAR across smart infrastructure applications is fast and growing, driven by government initiatives built to build safer, more sustainable cities by modernizing public infrastructure and transportation systems, as well as emerging opportunities for LIDAR and security and crowd analytics to enhance the guest experience, boost revenue, and simplify operations. With millions of signalized intersections around the world, and the global market for end system security cameras already estimated at 32 billion, there is a multi-billion dollar market opportunity for LiDAR and smart infrastructure. As LiDAR technology becomes increasingly prevalent on critical infrastructure across the U.S., from airports and shipping ports to our country's most populated cities and trafficked roadways, Ouster is proud to be one of the few companies offering Buy American certified sensors. To build on this momentum, we recently released the Ouster Gemini smart infrastructure perception platform and added the Blue City traffic management solution. With the successful early rollout of Ouster Gemini in the second half of 2022, and after closing deals with more than 10 companies, we officially released Ouster Gemini in January 2023. A handful of these customers are already using Ouster Gemini in live deployments across the U.S. and Europe. to improve retail operations, security, and roadway safety. Blue City is a turnkey LiDAR-based solution for intelligent transportation systems with over 100 active deployments in 2022. As part of our plans to unify our software solutions for the smart infrastructure vertical, Blue City will be underpinned by Ouster Gemini to add OS sensor compatibility, more features, and better overall performance to Blue City customers. With the launch of our game-changing Rev7 sensors, new software solutions for smart infrastructure applications, and early B-samples for the DF series, as well as key benefits from our merger with Velodyne, including an expanded team, customer base, product portfolio, and partner ecosystem, we believe Ouster is more competitive and poised to close exciting new deals in 2023. In order to position the company for stable near and long-term growth, We are building a business model that is both competitive and resilient. I'm happy to introduce Mark Weinswig as our new CFO to lead us through the integration with Velodyne to help us align our cutting edge technology and market growth with a solid business foundation to support Ouster now and into the future. And with that, I'll now turn it over to Mark to update on our financial results for the fourth quarter and full year 2022. as well as provide further details on our near-term integration plans.

Thank you, Angus, and good afternoon, everyone. I am excited to be a member of the Ouster management team and look forward to aligning our differentiated digital LiDAR technology and diversified market approach with a business model that is in line with the LiDAR industry's estimated growth trajectory. Starting off with our fourth quarter 2022 results, we recognized nearly $11 million in revenue, Our industrial and robotics customers accounted for a combined 62% of sales in the fourth quarter, which included substantial shipments for port automation, material handling vehicles, drone inspection, and warehouse automation applications. A key highlight of the quarter was the number of units shipped, reaching a record of 2,950 sensors in Q4, or a 23% increase over the fourth quarter of 2021. This includes the first commercial shipments of our new Rev7 sensors to 29 customers. Further, we shipped sensors to nearly 90 new customers in the fourth quarter of 2022. Ouster is entering 2023 in a great position with a newly released platform, over 850 customers worldwide across all of our key markets, and a strong balance sheet. Ouster continued to deliver positive gross margins in the fourth quarter of 2022, recording 17% gross margins. Gross margins were lower in the fourth quarter, primarily driven by some large unit volume sales to certain commercial customers with lower ASPs, as well as higher expenses associated with the manufacturing transition to the REV7 sensor platform and overhead underutilization from our lower build plan as part of the product transition to the REV7. We expect to deliver higher margins over time after we complete the Velodyne integration and ramp up our manufacturing of the REV7 sensors. This transition to REV7 is a major catalyst for growth, as this suite of sensors more than doubles our serviceable market, opening up new opportunities and increasing our overall competitiveness in 2023. Moving on to our full year results, we are very pleased with our progress over the past year. Avster achieved both our revised revenue and gross margin targets for 2022, recording approximately 41 million revenue and 27% gross margins for the year. In total, we shipped over 8,650 sensors in 2022, which amounts to over 18,500 sensors shipped to date. Across our target markets, Oster saw strong traction in the industrial and robotics verticals, accounting for 35% and 34% of our sensor shipped in 2022, respectively. with strong demand for automation technologies across the supply chain continued from mines and farms to shipping ports and warehouses. The automotive vertical accounted for 22% of sensors shipped primarily for robotaxis, robotrucking, shuttles, and buses. Finally, 9% of sensors were shipped to customers in the smart infrastructure vertical in 2022. This remains an area of significant opportunity with over 210 new programs awarded in 2022 representing demand for thousands of sensors which will be deployed over the coming years, as well as with the release of the Ouster Gemini software product in January 2023 and our new Blue City offering. In 2022, Ouster recorded 70 million in bookings with new and existing customers, demonstrating our growing traction across verticals even in the near term. Bookings represents binding contact orders from customers which we believe is a more meaningful metric than strategic customer agreements or SCAs, as the bookings metric captures orders from all customers. Ouster ended 2022 as a leading LIDAR company amongst our public LIDAR peer set, based on both revenues and gross margins. We believe this momentum is only strengthened by the merger with Valodyne, which showcases Ouster's maturity in the industry and allows us to build a business model that can sustain near and long-term growth. Turning to the Velodyne merger integration activities, we are taking strategic steps to achieve the cost synergies that allow us to build a healthy business. The company is well capitalized with a combined approximately $315 million in cash, restricted cash, cash equivalents, and short-term investments as of December 31, 2022. We remain on track to exceed previously projected annualized cost synergies of $75 million within nine months. The synergy estimate is baselined against the standalone cost structures of the two companies as of the third quarter of 2022. We closed the merger with Valadyne on February 10th, earlier than expected, and took immediate steps to significantly reduce costs. By the end of the first quarter of 2023, the company expects to have removed approximately $50 million in annual run rate costs compared to the third quarter of 2022. We expect the first phase of integration to require one-time cash costs of approximately $12 to $14 million, with the majority paid by the end of March. These implemented cost reductions primarily focused on duplicative R&D programs, general administrative activities, and the creation of a joint operations team. These activities include a headcount reduction of approximately 200 employees, along with the closing of Velodyne's facility in India. We expect to retain approximately 350 employees following the completion of our integration efforts. We're keenly focused on positioning the company for long-term success and will continue to identify additional cost synergies as we work through the integration. Through these activities, we are taking the first steps to realign our operating model to build a healthy, scalable business that can deliver value to our shareholders. We look forward to providing further details over the next couple of quarters as we continue to develop and execute on our plan. Going forward, at this time, we plan to only provide quarterly guidance for revenue. For the first quarter of 2023, Oster is targeting between $15 million and $17 million in revenue. We expect the first quarter to experience some margin pressure due to the merger integration work, including the ongoing work to outsource manufacturing for Valodyne sensors, as well as the manufacturing transition and startup costs from the REV6 to REV7 OS sensors. That said, we remain highly confident in our long-term trajectory and continued traction in the market. With a strong balance sheet, increased scale, and new product offerings, we believe 2023 will be a transformational year for this company.

And with that, I would like to turn the call back over to Angus. Thank you, Mark. 2023 is going to be a major year for Ouster. driven by new hardware and software solutions that we believe will accelerate LIDAR adoption, and a new operating model aimed to put us on a path to profitability in line with our long-term growth plans. LIDAR is quickly becoming an essential technology on our roads, across our supply chain, and throughout our critical infrastructure. Ouster is well-positioned with the technology, team, and strategic approach to make LIDAR ubiquitous to build a safer, more efficient future. With that, I'd like to open it up for Q&A.

Thank you, Mr. Krakala. Ladies and gentlemen, at this time, if you do have any questions, again, star one. And if you do find your question has been addressed, you can remove yourself from the queue by pressing the pound key. We'll take our first question this afternoon from Andre Shepard at Cantor Fitzgerald.

Hi, good afternoon, everyone. Congratulations on the quarter, and thanks for taking our questions. Maybe to start off, I just, I wanted to see if you could provide a little more color on gross margins, right? So Q4 margin came down a little bit lower than historical numbers. I realize you don't provide guidance for 2023, but can you give us a sense of, you know, whether this last number is a bit of an outlier or whether we should expect, you know, similar gross margins in 2023? Thank you.

Thank you very much for the question. So looking at the fourth quarter, we did see lower gross margins. It was primarily driven by three areas. Number one was higher startup costs associated with the manufacturing transition from the REV6 to REV7 sensors, which we do believe will deliver higher margins over time. Number two was some large volume lower ASP deals with key commercial customers. And then number three was a reduced bill plan, which led to lower manufacturing absorption and a reduced operating leverage. Those were some impacts for the fourth quarter. Looking at the first quarter, obviously we're going to have some additional opportunities or pressures related to the merger integration with Valadyne. That will include some ongoing work to outsource manufacturing and for the startup costs associated with manufacturing those products over in Thailand. We will continue to see some additional manufacturing transition costs associated with the move from the REV6 to REV7 sensors. And then potentially some one-time merger related costs, including items such as purchase accounting step-up relating to inventory. But we do believe that the REV7 sensors will help us drive higher margins as we move through the rest of this year.

Yeah, and I would also add that we do expect ASPs to be stabilized back at historic levels, not the lower levels of Q4, and that's what we're seeing in Q1. I think overall it was absolutely the right call to invest in the REV7 lineup. And, you know, there were costs associated with that that did obviously impact the Q4 margin. But the early response from the REV7 customers, you know, we shipped to 29 customers in the quarter. We've had immense positive reaction from those products. And it set us up extremely well looking into 2023 on on where we're going with the business. So just a little helpful context on why we made that investment.

I know that's very helpful and insightful. Appreciate that color. Maybe as a quick follow up, do you mind just reminding us on your capital needs, right? So the $315 million in liquidity, that includes the merger with Velodyne. And so What does that mean going forward? Do you anticipate there being a need to raise additional capital, or is that aggregate liquidity sufficient to give you significant runway? Thank you.

As you mentioned, as of December 31st, we had a very healthy combined balance sheet if we take into account the cash that we received from the Valadine merger with roughly $315 million. One of the key things is that we took action on day one after the merger to reduce our cost structure. We had committed to, as part of the merger, to exceed $75 million in cost synergies. As we mentioned in our prepared remarks, we've already removed $50 million exiting the first quarter. There was some one-time cash costs associated with that of about $12 to $14 million, but we do feel very good about the early stage success of the integration. We see significant opportunities in the LIDAR space, and we do believe that our technology and products should enable us to win significant share in the future. We are going to continue to make investments over time, but it is something that we are weighing, which is obviously making sure that we can put in place a healthy business model for the future. And so we are looking at opportunities to continue to reduce our cost structure and put us in a good position for that.

Wonderful.

Thanks again, and congratulations on the quarter.

I'll pass it on.

Thank you.

Thank you. We'll go next now to Ryan Dobson of Chardon Capital Markets. Yeah, thanks very much.

So, you know, I understand that you're not issuing guidance. However, you did issue a combined pro forma outlook for the two companies just prior to the close of the deal. You know, now that you've had some time to overview the businesses as a combined entity, how do you feel about those 2023 and 2024 revenue numbers, and should the streets still rely on them?

Yeah, I would appreciate the question. Obviously, right now, we're only giving our, you know, our first quarter guidance, which, you know, is, you know, for this period, which is between the $15 and $17 million. We are continuing to look at, you know, the combined business and what it's going to look like. You know, obviously we're only 40 days into this merger, so we're just starting off with, you know, kind of looking at the opportunities to grow the business for the opportunities to, you know, get our cost structure in line. So, you know, I look forward to, you know, updating you in future quarters as we continue to make more progress on some of these integration activities. But for right now, we're really just putting our heads down and focusing on the task at hand.

Yeah, and I just add that, you know, we came out of 2022 with $70 million in bookings for the year. That's an extremely strong number for us as a business. And that was built primarily from the REV6 product line. And obviously we've invested and now we're shipping REV7 products. They're a game changer for our customer base and for expanding our SOM. And so, you know, the growth we saw in bookings, the growth we saw in revenue and shipments and one deal last year gives us a lot of confidence that we're on the right trajectory for this year. And the merger, you know, from the work we've done in the last four weeks, we're on track with the merger. We're on track with our product transition on the Velodyne side to Fabrinet to really supporting those products and that revenue-based long-term as well. So, you know, I think in aggregate, we feel really good about where we are for the year.

Right. And were those REV7 sales, were those contemplated in the pro forma numbers that you had put out in that filing?

Yeah, absolutely. So absolutely, this year, Rev7 will be a major catalyst for us winning new business and also expanding business with our existing customer sets. I can't stress enough how much of a game changer the Rev7 product line is. We changed basically every component in those devices we upgraded, starting with the L3 chip, a much more advanced semiconductor node, hundreds of millions of transistors worth of logic that double the range of the entire product line with no drawback in power draw, size, form factor, cost structure to the product line. And we also released a new form factor, the OS Dome, in the process. So not only are we improving our existing products, but we released this very differentiated OS Dome product to expand more in our industrial and robotic space but also give us a perfect sensor for all of our smart infrastructure solutions business, using it in a ceiling-mounted way, just like a security dome. So, you know, the REV7 is absolutely a part of the business. And, you know, I'd highlight that we've already announced head-to-head wins with the REV7 sensors, Syngin and LASA are two that we recently released, one in industrial robotics, the other LASA in port automation. And so the early product feedback has been incredibly promising.

Oh, that's excellent to hear. Thank you for that color. Just one final question. In the filing, you have some pro forma revenue numbers for 23 for Velodyne and for Ouster, and then you have the combined entity. And it seems like there's some leakage between those three numbers, and that's probably due to you know, call it redundant product lines or redundant customers. The first quarter guidance you gave, that's just for standalone ouster, right? Would you expect combined results to be below that range?

Well, I appreciate the question. So for the standalone guidance that we're giving for the $15 to $17 million of revenues, that includes any Velodyne products that we are shipping out after the merger date of February 10th. So that would include, you know, the existing Ouster Business Plus, the VLP16, the VLP32, and the VOS128 product lines from Belladine.

Okay. All right. Thanks very much.

And we'll go next now to Tristan Guerra of Baird.

Hi. This is Tyler. I'm for Tristan. Thanks for taking the questions. Could you provide an update of the state of demand in China? Do you expect a second half recovery? And then also, could you just remind us what your revenue exposure is to China?

Thanks for the question. Yeah, so we've never broken out the China revenue base. We've invested significantly in the region. There's a ton of great business to be had in APAC as a region overall. We do have a presence in China. Both Velodyne and Ouster did, and we continue to have a presence there. We have a lot of great customers within China in the robotics and automotive space. There's been a ton of investment in kind of robotaxi and adjacent industries. But we're also investing significantly into major other Asian markets like South Korea, Japan, Australia, Singapore, and obviously we have a big physical presence in Thailand as well with our manufacturing there. So we're expecting to continue to invest in the entire region. It's an important region for us. We haven't broken out the demand and don't expect to, but really feeling good about the APAC region and their performance in 2022 and what we're expecting from them in 2023.

Okay, great. For my follow-up, you mentioned that one Q23 ASP should go back to historical levels, but how should we think about price declines expected for the rest of the year, and then also compare that with your expected cost declines for the year?

Yeah, so just stepping back, the fundamental kind of premise of the digital LiDAR sensors that our COGs are going to continue to decrease faster than our ASPs continues to be our expectation. Mark mentioned some of the headwinds that we'll have as a part of the merger, as a part of the REV6 to REV7 transition. Those are near-term effects, but we do expect that REV7 will continue to march down this COGS trajectory while ASPs stay more stable. And so, you know, we noted that ASPs were lower in the fourth quarter due to some higher volume, lower ASP customers, but we've already seen ASPs rebound for the REV6 products and the REV7 products, you know, are already coming in at higher ASPs, premium ASPs than the REV6 products by design given their premium performance.

Great. Thanks again. Thank you. We go next now to Kevin Cassidy at Rosenblatt Securities.

Yeah, thanks for taking my question. Just congratulations on the book-to-bill ratio that you had in 2022. When you're looking at the first quarter, are you continuing that type of book-to-bill ratio, assuming $16 million in revenue?

Absolutely. I think that the book-to-bill is such a strong indicator for the business. Your call, going back even to when we went public, we talked about the importance of building binding relationships with our customers, signing contracts with our customers, and we continue to do that and expect to continue to succeed. It's better for customers to have visibility into their purchasing cycles, and it's better for us in managing our supply chain and understanding where the business is going.

Okay, great. And to just better understand getting the ASPs back up again, is that high-volume customer, are they still going to be in high volume in 2023, and you're just getting more lower volume, let's say higher ASPs, so the mix is bringing the ASP back up, or is that high-volume customer a one-time shipment?

It's really a mix of both, and there is some volatility in ASPs, and we saw that through the quarters last year. There are the seasonal effects of Q4 in our business. We generally see higher volumes with slightly lower ASPs. It was a little more pronounced this year, but yeah, I think that there's not too much to read into We have high volume customers that are purchasing in all the quarters through the year.

Okay, great. Congratulations on getting the merger done. Thank you. We'll go next now to Richard Shannon of Craig Hallam.

Hi, guys. Thanks for taking my questions. I guess my first one's for Mark here. You've given us some thoughts here on how to build the cost model and cost structure, but Just want to ask a direct question here of how you see your breakeven model from a gross margin OpEx point of view.

Yeah, I appreciate the question. And, you know, Richard, I can tell you that we've been focusing probably more time on that topic than on any other one. You know, I can tell you that we are in the process of kind of building out our long-term modeling plans to make sure that, you know, we can take into account the combined company. You know, we obviously have, you know, just 40 days ago, we obviously changed the entire dynamics of of the organization with the combination, and obviously we're very excited about that. In terms of kind of the near-term outlook, we are really focused on that $75 million of cost synergies. We went into the merger with that on our mind. We've really put a lot of effort onto it. We're very happy that really in just the first two months, we've already been able to obtain roughly 65% of those cost savings on a go-forward basis. We expect to continue to really drive the cost down from, you know, as committed to in the merger agreement and continue to actually see additional opportunities to lower the cost structure from that perspective. In terms of the long-term business model, I mean, we are doing a lot of work on the manufacturing side. You know, Angus talked about it a little bit before. I also had in my prepared remarks, which is this move of some of the historical Belladine products over to Thailand to really increase margins. You know, one of the things that You know, Angus mentioned in his remarks was that, you know, the merger allowed us to actually expedite some of that work, and you're going to start seeing more and more of the Valadyne products manufactured overseas, which should allow us to start to increase margins. There are some startup costs associated with that. There's some capital that we put in place, but we are really excited about what this opportunity means in terms of being able to give us a higher gross margin business over the next few quarters, especially as we get through these early parts of the merger. I know I'm not answering your question exactly, but Unfortunately, Richard, we're still 40 days in, and I look forward to giving you more updates, especially as we go through and we start getting more and more information under our belt.

Okay. I figured it might be a little early for that, but I appreciate your attempt at that one. I'm sure I'll ask again in the future. Maybe just to follow up on the gross margin topic here, kind of two thoughts here. You talked about some REV7 transitional things as well as the Velodyne merger impact in the first quarter. I would assume at least the Belladine merger part would affect the second quarter. So kind of when do we get rid of some of those effects and kind of get to a normal course of business? And then following up on that, as you talk about affecting the Belladine manufacturing approach with what you've done at Alster, where the gross margin is so good, is there any way or expectation that Belladine products that are still remaining can get to an Oster-like gross margin structure that you reported in the last few quarters?

Yeah, so looking at the gross margins, you know, and kind of what we're doing, first of all, from some of the historical Valadyne products, and, you know, we'll just call them the VLP1632 and VLS128 because, you know, we're really thinking about ourselves as one company, and it's, you know, obviously we're only 40 days into it, but it's something that we're really focused on from just that communication perspective. We started the transition before the merger, but after the merger, there's been a huge amount of increased efforts in terms of both the Velodyne and Ouster operations groups to continue to basically move that process forward. It will take a couple of quarters, additional quarters, before we get through most of that transition. Right now, we're expecting to be done sometime in the second half of this year, and that will allow those products to have a higher margin base. You know, there are some, you know, some intricate, you know, differences between the two different product lines, which, you know, Angus is, you know, I'm sure looking forward to discussing about, you know, some of the margin base. But that's something where, you know, obviously we do think that there's a better margin opportunity with some of the newer digital LIDAR products than what we've seen with some of the other existing historical products.

Yeah, just to add on to that, I mean, we quickly took a look at the time of the merger, what we could do on the Velodyne product base to increase margins quickly, efficiently, and for the purpose of really supporting the existing customer base and giving them a smooth transition that could be measured in years, not quarters, from analog LiDAR products to digital LiDAR products. You know, we're investing, when I just step back and continue to think about where this industry is going, digital LiDAR products have a fundamental cost structure advantage, and we're going to continue to invest in the R&D roadmap that's, you know, behind those digital LiDAR products. But, you know, we're in the fortunate position where we can provide really a supply guarantee to the Velodyne customers that they're going to be able to purchase these products for the VLP16 and 32 and 128 products for the foreseeable future and give them a really smooth transition to digital products over a matter of years.

Okay. Appreciate those thoughts, Angus. One last quick question for Mark. I was just trying to estimate what your cash balance ending this quarter will be, and you're only eight days from the end, so I figured I'd ask to see if you could give us an estimate. I was kind of doing back-envelope numbers and kind of getting to around 270. Is that in the right range?

Yeah, you know, obviously we entered the quarter with $315 million, or sorry, entered the year, we look at it as a combined basis. You know, both the historical Belladine and historical Oster, obviously were burning at their typical rent rates for that first 40 days. Since that time, we've continued to do a lot of these integration activities to lower the burn rate. There is some cash costs associated with it. We publicly announced that it would be You know, in just this first stage of integration, it would be roughly $12 to $14 million of cash cost. We did note, though, that that would give us a, you know, annualized run rate savings of about $50 million per year. But, you know, we are really looking at kind of making sure that, you know, our cash is going to be something that's very, very important to us because we have a long runway in front of us. We have a lot of investment that we want to do. And so, obviously, making sure that we can, you know, retain as much cash as we can and lower the burn rate and protect that asset, something that we are very much focused on.

Okay. Appreciate the thoughts, guys. That's all for me.

Thank you. Great. And I think that's the – I'm sorry.

I'm just checking if there are more questions.

We do have a couple more questions, sir. We go next now to Kevin Garrigan at West Park Capital.

guys let me echo my congrats on the merger completion and uh thanks for sending me in um just you know two quick questions so the first one you know last quarter or actually you know last two quarters uh the macroeconomic environment was impacting some customer cycles um in some end markets can you kind of update us on whether this is you know still a big factor in our customers delaying decisions to deploy your lidar at all or you know has macro improved and kind of will it be an impact in 2023

Yeah, I think that we, you know, looking back, our business came out of 2022, having weathered this environment quite well. And we expect, you know, we're a diversified company. We highlighted the growth in industrial and robotics sector for the business in 2022. Those are industries that really have a much more stable customer base than some of the R&D focused emerging technologies. that other companies in this space have kind of focused their companies on. And so diversification allowed us to complete the year with extremely strong bookings to bill ratio. Really want to highlight just kind of indicating how healthy this business is, even in this macroeconomic environment. And again, you can see that the places that we're investing in the business are meant to continue to diversify and broaden our scope to build an even more, I guess, robust company against any kind of macroeconomic trends.

Okay, got it. That makes sense. And then just as a quick follow-up, the combined company is, I'd say, a powerhouse in the non-automotive LIDAR market. We've heard from some other LIDAR companies that they're trying to break into non-auto. Are you seeing any competitors making a big presence in non-auto or, you know, any increased competition in this market?

You know, I've seen a lot of press releases and not a lot of products. And, you know, I hold that it's just going back to how hard it is to release products in the ladder space, let alone competitive products, let alone gross margin positive products. And now with REV7, it's the seventh time we've done that. So, you know, I expect there to be more head-to-head competition, but we've shown in the past, and I'm positive with the REV7 sensors that we're going to continue to show that we are highly, highly competitive in this space. And I'd actually point to what Ouster is doing in automotive and bringing now and looking to 2023 with the DF sensor line finally coming with early B samples into the automotive market. as an indication of the presence Alster is going to have in this market that historically some of our competitors thought was safe. And just to highlight some of the benefits that we're bringing to the market there, the DF sensor is really targeted at ultra cost competitive, high performance modular sensors to go into the consumer vehicles that you and I drive. And there's immense amount of technology that has gone into building the world's highest performing solid state digital LiDAR sensors in this DF product line and doing it at a cost point that is fundamentally shifting the entire kind of landscape of automotive LiDAR. So we mentioned on the prepared remarks, we're gonna be releasing early B samples, final form factor devices with the final size, shape, performance of the devices that will go into cars ultimately just in this next year, in the next couple quarters actually. And I have a ton of expectations for that and how it's going to catalyze our automotive business, given all the feedback that we've gotten internally from automakers as we've released eight samples last year, communicated the DF roadmap, and now finally putting the actual hardware into automakers' hands.

Yeah, that makes a ton of sense. Okay, thank you for that, Keller.

Great. That was all that I have. Thanks, guys, and congrats again. And we'll go next now to Colin Rush at Oppenheimer.

Thanks so much for fitting me in, guys. You know, first, could we talk a little bit about the ecosystem of, you know, non-hardware elements that you guys are merging here and how much progress and synergy there is within the software development tools and the other data, you know, and sensor fusion offerings that you guys are bringing to the table for your customers and how that's being received by the customer base so far.

Yeah, I think the biggest thing to highlight here, this is a great question, and it really targets where we're going as a business. I mentioned at the beginning how we have a multi-pronged strategy to really grow from a hardware LIDAR maker into a solutions provider, an autonomy solutions provider. And we have the good fortune that both Velodyne and Alster pre-merger had begun to invest in smart infrastructure solutions. And that's the Ouster Gemini software platform that targets really the entire vertical, so security, crowd analytics, and intelligent traffic systems. And then the Blue City solution, which is a very focused solution just for traffic analytics and management on the Velodyne side. Since the merger, we actually now have combined those teams and I held a software summit in Canada where we got both teams together and defined a unified roadmap where we could integrate Blue City and Gemini into kind of a single software roadmap where now Blue City is underpinned by the Gemini offering and both can be sold to their respective audiences. And we've seen a ton of really great initial progress on this. We mentioned early traction with Gemini released just this quarter. We already have over 10 deployments with that software. It's sped the time to market for the customer set that we're selling into really opened up new opportunities in crowd analytics, security and traffic, because we're selling to a customer that may not know about LIDAR specifically, but wants to have an end capability. And then Blue City has been in the market actually for a couple of years now and announced that they had done over 100 deployments in 2022 alone. And so we're combining, we now have a significant team devoted to these efforts. And I see huge synergies as a result of the summit and the combined roadmap that came out of the summit that we held just last month.

Okay, that's super helpful. And just shifting away from the synergies that you guys are seeing from the organization to the potential optimization of the balance sheet, can you talk a little bit about what you can do to lower the cost of capital overall for the organization and extend the runway given the scope and scale of the ambition for the combined entity?

Yeah, you know, as we talked about before, you know, obviously we entered the year with, you know, a combined $315 million. You know, as you mentioned, we are really focused on the cost synergies that we can take out of the business and making sure we can take those out as quickly as possible. You know, we are very pleased with the $50 million of annualized cost savings that we've taken out, you know, entering into the second quarter. You know, for us, you know, investment in new programs and new technologies is key. It's one of the reasons why, you know, Oster has been so successful. You know, the $70 million of bookings that we have as an organization that we got in 2022 is right from that investment. And so, you know, the LIDAR space is just starting off. You know, the deployments that we're doing right now You know, while we're very excited about it, these are just the beginning, and there will be additional investment that's needed. At the same time, we are putting together our business plan to make sure that we have the right operation structure, margin structure,