Earnings Call Transcript - OUST Q1 2024

Operator, Operator

Hello, and welcome to Ouster's First Quarter 2024 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'd now like to turn the conference over to Chen Geng, VP of Strategic Finance and Treasurer. Please go ahead.

Chen Geng, VP of Strategic Finance and Treasurer

Good afternoon, everyone. Thank you for joining us for our first quarter 2024 earnings call. I am joined today by Ouster's Chief Executive Officer, Angus Pacala, and Chief Financial Officer, Mark Weinswig. Before we begin the prepared remarks, we would like to remind you that earlier today, Ouster issued a press release announcing its first quarter 2024 results. An investor presentation was published and is available on the Investor Relations section of Ouster's website. Today's earnings call and press release reflect management's views as of today only and will include statements related to our business and financial outlook that are forward-looking statements under the federal securities laws. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business. For a discussion of the material risks and other important factors that could impact our actual results, please refer to the company's SEC filings and today's press release, both of which can be found on our Investor Relations website. 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, we undertake no obligation to update these statements as a result of new information or future events. Information discussed on this call concerning Ouster's industry competitive position and the markets in which it operates is based on information from independent industry and research organizations, other third-party sources, and management estimates, which are derived from publicly available information released by independent industry analysts and other third-party sources as well as data from Ouster's internal research and are based on reasonable assumptions and computations made upon reviewing such data and its experience in, and knowledge of such industry and markets. By definition, assumptions are subject to uncertainty and risks, which could cause results to differ materially from those expressed in the estimates. During this call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures should be considered as a supplement to and not a substitute for measures prepared in accordance with GAAP. For a reconciliation of non-GAAP financial measures discussed during this call to the most directly comparable GAAP measures, please refer to today's press release. I would now like to turn the call over to Angus.

Angus Pacala, CEO

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. Mark will cover our results in more detail before I close with some final thoughts. In the first quarter, we continued to build upon the positive operational momentum that we generated throughout 2023. We reported record revenues of $26 million, which was at the high end of our guidance range. This represents growth of 51% year-over-year and our revenues exceeded an annualized run rate of $100 million for the first time in Ouster's history. Our customers' continued adoption of REV7 sensors, combined with our operational leverage, drove non-GAAP gross margin expansion to 36%, which represents our highest level to date. During the quarter, we closed on numerous large deals in our smart infrastructure and industrial verticals. Within smart infrastructure, we continue to extend our collaboration with a leading global logistics company to install additional REV7 sensors and Ouster Gemini at their distribution yards. We see potential for further expansion as we are currently deploying our solutions on only 5% of their global footprint. Moreover, we estimate that this single customer represents only a fraction of the market opportunities for this use case. Last year alone, ten of the largest retail and logistics companies collectively invested nearly $50 billion in capital expenditures. Our Gemini solution is designed to offer a myriad of benefits, such as reducing operating costs, boosting operating efficiency, fortifying perimeter security, enhancing workplace safety, and alleviating labor constraints. We believe that these compelling value propositions will help secure an increasing portion of this spend. The industrial vertical is a perfect example of our belief that ultimately, everything that moves will become autonomous. During the first quarter, we landed million-dollar deals to bring REV7 to agriculture and port applications. Within agriculture, we see the potential for agricultural automation to become one of our largest end markets. Based on industry data, there are over 2 million tractors sold each year. Assuming two sensors per vehicle, each 1% penetration rate represents 40,000 sensors or nearly triple the amount of sensors we sold during 2023. Our solutions also bring a convincing value proposition to ports around the world. Throughput in ports globally surpassed 850 million containers in 2023. Our solutions can enable increased efficiency in tasks such as container positioning, tracking, collision avoidance, and twistlock detection. By saving 1 second per container, we estimate that ports can move an additional 20 million units per year. At an average terminal handling charge of $500 per container, this represents $10 billion of incremental revenue for the port industry. Governments worldwide are investing in their infrastructure, and the U.S. alone has committed to spending over $20 billion on U.S. port infrastructure over the next 5 years. We feel well positioned to capitalize on this investment. Turning to our strategic business priorities for 2024. Our first priority is to expand software and grow the installed base. During the first quarter, Ouster trained a new deep learning perception model that advances our ambition to become a world leader in lidar-powered perception solutions. With enhanced operating performance, our Gemini and Blue City customers now benefit from improvements to object detection at longer distances and multiple object tracking accuracy. We continue to expand Ouster Gemini and Blue City deployments and closed millions in software attached sales in the first quarter. Ouster collaborated with the recipient of the U.S. Department of Transportation SMART Grant to empower pedestrian safety improvements, near-miss detection, traffic counting, and traffic flow analytics. Compared to competing solutions, Ouster provides superior all-weather performance, privacy protection, and the ability to accurately detect and classify multiple types of road users. With over 300,000 signalized intersections in the U.S. alone, we view the market for intelligent transportation systems as a tremendous future growth opportunity. Our smart infrastructure team also recently attended major industry events, including the United States' largest security trade show. There were a few anecdotes that I'd like to share. First, one of the world's largest retailers noted that Ouster was one of the true gems of the show, while one of the largest security integrators in North America said Ouster was the most interesting technology he has seen in 20 years. This positive feedback reinforces our conviction that lidar is poised to become the preeminent technology for the next-generation smart infrastructure applications. Turning to hardware technology. Ouster continued to execute on its product roadmap in the first quarter. We introduced new firmware designed to enhance the performance capabilities of our REV7 sensors and coincides with heightened interest for AI and robotics customers. Delivered over the air, the update supports improved accuracy and zero minimum range and will enable operations in tighter spaces and closer proximity to other objects. Our next-generation L4 custom silicon chip is taped out and is expected to bring significant improvements in performance, reliability, and manufacturability, along with safety certifications to the OS sensor family. We continue to develop our automotive-grade custom silicon and plan to integrate the Chronos chip into our final form factor, solid-state digital flash or DF sensors in the next year. DF represents a first of its kind, truly solid state, compact, affordable, and performance family of automotive-grade lidar sensors. Finally, we progressed on our long-term financial framework during the first quarter. Our first-quarter revenue growth of 51% and margin expansion to 29% aligned well with the parameters we have laid out. While we are pleased that our GAAP operating expenses of $33 million were 14% lower than the third quarter of 2023, we do expect our GAAP operating expenses to fluctuate quarter-to-quarter primarily due to changes in noncash stock-based compensation expenses and other items. We continue to look for further opportunities to optimize our cost structure and reduce our cash burn. The first quarter marked strong operating results and progress on all 3 of our strategic business objectives. I'll now turn the call over to our CFO, Mark Weinswig, to provide more context on our financial results for the first quarter.

Mark Weinswig, CFO

Thank you, Angus, and good afternoon, everyone. In the first quarter, we recognized a record $25.9 million in revenue, a 51% increase over the first quarter of 2023 and a 6% increase over the fourth quarter of 2023. We also shipped a record 4,500 sensors in the quarter. Overall, we saw strong revenue contributions from each of our 4 verticals: automotive, industrial, robotics, and smart infrastructure. The robotics vertical was the largest contributor to revenue and more than doubled on a year-over-year basis, followed by automotive, which generated the highest quarterly revenue in our history. This quarter illustrates the benefits of our strong customer and market diversity, which provides us with the opportunity to capitalize on multiple emerging industry trends. GAAP gross margin improved to 29% from negative 2% in the first quarter of 2023 and increased 700 basis points from 22% in the prior quarter. Non-GAAP gross margin improved to 36% in the first quarter and reached the highest levels in Ouster's history. This marks our fourth consecutive quarter with higher GAAP and non-GAAP gross margin. The margin expansion over the past year reflects the operating leverage inherent in our business model, along with our premium-performing REV7 sensors. Over the past year, we have lowered our cost structure as we transition manufacturing to contract manufacturing partners in Thailand and streamlined our internal processes. These actions have positioned Ouster to be a low-cost provider of high-performance sensors. GAAP operating expenses of $33 million were lower by 81% year-over-year and 22% sequentially. We have continued to make strides on reducing our cost structure while substantially growing revenues. We are carefully managing our cost structure while at the same time continuing to invest in new products and technologies to drive future growth avenues. Our balance sheet remains strong with cash, cash equivalents, restricted cash, and short-term investments of $189 million at March 31. This cash balance includes approximately $4 million raised via our ATM during the first quarter, reflecting our strategy to maintain a strong balance sheet to help fund our future growth. Since Q1 of 2023, we have significantly reduced our operating cash burn. As the lidar industry transitions into its next phase of growth, we intend to maintain our financial position as a point of differentiation. We believe our customers are placing increased emphasis on their partners' balance sheets. Moving to our guidance for the second quarter of 2024, we expect to achieve between $26 million and $28 million of revenue. At the midpoint of the range, this represents approximately 40% year-over-year revenue growth.

Angus Pacala, CEO

Thanks, Mark. I'm proud of the notable accomplishments Ouster achieved during the first quarter. Our revenues exceeded an annualized run rate of $100 million for the first time. We shipped a record 4,500 sensors, and we reported the highest non-GAAP gross margin in Ouster's history. We also marked the 1-year anniversary of our merger with Velodyne. Compared to the first quarter of 2023, we have grown our revenues by 51% and expanded our gross margin by over 3,000 basis points. We are the only publicly traded lidar company over the past year to deliver 4 straight quarters of sequential revenue growth, margin expansion, and lower cash burn. Over the past year, our focused operational execution, combined with the leading product portfolio, has established us as one of the strongest Western lidar companies in the industry. This positions us well for the substantial opportunity ahead of us as we firmly believe that everything that moves in the future will be robotic. The adoption of lidar among our customers across industries remains in its infancy, and we are determined to capture the multibillion-dollar market for a global ecosystem of autonomy solutions. With our REV7 sensors and Gemini and Blue City software solutions, Ouster is creating the critical technologies at the core of autonomy. 2024 is off to a positive start, and I'm confident that our persistent execution will continue to set Ouster apart from the rest of the industry. With that, I'd like to open it for Q&A.

Operator, Operator

We'll take the first question from Madison De Paola, Rosenblatt.

Madison De Paola, Analyst

Congrats on the great results this quarter. So I just was wondering, did you have any 10% customers in Q1? And do you expect that over time there will be one or more 10% customers?

Angus Pacala, CEO

Well, thank you for the question. And this quarter, we did have one 10% customer. We have continued to see 10% customers come and go during different quarters based on our customers' ramp-up from the commercial perspective. Our customers continue to go through this stage of obviously early trials into pilot, into production. And as we see more and more customers move into production, we do expect that those customers that have a 10% level will continue to increase over time.

Operator, Operator

We'll go next to Shadi Mitwalli, Craig-Hallum.

Shadi Mitwalli, Analyst

This is Shadi Mitwalli on for Richard Shannon. Congrats on another solid quarter, guys. My first question is on revenue growth. In Q1, revenues grew 51% and Q2 has guided for a growth of 40% year-over-year. So I was just wondering if Ouster can give some clarification on if this 40% to 50% revenue growth range is expected for 2024?

Angus Pacala, CEO

Yes. Thanks for the question, Shadi. So we're really focused on delivering on the long-term financial framework, and that provides a path to profitability for Ouster. This spells out a 30% to 50% year-over-year revenue growth, a 35% to 40% gross margin, and an OpEx goal of keeping things flat or below Q3 2023 levels. That's very much what we're committed to. As you can see, we're definitely tracking to those metrics in Q1, and it stays in the mid-range of guidance to those metrics in Q2. So definitely happy about the progress to date and committed to that long-term model ultimately ending in profitability.

Shadi Mitwalli, Analyst

Great color on that. And then I just have a follow-up on OpEx. R&D this quarter was lower than usual and SG&A higher than usual. So I was just wondering if these are the new levels or just some typical seasonality going on in OpEx.

Mark Weinswig, CFO

Yes. OpEx in the first quarter is always just a little bit unusual. As you probably know, FICA and a lot of these taxes and 401(k) items do get reset in the first quarter. Additionally, we see some of the fees that relate to year-end audit related and insurance. Those come in at the end of the fourth quarter, which causes the first quarter to be a little bit higher than the prior quarter. We do expect, going back to Angus' remarks, to continue to see our OpEx be flat to down from the levels we guided from our financial framework, which is the third quarter of 2023. We've made really good progress over the last couple of quarters, almost better than expected. And we continue to focus hard on what we can do to bring down our cost structure on an overall basis.

Angus Pacala, CEO

Yes. And one thing I'd just add to the R&D spend portion of the OpEx. We're in two of our strategic priorities this year are based around the product roadmap, the software solutions, and then the digital lidar hardware as the core of our business. But our business is driven ultimately by silicon development. The chips that go into our sensors drive our product roadmap, and the costs associated with those chips can be lumpy. A chip taped-out can fall in a single quarter, causing a rise in R&D, and then go back to a more normal level. So that's where you might see some kind of inconsistency quarter-to-quarter specifically in R&D spend.

Shadi Mitwalli, Analyst

Awesome. Congrats on another solid quarter.

Operator, Operator

We'll take the next question from Itay Michaeli, Citi.

Itay Michaeli, Analyst

I have one, can you hear me?

Mark Weinswig, CFO

Sorry, Itay, you're kind of coming in and out.

Itay Michaeli, Analyst

Sorry. I think you hear me now. Just two follow-ups for me. First, going back to the revenue growth for the full year. Given the momentum, I think, Angus, you spoke about at the beginning of the call, just curious if there's like a bias to the low or high end of the 30% to 50% range for this year. And then second, maybe for Mark, the cash used this quarter, I think, about $7 million, maybe $13 million extra working capital inflow. Is that how we should be thinking about quarterly cash use over the next couple of quarters?

Angus Pacala, CEO

Yes, I'm happy to answer the first question. We are firmly committed to the long-term model of 30% to 50%. There are several pathways that can lead us to profitability within that range. It's important to note that we have several favorable factors supporting our business. Lidar is a key sensing technology for all our future projects, which are prevalent across various sectors we operate in. However, there are challenges related to our customers' adoption of this technology at a fast pace. This slow adoption rate is one of the significant obstacles we face. We are continually working to make it easier for customers to adopt lidar technology so that we can reach the higher end of our target range. Currently, we face both supportive and challenging factors for our business, which we need to address, but we feel confident about our projection of 30% to 50% and expect to move towards that.

Mark Weinswig, CFO

And on the cash usage, this quarter, the Ouster team really did a great job. We saw lower inventory, better AR, lower DSOs, and a little bit of an increase in our accounts payable, which led to some significant working capital improvements. While I'd love to see those kind of improvements going forward, sometimes those are onetime in nature. But we do expect that we will continue to drive down our inventory levels over time. In the second quarter, just as a quick FYI, we will have a $4 million fee or settlement associated with a previous litigation that we had taken the charge for in the fourth quarter. So, there will be a little bit of cash usage from that. But otherwise, significant improvements in our overall cash flow from operations over the last year.

Itay Michaeli, Analyst

Terrific. Very helpful. If I can sneak one last one in. I think that the incremental margin on gross margin sequentially this quarter was something like 57%. Is that kind of level sustainable here going forward as we think about your continued revenue growth from here?

Mark Weinswig, CFO

So on a non-GAAP basis, our gross margins this quarter were 36%. We were very happy with that performance. If we look at where we were a year ago, we're 11 percentage points higher than where we were a year ago. In terms of kind of incremental gross margins, this quarter, we did see some benefits in terms of some lower costs in the operating expenses on our cost of goods sold. We also saw some improvements in other areas. But in terms of our incremental margin, while we've never disclosed it, we do have an incremental margin that is obviously higher than our 35% to 40% level, and by continuing to increase our revenue levels, that's what's going to get us to that 35% to 40% GAAP gross margin levels that we're targeting as part of our financial framework.

Operator, Operator

Next up is Andres Sheppard, Cantor Fitzgerald.

Anand Balaji, Analyst

This is Anand on here for Andres. Congrats on the quarter. I know you're focused primarily on the automotive market. But with Tesla moving to further implement its FSD software into more vehicles and potentially launching a robotaxi in the future, do you think this could potentially be an opportunity for Ouster and do you still likely have to adopt the lidar? Or do you see potential similar opportunities in the automotive space?

Angus Pacala, CEO

Well, automotive continues to be a major vertical for us in the robotaxi, robo trucking, shuttle, and bus industry, and we have major customers that have been buying our sensors for years in those industries. Many of those customers naturally will transition between different products that Ouster has over time, specifically things like the DF sensors as we bring those to market. I do see a natural transition to different product lines. For us, I think I can't comment specifically on Tesla as being an opportunity or whatever for Ouster specifically. But I think that the AI advancements that are being made by companies like Tesla are very much applicable across all sensor modalities, lidar being one of them, and that is definitely buoying our business. I see that as a really good development. Again, because much of the difficulty with customers ramping quickly into this technology is just the challenge of them integrating the technology, building robust systems, and the advancements in AI that companies like Tesla are evangelizing, I would say, are actually helping us, not just in automotive, but across all of our verticals.

Mark Weinswig, CFO

And to add some numbers to that, as we mentioned in the prepared remarks, automotive, we had a record quarter for us. So we were very, very happy with Ouster's performance in the first quarter.

Anand Balaji, Analyst

Got you. That's very helpful. And if I could just get one quick follow-up. I was wondering since software was a big emphasis this quarter if you could go over quickly the business plan related to your software ecosystem and how that's going to impact your margins in the long term and how you're going to bridge to your long-term target with Gemini and Blue City?

Angus Pacala, CEO

Yes. The software we offer to customers has become a key strategic component and differentiator for Ouster. We provide various tiers of software, starting with developer tools that are mostly free for every customer purchasing an Ouster sensor, including the SDK and related tools. While we don't emphasize these tools much, our aim is to make Ouster sensors the easiest, most convenient, and efficient hardware for development. We are making significant progress toward that goal. Gemini and Blue City are the comprehensive solutions we've introduced to the market over a year ago. I'm very pleased with our aim to enter new markets that broaden Ouster's overall opportunities, specifically in smart infrastructure, security, crowd analytics, and traffic control, areas where lidar has traditionally had little presence. Additionally, we are working on creating a new revenue model for Ouster that is higher margin and more persistent. Over the past year, we have not only launched these products but have also commercialized them, crafted go-to-market strategies, and deployed them at a significant scale with end customers. Customer feedback has been very positive, even though these products are still in the early stages. We have a long way to go before Ouster becomes a leading player in any of our smart infrastructure sectors. However, given the overwhelmingly positive initial feedback, we believe there is a distinct possibility for that to occur. We will continue to invest heavily in the software side of Ouster due to our unique ability to provide both hardware and software to our clients.

Mark Weinswig, CFO

Going back to the second part of your question on the margin side, the 35% to 40% goal that we have put together in terms of margins is based on a significant amount of hardware revenue. We do expect our software revenue to increase, and we do expect that our margins from software will be higher in the long term. So we're looking forward to being able to discuss that a little bit more thoroughly, probably sometime early next year.

Operator, Operator

Your next question comes from Kevin Garrigan, WestPark Capital.

Kevin Garrigan, Analyst

Let me echo my congrats on the progress. Kind of going off the previous question, can you give us a sense of how quickly you're expecting to continue to offer new software solutions? And any customers that only buy the sensor and not go for the software. Is there anything you can do to change their mind? Or how do those conversations go?

Angus Pacala, CEO

Yes. No, that's a great question. The first part of it is just simple. We absolutely expect to be more nimble with the software and being able to provide more rapid updates and product releases with that software; it's the nature of the medium. On the second part of the question, I do see that ultimately, we can expand the software footprint into many different industries. Every single one of our customers needs a pretty complex piece of software in order to take advantage of the lidar hardware that they're buying from us. We're building credibility in each of our verticals by providing this incredibly sophisticated hardware, also a long-term relationship to each of our major customers, which builds confidence in Ouster not only as a hardware provider but as a support provider, systems provider, and ultimately as a combined software hardware provider. I do think there's opportunities for us to move into adjacent verticals, move into the industrial, automotive, and robotics verticals potentially with software solutions as we're doing in smart infrastructure. That's kind of the end state for Ouster, I think, more of an autonomy systems provider than just an isolated hardware and isolated software provider. But like I said, it's still early days, and we're going to stay committed to the smart infrastructure portion of our software business for the time being.

Kevin Garrigan, Analyst

Yes. Got it. Got it. Okay. Perfect. And then just as a quick follow-up, and I apologize if I missed this, but I'd love to hear feedback customers are giving you on the DF sensors and from what you're seeing in the automotive industry and the people you're talking to your timelines kind of for the start of production for some of these models? Are they getting pushed out pretty significantly? I've heard 2028 as some of the new kind of years that people are seeing.

Angus Pacala, CEO

Yes, absolutely. And I'm going to sound like a little bit like a broken record here because my view of the automotive industry remains the same and our place within it. We're building DF sensors to meet the market at the end state of what is required, which is low-cost, solid state, modular, flexible, high performance, and affordable products. And that's what DF is. It's a product that I expect will be in cars for the next multiple decades, not just in the next 5 years. Yes, unfortunately, one of the things that we've seen is timelines push out. They rarely pull in in the automotive industry and the adjacent robotaxi industry. That's definitely a dynamic that gives me confidence that we should be taking our time with DF and ensuring we're building exactly the right thing, which I think we are, and meet the market on our timeline because it's better to be correct than to be first into a market like this.

Operator, Operator

And at this time, there are no further questions. I'll hand things back to Angus to call up for any additional or closing remarks.

Angus Pacala, CEO

Well, thank you all for joining the call. Ultimately, Ouster's success is the result of our team's belief in the differentiated strategy that we've set out and the effort that the Ouster team has put in day in and day out. I do want to thank the Ouster team for another great quarter. 2024 is off to a really positive start. At this point, we're advancing on our path to profitability, and I'm confident that the Ouster team's execution is going to continue to set Ouster apart from the rest of the industry. So thanks again, and have a good evening, everyone.

Operator, Operator

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.