Ouster Q3 2023 Earnings Call Transcript

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November 9, 2023

Key Takeaways

  • Ouster reported $22.2 million in Q3 revenue (15% QoQ growth), $38 million in bookings, shipped over 3,300 sensors and achieved a non-GAAP gross margin of 33%.
  • The company exceeded its cost reduction goal a quarter early, delivering over $120 million in annualized cost savings and setting an operating framework targeting 30–50% annual revenue growth, 35–40% gross margins, and controlled operating expenses.
  • Ouster is on track to tape out its next-generation L4 and automotive-grade Cronos chips, completed DF sensor demos with over a dozen OEMs, and highlighted DS sensors’ 200 m range and solid-state design.
  • The software segment unified BlueCity into the Gemini platform, added deep learning AI models, expanded to over 375 licensed sites, booked $1 million in software-coupled sales, and secured a deployment across ~130 logistics sites.
  • For Q4 2023, Ouster guided $23 million–$25 million in revenue and expects ongoing gross margin improvement as GAAP and non-GAAP results converge.
AI Generated. May Contain Errors.
Earnings Conference Call
Ouster Q3 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Hello, and welcome to Ouster's Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After today's presentation and remarks, there will be an opportunity to ask questions. The call today is being recorded and a replay of the call will be available on the Ouster Investor Relations on the website 1 hour after the completion of this call. I'd now like to turn the conference over to Mr.

Operator

Chen Gang, Vice President of Strategic Finance and Treasurer. Please go ahead,

Speaker 1

sir. Thank you, and good afternoon, everyone. Thank you for joining us for our 2023 Q3 earnings call. I am joined today by Ouster'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, Ouster issued a press release announcing its Q3 2023 results.

Speaker 1

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 commentary regarding the company's growth strategy and go forward financial framework, the company's Q4 2023 financial guidance and other matters described in today's press release 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 and Ouster's actual results are subject to risks and uncertainties that may cause actual results to differ materially from current expectations that we 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 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 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 and knowledge of such industry and markets.

Speaker 1

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 would now like to turn the call over to Angus.

Speaker 2

Hello, everyone, and thank you for joining us today. Ouster had a fantastic Q3 as we continue to realize the benefits of our merger with Velodyne. We exceeded guidance recording over $22,000,000 in revenue and maintain strong quarterly bookings of $38,000,000 We continue to improve gross margins across the board in line with our expectations for the second half of the year. We shipped over 3,300 sensors, improved our product mix and recorded GAAP gross margins of 14% and non GAAP gross margins of 33%. Importantly, we exceeded our cost reduction goal and did so a quarter sooner than expected, achieving over $120,000,000 in annualized cost savings and bringing our spending below pre merger levels as compared to when we're a standalone company.

Speaker 2

On top of all of this, we continue to execute on our product roadmaps for the OS and DS series and achieved major milestones that we believe will further advance our software solutions business. Finally, we've built an operating model for the company in line with our growth strategy that we believe puts us on a clear path to profitability. Turning to our 4 strategic priorities for the business this year, which are to drive new business through a targeted sales approach to deliver near term growth, execute on the digital LiDAR roadmap for OS and DF series to expand our serviceable market, develop a robust software ecosystem to accelerate LiDAR adoption and build a financially strong business to support our long term growth. Ouster continued to drive new business, booking over $110,000,000 in business with new and existing customers in the 1st 3 quarters of 2023, including $38,000,000 in the Q3 alone. This includes a multimillion dollar award to supply REV7 sensors for use in a mapping application and demonstrates how REV7's enhanced range, Accuracy and precision is expanding the addressable market.

Speaker 2

We also booked large orders for a tolling application, warehouse logistics and port automation. Hauster continues to supply a diversified base of hundreds of customers with LiDAR solutions from start ups to established Fortune 100 Companies. We believe our expanded product portfolio, reliable hardware, Top tier customer support and simplified integration tools enable us to consistently drive new business. Turning to execution on our product roadmap. We are on track to tape out the L4 chip, our next generation custom silicon to power the OS sensor family, as well as the Kronos chip, our automotive grade custom silicon to power the solid state Digital Flash or DF Sensor Suite.

Speaker 2

We completed DF product demonstrations of our early B samples with over a dozen automotive OEMs and Tier 1 partners across North America, Europe, Japan and Korea during the Q3. Feedback was resoundingly positive from the richness of the point cloud, system stability and architecture simplicity. At only 40 millimeters tall, the final form factor DS sensors can detect 10% reflective objects at up to 200 meters range with camera like resolution and with absolutely no moving parts. Furthermore, Ouster's DF and OS sensors show the same patented VCSEL SPAD digital architecture that provides numerous advantages, including manufacturability, reliability, and best in class performance. As a result, many of the OS learnings we have gained have already been quickly implemented on the DS sensor to improve performance.

Speaker 2

We believe our customers clearly recognize the value and straightforward path to final these samples with the integration of the Cronos chip next year. Turning to software, we achieved several milestones in the Q3, which are expected to accelerate product adoption And signal growing demand for LiDAR powered smart infrastructure solutions, namely in the security and intelligent traffic system submarkets. This included unifying BlueCity under the Ouster Gemini platform, paving the way for more features and faster development. Adding new deep learning AI perception models that improve overall accuracy and reliability of Ouster Gemini and enabled advanced object classification and more complex use cases, completing integrations with lean real time video management systems to provide customers more flexibility and accelerate adoption, expanding software adoption to over 375 licensed sites and booking 1,000,000 of dollars worth of software coupled sales. Where cameras, radar or inductive loops 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.

Speaker 2

One example of this is a significant deal we signed to deploy our digital LiDAR hardware coupled with Alstair Gemini at approximately 130 logistics sites. This commitment includes the purchase of hundreds of REV7 sensors and subscription licenses to Gemini Software for security, which are expected to drive recurring revenue for our business. For the customer, the addition of deep learning AI models to the Gemini platform, which improved detection accuracy and expanded classifiable objects was a key selling point given challenges they faced with alternative solutions that resulted in frequent false positives and poor analytics. We were able to solve this with our solution and are in discussions about additional site deployments in the coming year. AstroGemini has already opened up new and cost effective use cases for LiDAR and we're just getting started.

Speaker 2

The improvements to the Gemini platform have been met with excitement by current and prospective customers. We see major opportunities to scale software coupled sales with existing customers and a multi $1,000,000,000 market for legacy sensing technologies within security, transportation and retail that is ripe for LiDAR adoption. Over time, we expect the smart infrastructure vertical to drive a growing share of revenue, given higher hardware ASPs and revenue accretive opportunities to deploy the AsterGemini software. And finally, all of this progress is backed by a strong operating model that builds on decisive actions we have taken since the merger. We have already achieved over $120,000,000 in annualized cost savings 1 quarter ahead of schedule and reduced our cost of capital by refinancing our term loan.

Speaker 2

To reach profitability, we have set a financial framework focused on averaging 30% to 50% annual revenue growth, expanding gross margins to 35% to 40% and maintaining operating expenses at or below Q3 2023 levels. We expect to achieve meaningful progress against these goals over the next 18 months. I'll turn the call over to our CFO, Mark Weinswig to provide more context on our financial results for the Q3, the business outlook and our operating framework.

Speaker 3

Thank you, Angus, and good afternoon, everyone. Starting off with our Q3 2023 results, we recognized a record $22,200,000 in revenue, A 15% increase over the Q2. The automotive, industrial, robotics and smart infrastructure verticals each accounted for approximately 1 quarter of our revenues. In the 3rd quarter, we booked $38,000,000 in business with new and existing customers. This represents a book to bill ratio of 1.7 in the 3rd quarter.

Speaker 3

Over the last three quarters, our book to bill ratio has averaged 2.0. Similar to the first half of twenty twenty three, the third quarter saw continued commercial traction driven by strong demand and improved product mix. We shipped over 3,300 sensors in the 3rd quarter and ASPs increased slightly on a sequential basis. As anticipated, Ouster significantly improved its GAAP gross margins in the 3rd quarter to 14%. 3rd quarter gross margins included certain expenses outside of our ordinary operations, including excess and obsolete costs and losses on firm purchase commitments of approximately $3,000,000 primarily associated with the consolidation of product lines.

Speaker 3

Ouster's non GAAP gross margins were 33% in the Q3 of 2023, up significantly from the prior quarter to a near record level as a public company. The higher gross margins were driven by an increase in product and software revenue, higher ASPs And a reduction in manufacturing costs, which reflects the actions we have taken over the past 9 months to reduce our cost structure. We expect further improvements in our GAAP and non GAAP gross margins. Given the transient nature of our 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's future operating performance. Operating expenses during the Q3 came in lower than expected, primarily due to the significant actions we have taken over the last couple of quarters to reduce our cost structure and the timing of certain R and D expenses.

Speaker 3

We expect our R and D expenses to fluctuate due to the timing of projects, including the tape out of our next generation Cronos chip. We have lowered the cost structure of our business while maintaining our ability to invest in our digital road map. We believe Ouster is in a strong position as we enter the 4th Quarter of 2023, we believe 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 $202,000,000 in cash, cash equivalents, restricted cash and short term investments as of September 30. We view our solid financial position as a differentiator, and we intend to continue to be prudent and proactive with regards to fortifying our balance sheet. As we announced in October, we refinanced our existing term loan by establishing a new credit facility that we expect to result in significantly lower interest expenses, along with increased financial and operational flexibility compared to our prior loan agreement.

Speaker 3

Our cash balance at September 30 included approximately $3,000,000 raised via our ATM during the quarter, reflecting our strategy to maintain a strong balance sheet. We believe the LiDAR industry will be a winner take most market and that these actions place us on a better path to win. As part of our merger integration efforts, we have made significant strides aligning our cost structure with our business model. We have now completed the majority of our integration activities and have enough visibility to discuss our go forward financial strategy. As Angus shared, we have established a 3 pronged financial framework to drive us to profitability.

Speaker 3

1st, achieving 30% to 50% average annual revenue growth 2nd, expanding gross margins to 35% to 40% and third, maintaining operating expenses at or below Q3 2023 levels. Our first focus has been on controlling operating expenses. Since the merger, we have worked to establish an appropriate cost structure to support and sustain our current business trajectory. We have successfully implemented a plan to materially reduce these costs while continuing to invest in our product road map and supporting our sales network. We are pleased that our Q3 2023 cost savings have surpassed our prior year end target of $110,000,000 Our operating expenses are over $120,000,000 lower or 40% compared to the combined pre merger cost of Ouster and Valadigm.

Speaker 3

Notably, this represents our lowest spending level since the Q2 of 2022 when Ouster was a standalone company. Looking forward, we aim to maintain operating expenses at or below We've identified savings opportunities through software consolidation, office space optimization and the transition to Thailand. Operating expenses on a quarterly basis may fluctuate due to the timing of certain R and D investments and non cash expenses, and we may incur certain expenses to achieve these savings. After realizing these cost savings, we expect to keep operating expenses relatively flat on a dollar basis. We expect multiple years of significant revenue growth and believe we have already invested the necessary Personnel and Infrastructure to support this growth.

Speaker 3

We expect to benefit from our businesses' inherent operating leverage and expect operating expenses to decline as a percentage of revenue. Cost management is a continuous effort and we are committed to optimizing expenses to maximize the earnings power of the business. Moving now to our second key metric, gross margins. Post merger, our gross margins have been negatively impacted by transitory costs such as excess and obsolete inventory, losses on purchase commitments and product transition. We made significant progress in the Q3 to improve our gross margins, realizing 14% on a GAAP basis and 33% on a non GAAP basis.

Speaker 3

We are pleased with the improvement in our 3rd quarter results as our margins have rebounded. However, we are not finished and we expect to reach 35% to 40% gross margins over time as we continue to implement numerous business initiatives. First, we are shifting volume production of all Velodyne products to Thailand. We expect margins to expand as we leverage our contract manufacturing model. As a reminder, our OS products are already primarily manufactured in Thailand.

Speaker 3

2nd, we believe our customers recognize the superior performance and increased value proposition of our REV7 sensors. Given these are higher priced products, we expect to see margin improvement as our customer base continues to shift towards these differentiated sensors. 3rd, we expect sales of our software products to grow at a faster rate than hardware. We expect our software margins to be accretive to overall margins and will provide a growing contribution as these solutions become a higher percentage of revenues. Lastly, we expect to benefit from fixed cost absorption as our We've already experienced positive operating leverage this year and expect additional improvements as our volume continues to grow.

Speaker 3

Optimizing our cost structure and expanding our gross margins are 2 key variables in our financial framework. I'd now like to turn the call back over to Angus to have him discuss the 3rd key pillar, revenue growth. Thank you, Mark.

Speaker 2

Our business has tremendous revenue growth potential across all verticals. The use case for LiDAR continues to expand and we believe that Ouster Software Products will accelerate adoption. As such, we aim to achieve an average annual revenue growth rate of 30% to 50% and see multiple opportunities to drive this growth. First, our strong bookings will serve as a tailwind as we enter 2024. For example, key customers in our mapping and automotive verticals have signed binding commitments, tripled their purchases next year versus 2023 levels.

Speaker 2

These large multimillion dollar bookings will provide substantial momentum. 2nd, we are witnessing an expanding sales pipeline across multiple verticals as customer projects progress from evaluation to commercialization. For example, we are engaged with leading OEMs in the forklift industry, which manufactures over 2,000,000 units annually. We estimate a 1% penetration rate in this single subvertical, representing over $50,000,000 of annual LiDAR hardware revenue opportunity with substantial upside from retrofitting the installed base. Similar sized opportunities exist with other large end markets like autonomous mobile robots, earth movers and agriculture.

Speaker 2

Our pipeline includes robust engagements with multiple customers whose demand plans grow from initial purchases in the dozens of units to 100 or 1000 of units over 12 to 24 months. 3rd, we are encouraged by positive industry growth trends. 2 leading LiDAR industry analysts, Yoel and ABI, forecast volumes for logistics, smart infrastructure and non automotive ADAS applications to grow at a 40% plus CAGR from 2023 through 2026. This broad adoption wave strongly supports our business. We firmly believe that the non ADAS market opportunity is substantial and will not be a constraint on our long term growth.

Speaker 2

Lastly, automotive ADAS is a major upside catalyst for our business. Our current operating model does not rely on an ADAS win to achieve success. We believe 2024 will represent Culmination of multiple years of developing the end state architecture of automotive lidar with the fully solid state DF series. We are confident in our ability to win high volume series production programs based on the positive feedback from OEM and Tier 1 demos as we put increasingly mature DF hardware in their hands. So to recap, we are laser focused on 3 key areas to position Ouster for financial success as we proceed along our path to profitability.

Speaker 2

Growing revenues by 30% to 50% annually by expanding current customer commitments, penetrating new market opportunities and capitalizing on growing demand for LiDAR technology, Expanding our gross margins to 35% to 40% through improving our operations structure and a more favorable product mix and maintaining operating expenses at or below Q3 2023 levels to capitalize on our operating leverage. I'll turn it back to Mark to provide our Q4 guidance.

Speaker 3

Thanks, Angus. Our 3rd quarter performance saw a number of financial improvements over The Q2 including higher revenues, higher gross margins, lower operating expenses and a significantly improved net loss and adjusted EBITDA. We have sequentially increased our reported gross margins and revenues each quarter since the merger and see strong demand going into the Q4. For the Q4 of 2023, Ouster is targeting between $23,000,000 $25,000,000 in revenue. We are pleased at our growth over the past several quarters, driven by the strong bookings activities and key design wins.

Speaker 3

We expect to see continued progression on our gross margins as we complete the integration activities, transfer manufacturing of the Velodyne sensors and benefit from a favorable product mix. As we continue to make progress on these activities, we expect our GAAP results to further converge with non GAAP results. And with that, I would like to turn the call back over to Angus for closing remarks.

Speaker 2

Thanks, Mark. I'm extremely proud of our Q3 results In addition to the massive effort by everyone at Ouster to support a successful integration following our merger with Velodyne in February. While we still have one more quarter to go, we have already made incredible progress against the goals we set earlier this year. We optimized our business operations, achieved significant cost savings, improved the unit economics of the Velodyne products through outsourcing, Transition the manufacturing of our REV7 sensors, continued to execute on our OS and DF digital ladder roadmaps and unified and improved our software offerings to accelerate our solutions business. We did all of this while shipping more sensors, improving gross margins and recording growing quarterly revenues.

Speaker 2

We believe that Ouster's multi market strategy and digital LiDAR roadmap, Combined with the tailwind from Velodyne product sales and growing opportunities for software coupled sales, all backed by our new operating model, puts us on a clear path to profitability and positions us as a top global LiDAR company today and to remain one well into the future. And with that, I'd like to open it up for Q and A.

Operator

Thank We'll go first this afternoon to Madison DePaola at Rosenblatt.

Speaker 4

Hi. This is Madison DePaola calling in for Kevin Cassidy. I was just wondering how much visibility does your order backlog give you? Or are your customers ordering beyond your lead times?

Speaker 2

Thanks for the question. We actually have a really strong visibility into the future growth at Ouster. And it really starts with the bookings performance that we've had all year and including in Q3. We had a 1.7 Book to bill ratio in Q3, we booked over $100,000,000 worth of business in 2023 alone. And that gives us a lot of confidence now on kind of the multiyear view on where Ouster's business is going.

Speaker 2

And I would say that we were very thoughtful also in our growth metrics in our long term financial model, where we talk about a 30% to 50% Growth trajectory as part of that. And so all of that those numbers are based on the observations that we've had from our internal data in addition to the CAGRs that we see across the industries that are driving our business.

Speaker 3

Thank

Speaker 2

you.

Operator

Thank you. We'll go next now to Kevin Garian at Westpark Capital.

Speaker 5

Yes. Hey, good afternoon Angus and Mark and thanks for taking my questions and congrats on the progress. Your Gemini and BlueCity software, you had a strong bookings quarter.

Speaker 3

Can you kind of give us

Speaker 5

a sense of what Bookings were for these platforms over the last few quarters and now with the unification and added features, do you expect software revenues to Kind of be a little bit ahead of what you were previously expecting?

Speaker 2

Well, yes, let me start by saying, I mean, I'm very happy with Where we are with our software business, we're in the Q3 since releasing Gemini at the beginning of the year. We brought BlueCity into the mix with the merger and have now completed the integration of BlueCity into the Gemini software platform. So we've been moving extremely quickly on this front. And by the end of Q3, at this point, we put out a press release that Talked about the multimillion dollars worth of bookings that we've closed with software coupled sales to this point in the year. I mean, that's just I couldn't be happier with where we're going with this business and the markets that we're tapping into, Really multibillion dollar markets that we are tapping into that are ripe for expansion with our software coupled sales.

Speaker 2

In terms of breaking out those sales by quarter or in more detail, not ready to do that yet. But my hope is that as we get our heads wrapped around exactly where this business is going, especially into Dear, that we'll start to give some more visibility into the numbers that are driving that side of the business specifically.

Speaker 5

Okay, perfect. And then I apologize if I missed this, but On your DF sensor, any comments you can make about how many automotive OEMs you're shipping to? And what do customers kind of like about your sensor over the competition?

Speaker 2

Yes. Thanks for the question. So in Q3, we met with A number of auto OEMs, Tier 1s and other partners across the world. I attended many of the meetings. I got to see direct feedback from those teams.

Speaker 2

And We got overwhelmingly positive feedback on the richness of the point cloud, the maturity of the architecture and the fact that we are building the end state architecture for this industry. It's really important that our strategy was validated Through customer feedback, seeing the product, understanding the technology and them acknowledging to us that they see the industry going towards these solid state Digital first architecture sensors, of which DF is really the preeminent example. So I couldn't be happier with kind of the acknowledgment And of the benefits of DF from those kind of three key points: compact, Which means rugged, digital and solid state, right? Those are the key points that allow us Commercialize this technology into automotive and create end state technology like other digital technologies, CMOS cameras, radar sensors in cars and just get this into every last car in the world. And I'm sorry, you had a follow on question?

Speaker 5

No, no. I was just wondering, what customers like about your sense over the competition, but you answered that. So I appreciate the detail.

Operator

And gentlemen, it appears we have no further questions today. Mr. Pakala, I'll hand things back to you for any closing comments.

Speaker 2

Well, I'd just like to say success in the LiDAR industry requires having a great technology, great strategy and team, but it also requires execution. And this is only the 2nd full quarter since Ouster's merger with Velodyne. And our Q3 results, I think, speak for themselves. I'm incredibly proud of what our team has accomplished in short order, and I believe that Alstair is on a strong path of growth. So I want to thank everyone who joined the call today and thank the Ouster team for all of their hard work for this quarter.

Operator

Thank you. Ladies and gentlemen, I will conclude Ouster's Q3 2023 earnings conference call. I'd like to thank you all so much for joining us and wish you all a great remainder of your day. Goodbye.

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