Symbotic Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2023

There are 12 speakers on the call.

Operator

Morning, ladies and gentlemen. Thank you for standing by. Welcome to SMART's Third Quarter 2023 Financial Results Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

At the end of the call. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Jeff Evanston, VP of Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone. Jeff here and Olivia, thank you for the introduction. Welcome to Symbiotic's Q3 2023 Financial Results Webcast. Our press release and discussion today will include forward looking statements based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward looking statements, including as a result of the factors described in cautionary statements and risk factors in SimBodix Financial Release and Regulatory Filings with the SEC by which any forward looking statements made during this call are qualified in their entirety. In addition, during this call, we will discuss certain financial measures that are not recognized under U.

Speaker 1

S. Generally Accepted Accounting Principles, which the SEC refers to as non GAAP measures. We believe these non GAAP measures assist management in planning, forecasting and evaluating our business and financial performance, including allocating resources. Reconciliations of these non GAAP measures to our most comparable reported GAAP measures are included in our financial press release, which is available in the Investor Relations section of our website and is on file with the SEC. These non GAAP measures may not be comparable to measures used by other issuers.

Speaker 1

Today, we will provide guidance for the 4th quarter, including revenue and adjusted EBITDA. We are not providing guidance for net loss today or profits, which is the most comparable GAAP financial measure to adjusted EBITDA. We are not able to provide reconciliations of adjusted EBITDA to GAAP financial measures because certain items required for such reconciliations are outside of the control and cannot be reasonably predicted,

Speaker 2

such

Speaker 1

as provision for stock based compensation. On today's call, we are joined by Rick Cohn, Symbiotic's Founder, Chairman and Chief Executive Officer and Tom Ernst, Symbiotic's Chief Financial Officer. These executives will discuss our Q3 2023 results and our outlook followed by Q and A. And now with that, I'll turn it over to Rick for some opening remarks. Rick?

Speaker 3

Thank you, Jeff. Good morning, everyone. Thank you for joining us to review our Q3 financial results. Since we spoke last quarter, we have demonstrated our ability to successfully do at least 2 important things at once. First, we achieved record quarterly results and second, we launched the GreenBox joint venture.

Speaker 3

We were able to report strong third quarter results in part because our outsourcing strategy related to deployments. We are pleased with these partnerships And they are beginning to bear fruit and our supplier ecosystem continues to ramp. Tom will talk more about the quarterly details. So instead, I want to emphasize how excited we are about our Green Box joint venture with SoftBank. Green Box is the realization of a vision I've had for many years to bring A1 AI enabled automation to companies of all sizes.

Speaker 3

We are excited about Green Box because it adds more than $500,000,000,000 per year to our total addressable market by bringing automation to all customers. Warehouse costs for these customers are typically 2 to 3 times higher than they are for large customers. This means GreenBox can offer small and medium sized businesses a great value proposition while capturing more of the value of our technology and we already have interest from potential customers. We capture this value three ways: 1, through a large higher margin system contract that is backed by SoftBank 2, by securing 3 times the level of recurring revenue streams that we get today and 3, we get to own 35% of a highly profitable Green Box business. We were fortunate to have SoftBank join us as a partner in GreenBox to help us with capital to help drive our go big, go fast strategy.

Speaker 3

In fact, if I in the early years of CNS, if I had had more capital, I could have grown CNS to a much larger company than even it is today. So I made the decision early on to adopt more capital through from Green Box into the Ximotic network. Ximotic also wanted higher pricing, more recurring revenue and a way to capture more of the value stream from our technology. SoftBank wanted a largest stake in Symantec. As negotiations advanced, I decided we could get to consensus by agreeing to sell about 4% of my family's 78% ownership stake down to about 74% and that we sold at about $28 And I was happy to do so because I am quite confident Green Box will create much more value for Symbiotic than what I gave up and I was able to do it with no dilution to shareholders.

Speaker 3

The launch of the GreenBox joint venture was demand led, so we know these services will be attractive to prospective customers. While we are anxious to bring Green Box to market, Like Symbotic, we intend to infuse the Green Box culture with the same North Star of creating brag me happy customers. Therefore, customer launch will not come before the business operations are ready sometime in 2024, which is when we anticipate securing the 1st Green Box customers. We won't lose focus on our existing customers who help us get to this point. We will continue to take care of all our large customers and scale up for Walmart and all the rest of our customers.

Speaker 3

I would like to thank all these customers as well as our associates, shareholders, partners and suppliers who have made this quarter such a well rounded success. Now Tom will discuss our financial performance and outlook. Tom?

Speaker 2

Thank you, Rick. We grew our 3rd quarter revenue 78% compared to a year ago to $312,000,000 The strong growth was driven by solid execution on existing deployments and new deployment starts. We continue to see acceleration in the rapid pace of installation of deployments with the help of our partnership initiatives as well as to our ongoing efforts to standardize our platform and streamline our deployment processes. Our backlog at the end of the Q3 was about $12,000,000,000 The Green Box joint venture we completed last week adds another approximately $11,000,000,000 to backlog, bringing our total backlog now to about $23,000,000,000 $11,000,000,000 from Green Box is backed by the capital of Green Box's investors led by SoftBank. We initiated 6 new system deployments during the quarter and advanced 1 system to full operation.

Speaker 2

As of the end of the Q3, we have 10 fully operational systems and 33 systems in the process of deployment with multiple customers, an increase from 28 systems last quarter and 13 systems in the Q3 of last year. Our sales and deployment progress for platform purchases continues at a rapid pace. Each quarter, we add new deployments from multiple customers. For example, progress with Walmart continues to plan and we recently started deployment of the second of 5 warehouse facilities with UNFI. Recurring revenue continued to grow sequentially as deployments move to production.

Speaker 2

We now have 10 systems operating at customer sites. As system completions increase, our recurring revenue should continue to grow and have a much higher gross margin than systems revenue. This quarter, we posted strong improvement in recurring gross margin and in time, as recurring revenue becomes an increasing share of our revenue mix, and can provide a powerful operating leverage to our business. Our 3rd quarter adjusted gross margin was consistent with last quarter. These results still reflect significant costs associated with lower margin innovation projects, the burden of elevated pass through steel cost and the costs associated with rapidly scaling our operations.

Speaker 2

Operating leverage improved again sequentially as we achieved a 1% adjusted EBITDA loss rate compared to 4% last quarter and 12% last year loss rates. This was driven by a rapid revenue growth and gross profit growth along with slower operating expense growth. Gross margin was consistent with last quarter as we maintained our focus on rapidly scaling deployment capability. Our cash and equivalents including marketable securities and restricted cash grew $48,000,000 sequentially to 513,000,000 Turning to our outlook. For the Q4 of fiscal 2023, we expect revenue of $290,000,000 to $310,000,000 and to report our 1st profitable quarter with adjusted EBITDA between $0,000,000 $3,000,000 positive.

Speaker 2

Finally, I'd like to address some topics related to our Green Box joint venture announcement. As Rick mentioned, The way we have structured the Green Box joint venture allows us to rapidly transform a very large segment of the supply chain in a very capital efficient way to harvest significant returns for shareholders. Symbotic has a non cancelable committed contract with GreenBox for the purchase of $7,500,000,000 in Sibonix Systems. This contract allows for a visible deployment schedule and is backed by the investment partnership of SoftBank and Symbiotic. We believe that GreenBox is a great opportunity for Symbiotic's shareholders and are very excited about its future.

Speaker 2

In all scenarios and at all times after our initial $35,000,000 funding, Symbiotic's cash flow from Green Box will be positive net of any incremental capital needed to support Green Box growth. This means that Symantec's shareholders are protected such that even in the remote scenario where no systems are ordered, a net cash payment is due to Symantec for approximately $2,000,000,000 backed by SoftBank. We are confident and excited about the launch of this joint venture as we are responding to market demand signals. In addition to the large committed order for systems, sales and recurring revenues that follow it, we believe Green Box can generate strong returns. Thus, we expect Symbiotic's 35% interest in Green Box subscription business will yield a strong cash flow stream to Symbiotic.

Speaker 2

In conclusion, we are continuing to scale our business and innovating rapidly to deliver for our customers. We look forward to speaking with you again next quarter to provide an update on our progress. We now welcome your questions. Operator, can you please open the Q and A?

Operator

Our first question coming from the line of Andy Kaplowitz with Citi. Your line is open.

Speaker 4

Hey, good morning, everyone.

Speaker 2

Good morning, Andy.

Speaker 4

Tom, can you talk about your adjusted gross profit margin and what you'd expect moving forward as we go into FY 'twenty four? Obviously, remain relatively steady, as you said, despite higher sales. So how do you look at gross margin from here? And why didn't it inflect a bit more as I think you said last quarter that steel would be Tailwind at least in Q4. And I think last quarter you mentioned innovation related headwinds could diminish a bit.

Speaker 2

Yes. Thanks for the question, Andy. So, gross margin, we continue to expect that particularly when you're watching us track over times over an annual basis. We expect to see our gross margin expanding. On a given quarterly basis, there can be some variability to that expansion As we're seeing here in this Q4, we're sequentially flat at 18.3%.

Speaker 2

Continues to be the same factors that we've been seeing Andy, where we are we see that expansion coming as the impact of a handful of things update over time, particularly the redundant costs associated with just growing so fast. It's the rate of expansion of our business along with the rate of shift to our outsourcing partners where we have redundant costs. We continue to see those abating over time. As you mentioned, steel continues to be a headwind when we look relative to the 10 year average. We do think that we've seen a modest benefit in this quarter and last quarter, continue to expect to see a modest benefit relative to where we were 3 4 quarters ago.

Speaker 2

However, the Steel Index actually has been going up over the recent few months and seems to be still at a relatively high elevated level to the 10 year average. So we think that there is potentially a longer term opportunity for that to abate over time. And then finally, recurring revenue margins are expanding. We had a significant expansion of recurring gross margin is now at 6% loss rate versus where we were a year ago in the 32% loss rate. However, we see a lot more power as we continue to waterfall recurring revenues on and gain scale in that business where we see long term structural recurring gross margins and recurring side, north of 60% over the long term.

Speaker 2

So again, as we look over an annual basis, you should expect to see expansion.

Speaker 4

Very helpful. And then Tom, maybe just on the revenue side, revenues obviously stepped up nicely over the last few quarters. We see your guide for Q4. You see sort of where the street is for FY 'twenty four. I'm sure you don't want to give a ton of guidance.

Speaker 4

But Does your backlog and maturation of your outsourcing strategy support the kind of growth the Street is projecting at this point for FY 'twenty four? Any sort of initial thoughts would be appreciated.

Speaker 2

Yes. Thanks, Andy. So we are looking forward to fast growth in You're right, we are providing guidance, specific guidance for revenue on a quarterly basis, but our growth next year is going to be underpinned by the ramping sites and deployment we have. So we do anticipate seeing healthy growth as we look into next year And we expect that Yes. A little commentary on our Q4, and your question as well.

Speaker 2

Our Q3 really did exceed our expectations Significantly, we saw some timing benefits just in speed of our deployments picking up that perhaps also creates a little bit of a sequential compare to Q4 in terms of why we see a flattish type of sequential growth in Q4.

Speaker 4

Tom, just a quick follow-up there, like 6 systems initiated, you would continue to see that continue to rise from here, right, because It's been a little bit stable over the last few quarters.

Speaker 1

You can see some lumpiness here

Speaker 2

as well, Andy. So it has been kind of consistent. I think over the long run, you'll see growth there, but it won't be surprising when we have if we have quarters where we're actually down sequentially. Timing on those system deployment starts does depend on customers' readiness as well. So there will be some quarterly variability, but as we move forward, we should expect Thank

Operator

you. Thank you. And our next question coming from the line of Matt Summerville with D. A. Davidson.

Operator

Your line is open.

Speaker 5

Thanks. Just A couple of quick questions back to the gross margin kind of topic, Tom. Can you maybe parse out some of the headwinds and tailwinds From a quantification standpoint, whether or not you've seen any tangible benefit from the restructuring actions taken last quarter and what lies ahead in that regard as we think about how to kind of model this?

Speaker 2

Yes. Thanks for the question, Matt. We did see some benefits in the quarter. We continue to see though that our outsourcing initiative leaves a lot of opportunity for us to continue to see expansion over time. So we're only seeing the earliest of those benefits.

Speaker 2

We're continuing to invest significantly in our major innovation initiatives as well. So that continues to be something that we think has a significant payoff over time. Rick's mentioned these on multiple occasions, but Our major platform release of our AutonomousBot, SIMBot along with our Brake Pak project are 2 major innovation projects that we're investing in the near term. That cost us in the gross margin line that are going to have big payoffs. And then finally, just the rate of speed at which we're growing, Kind of that redundant cost, I think you take those in kind of that order and that's the magnitude of expansion opportunity we see as we look forward over the coming couple of years to expand.

Speaker 5

Got it. And I was wondering if you guys could maybe talk a little bit qualitatively with the Green Box JV formally announced, What has inbound early potential customer feedback been? And then Tom, I wanted to make sure I understood. Can you just go over The situation that would drive that $2,000,000,000 inbound payment to Symbonic with respect to GreenBox, I want to make sure I heard you correctly. Thank you guys.

Speaker 2

Sure, Matt. So we have received from numerous channels interest in Green Box. First, this has been demand led. And as Rick mentioned in his prepared remarks, his vision for the company has been to be able to provide Warehousing as a service, is a huge opportunity to just provide much higher quality of lower cost services to end customers. And so this vision hasn't been new and the interactions we've had with customers for quite some time has expressed interest in this business model.

Speaker 2

And since the announcement, although it's only a week old, we've Received inbound expressions of interest in hearing what it's about. I'll reminds you of what we said last week and what Rick said today as well that our first goal here is to get this Business up and running and then stand up to go to market and management and then we'll bring it on new we'll bring our new customers sometime in 2024. We'll keep you updated on that and the progress. On the $2,000,000 question, so as we think about GreenBox, We have structured this business such that in all scenarios, including the Base growth scenarios along with the more aggressive growth scenarios as we think about the execution of the business, we structured it Not only such that we have control and visibility over that scheduling to make it, efficient for our planning purposes and to incorporate the rest of our customers' capacity slots around Green Box, but to also be cash flow positive at every interaction we have with Green Box. So that means that The payments that are due to us proceed the payments that go out the door, including any capital requirements that are necessary in the faster growth scenarios of GreenBox where we're actually funding capital in support of our 35% ownership position.

Speaker 2

And as we thought about every scenario that's possible, We thought about the extreme downside case that what if Green Box for whatever reason had to cancel. Well, in that case, we have a Sizable payment that's due to us for all the profit that would be would have been received on that entire $7,500,000,000 order, plus our 1st recurring annual commitment. So that nets to us over $2,000,000,000 Just wanted to highlight the level of Capital Investment that our partners and we are taking on here and believe in the business.

Speaker 3

Thanks, Tom.

Speaker 2

Thank you, Matt.

Operator

Thank you. And our next question coming from the line of Mike Latimore with Northland Capital. Your line is open.

Speaker 6

Great. Thanks. Yes, impressive results there. I guess, As you think about the 4th quarter, should we think about cash flow exceeding EBITDA again here? That's been a Trend last couple of quarters?

Speaker 2

Yes. Thanks for the question, Mike.

Speaker 3

We continue to be expect to

Speaker 2

be cash flow positive for the year and we can have cash flow variability. So I tend not to guide on the cash flow line. But generally, you should expect that our trend will be that the dynamic you're describing where our working capital is a net production above and beyond our EBITDA will be the case. Cash flow can be a little bit lumpier than our revenue can because our revenue recognition is percentage of completion and a little bit more atomically spread whereas sometimes the Cash flow from customers can be just a couple or 3 invoices per system purchase, so they can concentrate a little bit. Got

Speaker 6

it. And then Tom, in the past, you've given some general color on number of deployments that are hitting kind of their biggest rev rec phase. How would you characterize that dynamic in the Q4?

Speaker 2

Mike, the dynamic continues as to what we've seen in the past and that is that while we are 1% complete on a rev rec basis, Those systems that have gotten a value year end of the deployment schedule where the most extensive part of the physical installation phase is occurring is where the strongest revenue generation is. So I think if you think about what we've disclosed in the past about number of systems and deployment, Those systems that were in deployment in SAES by the end of Q2 and start from Q3, Those 9 to 13 are the ones that are generating the strongest revenue contribution, here in our fiscal Q4.

Speaker 7

Thank you.

Speaker 2

Thank you, Mike.

Operator

Thank you. And our next question coming from the line of Nicole DeBasper with Deutsche Bank. Your line is open.

Speaker 8

Yes, thanks. Good morning, guys.

Speaker 2

Good morning, Nicole.

Speaker 8

Just on the backlog now being $23,000,000,000 I guess are you guys a little bit less focused on going after sales to new customers similar to what you announced with UNFI earlier this year or is that still a focus for management?

Speaker 2

So our first focus has always been, in Rick's words, Frankly happy customers. So it's making sure that everything we're deploying in that What was $11,000,000,000 or $12,000,000,000 and is now $23,000,000 results in really happy customers. In addition to that, we do intend on bringing our new customers by the ones or twos per year in the near term. And so, we've already brought on 2 new customers this year and launched GreenBox. So it's a pretty big year for us.

Speaker 2

I think We're a little bit above that 1 or 2. But I think as you look forward, you should expect to see us 1st and foremost focused on execute the backlog and then where it makes sense to have that right incremental customer or 2.

Speaker 8

Okay, got it. Thanks, Tom. And then SG and A ticked down a bit Q on Q in this quarter. I guess like is this level of SG and A sustainable or anything to highlight there?

Speaker 2

Well, we do continue to see project and other variable activity at a pretty significant run rate basis in our fiscal Q3 as we saw in fiscal Q2, slight downtick there. But I think as you look forward, we actually see some of that abate a little bit more. This is partially being offset by we Have expanded our hiring a little bit. Our headcount is up about 100 heads to about 1300 people quarter on quarter. I think as you think about that moving forward, our expectation would be that you should expect Moderate OpEx expansion looking forward, kind of consistent with what we've thought as we've framed out the near term future over this year.

Speaker 2

But that's moderate headcount expansion against strong revenue growth, so we continue to see some strong operating leverage.

Speaker 8

Thanks. I'll pass it on.

Operator

Thank you. One moment for next question. And our next question coming from the line of Greg Palm with Craig Hallum, your line is open.

Speaker 9

Yes, thanks. Congrats on the continued progress. I guess just Looking back in the quarter in terms of the upside, I think you mentioned speed of deployment. So what exactly is outperforming? I mean, are you Deploying more systems than maybe what you initially thought?

Speaker 9

Are you deploying faster, meaning you're able to capture or recognize more revenue within the quarter? Just a little bit more

Speaker 2

What we're seeing Greg is that with each new system as it goes through phases, we're able to shave off Some marginal time here or there and the new systems we're starting, we're putting a slightly faster target time on. This is consistent with what our goals were, not what we needed to do that to keep the business plan, but also still leaves a huge opportunity where we're still expecting the systems we started today are a little bit under 2 years from that launch and deployment until We get that deployment completed and the customer begins the ramp of the full production use. Our goals over the long term are still to materially cut that time through both technology and process and partners, where over the long run we look to move to take that to 6 months if we can.

Speaker 9

Got it. Okay. That makes sense. And then just a little bit more on gross margin. So if we look at it based on segment, at least sequentially, You did see a bump in systems margin, but you saw a pretty significantly higher loss on software maintenance support and operation services.

Speaker 9

So I'm just kind of curious how you sort of view that looking forward in terms of the gross profit loss by segment?

Speaker 2

I think if you Greg, if you look at it on a non GAAP basis, you'll see more consistent you'll see actually expansion in the recurring line and more static a little bit more static in the system line. So you're seeing a little bit of an effect of online. So you're seeing a little bit of an effect of accounting treatment on stock based comp that's created a difference to the GAAP results.

Speaker 9

Do you know off the top of your head stock based comp by segment in terms of the mix or proportion?

Speaker 2

I think we have that in the reconciliation table in the release.

Speaker 9

I can follow-up with you offline too.

Speaker 2

Yes, we'll pause it again. It is on the table on the release though.

Speaker 9

Okay, sounds good. Thanks.

Speaker 2

All right. Thank you.

Operator

Thank you. And our next question coming from the line of Chris Snyder with UBS. Your line is open.

Speaker 6

Thank you. Maybe starting with the Green Box JV, can you just talk a little bit about the plan for managing These facilities, is this something that SoftBank will be doing? And I ask because it does seem that these The commercial burden for managing these multi tenant facilities could be pretty high. Thank you.

Speaker 3

Yes. So this is Rick. So Symbiotic will run the systems as we do with many of our customers. The commercial relationship is being developed between SoftBank, Symbiotic and quite frankly there are 3 PL operators today that would like to partner with us on some of the customer acquisitions. So it's a the so think of it this way, The Symbiotic will sell a system to GreenBox and GreenBox will be just another traditional customer for Symbiotic.

Speaker 3

Then there's a management team that GreenBox will have to develop, which is we have inquiries now and so We're developing that management team as we speak and it could be a combination of some of our partners who, for instance, a port operator could be a partner who has customers, but would hire Symbiotic to be the operator of the system. So there's a couple of relationships here. There's the commercial relationship, which we're going to have to scale and build the sales force. But outside of that, we're not going to we think we're not going to be in the construction business. We think we'll go into probably existing businesses or have real estate partners who have already built buildings.

Speaker 3

So it's not as complex on the outside as it might seem. Ensoft Bank and Zomotic have been working on this for well over a year talking to various different customers. But yes, we will have to develop a sales force and a commercial focus and that will be on Green Box. And the reason we set up the structure the way we did is we did not want to burden Symbiotic with that overhead. We want to keep Symbiotic as a pure play and then GreenBox will be a commercial Salesforce driven 3PL kind of operator finding the right partners and they will simply buy the systems from Smbiotic.

Speaker 3

Smbiotic will run the systems, but Symbiotic will not be involved in getting the commercial customers.

Speaker 6

Thank you, Rick. Really, really helpful. Another kind of steady question that we're On the deal is that on the conference call last week, you said that Symbiotic will not need to contribute any more capital outside of The original $35,000,000 But Green Box, will be taking on more capital presumably from SoftBank. Will that come through Green Box in the form of debt to SoftBank? Will it be incremental equity that they're getting?

Speaker 6

I guess, what are they going to get as they continue to

Speaker 2

Yes. Thanks for that, Chris. So we do anticipate that Green Box will require capital and that's because we anticipate a very strong growth profile for the business. So Now that capital is going to come in the form of it will be netted against cash flow that is due to Symbiotic for the purchase of the system. So we will be funding we anticipate we will be funding capital, But as I mentioned, it will come out of the cash flow we get.

Speaker 2

SoftBank will be putting capital in directly to support the growth. Now over time, we anticipate that we will be able to bring on debt capacity as well. So We anticipate that in the growth phase ahead of Green Box being cash flow positive on its own right with its own subscription customers that

Speaker 9

I appreciate it. If I could

Speaker 6

just squeeze one last one in, because it's another kind of common question. I think right now there's 33 systems under deployment. Green Box will start ordering next year. Where do you think, I guess, the capacity for units under appointment could be, say 12 or 18 months from now. Just trying to get a sense for kind of how that Green Box growth can layer in.

Speaker 6

Thank you so much.

Speaker 2

So Chris, we've been building our supplier network and our outsourcing partners and our operations to provide The scale to really open up the business model. I don't think we want to set a target on the timeframe, but our goal is to really just to ensure that we build that whole supplier network to more than support the $23,000,000,000 we have in backlog along with, as I mentioned, we want to create additional capacity slots for our existing customers and for those potentially 1 to 2 new customers per year we're bringing on. So we do believe that the outsourcing Progress that we've made to date gives us the visibility to do that already today. And what we're looking to do is harden and deepen that supply chain so that we can create more capacity beyond that.

Speaker 6

Thank you. Appreciate it.

Speaker 2

Thank you.

Operator

Thank you. And our next question coming from the line of Rob Newsome with Baird. Your line is open.

Speaker 10

Yes, good morning. This is maybe just a follow on to the last question. Just I am curious how far out You can secure your partner resources for the deployment of these systems and also thinking about what steps you're taking to insulate, I guess a stronger pull on Industry Resources. If you look out 2 or 3 years, the warehouse automation market is stronger than it is today, which there's been some step back by some of the larger players in the industry. If they were to come back, How do you insulate against pull on those resources?

Speaker 3

Yes. So this is Rick. So I spent A lot of time on this over the last 6 months and there's 2 things that we're doing. So We continue to find new partners that want to build systems for us. We're also continuing to find new Suppliers that may have, as you said, Seeing their backlog greatly cut down.

Speaker 3

And so we're developing a different kind of relationship with these suppliers. So we're developing That's what I did in my past life with CNS. These are real partnerships. So these are going to be long term partnerships And quite frankly, we're going to be a very large customer to a lot of suppliers, but we are not single sourcing anything, and we're finding suppliers around the world. So I think we're feeling pretty good about the ability to keep our supply chains running.

Speaker 3

One of the things that is, I think the whole community has seen, but the supplier community has seen It's unpredictable. I mean, we really there are very few times where these kind of suppliers actually have visibility to a 5 or 6 year backlog. And so, that's what we have. So, we're very excited about the suppliers. The question you were asking before and as the suppliers build higher and higher quality into their products, the installation times go down Faster and then we didn't buy more systems and install more systems.

Speaker 3

So We're very, very aware of what happened in the last couple of years about supply chains breaking and we're very, very focused on making sure that doesn't happen to us.

Speaker 10

Very good. And just a follow-up with respect to Green Box. It sounds like they'll pursue or secure some customers early on before you launch your systems into them. But as you think about This going forward, would you expect that, they would deploy systems on spec? Or would they need to have Customers under contract before they would place an order

Speaker 2

with you.

Speaker 3

I think they're going to do both. I mean, one of the reasons That in my prior one of the reasons that we did this deal with Green Box is that I spent I went to Japan a couple of times, spent a lot of time with Masa. Bakas, who is on our Ford from SoftBank has been a great champion of this idea. But we I believe that if we create a network and so some of these sites will be speculative and that's a risk that SoftBank was willing to take. The returns should be great, and so it's worth it.

Speaker 3

But it's not a risk that I think Symbiotic should have taken as a public company that started out as a warehouse automation company. So that's why we partnered with them. But I think there will be Facilities that we will build and wait for it to come. And then I think there will be other facilities that we will build as we are talking right now, where customers are saying we have a demand for this. We didn't know that you could What Green Box does that is so special, it's very, very hard for 3PL operators to put multi tenants Very hard to keep the inventory under control.

Speaker 3

Symbiotic, and this is what we're seeing over the last 6 months, meaning if a customer orders a 1000000 cases, We ship a 1,000,000 cases. We might have one error, but we might not. And we don't even know why we would have that. So we're nearly perfect inventory accuracy, perfect shipping accuracy, And that enables a whole new industry and a whole new way of creating these 3PL operations that we're really, really excited about. And Saad Bank is really excited about and even some of the 3PL partners and operators who are talking to us about could they buy our systems, They're excited.

Speaker 3

So we think this is a new market that I don't think people fully understand and it's a very, very big market.

Speaker 10

Very good. I appreciate it.

Operator

Thank you. And our next question coming from the line of Joe Giordano with TD Cowen. Your line is open.

Speaker 7

Hey, good morning guys.

Speaker 2

Good morning Joe.

Speaker 3

Just a lot of

Speaker 7

the operational questions have been asked. Maybe I can Kind of go through a couple of things that have been coming to us from clients over the last couple of days since Green Box because there definitely seems to be some confusion about Kind of how this works. Rick, a company that comes out of the SPAC and now does a JV that In a way, it's kind of self funding its own revenue to some extent. I think that's driving some confusion. Can you maybe talk to us about like If Symbiotic didn't go this route, if you were not going to do GreenBox, but you still want to accomplish what GreenBox is doing, like you wanted to do this all organically, what would you have had to do at Symbiotic organically to stand up this organization?

Speaker 7

What would that have meant in terms of capital, in terms of management bandwidth, if you were to do it yourself instead of through this mechanism?

Speaker 3

Yes. So, great question. So, obviously, I thought long and hard about Doing it ourselves, but what I realized was with the backlog that Simodic has, the start up costs for GreenBox or for outsourcing and building these spec buildings would have all fell onto Symbiotic will have been very, very confusing to our investors. So what we did is we separated it out and the pricing that Symbiotic has to GreenBox because we understand what a big value creation is, We're getting a very large percentage of the profits both through software and through margins to Symbiotic, while still offering great returns to SoftBank. So if I what the lesson that I learned is At CNS, which I still own 100% of and it's a large business, but if I never took outside capital because I liked owning 100%.

Speaker 3

And if I had taken outside capital earlier, we would have done a couple of massive acquisitions, which we didn't get done because we wanted the capital just at the right time and not give up any shares. And so I think that really hurts Symbiotic as we're hurt CNS in the long run. So one of the things I thought about with GreenBox is to create we're going to create a whole new infrastructure market. We need to get the capital early, but we also need to keep Symbiotic as a pure play. And so what we get is, we get very healthy software license fees out of GreenBox, Very healthy margins, higher than we get today.

Speaker 3

And then because it's really we created this business with with the help of SoftBank, but a lot of it was something why SoftBank invested in Symbiotic early on. We talked about this with them when we did our first look for a partner for the SPAC. So our 35% of the profit of Green Box will come back to Symbiotic as a distribution. So when you add those 3 profit streams, It's not as good as if I did it myself, but I think in the long term, it's going to be a lot more profitable in the early years than if I had waited to do this. And I think it would have taken 5 or 6 years to do it.

Speaker 3

And I think there would have been a lot of confusion at Simotics. So that's why I chose to do it now this way. And so I hope I answered your question.

Speaker 7

That's great color. I appreciate it. And then maybe just last one, I think there was also some confusion that the shelf registration happened at the same time and maybe there was like the initial response suggested that maybe people were Worried about a liquidity event. Can you talk about what that registration did and what the actual near term capital needs of legacy Symbiotic are at this Given your cash position, it doesn't seem like the primary share issuance is really necessary.

Speaker 2

Yes. Thanks for that question, Joe. We did file a shelf as you saw the S3 registration. This was our first opportunity to do that. So You have to anniversary your public listing for a year and then the subsequent month is when you can file that.

Speaker 2

So we felt like it was good Governance to have that shelf in place, should we want that streamlined process to any future, either debt or equity capital raise. And you're right, as we look at our business, we are cash flow positive, have been for 3 quarters in our own anticipate that for this year with expanding margins looking forward. And then that's the business before Green Box, add Green Box on top and we expect that that actually will be margin enhancing on a cash flow basis. So We don't really see a core general operational need for the business at this point as we look forward to our cash generation.

Speaker 6

Perfect. Thanks guys.

Speaker 2

Thank you.

Operator

Thank you. And our next question coming from the line of Mark Delaney with Goldman Sachs. Your line is open.

Speaker 10

Yes, good morning. Thanks very much for taking my questions. First, I was hoping you could please provide an update on how Breakback development is progressing and how feedback has been on that capability?

Speaker 3

Yes, sure. So, the BrightPack is progressing quite well. There's been a lot of issues starting up a whole new basically, it's a whole new business. It's a whole new product line for us. But I'm spending a lot of time down there.

Speaker 3

The whole team is spending a lot of time down there. It's on track. It's going to be a great product. We're already starting to work with Walmart on the learnings that we have from the first system and what the second And we think it's going to be A very good product for us to roll out to the

Speaker 2

whole marketplace. And I'll add to that Mark that we continue to expect that. We'll likely do one more proof of concept before making it generally available. But just add that I agree with Rick and the feedback we get from our prospects and our existing customers' intense interest in this product.

Speaker 10

That's all helpful color. I appreciate that. And my second Question was on the systems gross margin. I believe the company has articulated the potential for that to eventually reach the high 20s, if not even 30% over time. So could you comment in more detail on what the key factors would be to get to that sort of a gross margin relative to the current level?

Speaker 10

And then any rough sizing of how much the various factors could add to margins? Thanks.

Speaker 2

Yes. Thanks for the question, Mark. So we do continue to see that As we think about the backlog here for Green Box that we have a structural gross margin that over time, so over the coming years that we can begin to approach that high 20s to closer to 30% type of structural gross margin on a systems basis. I'll emphasize as well that as you layer on recurring revenues, which have a higher structural gross margin over the long run that we think we On that pre existing backlog, take our blended gross margins higher than that. As we're bringing on new business, Our new business is coming in at margins that are higher than that.

Speaker 2

So that's providing continued support for longer term gross margins. The factors really are unchanged as to where some of that margin power comes from. The biggest things are that we're investing a lot in innovation projects such as Breakback you asked about and Simbot. Those are lower margin revenues as they flow through our income statement on the COGS line. Just the nature of we're delivering that as a product.

Speaker 2

So the significant portion of the innovation costs actually flow through our COGS along with the 2nd biggest factor is just how fast we're moving and moving with outsourcing partners. So we continue to have Significant redundant costs, start up and shutdown costs effectively start up costs with the outsourced partner shutdown costs internally. Those are going to continue in the near term, but we anticipate that as quarters roll out, those redundant costs

Operator

Thank you. And our next question coming from the line of Derek Soderbergh with Cantor Fitzgerald. Your line is open. Yes.

Speaker 11

Hey, guys. Thanks for taking my questions. Wanted to clarify some earlier remarks around the outsourcing model. Just looking at the backlog, very sizable for you guys to fulfill over the next 5 or 6 years or so. Can the existing outsourcing model supply that backlog today?

Speaker 11

Do you need to continue to build that out? How much more work do you have left getting that outsourcing partner list to the point where you can fulfill that backlog, or do you feel like you can deliver on that with your list of outsourcing partners today?

Speaker 2

It can Derek. Short answer is it can. We have stress tested this network as we have it today. Now we're continuing to work to get that network efficient and hard and expanded even further. But as we entered the Green Box Contract, we're confident that our outsourcing partners and our plan as we have it now is more than adequate.

Speaker 11

Got it. That's great. And then as my follow-up and maybe this one's for Rick, just on GreenBox, I'm curious who wins with this business model? Is this Better for smaller firms or large firms, does this in any way change your priority selling to sort of the other big box retailers I've sort of laid down your growth strategy. Can you talk about sort of the size of the firms?

Speaker 11

Anything on that? That would be great. Thanks.

Speaker 3

Sure.

Speaker 2

So first of

Speaker 3

all, We're continuing to sell the Big Box Guys, the wholesalers. UNFI just announced that they're our second system with them. So and we have A lot of those type of customers still in the pipeline, which will get announced when we sign deals with them, but there's a lot of that in the pipeline. So One of the things that so one of the things I wanted to do is I really didn't know, Quite frankly, a little bit surprised how big this market is, considering that I thought I was just going to do automation for CNS 10 years ago and find out how much in demand this product is. So we still have the big box, and we continue to talk to existing customers about even more projects.

Speaker 3

So that's One thing. The Green Box, let me give you an example of so Green Box could be As small as Mama Brown's spaghetti sauce that makes something that you might buy online or you might buy it at a Whole Foods, a small supplier and they're warehousing products before they're shipping somewhere. So that could be somebody that takes 50,000 case positions in a building that holds a 1,000,000. So that would be a small customer, it could be a lot of small customers. On the other hand, One of the things that we've talked to SoftBank about, which is one of the reasons why we're excited them as a partner.

Speaker 3

So The Sovereign Wealth Funds, all of them, whether it's Singapore or UAE or the Saudis, They're all very large owners of ports. And the way the ports work is that, they basically build warehouses for people and then they have operators. So if you automated all the ports in the world, that would probably be the world's largest customer. So they're both big customers and small customers. So who would go into the ports?

Speaker 3

Everybody that's unloading containers has got to store that stuff somewhere. And so you could have big customers that today only do that themselves And now we could offer somebody like some of the big shoe companies instead of having 6 warehouses where they put their shoes. They might want to have 20 warehouses that are much more efficient freight wise. They can't do that today because they have these massive warehouses with massive and Warehouse Management Systems. And so we could say, you could store 200,000 boxes instead of 2,000,000 boxes in our facility and spread around the country.

Speaker 3

So the concept that we're talking about, the way I describe it is it's a combination of Iron Mountain, which created a whole business for Secure Storage. And of course, that's not a great business anymore because of everything going online. But when it started, It created a business that nobody really understood because everybody stored their records themselves. So there were small customers and big customers. That extreme And then the other thing that I focus on is all these storage sheds that are being built around the country.

Speaker 3

They never stop building them. Every time they build an apartment building, They built these more storage units. Nobody had any idea how big that business was 20 years ago. If they had, they would have built them all out. So we're offering both small customers and large customers, a whole different supply chain flexibility that they never had before.

Operator

I'm showing no further questions in the queue at this time. I'll turn the call back over to Jeff Evanson for any closing remarks.

Speaker 1

All right. Thank you everyone for joining our call today. We appreciate all your interest in Symbiotic and look forward to seeing

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Earnings Conference Call
Symbotic Q3 2023
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