Symbotic Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 29, 2024

There are 15 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Symbiotic Third Quarter Fiscal 20 24 Financial Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speakers today, Jeff Evenson, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Victor. Hello. Welcome to Simbotix' Q3 2024 Financial Results Webcast. I am Jeff Evanson, Symantec's VP of Investor Relations. Some of the statements that we make today regarding our business operations and financial performance may be considered forward looking.

Speaker 1

Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our Forms 10 ks and 10 Q, including the risk factors. We undertake no obligation to update any forward looking statements. In addition, during this call, we will present both GAAP and non GAAP financial measures.

Speaker 1

A reconciliation of non GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at ir. Symbiotic.com. On today's call, we're joined by Rick Cohen, Symbodyx' Founder, Chairman and Chief Executive Officer and Carol Hibbert, Symbodyx' Chief Financial Officer. These executives will discuss our Q3 fiscal 2024 results and our outlook followed by Q and A.

Speaker 2

Rick, I

Speaker 1

will now turn the call over to you.

Speaker 2

Thank you, Jeff. Good afternoon and thank you for joining us to review our most recent results. Our Q3 reflects record revenue growth, strong recurring revenue gross margin and careful management of operating expenses. However, our system gross margin reflects elongated construction schedules and implementation costs associated with last quarter's rapid pace of innovation. For example, during the quarter, we decided to retrofit all SIM bots in the field with our new sensor array to enhance performance capabilities at the majority of our customer sites.

Speaker 2

While we believe much of the cost growth is now behind us, we could continue to see some impacts in the coming quarters as we focus on scaling high quality deployments for our customers. As you recall, 2 years ago we embarked on a strategy to outsource much of the manufacturing and installation of our systems. This approach enabled us to scale at a rapid pace. Based on our key learnings over multiple deployments, we plan to reabsorb a portion of the construction management processing starting this quarter, which will reduce costs. We believe bringing some of these functions back in house will help us put a sharper focus on the implementation process and reduce costs further.

Speaker 2

In the short term, our revenue growth may slow as we make these changes. Our backlog demonstrates that demand continues to be very strong for our systems, but we will always prioritize execution on existing deployments ahead of chasing growth. On the innovation front, we made important progress on a new mini bot that will populate our 2nd Freight Pack installation and advanced our non ambient system development work. We also began deployment of the first symbolic system for GreenBox. While this did not contribute a significant amount of revenue in the quarter, the GreenBox deployment is on schedule.

Speaker 2

I'm confident that we are making the right choices to quickly return to higher system gross margin and faster growth. Thank you to all Symonec employees, partners and investors for your efforts and support. Now Carol will discuss our financial results and outlook.

Speaker 3

Carol? Thank you, Rick. 3rd quarter revenue grew to $492,000,000 up 58% compared to the same quarter last year. The strong revenue growth is driven by steady progress across our 39 systems in the process of deployment. As planned, system starts reaccelerated in the Q3.

Speaker 3

We started 5 new system deployments and completed 3 systems, bringing us up to 21 fully operational systems. We expect quarterly system starts to increase in the 4th quarter. Our backlog of committed contracted orders of $22,800,000,000 remained consistent with last quarter as finalized pricing on contracts already in the backlog was offset by the revenue recognized during the quarter. As Rick mentioned, system gross margin fell below expectations due to scheduled growth and higher labor costs during the quarter. We are focused on improving our planning, speed of implementation and project management to enhance performance of the business.

Speaker 3

We continue to improve our operating leverage with focus on prudent expense management. During the quarter, we generated $50,000,000 in cash from operating activities. In total, our cash and equivalents declined $81,000,000 sequentially to 870,000,000 dollars This was driven in part by a first investment in Green Box as they begin operations. For the Q4 of fiscal 2024, we expect revenue of $455,000,000 to $475,000,000 and adjusted EBITDA between $28,000,000 $32,000,000 representing temporarily slowed revenue growth and system gross margin returning to historical levels during our Q4. Finally, we believe our Q1 of fiscal 2025 should reflect reaccelerating year over year revenue growth.

Speaker 3

We now welcome your questions. Operator, please begin the Q and A.

Operator

Thank you. And at this time, we'll conduct a question and answer session. Our first question will come from the line of Andy Kaplowitz from Citigroup. Your line is open.

Speaker 4

Good afternoon, everyone.

Speaker 3

Hi, Andy. Hi, Andy.

Speaker 4

Rick or Carol, can you give a little more color into what happened with system gross margin and why will rebound in Q4?

Operator

Are you basically saying that in

Speaker 4

some cases outsourcing is not working for your deployments? And maybe what happened to convince you to take Construction Management again in house? And what is the visibility into your Q4 expected margin improvement?

Speaker 3

Yes. So I'll start and then Rick can chime in, in terms of some of the things we're putting in place to improve gross margin going forward. So on the outsourcing, as we talked about outsourcing, our primary reason why we chose outsourcing over a year ago was to go ahead and scale. And so we did that across multiple areas of our supply chain so that we could also have redundancy. We're looking at bringing back in house just one element, which is the EPC, so the engineering procurement construction piece of that.

Speaker 3

And we continue to own a piece of that. So we actually Symbiotic continued to deploy at some of our sites and then we had multiple supply chain partners off doing that. What we're finding is why that's not a significant item in terms of the overall cost of the system. It's a significant item in terms of that final mile of installation when you're extremely focused on making sure that everything comes together. We're finding that focus on schedule and focus on cost that's a critical point for us.

Speaker 3

So that's one of the elements that we're going to bring back in house so that we have more control over that overall integration. In terms of the other things that really drove our gross margin performance in this quarter, Rick mentioned we've had delays in construction creating inefficiencies. And so some of our more complex projects we've had delays around, for example, permits. And when you talk about a delay in the construction phase, this is after we've already deployed resources to each of those sites, which is extremely inefficient. And our projects are taking longer.

Speaker 3

I think last quarter I referred to some of the projects that we had in flow where we're not always going to see that 20 month deployment because I think I called them stragglers. And what we're seeing now is some of those complex systems where they're just taking longer. Longer system deployment creates higher cost. And then we did talk about the other contributor to gross margin is implementation of system improvements. There are several cases where we're going to go ahead and make that decision to go ahead and deploy and retrofit now, which might drive cost.

Speaker 3

So in terms of some of the things we're focused on going forward, Rick, do you want to add any other color to that?

Speaker 2

Yes. I think the most important thing is we're not I mean our margin is down, but we're not a retail company. So we're not discounting. We're getting the gross profits that we want, but the projects have been costing more than we anticipated. Keep in mind, we've done about 40 projects so far.

Speaker 2

We have 100 ahead of us. We've enhanced our supply chain team. We now have a lot of these people that we've been looking for, for the last year on board. Have a lot of talent. And so we just simply think we can do it better than some of the partners that we needed to use because we didn't have the resources and we wanted to hit our sales targets.

Speaker 2

For me, hitting our sales targets, pushing sales is something that is critical. For 50 years, I've been used to running a business on a 1.5% margin and a 6% gross profit. So I have no concerns about getting these costs under control. What I want to make sure is that we keep our customers brag and happy and that we continue to roll out our sales. So I think we made some choices.

Speaker 2

We could have fought with the customers over who paid some of these things, but we said let's just keep the customer happy. Let's keep the sales rolling. Some of these things will absorb now and some of these things will not be expenses in the future and are I fully well expect our margin to come back and our goal is to enhance the margin further. But just getting back to where we where everybody expected us to be would be a good place in the near term.

Speaker 4

That's fair, Rick. And should we think about it though as sort of like in quotes one time in Q3 and that's why it comes back in Q4 because you're talking about normalized margins just in this current quarter basically?

Speaker 2

Yes. I think I'll let Carol speak, but things like delays because things weren't placed orders on time and you have 200 people standing around the site, that's just not acceptable. And we don't expect that to happen in the future. So it's not like we'll go to 0 immediately, but most of this stuff should go away from what we're seeing in the people that we've hired in the Q4.

Speaker 3

And our guide implies, Andy, that we're going to return to more gross margin similar to our historical. Now as Rick said, we've got future plans of improving that gross margin, which we talked about. And so there while there might be some pressure on those gross margins still in the Q4, We're not going to be at the levels that we were this quarter.

Operator

Got it. And then, Carol, how

Speaker 4

do we interpret the commentary that you're going to have accelerating deployments from the 5 you had in Q3 and then revenue will accelerate in Q1 'twenty five with the commentary that improving your deployment process may temporarily slow your revenue growth like obviously those 2 are kind of competing. So how do we sort of interpret that as you move forward?

Speaker 3

Yes. So I'll interpret that as we had 3 system starts last quarter, which was one of our lows. And so that's impacting the revenue in the Q4. We ramped that up to 5 this quarter and you should expect to see that 5 continue to grow incrementally quarter over quarter as we finish out our backlog.

Operator

All right. Thank you.

Speaker 3

Thanks, Andy.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Damian Karas from UBS. Your line is open.

Speaker 5

Hi, good evening everyone. Hi, Damian. I think in your commentary on Green Box, you noted that everything is kind of on track there. I was wondering if maybe you could just kind of peel back the onion a little bit and give us some additional color on what you're seeing for Green Box JV?

Speaker 2

Yes. So we have our first install in a site in California. So we're ramping that up. That's our first install. We have several sites where we're now talking to landlords about leasing space and we're spending a lot of time interviewing building out the management team.

Speaker 2

About where we are in terms of rolling it out and building out the sales force. But right now, what we're doing is focusing on a couple of critical sites that are in the right geographies, sizing the system, specking the systems, finding the real estate and then building the management team to operate the site. And then we have started having numerous discussions with potential customers to be anchor customers for Green Box. So it's going on a good pace. I mean, sure everybody wants it to go faster, but we're pretty happy with the pace.

Speaker 2

We're thoughtful. I think it's we're excited about the potential for the business.

Speaker 5

Great. Glad to hear. And Carol, you had made a comment that you're kind of executing some prudent expense management. I was wondering if you might be able to elaborate on that. Was that kind of tied to the in sourcing that you also spoke to?

Speaker 5

Or kind of what all did you mean by this prudent expense controls?

Speaker 3

Yes. It's not tied to the in sourcing. The commentary there is if you look at our miss on gross profit this quarter, it is entirely a story around system gross margin. So when you look at our SG and A and R and D, we continue to manage those expenses as we grow. So we did not see any one time impact in the quarter, associated with adjusted EBITDA like we might have seen in other quarters around restructure.

Speaker 3

We did not have any of that this quarter We're managing our expenses appropriately as we grow.

Speaker 5

Understood. Thank you.

Speaker 3

Thanks, Damian.

Operator

One moment for our next question. Our next question comes from the line of Matt Summerville from D. A. Davidson. Your line is open.

Speaker 6

A couple of questions. As I think about kind of the commentary coming out of the last quarter, the messaging from the Analyst Day, I guess, was this something that developed really late in the quarter that you felt kind of blindsided by? Because I guess I thought some of the challenges and growing pains, if you want to call it that, growing pains associated with increasing your concurrent deployment capability. I guess I was under the impression that this quarter was going to sort of be a proof point that a lot of that stuff was in the rearview.

Speaker 2

Yes. I mean, I think with construction costs and delays, a lot of it shows up right at the end. And so, we did not anticipate this and we're pretty we're not happy about it. That's why we're taking over some of the management ourselves who are acting very quickly. I mean, this is not like this is not acceptable.

Speaker 2

But yes, a lot of this stuff came at the end and we just had to deal with it right at the end of the I have not said the end, but certainly after Investor Day, well after Investor Day.

Speaker 3

And then the other thing I'll add Matt is one of the things we're putting in place is as we scale, one of the things we're finding is that a focus on overall program management and schedule integration across all of our projects and flow is a critical skill set that we need to put more resources against. And I think when you talk about was it a surprise, not a surprise, but it's those final elements associated with putting the install together. As Rick said, you get to the final completion of implementation. We need a better view around all of our program management to predict when those delays might be impacting, which is one of the reasons why that EPC role is so critical because they're the ones receiving equipment on-site. They're the ones who will have the first visibility in terms of a potential delay.

Speaker 3

And that's why we want to bring that back in house. That is a critical element for us that we perhaps weren't getting the visibility we need.

Speaker 6

So is my follow-up, 1, do you have that role and individual in that role that is the head of what you just described, so there's organizational accountability as we speak on what's going on? And to that my point, has anything that's happened here impacted the performance of the systems in the eyes of the customer?

Speaker 2

No, that's what we really protected against. I think the analogy that comes to mind is our offense is working great. We had 5 minutes left in the Q4 and the defense blew a couple of plays. And so I think that's the way we look at it. We have been hiring people in the supply chain, in the EPC space over the last 6 months and they finally got in place and they're actually the ones that are saying we should do this ourselves.

Speaker 2

Our partners that we picked on supply chains, they got the work done, but then they came in with extra bills at the end. And that's just that's it's a part of the business we have to manage and we have to make sure we play defense, but it's not what drives the business. We just got to shore it up. And so that's my answer. And yes, it does come when you finish a project and you're saying, okay, we're ready to gear it up and they're saying, no, no, no, these parts aren't here and you have people hundreds of people standing around the site for weeks.

Speaker 2

That's the problem. So the systems are running well, and they just took longer to bring online than we thought. And we're not going to tolerate that.

Speaker 6

Got it. Thank you guys.

Speaker 2

Yes. Thanks, Matt.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Ross Berenblak from William Blair. Your line is open.

Speaker 2

Hey, good evening, guys.

Speaker 3

Hi, Ross.

Speaker 7

Hey, sticking on the in sourcing, can you maybe help frame how this is impacted if it has your ability to reduce commissioning hours? I know you provided some impressive walk at your Investor Day in May on bringing those down. And then maybe just trying to get a sense also on as you bring those commission hours down, what does that provide on closing the gap on your longer term gross margin targets?

Speaker 3

I'd say the commissioning is done by a different group of people than the EPC. So that walk that you heard Walt talk quite a bit about at our Investor Day, that remains on track. And so the commissioning think about that as the final mile. We're talking about the directing of resources throughout that installation process and that's where we've seen some of the cost growth and schedule impact around that portion of the build.

Speaker 2

Yes. The actual building of the bots, which was a big problem for us before, actually very happy with our partners on building bots and we have a very competitive situation. Some of the parts suppliers to some of the bots maybe could do a little better, but the actual assembly of the bots is critical. It's the actual big setting up the structure, the construction part of the business that is really going to be we got to be boringly good at that. And so in this process, I think we've learned that there's a couple of things we should be doing differently.

Speaker 2

There's timing on the sites, but the most critical thing would be building the bots and building the robotic palletizing cells. And those we've been pretty happy with. It's just when it all comes together, so many people standing around at the end.

Operator

All

Speaker 7

right, got it. And then maybe on something a little bit more optimistic. Rich, have you just provided any updates on where you guys are with the European sales force expansion? And any commentary you're willing to provide on what those early customer conversations have looked like in the region?

Speaker 2

Yes. So we've had a lot of conversations in Europe. We have I've been to Europe a bunch of times. We've hired some Europeans to actually do sales work. We've hired a couple of consulting firms, All the big suspects in especially in the food space in Europe are now we're engaged with conversations on.

Speaker 2

We've also had some conversations with some of the port operators, whether it's GreenBox or Symbonic Systems that we've been helpful with. And we continue to recruit and look at hiring more sales folks. But we've hired a couple of very good sales people from some of our competitors that we're delighted with.

Speaker 7

So I mean just really quick on the follow on there, maybe I under appreciated the dual nature of the supply chain. Are you going to need the engineering exposure in Europe as well? So there's going to be another layer of hiring once these orders do start to come in on delivering the deployments?

Speaker 2

No, no. The systems our systems are pretty much cookie cutters that's designed. And so and we continue within our expense package, we're actually increasing the amount of money and the amount of people we have in R and D. But what we're doing is actually figuring out how to install these things simpler and easier, so that there's just less people doing basically construction work.

Speaker 7

All right. That's perfect. I'll leave it there. Thanks guys.

Speaker 3

Thanks.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Greg Palm from Craig Hallum. Your line is open.

Speaker 8

Yes, thanks. I guess I'm still a little bit confused just in terms of the revenue and profit bridge in the quarter. You had completed 3 systems. You started 5. You actually outperformed revenue by a pretty wide margin relative to the guide.

Speaker 8

And so I'm trying to tie the statements about deployment delays in construction implementation delays to the fact that actually revenue outperformed quite a bit, which obviously implies that you were able to recognize the revenue. So can you maybe just dig into that a little bit more?

Speaker 3

Yes. So if you start with current revenue, that strong revenue is based on the progress of the 39 systems in deployment, many of which we had a higher SAU signature. If you think about 2Q of 2023, 3Q of 2023, we had signed 5 and 6 SAU's back in that timeframe. Right now, we are heavy into the implementation. So the bulk of our revenue is coming from projects that we signed about a year ago.

Speaker 3

So that's driving the strong revenue performance. There are a couple of things driving our 4Q guide lower. The first one is we had fewer system starts last quarter. So we had 3 starts. And so that start of those systems, we're starting to see the ramp up of revenue would occur in 4th quarter.

Speaker 3

And so the lower system starts is the first driver of why 4Q is down. The second is when we talk about construction delays and how that impacted our performance this quarter. Those construction delays that started on systems over the last quarter, that's going to delay revenue recognition for implementation milestones in the next quarter. And that's another significant driver in terms of why revenue is down. And then the last one as Rick talked to is the technology we're improving that slowed some things down.

Speaker 3

So that's also going to slow milestones that we would have received revenue recognition on next quarter and that's going

Speaker 1

to shift out in the quarter or so. So those are

Speaker 3

the big drivers why you see the dip down. That outlook is temporary. So as we look and plan for the beauty of having the backlog that we've got being able to look at what we have in deployment, we can we're getting better at predicting our revenue as long as we remain on schedule.

Speaker 8

Okay. So maybe a little bit of a lag. So I guess that makes sense. And did I hear it right? Was there a cost associated as well with upgrading or retrofitting some of the bots that are that were in the field already?

Speaker 8

Was that an impact as well that was unforeseen or was that expected?

Speaker 2

That was unforeseen. Some of the cables that enable the vision enhancement on the bots, which is one of the ways that we use vision to connect to our boards and use AI. A lot number of those cables came in late. So we shipped the box to the customer, so they could still do 90% of what they were supposed to do. And then we made the decision to retrofit the cables in the field, which was expensive.

Speaker 8

Got it. Okay.

Speaker 3

So now in line at our spot producer, but we made the conscious decision to go ahead and retrofit solid on what's already in the field.

Speaker 8

Yes. Okay. And then just lastly, if I think back a few quarters to your fiscal Q1, you slowed deployments,

Operator

I guess,

Speaker 8

it was for differing but similar reasons, but that ended up really being at least at that point a 1 quarter issue. So what is your visibility? You're talking about reacceleration in fiscal Q1. Do you have pretty strong visibility that suggests, I mean, what else unforeseen could happen between now and then that would maybe impact that timing?

Speaker 3

So in terms of the visibility in new system starts, we get with our customers and try and map out from around our backlog, we try and do a 6 month and a 12 month outlook and we stay lockstep with our customers because we've talked before about why we may be ready to be full steam ahead and start deployment at a particular site, it's a joint decision with our customer. And so we look out 12 months and map that out. What can cause issues with that, our construction delays in one phase may start may delay start of another phase of that project. And so when you talk about those unforeseen things, that's the piece that we've got to remain on schedule so that you can continue the deployment in that phased approach.

Speaker 2

So we have pretty good visibility. Once the permits are issued, it just flows. And most of the things that we're talking about, I think in the Q1, we're pretty confident of.

Speaker 8

Okay, perfect. I will leave it there. Thanks.

Speaker 3

Thanks.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Jim Ricchiuti from Needham. Your line is open.

Speaker 2

Hi, thank you. So

Speaker 9

when you talk about the revenue growth accelerating in fiscal Q1, should we anticipate a pickup in margins? I mean, you're already suggesting there's going to be some recovery back to historical levels in Q4 margins. I'm just wondering though, as we start seeing an acceleration in revenue, do we then potentially have some cost issues that could impact margins in the near term beyond Q4?

Speaker 3

So in terms of revenue acceleration, you're going to see 4Q will be our lowest year over year revenue growth. So when we refer to getting back to 1Q, 4Q is going to be our lowest point when you look at that. In terms of gross margin impact, the accelerations we're talking about are not accelerating schedule where we're dumping resources to expand to complete ahead of schedule. I'm not sure if that was the nature of your question. But you should expect to see gross margin incrementally get better as we deploy systems.

Speaker 3

So the other thing impacting our gross margin is we have lower margin projects in flow right now. The longer they take to deploy, the longer those lower margin projects stay with us. So we've got to get that deployed so that we can start moving into our higher concentration of our higher margin business.

Speaker 9

And just a follow-up question on what you're doing in house with EPC. As you begin to accelerate, I mean, you're talking about a significant acceleration in deployments over the mid to longer term. And I'm wondering if that's going to require a scale up in EPC Resources as well, maybe not immediately, but it sounds like as you start doing more of this in house and as the deployment really starts to ramp, you're going to require more resources in house. Is that am I thinking about it, Drew?

Speaker 2

Yes. I think in perspective, so let me just step back a second. So we basically doubled the sales of this company in 2 years. And so, I mean it's not I mean it's like we hope we wouldn't hit another speed bump and but I think this is I mean it's pretty minor. This is actually our highest EBITDA quarter ever.

Speaker 2

So it's pretty minor. I don't have any below the line adjustments. But yes, we're going to continue to scale up on some resources. We're also going to scale down on other resources. We'll do a good job controlling our expenses.

Speaker 2

And now what we need to do is control the construction costs at the site. So this was a good learning quarter for us. It was a little bit painful. If the gross had been good based on the sales, we would have been delighting our the people we're talking to today. So, we took our hits, we cleaned it up and we're done.

Speaker 9

Okay. Thank you.

Speaker 2

Yes.

Operator

One moment for next question. Our next question comes from the line of Nicole DeBlase from Bank. Your line is open.

Speaker 10

Yes, thanks. Good evening, guys. Hi. Hi. Just maybe kind of putting all of this together, thinking about the ramp to 2025, talking about your view that revenue should kind of get back on track and reaccelerate in the Q1, margins following that and then ability to kind of hold costs constant.

Speaker 10

Does that mean that it's fair to assume that EBITDA margins in 2025 move above this mid single digit level that you're expecting for the Q4 of this year?

Speaker 3

You're definitely going to see a return to EBITDA higher than where we are this quarter. We should be above mid single digits and then on a trajectory to continue to improve that gross margin and EBITDA margin going forward.

Speaker 10

Okay, got it. Thank you. That's very helpful. And then just on steel costs, they've been coming down for some time.

Speaker 3

Do you think that's reflected in your gross margins yet?

Speaker 10

Or is that an additional help as we move into future quarters?

Speaker 3

I'd say it's reflected. So what we've gotten a lot better at is locking in our steel pricing at the same time we go ahead and sign an individual contract or an individual project with our customers. When there is a lag is when we either get the benefit of steel pricing or we get the impact of steel pricing. So what we've gotten better at is locking in a commitment and our supply chain team is focused on with that stronger visibility in terms of what's in our backlog, we've been able to lock in commitments with our steel partners further out.

Speaker 2

A lot of these projects we're doing now, we locked in prices almost 18 months ago when steel was higher. So I can't predict what steel is going to do, but if you think we expect it to come down lower and that would be reflected in the future. But sites that we're doing now, we actually locked in steel 18 months ago. So we're not buying on the spot market or if we are buying on the spot market, it's for delivery at a price 18 months from now.

Speaker 10

Got it. Thank you guys. I'll pass it on.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Mark Delaney from Goldman Sachs. Your line is open.

Speaker 7

Yes, good afternoon. Thanks for taking my question. Last quarter, the company said it expects to begin the installation of its second breakback solution with a customer this summer. I think you mentioned today progress with the mini bot, but can you comment on when you expect to deploy the second break pack and how break pack more broadly is going?

Speaker 2

Yes. So we're hitting so the answer is it's going well. We're meeting our customers' expectations. 2nd system will start construction in our next fiscal year. And I think it gets rolled out in 2025 or thereabouts.

Speaker 2

But we've redesigned the MiniBot. We've taken it in house. We've put a lot of new technology in the bot. Customer is really excited. I actually think it's going to be a growth opportunity for us.

Speaker 7

Thanks for that, Rick. And my other question was hoping to better understand the top line. And can you please remind us what percent of revenue recognition comes from procurement, installation and commissioning of the system? Thanks.

Speaker 3

So our revenue curve, because I think this is where you're going Mark, is a much more significant part of our revenue is coming from system deployment near about 12 months into the install. So I think your question though is what percent of that overall revenue is driven by the EPC in terms of if we're bringing that back in house, how much of the revenue is driving. That is not a significant contributor to cost. And so the focus there for each individual system, it's a very small percentage of what that overall cost curve is, but it's such a critical element, which is why we're bringing it back.

Speaker 7

Thank you. I'll pass it on.

Operator

Thank you. One moment for our next question. Our question comes from the line of Rob Mason from Baird. Your line is open.

Speaker 11

Yes, good afternoon. Rick, I was going to see if you could update us on maybe it's early, but if you could update us on progress on the non ambient effort that you have ongoing and how you see that timeline. And just referencing that one of your large customers in the quarter made some commentary around their implementation of, I guess, a vendor they've been working with on that effort at least since 2018. But maybe how you see your opportunity unfolding in the non ambient space with either new or existing customers?

Speaker 2

Yes. So we are working on we have a couple of friendly CNS sites that we're able to experiment with in perishables in Massachusetts. And so we're continuing to work on that. We're learning a lot. We don't see any showstoppers, perishable system for bots.

Speaker 2

We're pretty well designed for. It's just we're so busy right now selling the ambient systems. But we're continuing to spend a lot of money on R and D here. And everybody should know that, that we haven't cut back any of that and that's reflected in our numbers. But the perishable is that development it continues to go well.

Speaker 2

A lot of what we do in ambient is relevant for perishables.

Speaker 12

So we don't have

Speaker 2

any deployments, but we deployment. We think that's going to be a big business.

Speaker 11

Very good. And then Carol, just real quick, you made the commentary around funding for Green Box. How does that tie into a couple of the larger outlays that were on the cash flow statement in the quarter either around strategic investments or the distributions for Symbiotic Holdings. Is that related?

Speaker 3

Yes. The Symbotic Holdings is not related to Green Box, but I'll touch on the two things that impacted our cash for the quarter. So you see an $81,000,000 reduction quarter over quarter in terms of cash balance. And so there were 2 unusual events this quarter. The first one being, this is our Q1 with our Green Box investment.

Speaker 3

And so if you may recall from our overall Green Box LLC agreement, each partner would contribute to the initial capital call associated with that investment. And so that initial capital call that is not related to the system happened this quarter. And so that was one element of what you saw from the cash burn. The second element you referenced, which was in our press release and the financials, distribution to SIM Holding LLC, the non controlling interest. This has to relate to our SIM LLC.

Speaker 3

We make a distribution to the members in the year that we believe we will become profitable for tax purposes. And so associated with that distribution, you saw $48,000,000 cash impact. That run rate will not continue at that rate. We actually had an April and a June payment that both hit in the quarter. So we had double the impact in one particular quarter.

Speaker 3

You're not going to see that run rate going forward.

Speaker 11

Thank you. That's helpful.

Operator

Thanks. Thank you. One moment for our next question. Our next question will come from the line of Ken Newman from KeyBanc Capital. Your line is open.

Speaker 13

Hey guys, thanks for taking the question here. I appreciate all the color so far, just on all the moving pieces for system gross margins into this quarter. But I'm just curious, Carol, can you just quantify exactly how large those impacts were in the quarter? That way we get a better sense of just what EBITDA margin would have been had these costs not kind of crept up on you late into the quarter? And then just helping us bridge how much of that is expected to roll off in your 4Q guide?

Speaker 3

And so what you're seeing is the entire impact, if you think about we were at 15.6% gross margin. We had that full impact from what we would have been predicting at about 20%, which is what we're trying to get back to in terms of 4th quarter. That full impact comes from the 3 elements we talked about. And I'm not going to split out between the 3, but it's overall cost growth, construction delays and then going ahead and rolling forward the innovation that we had talked about last quarter. So those were the impacts driving that gross margin.

Speaker 13

Okay. And is it fair to think, I mean, it sounds like you're not expecting the full impact or that to roll off here in the Q4. But as I think about just the timing here, is there a sense that you get back to 20% plus gross margins beginning in the Q1 of 'twenty five? Or is that still too hard of a hurdle?

Speaker 3

No, that's what we're predicting. So our guide reflects getting back to 20% in the 4th quarter. And I'll just do a quick go back on the 3 categories of what impacted our overall margin. To summarize that, the vast majority of that is labor refated. We talked about inefficiencies.

Speaker 3

We talked about schedule. The bulk of that is people costs, people being ready for work that then work in the equipment did show up. So our guide for 4Q, our expectation is we'll be back to 20%. Was that where we wanted to be? No.

Speaker 3

So we're lower than what we would have planned at the beginning of the year and that's why you're seeing we're saying there's still some impact heading into the Q4, but our guide reflects that.

Speaker 13

Got it. And then just real quickly for my follow-up here. Just looking at the free cash statement, I mean, it looks like CapEx did step up kind of decently sequentially here this quarter. Just any thoughts on where free cash flow or CapEx expectations into year end? And is it fair to think that you'd still expect to be free cash flow positive in the Q4?

Speaker 3

Yes. We still expect to be free cash flow positive going the 4Q. What you're seeing on CapEx is a couple of things. So we're going ahead and investing in additional equipment as we're ramping up R and D. And then we also talked last quarter about our move from some equipment out of deferred cost into PP and E and that's what you're seeing.

Speaker 3

So I think the run rate for this quarter is indicative of what you'll see going forward.

Operator

Our next question comes from the line of Derek Soderbergh from Cantor Fitzgerald. Your line is open.

Speaker 12

Yes. Hey, everyone. Thanks for taking the questions. I wanted to ask about Green Box. Is there any way you can quantify the interest level you're getting for Green Box today?

Speaker 12

Is that pipeline growing? And then how would you characterize the size of the firms you're getting interest from today? Is it more mom and pop shops, mid size or large regionals? And then I've got a follow-up.

Speaker 2

Mostly what we're getting interest at this point is medium and large regionals. And what we want to do is develop a sales force to go after the mom and mom shops, which is where we think there's more margin, but we need anchor tenants. So we've had a number of incomings as people are still trying to understand what we're doing, how this all works, but medium and large regionals.

Speaker 12

And Rick, what do you think they're waiting for to hop on board with that first anchor customer? What are they looking for when that solution comes live? What are you hearing from them in terms of feedback? I guess just what are they watching from that first customer? Thanks.

Speaker 2

I think they were waiting for the 1st Simmonics site and Green Box site to become available. So we'll be able to tour people through that. But I just waiting for us to announce the locations, which we plan to do shortly of the next couple of sites.

Speaker 3

Thanks, Derek.

Operator

Thank you. One moment for our next question. And our next question for will be from the line of Joe Giordano from TD Cowen. Your line is open.

Speaker 14

Hey, guys. I wanted to start on just back on the EPC thing. So I just want to make sure I get this right. Like you're dealing with companies that do this as like the core competency, I guess.

Speaker 5

So like how what gives

Speaker 14

you the comfort that bringing this in house like to do something that's not like your I guess your core of what you do like that you'd be able to do it that much better? And like would you be hiring like kind of the same people that you're working with, like kind of poaching people from those EPCs? So I just want to make sure I understand that whole dynamic and what gives you the confidence that that improves significantly in house?

Speaker 2

Yes. So actually what we did, Joe, fair question is a lot of the people that we had hired when we were doing this ourselves were then hired by some of the general contractors who probably are better at defense work than our kind of work. And so, it was so we some of these contractors that we will then go back and take over will actually reduce the price. And we're finding that we're spending a lot of time managing the contractors. And what we've done so that's one thing.

Speaker 2

The other thing we've done is we've actually been able to hire people that have done this from some of the large automation firms that do this in house. And so that's given us real comfort that we don't need in some cases the middleman and in some cases we're just better off to hire people ourselves. So it's simply I guess the answer is simply we've been disappointed at the performance with some of the suppliers that we've hired and we know we can do it better ourselves.

Speaker 14

Are you ultimately using these same like construction firms? You're just taking a part of the function away? Like do you plan on keeping the same kind of mix of partners though?

Speaker 2

Yes. So for instance, there's a company that installs all our rack, which is one of the largest contracts that we order in terms of labor. And so we turn those over to the general contractor and the general contractor used them and did a worse job managing them than we did. So we'll just take them back. We'll also and on the electrical side, we've learned a lot about electrical.

Speaker 2

And so that's been another part, but yes.

Speaker 14

So it's them not managing the subs it's them not managing the subs the subbing it out well and that's the capability that you think you can bring more efficiency by the side. Okay.

Speaker 2

Yes. When we took this over and I think we told the group that we thought these people were going to manage all the subs better. We're going to bring in new subs. It just hasn't happened.

Speaker 14

Okay. And then my follow-up here and I think this was brought up, but I just want to clarify it like I know that you're frustrated by this. I'm sure investors are going to be somewhat frustrated by this. But like if I'm talking to your customers, like is this am I getting kind of different reactions? Like do they know do they see this on their side?

Speaker 14

Are you bumping up against kind of like timelines that you need to hustle to get to now? Like what's the difference between like the conversation we're having right now and the ones that you're having with your customers on-site?

Speaker 2

Yes. So what we've done and this is one of the reasons why we spend more money is we've tried to as much as we can isolate our customers. We think this is a short term problem. And so we certainly the customers are leaning in to pay some of it. Some of it we're paying and we're working with ahead

Operator

of

Speaker 2

time, clean ahead ahead of time, clean ahead of time and some of them have been lagging with their contractors getting power to the building and that stuff. So we're all learning together, but I'm confident this is a very short term problem.

Speaker 14

Thanks guys.

Operator

Thank you. I'm showing no further questions in the queue. And now I'd like to turn the call back over to Jeff Evanson for any closing remarks.

Speaker 1

Thank you everyone for joining our call tonight. We appreciate your interest in Symbiotic and we look forward to seeing many of you during the quarter at the various investor conferences we will be attending. Good night.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

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Earnings Conference Call
Symbotic Q3 2024
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