Ouster, Inc. Q2 FY2025 Earnings Call

Hello, and welcome to Ouster’s Second Quarter 2025 Earnings Conference Call. The call today is being recorded, and a replay of the call will be available on the Ouster Investor Relations website an hour after the completion of this call. I would now like to turn the conference over to Chen Geng, Senior Vice President of Strategic Finance and Treasurer. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining our second quarter 2025 earnings call. Today on the call, we have Chief Executive Officer, Angus Pacala; and Chief Financial Officer, Ken Gianella. As a reminder, after the market closed today, Ouster issued its financial news release, which was also furnished on a Form 8-K and is posted in the Investor Relations section of the Ouster website. Today's conference call will be available for webcast replay in the Investor Relations section of our website. Before I pass the call over to Angus for his opening remarks, I want to remind everyone that on this call, we will make certain forward-looking statements. These include all statements about our competitive position, anticipated industry trends, our business and strategic priorities and our revenue guidance for the third quarter of 2025. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause actual results and trends to differ materially from those contained in or implied by these forward-looking statements are set forth in the second quarter 2025 financial results release and in the annual and quarterly reports we file with the Securities and Exchange Commission. Any forward-looking statements that we make on this call are based on assumptions as of today, and other than as may be required by law, Ouster assumes no obligation to update any forward-looking statements, which speak only as of their respective dates. In today's conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the financial results release that was issued today. I would now like to turn the call over to Angus.

Hello, everyone, and thank you for joining us today. I'll start with a brief recap of the quarter, an overview of the market and an update on our strategic priorities. Ken will cover our financial results in more detail before I close with some final thoughts. Ouster delivered strong second quarter results with revenue just over $35 million, above the high end of guidance with a solid gross margin of 45%. This performance was driven by record sensor shipments, which surpassed 5,500 units in the quarter, bringing Physical AI to life across logistics, industrial and smart infrastructure sites around the world. We finished the second quarter with a robust balance sheet of $229 million of cash and equivalents and no debt, underscoring our continued financial strength. Proven in the field, our lidar solutions are enabling intelligent real-world autonomy across industries and driving tangible improvements in safety, efficiency and sustainability. Our strategic investments in AI algorithms and data training infrastructure are enabling new capabilities to unlock significant commercial opportunities. One of our long-time customers has deployed Ouster Gemini at hundreds of facilities and driven by performance improvements from new Gemini AI algorithms, this customer is now testing new high-value use cases, which require more than quadruple the number of sensors per site. Our ability to land and expand deals was a highlight during the quarter as we continue to convert customer pilots into large volume orders as they roll out deployments or move into production. In smart infrastructure, we successfully converted a pilot program with a Fortune 500 technology company into a multimillion-dollar global deployment. We are installing OSDome sensors in their retail locations worldwide to provide powerful analytics while ensuring personal privacy. With over 500 locations in more than 2 dozen countries, we see tremendous potential for future growth. In our industrial vertical, we are partnering with an ag tech company to power autonomous mowing and precision application of crop protection. We have worked with this customer for multiple years, helping them transition from prototypes equipped with Velodyne sensors to larger volumes powered by the OS0. In Asia, we are installing our OS1 sensors on smart cranes to increase throughput at one of the continent's busiest container terminals. We also continue to solidify our competitive moat. During the quarter, Ouster's OS1 became the first and only 3D lidar sensor to be approved for Blue UAS and certified by the U.S. Department of Defense for use in unmanned aerial systems. This sets Ouster apart as a trusted solution for government applications and positions us well to benefit from the U.S. government's efforts to strengthen the domestic industrial base for critical technologies and promote trustworthy supply chains. For example, we recently won a pilot program for the OS1, OSDome and Ouster Gemini to provide perimeter security for a U.S. Army base, and our technology is already deployed in systems used by the United States Navy, NASA and National Labs. Looking ahead, we anticipate continued momentum driven by powerful secular tailwinds. Recent legislation has unlocked billions in federal funding dedicated to accelerating the deployment of autonomous and intelligent systems across defense, transportation and industrial sectors. We are uniquely positioned to capture this demand to enhance critical systems for government, defense and civil infrastructure institutions worldwide. We are seeing similar trends play out in Europe and Indo-Pacific with increased adoption of our technology for U.S. allied defense and infrastructure applications. Turning to our 2025 strategic priorities. We progressed across all 3 key focus areas: scaling software-attached business, transforming the product portfolio and executing towards profitability. Starting with software-attached business. In 2026, the world's most watched sporting event is coming to the United States, the FIFA World Cup. We won an award to deploy Ouster Rev7 and BlueCity across dozens of sites at a World Cup host city to bring real-time on-demand traffic data to reduce congestion and improve safety for visiting fans. We also recently expanded an agreement to meet demand from the Utah Department of Transportation to bring Ouster BlueCity to nearly 100 intersections across the state to enhance traffic flow, safety and operational efficiencies. A key focus this quarter was to expand our distribution channels, and we made significant progress for both our smart infrastructure and security solutions. We signed 3 exclusive partnerships to bring BlueCity to major markets such as Texas, Michigan, New York and Pennsylvania. With these key additions, our BlueCity partnership network now spans 39 states and gives us a direct line of sight to capture the vast nationwide market of over 300,000 signalized intersections. For Ouster Gemini, we formalized a partnership with one of the world's largest security integrators. This agreement will support deployments into some of the world's most critical and high-value security sites where the global market for end system security cameras is already in the tens of billions. Moving to product development. Ouster Gemini and BlueCity are delivering AI solutions to solve our customers' most complex challenges through powerful new software features and major performance improvements. We implemented advanced actuation for Ouster BlueCity that enables filtering for additional subclasses and objects, allowing our customers to control their traffic systems with additional rule-based nuances. We also added 3D event recording, which allows customers to automatically record and review safety incidents without disclosing personally identifiable information. These features leverage BlueCity's proprietary deep neural network that has been trained on more than 4 million labeled objects collected from 800 sites and runs on NVIDIA Jetson and Orin system-on modules for real-time inference at the edge. Turning to our Gemini platform. We made significant improvements in core perception and ease of deployment. One of the most complex challenges in perception is maintaining stable object tracking over long periods of time. To solve this, Ouster Gemini now features a breakthrough multisensor AI model that fuses point clouds together in the early stages of the perception pipeline for improved accuracy. Ouster Gemini now delivers significantly improved long-term object identity persistence, a critical requirement for many customer applications. We also launched the Gemini Event Server to accelerate customer adoption and reduce deployment time and cost. This is a powerful no-code environment with built-in logic modules, enabling our customers to easily build and deploy their own automated solutions for applications like intrusion detection, proximity monitoring and zone occupancy tailored to their business needs. During the quarter, we progressed on engineering bring up of our next-generation L4 and Chronos custom silicon. These investments will unlock a new era for our products, including major performance, security and reliability gains for the OS product family and the introduction of the solid-state digital flash or DF line. Early customer feedback reinforces our belief that these innovations will more than double our current addressable market and represent the most significant product cycle in Ouster's history. Finally, our excellent second quarter results keep us on path to meet our long-term framework of 30% to 50% annual revenue growth, maintaining gross margin of 35% to 40% and operating expenses at or below third quarter 2023 levels. Before turning to our financial results, I'm delighted to welcome Ken Gianella as our new Chief Financial Officer. Ken brings a wealth of experience and a proven track record of financial leadership to Ouster and is already instrumental in driving our financial strategy and supporting our growth initiatives. Ken, welcome, and please go ahead.

Thank you, Angus, and good afternoon, everyone. I'm thrilled to join Ouster at an exciting moment in the company's journey, and I look forward to working with Angus and the team towards Ouster's continued success. Turning to Slide 9 in the presentation. I will now give an overview of our second quarter 2025 results. First, we shipped a record 5,500 sensors in Q2 and generated just over $35 million in revenue. These results are right at the high end of our guidance range. Revenue growth was 30% year-over-year and 7% sequentially. Adjusting for the impact of patent royalty in the first quarter, sequential revenue growth was 13%. The industrial vertical was the largest contributor to second quarter revenue, followed by automotive. We shipped large volume deals to support applications in warehouse autonomy, robotaxi, yard logistics and defense. GAAP gross margin in the second quarter increased by 11 points year-over-year to 45%. Gross margin strength reflects the benefit of higher revenue, product mix and favorable employment tax refund. The refund had a positive impact of approximately 5 points on GAAP gross margin. While we are pleased with our operational execution this quarter, we continue to view 35% to 40% as an appropriate annual gross margin target for the business. Next, GAAP operating expenses were $43 million in the second quarter, up 24% over the prior year. The increase was primarily driven by higher stock-based compensation and litigation expenses. We remain vigilant on managing our operating expenses as we execute the business. While we do anticipate expenses fluctuating on a quarterly basis, these are largely driven by investment in our innovation, our go-to-market execution and other one-time investment in costs. Ouster is committed to our growth strategy and maintaining a disciplined path towards profitability. Next, turning to our balance sheet. Cash, cash equivalents, restricted cash and short-term investments were $229 million at June 30, which includes approximately $59 million of net proceeds from our ATM. While we retain access to capital markets, we are comfortable with our current cash position within the context of our execution of our business plan. Finally, we continue to actively manage the challenges of the current geopolitical and macroeconomic environment, specifically around our supply chain and tariffs. The landscape remains fluid, but we are fortunate to have close relationships with our customers and our partners as we navigate the potential impacts. As I stated earlier, we continue to view 35% to 40%, including the impact of any tariffs we may have as an appropriate annual gross margin target for the business. We will continue to work diligently to manage the situation as we assess potential near- and long-term impacts on our operations and our margins. Moving to guidance on Slide 10. For the third quarter, we expect to achieve revenue between $35 million and $38 million. Before I hand the call back to Angus, I just want to reiterate how excited I am about the opportunity for Ouster and how pleased I am to be able to contribute to the company's success. I look forward to getting out this quarter and meeting our stakeholders. Thank you for your time, and I'll now turn the call back to Angus for his closing remarks.

Thanks, Ken. I'm proud of our team for delivering a record quarter as Ouster continues to drive the accelerating adoption of Physical AI. We have now delivered 10 straight quarters of revenue growth and meeting or beating our guidance. This is particularly fitting as we recently celebrated Ouster's 10-year anniversary. We have transformed from a lidar manufacturer to a Physical AI company, adding software solutions to our industry-leading hardware portfolio to enable intelligent real-world autonomy across industries. I am proud of our performance and achievements to date, but our most exciting chapter is just beginning. Our technology roadmap will bring the largest transformation to Ouster's product portfolio in our history, taking us into larger markets and more use cases than we've ever had. We are at the forefront of a monumental market transformation driven by lidar. And as our customers scale from prototype testing to commercial production, we are well positioned for continued growth. Our story is just getting started, and we have the team, customers and strategy to be a leader in Physical AI. With that, I'd like to open the call for Q&A.

Our first question comes from Colin Rusch with Oppenheimer.

Congratulations on all the progress. As you get into the latter part of the year and start getting ready to ship commercial volumes of the L4 chip, can you talk about that...

Apologies, sound cut off on the question.

I apologize for the inconvenience. I would like to understand how quickly you can begin moving customers to the L4 platform as you ramp it up and transition to the lower-cost modules.

Yes, absolutely. The positive aspect is that we have experienced this type of transition many times before. The L4 represents the fourth generation of our silicon, and it presents a significant opportunity. We aim to ensure that it not only opens up new opportunities and doubles the company's total addressable market upon its release, but also allows for a smooth transition for existing customers to scale up and explore more applications. Historically, about half of our customer base typically takes around a year to transition from one version to the next. Generally, we complete the product transition, for example from REV6 to REV7, within about two years. However, the transition from REV7 to REV8 will be somewhat different. We have given our customer base more advance notice and have established long-term commitments regarding the production of this technology. We currently have more customers in production with REV7 than we ever did during the transition from REV6 to REV7. We are committed to ensuring that we support every single customer so that no one is left behind on a previous generation platform. This support began long before we discussed any upcoming product releases. I believe we will facilitate a smooth transition for everyone while also expanding the overall market opportunities available with the L4 chips.

That's super helpful. And then you've talked about upwards of 1,000 customers and call it, 10% that are looking at production volumes and then really a limited number that are in production. Can you talk about some of the prototypes that are out there and how quickly some of these machinery or off-road vehicles or some of the other products might end up moving into volume production because it seems like a limited number of customers could start really leveraging some of the revenue growth here pretty meaningfully for you guys?

Yes, this is a great question. Ouster is in the early stages of Physical AI, which is spreading into every moving machine on earth. Given our scale of 4,000 to 5,000 units plus per quarter, it doesn’t require many customers each quarter to significantly boost our volumes and shipments. We experienced a nearly 1,000 unit difference between Q1 and Q2 shipments, which is substantial for a single customer in the automated industrial platform space. This means we don't need a hundred different customers to reach production in order to maintain our current growth rate. A small number of customers will suffice to continue the solid revenue growth we've had for the last ten quarters, and we aim to transition as many customers as possible into production quickly. Once they are in production, we see significant scaling from quarter to quarter. Most of our customers have not yet transitioned to production, which will drive our future growth.

Your next question comes from the line of Andres Sheppard with Cantor Fitzgerald.

Congrats on the quarter. This is Anand on for Andres. It looks like you've really cemented market leadership with this quarter, especially with the Blue UAS certification. And that seems to be a huge part of the story this quarter. So I was wondering perhaps what opportunities you're looking at there and how that could really translate for the company. I know you touched on that on the earnings call. And maybe potentially where could this go besides the first thing that comes to mind, the drones?

Yes. This is a great question. Thank you, Anand. The Blue UAS milestone for the OS1 was a big deal for us. We are the first 3D lidar sensor that got the certification. And that means that now we can be deployed on DoD aerial platforms as a sensor payload. So it's a big deal. We're the first company. And I think that's a trend for Ouster is we are a first mover in many different markets because we have the products and we have the strategy and we have the commercial team to get all of that done ahead of our competitors. So Blue UAS is part of a bigger expansion in kind of defense focus for the United States for our Western allies. I mentioned on the script, there's a lot of good progress here behind the scenes. We're already working with the United States Navy. For instance, we are deployed now at a U.S. military base and Army base for perimeter security with not just our lidars, but with our full Gemini Physical AI solution. So there's a lot going on in the background. It's ultimately fueled by an investment from the U.S. government and from Western allies. And I think that's playing into our favor. And I don't think there's any company better positioned to serve that demand than Ouster right now.

Fantastic. That's very helpful. And I guess switching to another vertical. I was wondering, since autonomous vehicles are coming into play more nowadays and they're getting more popular here in the States, how you're seeing that opportunity play out for you guys? And if there's potentially anything that you're pursuing in that vertical or with an OEM?

It's encouraging to see a rise in interest in autonomous vehicles, driven by Waymo's advancements demonstrating that the technology is maturing into a viable business rather than just research and development. This development is beneficial for Ouster and the lidar industry as a whole. Ouster has strategically positioned itself to capitalize on this emerging market, and we are realizing this potential. We offer excellent products for autonomous vehicle and automotive customers, and in the most recent quarter, automotive became our second largest market segment, highlighting our significant presence in this area. We have received positive feedback from long-time clients such as May Mobility, which has made substantial announcements with major rideshare companies. This indicates not only that the technology is ready but also that a network of companies is willing to make significant commercial and strategic changes. Ouster is exceptionally well-equipped to leverage this opportunity, and I am pleased to see these developments come to fruition.

The next question comes from the line of Kevin Garrigan with Rosenblatt Securities.

Congrats on the strong results. Angus, you spoke about several design wins using the FIFA World Cup as an example, can you give us a sense of who you kind of beat out with that contract? Was it more camera-based solutions or other lidar suppliers? And with AI everywhere now, is the competition getting any more competitive?

Yes, it's noteworthy that in the case of FIFA, there’s typically competition among various projects. Ouster has demonstrated significant progress over the past year with BlueCity, particularly in core performance metrics such as object perception accuracy. It excels in accurately counting cars, pedestrians, motorcyclists, and trucks at intersections and traffic corridors, outperforming any other solution available. This success can be attributed to our extensive investment in AI. Recent advancements in AI for cameras can also be applied to lidar when utilized effectively. We recently released a statement about our substantial investment in AI data training, collection, annotation, and training specifically for our BlueCity product, which is being deployed at FIFA sites and other locations such as Utah DOT and Chattanooga. Ouster is at the forefront of investing in Physical AI at the edge, utilizing deep neural networks we've trained on over 4 million annotated objects collected from a diverse range of our deployed systems. This process is ongoing, as we continually refine our AI algorithms to ensure best-in-class performance in perception accuracy, which is essential for traffic control and analytics products in the field. Your observation that AI enhances everyone's capabilities, whether through cameras, radar systems, or lidar, is accurate. However, we're making strides to lead in this area with our investments and applying them to a more advanced sensor data stream with lidar compared to cameras.

Got it. Okay. That makes sense. And then as a follow-up, can you just talk a little bit more about your distributor strategy? Are you looking to eventually have maybe a majority portion of your sales through the distribution channel? Or is your main focus still on dealing with the direct end customers?

The distribution strategy differs by industry and sub-industry. We focus on four main sectors: automotive, industrial, smart infrastructure, and robotics. Specifically, within smart infrastructure, we are concentrating on the sub-sector related to traffic with our BlueCity product. We see this as a heavily integrative and distributive market. A few years ago, we initiated a strategy that has led us to establish 39 exclusive distributors for BlueCity across various states. This positions us well to cover the U.S. with regional distributors who enhance traffic technology and maintain long-term relationships with state, local, and federal clients. In the security sector, we have a similar approach, with established technology integrators and distribution networks, mirroring our traffic strategy. Thus, we will likely continue to leverage these partners instead of relying solely on a direct sales team. However, outside of these two sectors, Ouster has been successful in finding enterprise partners and maintaining a direct sales force to ensure strong relationships with customers like Komatsu or major industrial OEMs and automakers, who prefer a direct partnership for sales and technical support.

Your next question comes from the line of Richard Shannon with Craig-Hallum Capital Group.

Let me ask a couple of questions here. My first one is on the defense market here. If I caught the language right here, you mentioned defense is one of the key verticals or top verticals here, and I did a quick search. And I didn't find any mention of that in past conference calls about that being a leading contributor. Was the Blue UAS certification a driver of that or drones? Or can you kind of help us tie those things or not tie them together?

Yes, Richard. While we didn't state that defense was one of our top two verticals this quarter, it was actually industrials and automotive that led. We haven't focused much on defense in previous earnings calls, so I understand your point. This represents a new development for us. As I mentioned, it involves both federal and international interest in defense, along with new investments, coupled with advancements in our commercial products, such as the UAS certification. Therefore, I see this as more of an opportunity for the future rather than having a significant impact on our Q2 earnings.

Thank you for the clarification. My second question, Angus, is related to the introduction of the new products with the L4 and Chronos chips. I assume they will align with the next set of products. Can you discuss your pricing strategy for these products? Given your previously mentioned long-term gross margin profile, I assume your pricing will adjust in line with costs as the new product line launches.

The pricing strategy at Ouster is complex due to our diversification, varying from case to case based on different industries and sub-industries. We have considerable flexibility in this area. A key aspect of our pricing approach is ensuring we maintain strong gross margins, and we are committed to achieving gross margins between 35% and 40% as we move towards profitability in the coming years. This is crucial for us, and we're working on it by increasing our volume and reducing costs over time, which allows us to adjust pricing when necessary to support customer business models. When we lower prices, it's typically because we've analyzed the customer's needs and found that a lower cost is essential for them to enter the market. Our pricing decisions are carefully controlled, and we collaborate closely with customers. This isn’t a commoditized market where price reductions are made solely to compete. Instead, we work with clients to help them transition from research and development to production while ensuring long-term commercial viability. Nevertheless, there will always be lower-priced applications for any technology, so we are also focused on reducing our internal costs to penetrate new markets with competitive pricing. This includes targeting emerging opportunities in robotics that may require different pricing strategies while still aiming for high volumes.

Your next question comes from the line of Tim Savageaux with Northland Capital Markets.

Congrats on the results. My first question, kind of going back to the defense opportunity and understanding this is something that's emerging for you guys. But is there anything you can share with us about total addressable market in that kind of drone defense area as it relates to your targeted TAMs across other verticals? And I'll follow up from there.

Yes, thank you for the question. Traditionally, we have included our defense market within our robotics vertical. When we have provided the total addressable market for robotics, defense has been considered a subvertical and has never been separately categorized. This is mainly because defense is an emerging market that is rapidly evolving. In the past year, we've seen significant changes with technology companies entering this space and new solutions being applied to longstanding defense challenges. At some point, we may start to break this out as the ecosystem develops further, and the autonomy technology from related markets begins to have a more significant impact on defense. However, I don't believe we're quite at that point yet. Overall, there is a substantial opportunity in this area. There is already an established market for drone payloads and sensor payloads on drones, with the Blue UAS certification serving as a leading indicator for early opportunities in defense. It may take some additional time before ground systems and other autonomous technologies reach the market and achieve the necessary technological maturity to start defining a total addressable market around those.

Great. Sorry. And shorter term, as you look at your guidance for Q3, are there any kind of particular verticals driving that expectation for sequential growth that you can call on?

Overall, the diversification at Ouster is driving strong and consistent growth, which we have seen for ten straight quarters and hopefully will continue into the eleventh with our guidance. The industrial sector has been fundamental for Ouster, and it is crucial that this segment continues to expand. We are witnessing significant support as the industrial sector adopts Physical AI and new sensor technologies. I anticipate this trend will continue to fuel our growth. We have numerous long-term industrial customers that are now moving into production, and we have substantial visibility into the demand for our technology across various sectors, thanks to the strong relationships we've established with our customers. I am very pleased to confidently guide an expected revenue of $35 million to $38 million for the next quarter, reflecting the momentum from years of engagement in a diverse range of industries with high-quality clients.

Your next question comes from the line of Richard Shannon with Craig-Hallum Capital Group.

Next, I'd like to ask a follow-up question. I just have one inquiry here. I want to discuss the automotive space. Can you clarify how much of this past quarter and the recent year has been related to robotaxis? As we look ahead to your next-generation products, you mentioned the digital flash products enabled by the L4 chip. How should we understand your future strategy and the timelines you anticipate for achieving broader volumes in the automotive sector?

Thanks for the clarification. The L4 chip and the digital flash products are utilizing the Chronos chip. Currently, we are working on two pieces of silicon, the L4 and the Chronos, with Chronos specifically being integrated into the digital flash units. This is fueling significant activity in our product roadmap and development efforts. As I mentioned, the roadmap we have in development positions us at double our total addressable market. It’s the most compelling roadmap Ouster has ever had, and I remain very optimistic about our internal projects. This leads to our positioning for the automotive ADAS and consumer ADAS markets when they are ready. While I distinguish this from the robotaxi opportunity, which may emerge in the next few years, consumer ADAS remains a challenging market to forecast. However, we have been developing products that will be pertinent when OEMs are prepared to adopt this technology on a large scale, particularly L2+ and L3 ADAS systems in consumer vehicles. We believe we will have the appropriate products available at the right time, though it is challenging to predict when volume demand will arise in the U.S. or Western markets. That uncertainty is why our long-term financial framework does not heavily incorporate it. Nonetheless, we are confident in achieving our financial targets of 30% to 50% revenue growth without relying on consumer ADAS as a critical driver. Well, thank you all for joining the call, and I look forward to speaking with you again on the third quarter. Thanks all.

This concludes the meeting. You may now disconnect your lines. Have a pleasant day.