Ouster Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
March 23, 2023

There are 11 speakers on the call.

Operator

Hello and welcome everyone to Ouster's 4th Quarter 2022 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 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.

Operator

Sarah, please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. Thank you for joining us for our 2022 Q4 earnings call. I'm 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 Q4 year 2022 results. The company also published an investor presentation, which is available on the Investor Relations section of ouster.com.

Speaker 1

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 Velodyne, 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 Q1 2023 financial guidance and trajectory are forward looking statements that are intended to be covered by the Safe and 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, Ouster'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 Ouster's future results as described in its most recent annual report on Form 10 ks and other reports that the company files with or furnishes with the SEC.

Speaker 1

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 excludes 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.

Speaker 1

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.

Speaker 2

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 LiDAR 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 Q4. 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.

Speaker 2

Even more, we built and pre released our 1st subscription software, Ouster 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, Ouster delivered nearly 11,000,000 And revenue in the Q4 of 2022 with 17% gross margins and achieved our full year 2022 guidance with $41,000,000 in revenue and 27 percent gross margins. We sold a record of over 2,950 sensors in the 4th 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 $70,000,000 in business in 2022. Finally, we announced our merger with Velodyne in the 4th quarter, which we completed on February 10, 2023, ahead of our initial timeline.

Speaker 2

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 service 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 VLS 128 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 and D in our digital Ladder roadmap along with the Ouster Gemini and BlueCity software to drive product adoption and new high margin revenue streams.

Speaker 2

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 4 directors to the Board, all with valuable experience and perspective to offer the company, including former Velodyne's 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.

Speaker 2

I'm excited to work with this strong team to scale the development of digital lidar and evolve Ouster 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 VLP 16 sensors in Q1, the VLP32 in Q2 and the VLS 128 by the end of the year. As products are successfully transitioned, we remain focused on improving yields and quality and optimizing BOM cost with the goal of improving the margin structure of the Velodyne sensors.

Speaker 2

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 digital lidar hardware and software roadmaps. We developed a plan to integrate the Ouster Gemini and BlueCity Our G and A and IT operations under a consolidated team and platform to realize a cost efficient structure to drive value creation for Ouster and its shareholders. Following the integration, we expect to retain approximately 350 employees. The new Ouster is a LiDAR powerhouse, offering a comprehensive suite of incredible LiDAR sensors, 2 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 3 strategic priorities for 2023, execute on our digital Ladder roadmap, develop a robust software ecosystem to accelerate LiDAR adoption and build a financially strong business to support our long term growth and deliver value to shareholders.

Speaker 2

Our differentiated digital LiDAR 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 Q4, 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 1.5x more range and 6x higher resolution than competitors. Our OS-one delivers 2 times more range and 4 times higher resolution than competitors. And our OS-two not only achieved a greater than 200 meter range on 10 percent reflective objects, but now has a maximum range of over 400 meters.

Speaker 2

Additionally, the OSDome's hemispheric 180 degree field of view delivers 4x 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 4th quarter. We also booked orders Customers such as Syngen and Vecna for warehouse automation, ParaFx 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.

Speaker 2

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 Red7 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.

Speaker 2

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 to 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.

Speaker 2

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 BlueCity 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 $32,000,000,000 there is a multibillion dollar market opportunity for LiDAR and Smart Infrastructure. As LiDAR technology becomes increasingly prevalent on critical infrastructure across the U. S.

Speaker 2

From airports and shipping ports to our country's most populated cities and traffic 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 BlueCity traffic management solution. With the successful early rollout of Ouster Gemini in the second half of twenty twenty two 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.

Speaker 2

And Europe to improve retail operations, Security and Roadway Safety. BlueCity 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, BlueCity will be underpinned by Ouster Gemini to add OS sensor compatibility, more features and better overall performance to BlueCity 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.

Speaker 2

I'm happy to introduce Mark Weinswig as our new CFO to lead us through the integration with Velodyne and 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 Q4 and full year 2022 as well as provide further details on our near term integration plans.

Speaker 3

Thank you, Angus, and good afternoon, everyone. I'm 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 Q4 2022 results, we recognized nearly $11,000,000 in revenue. Our industrial and robotics Customers accounted for a combined 62% of sales in the 4th 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 Q4 of 2021.

Speaker 3

This includes the 1st commercial shipments of our new REV7 sensors to 29 customers. Further, We shipped sensors to nearly 90 new customers in the Q4 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 Q4 of 2022 recording 17% gross margins. Gross margins were lower in the 4th 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.

Speaker 3

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. Ouster achieved both Our revised revenue and gross margin targets for 2022 recording approximately $41,000,000 of 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.

Speaker 3

Across our target markets, Ouster saw strong traction in the industrial and robotics verticals accounting for 35% 34% of our sensors 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, robo trucking, 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 BlueCity offering. In 2022, Ouster recorded $70,000,000 in bookings with new and existing customers demonstrating our growing traction across verticals even in the near term.

Speaker 3

Bookings represents binding contact orders 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 Valadigm, 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.

Speaker 3

The company is well capitalized with a combined approximately $315,000,000 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 $75,000,000 within 9 months. The synergy estimate is baselined against the standalone cost structures of the 2 companies as of the Q3 of 2022. We closed the merger with Velonie on February 10 earlier than expected and took immediate steps to significantly reduce costs. By the end of the Q1 of 2023, the company expects to have removed approximately $50,000,000 in annual run rate costs compared to the Q3 of 2022.

Speaker 3

We expect the first phase of integration to require one time cash costs of approximately $12,000,000 to $14,000,000 with the majority paid by the end of March. These implemented cost reductions primarily focused on duplicative R and D programs, general and 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 we'll continue to identify additional cost synergies as we work through the integration.

Speaker 3

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 Q1 of 2023, Ouster is targeting between $15,000,000 $17,000,000 in revenue. We expect the Q1 to experience some margin pressure due to the merger integration work, including the ongoing work to outsource manufacturing for Validine Sensors as well as the manufacturing transition and start up costs from the REV6 to REV7 OS Sensors.

Speaker 3

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 Aengus. Thank you, Mark.

Speaker 2

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 Leidre ubiquitous to build a safer, more efficient future. With that, I'd like to open it up for Q and A.

Operator

Thank you, Mr. Kekala. We'll take our first question this afternoon from Andre Sheppard at Cantor Fitzgerald.

Speaker 4

Hi, good afternoon everyone. Congratulations on the quarter and thanks for taking our questions.

Speaker 3

Maybe to start off, I just

Speaker 4

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 whether this last number is a bit of an outlier or whether we should expect Similar gross margins over the in 2023. Thank you.

Speaker 3

Thank you very much for the question. So looking at the Q4, We did see lower gross margins. It was primarily driven by 3 areas. Number 1 was higher start up costs associated with the manufacturing transition from the REV6 to REV7 sensors, which we do believe will deliver higher margins over time. Number 2 was Some large volume lower ASP deals with key commercial customers.

Speaker 3

And then number 3 was a reduced build plan, which led to lower manufacturing absorption and the reduced operating leverage. Those were some impacts for the Q4. Looking at the Q1, obviously, we're going to have some Additional opportunities or pressures related to the merger integration with Valadigm. 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 Rev VI to Rev VII sensors and then potentially some one time merger related costs, including items such as purchase accounting step up relating to inventory.

Speaker 3

But we do believe that the REV7 sensors will help us drive higher margins as we move through the rest of this year.

Speaker 2

Yes. 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. So I think overall, it was absolutely the right call to invest in the Rev 7 lineup. And there were costs associated with that, that did obviously impact the Q4 margin. But The early response from the Rev 7 customers, we shipped to 29 customers in the quarter.

Speaker 2

We've had immense positive reaction from those products. And it set up set us up extremely well, looking into 2023 on where we're going with the business. So Just a little helpful context on why we made that investment.

Speaker 4

Got it. No, 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 $315,000,000 in liquidity, that includes the merger with Velodyne.

Speaker 4

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.

Speaker 2

Yes. As you mentioned, as

Speaker 3

of December 31, we had a Very healthy combined balance sheet if we take into account the cash that we received from the Valadigm merger with roughly $315,000,000 One of the key things is that we made we took action on day 1 after the merger to reduce our cost structure. We had committed to as part of the merger, to exceed $75,000,000 in cost synergies, as we mentioned in our prepared remarks, We've already removed $50,000,000 exiting the Q1. There was some one time cash costs associated with that of about $12,000,000 to $14,000,000 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.

Speaker 3

And so we are looking at opportunities to continue to reduce our cost Structure and put us in a good position for

Speaker 4

that. Wonderful. Thanks again and congratulations on the quarter. I'll pass it on.

Speaker 3

Thank you.

Operator

Thank you. We go next now to Brian Dobson of Chardan Capital Markets.

Speaker 5

Yes. Thanks very much.

Speaker 3

Phil? I understand that

Speaker 5

you're not issuing guidance. However, you did issue a combined pro form a outlook for the 2 companies just prior to the close of the deal. Now that you've had some time to overview the businesses of the combined Adi, how do you feel about those 2023 2024 revenue numbers and should the Street still rely on them?

Speaker 3

Yes, we appreciate the question. Obviously, right now, we're only giving Our Q1 guidance, which is for this period, which is between the $50,000,000 $17,000,000 We are continuing to look at the combined business and what it's going to look like. Obviously, we're only 40 days into this merger. So we're just starting off with kind of looking at the opportunities to grow the business, for the opportunities to get our cost structure in line. So I look forward to updating you in future As we continue to make more progress on some of these integration activities.

Speaker 3

But for right now, we're really just putting our heads down and focusing on the task at hand.

Speaker 2

Yes. And I'd just add that we came out of 2022 with $70,000,000 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 SON. And so the growth we saw in bookings, the growth we saw in revenue And one deal last year gives us a lot of confidence that we're on the right trajectory for this year.

Speaker 2

And the merger from the work we've done in the last 4 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 base long term as well. So I think in aggregate, we feel really good about where we are for the year.

Speaker 5

Right. And were those Rev 7 sales, were those contemplated in the pro form a numbers that you had put out in that filing?

Speaker 2

Yes, absolutely. So absolutely, this year, Rev 7 will be a major catalyst for us winning new business And also expanding business, whether 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, 100 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.

Speaker 2

So not only are we improving our existing products, Sobe released this very differentiated OSDome product to expand more in our industrial and robotics space, but also give us Perfect sensor for all of our Smart Infrastructure Solutions business, using it in a ceiling mounted way just like a security dome. The REV7 is absolutely a part of the business. And I'd highlight that we've already announced head to head wins With the REV7 sensors, Syngen and LAHSA are 2 that we recently released, 1 in industrial robotics, The other Lhasa in port automation. And so the early product feedback has been incredibly promising.

Speaker 5

That's excellent to hear. Thank you for that color. Just one final question. In the filing, you have some pro form a revenue numbers for 2023 for Velodyne and for Ouster. And then you have the combined entity.

Speaker 5

And it seems like there's some leakage between those three numbers and that's probably due to call it redundant product lines or redundant customers. The Q1 guidance you gave that's Just for standalone Ouster, right? Would you expect combined results to be below that range?

Speaker 3

Well, I appreciate the question. So for The standalone guidance that we're giving for the $15,000,000 to $17,000,000 of revenues, that includes any Velodyne products that we are shipping out after the merger date of February 10. So that would include the existing Ouster business plus the VLP 16, The BOP32 and the BOS 128 product lines from Velodyne.

Speaker 5

Okay. All right. Thanks very much.

Operator

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

Speaker 6

Hi, this is Tyler on 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?

Speaker 2

Thanks for the question. Yes, 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.

Speaker 2

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, where there's been a ton of investment in kind of robo taxi 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.

Speaker 2

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.

Speaker 6

Okay, great. For my follow-up, you mentioned that 1Q 'twenty three 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?

Speaker 2

Yes. 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 Rev VI to Rev VII transition, those are near term effects. But we do expect that REV VII will continue to march down this COGS trajectory while ASPs stay more stable. And so we noted that ASPs were lower in the 4th quarter due to some higher volume, lower ASP to be customers, but we've already seen ASPs rebound for the REV6 products And the Rev 7 products are already coming in at higher ASPs, premium ASPs than the Rev 6 products by design given their premium performance.

Speaker 6

Great. Thanks again.

Operator

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

Speaker 7

Yes. Thanks for taking my question. Just congratulations on the book to bill ratio that you had in 2022. When you're looking at the Q1, Are you continuing that type of book to bill ratio assuming $16,000,000 in revenue?

Speaker 2

Absolutely. I think 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.

Speaker 7

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

Speaker 2

It's really a mix of both and we have Things are 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,

Speaker 3

it was

Speaker 2

a little more pronounced this year. But yes, 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.

Speaker 7

Okay, great. Congratulations on getting the merger done.

Speaker 2

Thank you.

Operator

We'll go next now to Richard Shannon of Craig Hallum.

Speaker 8

Hi, guys. Thanks for taking my questions. I guess my first one is for Mark here. You've given us some thoughts here 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?

Speaker 3

Yes. I appreciate the question. And Richard, I can tell you that we've been focusing probably More time on that topic than on any other one. I can tell you that we are in the process of kind of building out our long term modeling plans to make sure that We can take into account the combined company. We obviously have just 40 days ago, we obviously changed the entire dynamics of the organization with the combination.

Speaker 3

And obviously, we're very excited about that. In terms of kind of the near term outlook, We are really focused on that $75,000,000 of cost synergies. We went into the merger With that on our mind, we've already put a lot of effort onto it. We're very happy that really in just the 1st 2 months, we've already been able to obtain Roughly 65% of those cost savings on a go forward basis. And we expect to continue to really drive the cost down from As committed to in the merger agreement and continue to actually see additional opportunities to lower the cost structure from that perspective.

Speaker 3

In terms of the long term business model, I mean, we are doing a lot of work on the manufacturing side. Angus talked about it a little bit before. I also had in my prepared remarks, which is this move of some of the historical Velodyne products over to Thailand to really increase margins. One of the things that Angus mentioned in his remarks was that the merger allowed us to actually expedite some of that work. And you're going to start seeing more and more of the Velodyne products Manufactured overseas, which should allow us to start to increase margins.

Speaker 3

There are some startup costs associated with that. There's some capital that we've 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.

Speaker 7

Okay. I figured it might be

Speaker 8

a little early for that, but I appreciate your attempt at that one. I'm sure I'll ask again in the future. Maybe a follow-up on the gross margin topic here, kind of two thoughts here. You talked about some Rev 7 transitional things as well as the Velodyne merger impact in the Q1. I would assume at least the Velodyne merger part would affect the Q2.

Speaker 8

So kind of when do we get rid of some of those effects and kind of get to normal course of business? And then following up on that, as you talk about affecting the Velodyne manufacturing approach with what you've done at Ouster where the gross margin is so good. Is there any way or do you expectation that Elodine products are still remaining, can you get to an Ouster like gross margin structure that you reported in the last several or last few quarters?

Speaker 3

Yes. So looking at the gross margins and kind of what we're doing first on the from some of the historical Valadigm products and We'll just call them the VLP1632 and VLP 128 because we're really thinking about ourselves as one company and it's obviously we're only 40 days into it, but it's something that we're really 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 the 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. There are some intricate differences between the 2 different product lines, which Angus is, I'm sure looking forward to discussing about some of the margin base, but that's something where obviously that 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.

Speaker 2

Yes. And 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. We're investing when we look 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 and D road map that's behind those digital adder products. But 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.

Speaker 8

Okay. Appreciate those thoughts. And just 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 8 days And so I figured I'd ask to see if you could give us an estimate. I was kind of doing back end bloat numbers and kind of getting to around 270.

Speaker 8

Is that in the right range?

Speaker 3

Yes. Obviously, we entered the quarter with $315,000,000 or sorry, into the year, we look at it as a combined basis. Both the historical Valadigm and historical Ouster, obviously, were burning at their typical run rates for that 1st 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.

Speaker 3

We publicly announced that it would be And just this first stage of integration, it would be roughly $12,000,000 to $14,000,000 of cash costs. We did note though that that would give us Annualized run rate savings of about $50,000,000 per year. But we are really looking at kind of making sure that 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 retain as much cash as we can, lower the burn rate and protect that asset is something that we are very much focused on.

Speaker 8

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

Speaker 3

Thank you.

Speaker 7

Great. And I think that's

Speaker 3

the I'm

Speaker 2

sorry, I'm just checking if there are more questions.

Speaker 3

We do

Operator

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

Speaker 9

Got it. Let me echo my congrats on the merger completion and thanks for fitting me in. Just two quick questions. So the first one, Last quarter or actually last two quarters, the macroeconomic environment was impacting some customer cycles in some end markets. Can you kind of update us on whether this is still a big factor in our customers delaying decisions to deploy your LiDAR at all or Has the macro improved and kind of will it be an impact in 2023?

Speaker 9

Yes.

Speaker 2

I think that we Looking back, our business came out of 2022 having weathered this environment quite well, and we expect 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 and D focused, emerging technologies, that other Companies in the 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.

Speaker 9

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.

Speaker 9

Are you seeing any competitors making a big presence In non auto or any increased competition in this market?

Speaker 2

I've seen a lot of press releases and not a lot of products. And I hope that it's just going back to how hard it is to release Products in the LiDAR space, let alone competitive products, let alone gross margin positive products. And now with Rev 7, it's the 7th time we've done that. So I expect there to be Head to head 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 the space. And I'd actually point to what Ouster is doing in automotive And bringing now looking to 2023 with the DF sensor line finally coming with early B samples into the automotive market as an indication of the presence Ouster is going to have in this market that historically some of our competitors thought was safe.

Speaker 2

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 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 going to 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 of 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 8 samples last year, communicated the DF roadmap and now finally putting the actual hardware into automakers' hands.

Speaker 9

Yes. That makes a ton of sense. Okay. Thank you for that color. Great.

Speaker 9

That was all that I have. Thanks guys and congrats again.

Operator

And we'll go next now to Colin Rusch at Oppenheimer.

Speaker 10

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

Speaker 2

Yes. 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 multipronged strategy to really grow from a hardware LIDAR maker into a solutions provider, and autonomy solutions provider. And we had the good fortune that both Velodyne and Ouster 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 BlueCity solution, which is a very focused solution just for traffic analytics and management on the Velodyne side.

Speaker 2

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 road map, where we could integrate BlueCity and Gemini into kind of a single software roadmap where now BlueCity 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 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 BlueCity has been in the market actually for a couple of years now and announced that they had done over 100 deployments in 2022 alone.

Speaker 2

And 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.

Speaker 10

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 Organization extend the runway given the scope and scale of the ambition for the combined entity?

Speaker 3

Yes. As we talked about before, obviously, we entered the year with a combined $315,000,000 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. We are very pleased with the $50,000,000 of annualized cost savings that we've taken out entering into the 2nd quarter. For us, investment in new programs and new technologies is key. It's one of the reasons why Ouster has been so The $70,000,000 of bookings that we have as an organization that we got in 2022 is right from that investment.

Speaker 3

And The LiDAR space is just starting off. The deployments that we're doing right now, 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, so that we can do what we can to get to a place where we feel that this is a truly successful business. And it's going to take some time, it's going to take a lot of work, but we're very excited The opportunity and the merger really helped us in terms of putting together these 2 organizations, giving us additional scale and then allowing us to realign the overall cost structure.

Speaker 10

Okay. I'll take the rest of it offline. I've got some more detailed questions. Thanks guys.

Speaker 3

Thanks, Colin. Thank you.

Operator

And Mr. Pakal, it appears we have no further questions today. I'll turn the conference back to you.

Speaker 2

All right. Well, I wanted to end by thanking all of our employees actually for a very strong 2022 and for putting in the work that positions Ouster Thank you. Ladies and gentlemen, that will conclude

Operator

Thank you. Ladies and gentlemen, that will conclude Ouster's 4th quarter 2022 earnings Again, we'd like to thank you all so much for joining us and wish you all a great remainder of your day.

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Earnings Conference Call
Ouster Q4 2022
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