Ouster, Inc.

Good afternoon and welcome everyone to Alster's second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After today's presentations 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 telephone keypad. And if you would like to withdraw your question, simply press star one again. The call today is being recorded and a replay of the call will be available on the Alster Investor Relations website. an hour after the conclusion of this call. I'd now like to turn the conference over to Ms. Sarah Ewing, Director of Investor Relations. Ms. Ewing, please go ahead.

Thank you, and good afternoon, everyone. Thank you for joining us for our 2023 second quarter earnings call. I'm joined today by Oster's Chief Executive Officer, Angus Pakala, and Chief Financial Officer, Mark Weinswig. Before we begin the prepared remarks, we would like to remind you that earlier today, Oster issued a press release announcing its second quarter 2023 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 and industry trends, anticipated synergies from the company's merger with Belladine, ability to recognize the benefits of cost savings initiatives, future products and release dates, anticipated benefits and applications of new product releases, manufacturing expectations, technological advancements and commercial paths, potential future market opportunities, customer traction, and the company's business outlook and the third 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 expectations, future results, and performance, ousters' 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 Alster's future results as described in its most recent annual report on Form 10-K and other reports the company files with or furnishes to 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 the markets at which it operates is based on the 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. These non-GAAP financial measures should be considered as a supplement to, and not a substitute for, measures prepared in accordance with GAAP. For a reconciliation of non-GAAP financial measures discussed during this call to the most directly comparable GAAP measures, please refer to today's press release. I now like to turn the call over to Inger.

Good afternoon, everyone, and thank you for joining us today. Following our merger with Belladine in the first quarter, we set out to expand our product offering to broaden our serviceable market, strengthen our overall financial position, and build an operating model for Ouster that would enable us to viably scale and catalyze growth across the business. Ouster exited the second quarter of 2023 with record revenues of over $19 million. record bookings of $43 million, increased average selling prices of approximately $6,300 per sensor on shipments of over 3,000 sensors, and a sustainable cash balance of $224 million. That, coupled with a meaningful reduction in expenditures across the business and our cutting-edge product roadmap, positions the company for long-term success and puts us on an achievable path to profitability. Last quarter, we shared our four strategic priorities for the business in 2023 as we build Alster into a global leader in autonomy solutions and digital LIDAR across our diverse end markets. Number one, drive new business through a targeted sales approach to deliver near-term growth. Two, execute on the digital LIDAR roadmap for OS and DF series to expand our service full market. Three, develop a robust software ecosystem to accelerate LIDAR adoption. And four, build a financially strong business to support our long-term growth. Ouster had a record quarter with increased sales of REV7 sensors. Our REV7 sensors now account for the majority of our OS sensor revenue and bookings. We also shipped GLS128 sensors to Motional and Maymobility, coinciding with new and expanded multi-year customer agreements in the first and second quarters. Additionally, we expanded the number of customers licensing the Ouster Gemini and Blue City software solutions. Turning to execution on our product roadmap, our ability to improve sensor hardware through custom silicon CMOS chipsets will continue to set Ouster apart and keep our OS scanning sensors on the front end of innovation and performance. We have demonstrated this through multiple chipset tape outs over the years, including the L3 chip last fall. We intend to do it again with the tape out of our next generation custom silicon, the L4 chip, later this year. We also completed the integration of our early B sample solid state digital flash, or DS, sensors. At only 40 millimeters tall and fully solid state, these final form factor sensors can detect 10% reflective objects at up to 200 meters range with camera-like resolution. The DF advantages are key for automakers looking to integrate reliable sensors that can be manufactured affordably and at scale in high-volume production vehicle programs. Our early B samples will be sampled to leading automakers in the third quarter of 2023, which is a critical milestone in our automotive roadmap and in our commercial engagements with automakers. Next year, we will upgrade our B samples by integrating our next-generation silicon, the Kronos chip. which is also expected to tape out later this year. Turning to software, Oster has made major product and commercial strides since the start of the year, as we now offer our flexible Gemini smart infrastructure platform and our highly optimized Blue City traffic actuation and control solution to an ever-expanding set of customers. We now have over 200 active deployments of our software solutions, running an array of in-house developed machine learning algorithms. that make real-time observations of the environment around them. These AI-enabled sensor solutions allow companies and governments to solve a range of challenges involving logistics, security, and transportation. Where cameras have been used in the past, our LiDAR hardware and software solutions provide more actionable and reliable data in all manner of low-light and environmental conditions to detect and track objects or people in real time and aggregate analytics in the cloud. We are on track to complete the full unification of Blue City with Ouster Gemini in the third quarter to pave the way for more features and a unified technology stack for faster development of both platforms in the future. I expect the demand for LiDAR hardware and software solutions across the smart infrastructure vertical will be a major growth driver for our business over the coming years. I spoke at a White House event in June to formally launch the Advanced Research Projects Agency for Infrastructure, or ARPA-I, a new agency within the Department of Transportation to foster the development and adoption of technologies that can improve the safety, sustainability, and efficiency of our transportation infrastructure. The U.S. government's recognition of LIDAR as a critical transportation technology, combined with accelerating the adoption of sensors at the state and municipal level, make me confident that we're on the cusp of the wide-scale deployment of this technology. And Ouster is well positioned to supply that demand. And finally, all of this progress is backed by an increasingly strong operating model with an eye on profitability. This is why Ouster took decisive steps in the second quarter to further reduce our expenditures across the business. As a result of those actions, as well as additional steps to streamline our operations, we are now targeting over $110 million in cost savings exiting the fourth quarter of 2023, compared to our original goal of over $75 million at the close of the merger, as baselined against the standalone cost structures of Ouster and Velodyne as of the third quarter of 2022. As part of these efforts, Ouster also continued to execute on its outsourced manufacturing strategy for the former Velodyne products. We completed the transition of the BLP32 sensor to FabriNet in Thailand following the full transition of the BLP16 in the first quarter of 2023 and remain on track to fully transition the BLS128 by the end of the year. We look forward to providing the market with more information on how these actions fit into our detailed financial plan next quarter. I'll turn the call over to our CFO, Mark Weinswig, to provide more context on our financial results for the second quarter and outlook for the third quarter.

Thank you, Angus, and good afternoon, everyone. The second quarter marked continued commercial traction and strong ASPs of our Rev7 product family, as well as significant progress towards completing our merger integration efforts and realigning Ouster's business model with our expected growth trajectory. Starting off with our second quarter 2023 results, we recognized a record $19 million in revenue, a 13% increase over the first quarter, Industrial and robotics customers continue to drive the majority of our revenue in the second quarter, accounting for approximately 56% of sales, closely followed by sales in the smart infrastructure vertical. In the second quarter, we booked 43 million in business with new and existing customers, up from 33 million in the first quarter 2023. This represents a book-to-bill ratio of over two in the second quarter. In the first half of this year, we have already booked a combined 76 million in business, up from a total of 70 million in the fiscal year 2022. Similar to the first quarter, we saw continued commercial traction driven by strong demand and improved average selling prices for our REV7 sensors. In total, we shipped over 3,000 sensors in the second quarter. Our ASPs increased to 6,300 from 5,700 per sensor in the first quarter. primarily due to the strength of REV7 and a positive mix shift within the VLP product category. We believe Ouster is in a strong position as we move through the remainder of 2023. We have the most performant family of sensors on the market, one of the broadest customer bases in the industry, and a strong balance sheet with $224 million in cash, cash equivalents, and short-term investments as of June 30th. As anticipated, Ouster saw slightly improved GAAP gross margins in the second quarter. The second quarter gross margins of 1% included certain expenses outside of our ordinary operations, including excess and obsolete costs and losses on firm purchase commitments of 3.8 million associated with the consolidation of product lines and manufacturing transition to the REV7 OS sensors. Ouster's non-GAAP gross margins were 26% in the second quarter of 2023. Given the transient nature of integration-related activities, We will continue to break out merger integration, product transition, and other expenses outside of our ordinary operations in an effort to provide a clear delineation between infrequent or unusual impacts and the fundamentals of the business to help baseline future operating performance. In an effort to meet customer demand, reduce costs, and ultimately expand long-term gross margins, we made further progress in our efforts to transition all Velodyne sensor production lines to a contract manufacturer in Thailand. We have completed the full transition of the VLP32 sensor following the full transition of the VLP16 in the first quarter, and we remain on track to transition the VOS128 by the end of the year. As a result of these efforts, we expect to see improved gross margins in the second half of 2023 as these activities are completed and the savings begin to be realized. Turning to our cost reduction efforts, we took additional actions in the second quarter to reduce our cash burn rate and align our cost structure with a path to profitability. Building off the actions already taken in the first quarter, the company reduced annual run rate costs by an additional $40 million in the second quarter of 2023. We implemented further cost reductions across the organization, which resulted in a one-time cash expense of over $3 million. With these cuts, We are now on track to exceed our previously announced cost savings target of 80 to 85 million, increasing our estimate to over 110 million in annualized cost savings exiting the fourth quarter of 2023 as baselined against the standalone cost structure of Ouster and Valadyne as of the third quarter of 2022. During our third quarter earnings call, we expect to present a long-term plan for the business. as well as greater detail on our combined company cost structure on a go-forward basis. The actions we have taken have been difficult. We believe they put us in a great position to improve our financial results, providing us with strong operating leverage as we grow the business. We are working to position Ouster for long-term success and are taking the necessary steps to grow top-line revenues while also containing costs and improving margins. Now turning to guidance. For the third quarter of 2023, Ouster is targeting between $20 million and $22 million in revenues. We are pleased at our growth rate over the past couple of quarters, driven by the strong bookings activities and key design wins. We expect to see continued progression on our gross margins over the next two quarters as we complete the merger integration work, outsource manufacturing of Velodyne LiDAR sensors, and migrate more of the business to our more performant Rev7 sensors. As we continue to make progress on these activities, we do expect our GAAP gross margins and non-GAAP gross margins to start to converge in the second half of the year. Overall, the second quarter performance saw a number of financial improvements over the first quarter, including higher bookings and revenues, a strong book-to-bill, higher gross margins, lower operating expenses, and an improved adjusted EBITDA. And with that, I would like to turn the call back over to Angus.

Thanks, Mark. Ouster is now the largest U.S. producer of 3D LiDAR. We have a proven ability to manufacture at scale with positive gross margins and have demonstrated strong growth with record revenue and bookings in two consecutive quarters. Increasingly, we provide AI-enabled sensor solutions to companies and governments worldwide to solve a range of challenges involving logistics, security, and transportation. By leveraging Moore's Law and our silicon roadmap, We continue to release new sensor products and capabilities annually, and have typically increased the performance of our devices substantially with each release. The success of our Rev7 sensors is the latest example of the effectiveness of our digital first strategy. This quarter, we hit another major milestone, completing the integration of our first DF sensors, our line of affordable, low energy, quiet, extremely high resolution LiDAR sensors tailored for the global automotive industry. With our continued product and commercial advancements and recent actions to reduce costs across the business, I believe we can achieve the revenue growth, margins, and cost targets necessary to become a highly profitable supplier of LiDAR sensors and solutions.

And with that, I'd like to open it up for Q&A. Thank you, Mr. Fricalla. And we'll now begin the question and answer session. To ask a question, you may press star then 1 on your telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star 1 again. And we ask that when called upon, please limit yourself to two questions. We'll go first this afternoon to Andre Shepherd at Cantor Fitzgerald.

Hi. Good afternoon, everyone. Congratulations on the quarter, and thank you for taking our questions. I want to start by maybe asking about gross margins, maybe particularly on a gap basis. It's great to see that you're back in positive territory there. I think that was a surprise, at least to us. Curious on how you're thinking about it throughout the rest of the year. I know there was some commentary in the prepared remarks, but maybe just to expand from there, what might we expect from margins throughout the rest of the year? Thank you.

Thank you for the question. And, you know, gross margins is something that we're very passionate about. You know, gross margins for the quarter were 1%, and that included a number of non-recurring, unusual, and frequent items, including our excess and obsolete costs, and certain losses on purchase commitments that totaled about $3.8 million. And these were mainly associated with the consolidation of product lines and the manufacturing transition from the REV6 to the REV7 sensors. Our non-GAAP gross margins were up to 26%, which was sequentially up, and it reflected both higher revenues and the higher ASPs associated with our REV7 sensors. We do believe, looking forward into the second half of the year, that with continued commercial traction and higher revenues, the cost reduction efforts we've undertaken, and also our move to outsourced manufacturing, that we should see our margins expand. in the second half of the year, and with our gap gross margins starting to get more aligned with our non-gap gross margins.

Got it. Okay, that's super helpful. And then maybe just a quick follow-up. In terms of the $43 million in bookings, which you alluded to, and it's a combination of business with new and existing customers, just remind us, how quickly does that translate into revenue? Is that all reported in the quarter or is that maybe spread out throughout the few quarters that are left? Thank you.

Yeah, thanks for the question, Andres. So, you know, it's good to highlight that the vast majority, well, bookings first of all encompasses all business that we close that's binding in the quarter, whether we recognize some of that business in the quarter as revenue or whether we push it off as backlog into subsequent quarters or into subsequent years. I would say that the majority of what we book is for the same year that we book it in. But with a book to bill of over two this quarter, you can imagine that there's actually a multi-year component to a certain percentage of the bookings that we do make. And we highlighted that really Well, emotional is a good example of this, where we announced a multi year through 2026 supply agreement with emotional and that booking obviously has a near term component, but that is layered in over the next couple of years. So, you know, not the majority of our bookings are not that long in length. I'd say the majority of bookings tend to be within the year or the two years following the booking. But overall, the takeaway there is that it's a very strong forward indicator of the business. And again, we closed $76 million so far in bookings in the first half of this year compared to $70 million in bookings for all of 2022. So we're off to a great start.

Got it. That's super helpful. That's it for me. Thank you so much. Congrats again. We'll pass it on. Thank you.

Thank you. We'll give that now to Kevin Gerrigan at West Park Capital.

Yeah. Hey, good afternoon, guys. And let me echo my congrats and thanks for letting me ask the question. I think you noted you're in 200 active deployments with Blue City and Gemini. Can you give us a sense of how much revenue came from the software? Or is it still kind of too minimal? And then does the combination of both come with higher pricing?

Thanks, Kevin, for the question. You know, this is a really interesting area of the business. It's one that I believe in and think it's a major growth driver for us in the future of the company. And so just to reiterate, you know, the smart infrastructure, the software that we're selling is focused on the smart infrastructure vertical. We're selling into security, logistics, and transportation networks with our Gemini and Blue City solutions. It's still the early days. We announced Gemini in the first quarter of this year. Blue City was a product that we have now incorporated from the Belladine merger and have two quarters of that under our belts. But the early progress with these 200 deployments is incredibly compelling. In terms of breaking this out, we're going to wait until this is a significant enough part of our business that we start breaking this out as a separate metric. um to kind of show the momentum that we have in the in the in the software side of the business um and absolutely i expect that we'll be driving higher asps or or higher gross margins in our combined kind of software attached sales because keep in mind with every piece of software that we sell or every software license we're also selling hardware we're selling lidar sensors as well so this software attached sale is a really really positive new dynamic that we've built into the business and You know, from every indication we've seen from customer feedback to the government response to just the raw product performance, this is off to a great start.

Okay, great. I appreciate that, Tyler. And then on ASPs, congrats on the strong growth there. Can you give us a sense on how we should kind of think about ASPs as we kind of head into the second half of the year and should we expect kind of the typical seasonal effects in Q4?

Well, it's hard to anticipate exactly where ASPs will go, but what we've seen so far is a very positive trend in the upward direction. And it's for one main reason, it's the REV7 release. So if you recall, we started, we had $5,600 ASPs last quarter. That was a rebound from the fourth quarter of 2022 for Ouster. And it was really driven by the REV7 release. Why is it commanding higher ASPs? Because we built fundamentally more capability and performance into L3 chip that went in those devices, boosted the performance of the sensor and commanding premium ASPs as a result. And having this kind of outsized impact on the entire business. We saw that continue this quarter with $6,300 ASPs versus $5,600 last quarter. So the trend is in the right direction. And I'd say that while now we announced the majority of our sales for Rev7, the majority of our OS sensor sales are now for Rev7 sensors, but that doesn't mean that all of them are. So we're still seeing more uptake from the customer base, and we'll see how that plays out with the ASPs for the second half of the year. But I have a lot of confidence in where we're going.

Okay, perfect. I appreciate the detail. Thanks, guys. Thank you. We'll go next to Greg Pendi at Chardon.

Hey, guys. It's Greg Pendi in for Brian Dobson. Thanks for taking my question. Just real quick, trying to frame how much left is on the gross margin upside from transitioning to Thailand. Could you just kind of help us understand how much of an impact the BLS-128 will have, just assuming your gross margins on a non-GAAP basis were 27%? in this quarter and how we should be thinking about that maybe as a tailwind in the second half?

Yeah, thank you for the question. So our non-GAAP gross margins for the quarter were 26%. We do believe that there is a significant amount of expansion opportunity due to both the cost reductions that we've put in place that we're executing on over the next couple of quarters and also the transition of the manufacturing over our contract manufacturer. In terms of individual product lines and the margins on either, we typically do not disclose what those are. But I can tell you as, you know, you have seen the increase in our ASPs. And obviously, as our ASPs continue to be robust, we would expect that, you know, that should flow right through to the gross margins and give us additional operating leverage down to the bottom line.

Okay. That's helpful. Thanks. Thank you. We'll go next now to Kevin Cassidy at Rosenblatt.

Hi. This is Madison DePaola from Rosenblatt Securities calling in for Kevin Cassidy. Thank you for taking my question. Could you give me a breakdown of the end markets for the bookings?

Hi, Madison. Thanks for the question. You know, we don't give a breakdown and never have given really a breakdown for the booking side of the business by vertical. But I can point to the revenue breakdown where Mark Weinzweig mentioned that we had driven the majority of our revenue from the robotics and industrial sector. That's become a trend for Ouster. We see a lot of strength in that side of the business. Our products really drive to the cost centers of industrial businesses. warehousing and logistic customers. It's one of the reasons why we've had so much success in things like automated forklifts and automated ground vehicles that are operating in warehouses and manufacturing facilities. So yeah, the majority of business driven right now in industrial and robotics. But I've also made a lot of comments on this call about my expectations for smart infrastructure and how much traction we're seeing now that we have some mature software offerings in that space to kind of spur the adoption of that technology.

Okay, great. Thank you so much.

Thank you. We'll go next now to Richard Shannon at Craig Hallam.

Hi, guys. Thanks for taking my question as well. Mark, I might follow up on the gross margin question, you know, clearly understanding you see some upside potential from a number of different vectors and I guess I'll ask specifically if you can quantify or give us a kind of a range of where you think this can go. Assuming, of course, the same mix here, obviously automotive may change that, but you've got some manufacturing transitions, some other cost reductions, and certainly a mix shift towards REV7 happening here. So I wonder if you can give us a sense of where it can peak out. This is a number that's going to start with a three or possibly higher. Just any way you can quantify a range, it would be great, please.

Yeah, I appreciate the question, and, you know, great hearing from you, Richard. You know, Ouster, prior to the merger, had been able to, you know, be able to attain margins that were north of 30%, and, you know, obviously our goal is to even strive that even higher as we go forward through the year. You know, there are a couple levers for us to do that. One is obviously revenue is a key thing. We have to, you know, we're going to need to grow. The great news is that, as you, you know, you heard from Angus in our prepared remarks, The bookings have been very strong, the book-to-bill being over two, and just the bookings through the whole fiscal year have given us a lot of confidence that we can actually grow the business. So obviously increasing revenue is one aspect. The other one is just getting higher ASPs and having an ability to actually bring some of those higher ASPs down to the gross margin line. And finally, it's the cost reduction. previously talked on the call and just in terms of overall cost reductions, the efforts that we've taken both in the first quarter and in the second quarter, and in addition to that, the transition over to our contract manufacturing. But, you know, one aspect that I think is important that, you know, Angus also mentioned and that we have probably not given enough time to at this point is You know, the software-enabled products that we actually are going to be providing as part of this smart infrastructure should give us an additional leverage as those become a higher part of our revenue. You know, that's not going to be tomorrow. That's not going to be probably this quarter that we start to see that breakout. But, you know, we are making very, very good progress there. So, you know, I think that this is something where, you know, we hope that, you know, we should be able to start seeing some type of quarter-on-quarter expansion of gross margins throughout this year and hopefully, you know, into 2024.

Okay, helpful, Mark. Thanks for that. Angus, my follow-up question is on the automotive market here, really looking at your digital flash products. Maybe you can quantify the number of engagements that you have, timeframes by which you might expect some sort of decision, and ultimately the SOP that you're targeting there. I assume it probably isn't before 26, but just want to get your sense of progress there.

Yeah, thanks for the question. I was hoping you were going to ask about DFI. because we're doing something really special there. And, you know, I'm looking forward to providing a more wholesome update. It's been a lot of hard work for a couple years to bring together the incredible technology that's driving this sensor. And so this quarter, we finished the integration of the world's first long-range, truly solid-state flash LiDAR sensor based on this digital technology. Um, there's really nothing like it in the world, uh, other than this device and we're putting it in automakers hands this quarter. So I'm going to be out on the road meeting with a number of automakers. We have a team doing worldwide, um, worldwide tour, getting this into the hands of OEM customers for the very first time. Um, what makes it special is a couple of things, but, but first of all, we're building a technology that we think can win the majority of this industry long-term. And we're building to meet the market. You don't need to be first as long as you're building the thing that's going to be sustainable long term. And that's an integrated solid state digital technology. And so the DF shines because it's low cost. It's solid state. It's digital. There's a multi-sensor platform that is required to really get into all the vehicle makes and models that make this a saturated technology. And it's high performance. we're hitting 200-meter range at 10% with a flashlight. This is something that physicists five years ago said couldn't be done. And we're doing it in a form factor that's incredibly slim, so this thing is only 40 millimeters tall. So, yeah, we'll be providing a more fulsome update next quarter, but we're tracking on our progress. We said we'd get this thing out into automakers' hands this quarter, and we're doing it, so I couldn't be more pleased.

Okay. Well, great. Thanks for the update, Angus. That's all for me.

Thank you. And just a reminder, star one, please, for any further questions today. And it appears we have no further questions this afternoon.

Mr. Pakala, I'd like to turn things back to you for closing time.

Well, I want to thank everyone for joining the call today. I did want to highlight it's been a quarter and a half since we completed the merger with Belladine. I'm incredibly pleased that we have delivered so far on the thesis of the combination of the two companies. We have significantly growing revenues, expanding product portfolio, record bookings, and a trajectory on cost, margin, and bookings that really is speaking to the bright future for the company. So thanks again for joining, Nicole.

Thank you. Ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.