Good day, and thank you for standing by. Welcome to Symbotic Second Quarter 2024 Financial Results Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker for today, Jeff Evanson, Vice President of Investor Relations. Please go ahead.

Thank you, Lisa. As a reminder, some of the statements that we make today regarding our business operations and financial performance may be considered forward-looking. 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-K 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. A reconciliation of non-GAAP to GAAP measures is included in today's earnings release, which is distributed and available to the public through our Investor Relations website located at ir.symbotic.com. On today's call, we're joined by Rick Cohen, Symbotic's Founder, Chairman and Chief Executive Officer; and Carol Hibbard, Symbotic's Chief Financial Officer. These executives will discuss our second quarter fiscal '24 results and our outlook, followed by Q&A. Rick?

Thank you, Jeff. Good afternoon and thank you for joining us to review our most recent results. Our second quarter reflects solid financial progress. At the same time, we accelerated the pace of innovation significantly during the quarter. We will discuss some of our recent innovations at our Investor Day on May 9. You can sign up for the webcast on the IR page of our website. Key innovations this quarter include advancing our core technologies in artificial intelligence and automation, improving system performance and the customer experience, enhancing safety, and accelerating deployment. I'd like to quickly highlight some important software improvements made this quarter. First, we improved our time-space reservation routing algorithms. This allowed us to more than double transfer capacity and boost bot density, which helps to increase throughput and system capacity. Second, we transitioned our code base to a microservices architecture for increased modularization. This enables more efficient coding evolution and support. Finally, on the hardware side, with the addition of a new AI chip, we have increased the computational power of SymBot. This higher compute power is key to unlocking more of the value of artificial intelligence across the entire Symbotic system. This quarter, we also wrapped up the restructuring and outsourcing of our manufacturing operations and standardized on the SymBot for all future deployments. This summer, we will begin the installation of our second BreakPack solution with an undisclosed customer. We're excited about the potential of this application as we continue to evolve the technology, knowing it has the capability to become an important part of an integrated omni-channel warehouse solution that services wholesale, retail and e-commerce channels with both case and each handling capacity. GreenBox recently signed their first logistics as a service customer and issued a related order for a Symbotic system all within this quarter, so Symbotic will begin recognizing initial GreenBox revenue in fiscal Q3. GreenBox will automate and operate a brownfield warehouse for CNS wholesale growth. Partnering with GreenBox allows CNS to accelerate its transition to an autonomous supply chain in a capital-efficient way. I'm excited that the CNS team saw the benefits of outsourcing with GreenBox. The GreenBox team is currently evaluating locations across the U.S. for these sites. Finally, while SoftBank team members have been performing much of the operational work in GreenBox, the initial hiring for a GreenBox management team has started. We expect to be able to announce our first hires in the next several months. To wrap up, we will continue to innovate, execute, and scale to deliver for our customers as we grow and drive increased profitability. I want to thank our entire team for their excellent work this quarter. Now, Carol will discuss our financial results and outlook. Carol?

Thank you, Rick. Second quarter revenue grew to $424 million, up 59% compared to the same quarter last year. The strong revenue growth was driven by significant progress across our 37 systems in the process of deployments. During the second quarter, we initiated three new system deployments and completed three systems, bringing us up to 18 fully operational systems. As indicated on our last call, system starts stabilized in the second quarter, as the team focused on implementing the innovations that Rick just mentioned and enhanced system standardization for phase deployments. We expect quarterly system starts to accelerate during the rest of the year. For this quarter, our revenue numbers reflect that significant revenue growth can be driven by our ability to accelerate deployments in progress. And just as important, reductions in system deployment time create capacity to support future customer demand. Our backlog of committed contracted orders of $22.8 billion declined due to the revenue recognized during the quarter. Our combined recurring revenue streams grew 85% sequentially and 145% year-on-year, reflecting the increase in the number of completed systems. Overall, non-GAAP gross margin was down slightly from last quarter, but still better than expected. The innovations we deployed during the second quarter weighed upon system gross margin, but were largely offset by effective cost management and solid project execution. System adjusted gross margin remained stable at 20% and generally in line with last quarter. As usual, our system gross margin also reflects the burden of pass-through costs and lower-margin innovation projects that weigh on a reported gross margin. Our combined recurring revenue streams contributed to positive adjusted gross profit. This demonstrates the high leverage in our business model, showing that we can be profitable with a small number of active sites generating recurring revenue, while also being invested for the much larger number of systems still in deployment. As I said last quarter, we do not expect gross margin to improve every quarter, but we do expect gross margin to improve each year well into our future. We expect that as we scale over time, combined recurring gross margins can trend to over 60%. Operating leverage improved again sequentially as we achieved a 5.3% adjusted EBITDA rate, compared to a 3.8% rate last quarter. This was driven by rapid revenue growth and gross margin expansion, along with stable operating expenses. As Rick indicated, we completed restructuring related to outsourcing bot assembly and component inventory management, including standardizing SymBot as our go-forward platform. As a result, we recognized a non-GAAP restructuring charge of $34 million in the quarter. Our cash and equivalents, including marketable securities grew $276 million sequentially to $951 million. Free cash flow, defined as cash flow from operating activities of $21 million, less capital expenditures of $3 million was $18 million and better than expected during the quarter. In addition, we raised $258 million from our February follow-on offering, which gives us the flexibility to maintain our aggressive pace of innovation in a variety of areas, including non-ambient systems development. As expected, stock-based compensation was elevated due to the January vesting that occurs each year. In fact, Q2 will usually be the quarter with the highest stock-based compensation every year. For the third quarter of fiscal 2024, we expect revenue of $450 million to $470 million and adjusted EBITDA between $27 million and $29 million. This represents revenue growth of over 47% and an adjusted EBITDA margin increase. We now welcome your questions. Operator, please begin the Q&A.

The first question is from Andy Kaplowitz of Citi.

Rick, I know you said in the release that you made significant advances in terms of our innovation roadmap. So could you give a little more color into what that means? I know you mentioned on the call already better software, the new AI chip. I'm sure you want to save much of this for the Investor Day, but did you, for instance, further accelerate deployment time? It seems like BreakPack revenue could come faster than expected. Maybe you can elaborate a little bit more on what you did in the quarter.

Sure, Andy. So, we've been working on this for about three years now. But putting vision on our bots and that combined with NVIDIA chips that we're using allows us to recognize boxes that may be deformed, but still recognize what the product is. And so, that makes our bots much more able to pick irregular cases. And as you know, we're one of the only people, maybe the only one that puts our box directly on shelves. We don't put them on trays. That requires a lot of expertise and a lot of knowledge. And so, we've been on this journey for a while. And now, about 40% of our bots in our network are vision-enabled. And so, there's a bunch of work for the AI to catch up with recognizing 1,000 different pictures of a single box and saying, oh, that's XY's product. And the shape, I didn't recognize it before because we were just using sensors. But now with vision, we can actually recognize that. So, that's one thing. The other thing we did is that we changed the routing algorithms for our bots. And they will also be vision-enabled so that they're more reliable, so that if something happens like a bot gets stuck on a broken case or something, we can now route around it. And we always could do that a little bit, but now we can do it much better. And then to be able to actually see the bot in front of us is also innovative. The next thing we've done is we have started work on a perishable testing. And so, we think that's going to go fairly well, because there's not a lot of new things we have to do on perishables, but we want to test what happens when a bot runs over yogurt. So, things like that. And then, the next thing after that will be testing bots in a frozen environment. So, those are a couple of things we've been doing.

I was going to address the accelerated deployment time. Last quarter, we noted that we achieved our first deployment in 20 months. This quarter, out of the three systems we deployed, several also reached a 20-month deployment time. We have certainly gained additional proof points. As a reminder, factors enabling this faster deployment include the continuous learning from multiple deployments in our supply chain as well as from our own team. There has been increased collaboration between us and our customers. We discussed in detail last quarter the quality and standardization of our build instructions and test procedures, and we're now seeing the benefits of that. Looking ahead, we do have some deployments that will take longer than 20 months to complete in the second half of this year, as each deployment varies in size and complexity. However, we remain on track to have multiple opportunities driving deployment times of less than 12 months in the future.

And then another pretty big update on the GreenBox side. So, maybe you can talk about that. I mean, you've been expecting your first customer, I think, this year, but starting in Q3. So, do you see an acceleration there from here? Do you focus on this customer like, how does that work moving forward?

Yes. So, we'll have our first deployment. C&S is going to use GreenBox to build a facility for them. I think when people will then reach out to us, they'll reach out to GreenBox or reach out to C&S and say, why did you make that decision? And it's everything that we've been saying. It's capital efficient. It allows people to get into automation quicker. And C&S believes we'll have higher customer satisfaction using GreenBox than using a conventional warehouse system. We are looking at sites across the country right now to put up additional sites, so we're feeling very bullish that if we build it, they'll come, and SoftBank's aligned with that. So, we're excited about that.

And our next question will be coming from Matt Summerville of D.A. Davidson.

I wanted to follow up on GreenBox and C&S. Is there a specific location that will support C&S? If so, how significant is the support that this location provides? I'm trying to understand if C&S is considering standardizing their warehouse operations around GreenBox, or if this is more of a trial to see if this approach aligns with their strategy. I'm looking to grasp their overall strategic vision and how this could develop for your company.

So, Matt, I'll start. So, C&S chose GreenBox as it was looking for ways to accelerate its automation rollout. This is the first proof point, I'll say, for C&S. As we continue to vet multiple customers, we can see potential for additional customers and potentially additional opportunities across C&S.

Okay. And then with respect to the perishable side of things, what are maybe the 2, 3, or however many it makes sense to talk about, what are the key milestones we should be looking for that we should be waiting to hear about where this perishable is in terms of when that gets green-lighted, that you actually start selling and rolling some of these out?

I believe it will likely take about a year, and I anticipate that achieving those milestones will be quite manageable. The reliability of our system offers tremendous value to our customers. We are currently testing robots in a temporary site within a perishable facility for a customer who is interested in this setup. During the tests, we create disaster scenarios and analyze edge cases to ensure our robots can operate effectively in conditions between 32 and 55 degrees Fahrenheit, with high humidity. We expect them to perform well, so we are conducting thorough testing. I think within the next year, we will announce that we have a perishable site operational. While I need to be cautious about being overly optimistic, this has always been part of our plans. The perishable sector is significant, and we believe there are unique applications for our technology. The costs of building ambient facilities range from $100 to $125 per square foot, while perishable facilities are around $250, and frozen facilities can reach $350. Given that we can store products more densely, we believe there will be compelling reasons for customers to utilize perishable systems. However, we want to ensure we have thoroughly tested all edge cases before marketing a system. In summary, you can expect to hear something from us in about a year.

And our next question will be coming from Mark Delaney of Goldman Sachs.

First one was trying to better understand the revenue per system and installation. It went up a fair amount relative to last quarter. And, Carol, you mentioned the progress you've made as a company in accelerating some of the installation times. I'm hoping to better understand how we should think about that ratio going forward? And is there opportunities to sustain or even build off of this level of revenue compared to the number of systems you have, given all the initiatives you have underway?

Yes. The primary factor influencing that ratio is our current position in the deployment lifecycle. Most of our revenue comes from systems that are in the middle of installation, so there will be variations each quarter. Forecasting the specific ratio is challenging because each system differs in size and complexity. This variation will persist. However, as we progress, our revenue will continue to grow, which means that the contribution ratio from each system will also increase beyond the 37 currently in deployment at any time.

It ties into my next question. Would it better understand what completing the restructuring in your shift to an outsourced model may mean, not only in terms of some of the financial implications, like profit margins, but could you also talk about what it might mean for your capacity in terms of how many systems the company could have in place relative to the number of systems it could be working on at any one-time relative to the 37 that you currently have in installation?

Yes. So, this quarter, we focused on completing the outsourcing that we began last year, and it was focused on the complete restructure and focusing to move to our SymBot platform. I don't necessarily see the connection of how that necessarily drives scaling other than we now have a standardized SymBot. We're going to be able to continue to deploy innovations along that SymBot, but what we did in terms of restructuring really shut down any additional inventory costs associated with all our obsolete bots.

Our next question is coming from Nicole DeBlase of Deutsche Bank.

I wanted to ask a couple on the financials. So the first is the system's gross margin fell to low double digits. I think you guys talked about in the opening remarks how that was driven by all of this innovation that you're working on. I guess, how quickly can that gross margin step up to a high teens or better level? Is that something you expect in the second half? Or will these innovation headwinds continue?

We did better than expected on gross margin. But as you indicated, we were stable quarter-over-quarter. So a couple of items that weigh on our gross margin. So I'll talk about the things that are weighing on those gross margins now, and then what we see for the future. So a couple of the things are the innovations that we have in work. We talked last quarter about focusing on additional resources to ensure quality deployments for some of those sizable projects we have in flow. We have the benefit on many of our contracts that we have pass-through costs, so while we're able to pass that through with a profit, it weighs on our gross margin. Lastly, what's weighing on our gross margin is we have several lower-margin projects in flow. I would expect to see those start completing in the second half of this year. And so our Q3 guide reflects stable gross margins. As I said, we've got several significant milestones coming up in the second half of the year on some of these big projects. Gross margin won't improve every quarter, but we expect improvement in the coming years and that it will step up year-over-year. As I mentioned earlier, just in terms of the unlock for gross margin, the single biggest one being the time it takes to deploy our system, and we continue to see steps in the right direction with each one that we're rolling out.

And then I guess on the Operations Services business, we saw a really big step change, like revenue almost doubled sequentially there this quarter. I guess what drove that? And is this new level of revenue in Operations Services sustainable?

So when you look at the step-up, the single biggest driver is we now have 18 systems that went operational. We were at 15 last quarter. When you compare that to just a year ago, we were at 9. So a significant step up. You're going to continue to see that grow. I will separate software and I will separate the operations because I think you started with the operations piece of it. We expect operations revenue to continue to grow as we bring systems online. You will likely not see the same level that you saw this quarter. We had several one-time events in the quarter that contributed not only to revenue but to our gross profit in the operations area. So a few of those you will not see repeat, but you should expect that revenue to continue to grow.

Our next question will be coming from Ken Newman of KeyBanc Capital Markets.

Sure. So first question here. I'm just curious, you've obviously been talking about accelerating deployments or initiations here into the back half. Is there any way to kind of size how you think about acceleration to the back half? You did three this past quarter. Is it fair to assume that you kind of return to that, call it four or five types of projects in the back half and accelerate into 2025?

Yes. So, we don't guide on system starts, but I'll start with where we were this quarter at three. So, we indicated last quarter that we would see stabilization of our system starts that allowed the team to focus on all the innovations that Rick talked about and really implement system standardization for those phased deployments. So, that's what you saw this quarter. It is a team effort to make a decision to go ahead and implement a new project or a new SOA. It's a complex decision between ourselves, our suppliers, and our customers. Our customers also need to manage their operations through all of our installation activities, including decommissioning legacy systems and preparing the site. So, it's a combined effort when we decide to go initiate. Given our contracted backlog at $23 billion, you're going to see system starts step up in the second half of the year.

I appreciate that. And then for my second question, I think you had positive free cash flow of just over $18 million this quarter. Is there anything that would prevent you from being free cash flow positive for the full year as it relates to some of the innovation spending that you guys are expecting for the rest of this year? Or any of the other restructuring actions you might be considering?

As we approach the end of the year, we anticipate positive working capital in the latter half of the year. There might be some variability each quarter due to the maturity levels of the systems we have deployed, similar to the revenue trends. Some quarters may see significant installations that could impact cash flow. It's important to note that we typically sign projects early on. While there may be some fluctuations, we are positioned for positive working capital moving forward.

Our next question is coming from Greg Palm of Craig-Hallum.

I'm curious, we've been talking about driving timelines down for some period, and you've been really successful at doing that. I'm just curious, how much of that is in your hands versus at the maybe expense of some of your outsourcing partners? And do you think that you're reducing the timelines at the expense of margins, meaning that as you continue to get better, that you might not need, I don't know how many folks that are paid overtime or any of the other related costs to ensuring that you have happy customers and get a system at a shorter amount of time?

I'll start with the first part in terms of how much is in our hands versus all of our partners. It is a joint effort. We are there helping to ensure the management of the project; Symbotic is also responsible for the planning upfront. You've got to start the system right and make sure you've got all the planning in place so that material shows up. All of our partners need to deliver to the schedules that we lay out. It's a combined effort across ourselves, and then our customers certainly have a play in that too, just ensuring the readiness. A fair point in terms of the timelines we've achieved. We have talked about wanting to make sure we're putting resources on a certain project so we can deploy on time and make sure we are deploying a very high-quality project. I would say as you see us moving through our learning curve, and we continue to learn at every single site installation as do our suppliers, you're going to see that we'll continue to improve that timeline without needing the additional resources to ensure schedule.

Yes. Okay. That makes sense. And as we think about sizing up that non-ambient opportunity, I know you've talked about that TAM or that SAM in the past. But just given your thoughts around maybe having some orders or some facilities, can you at least size up what type of share expansion is possible? Like could you theoretically double the size of the opportunity with some of your current customers? I mean, is it more? Is it significantly less? I'm not expecting an exact answer, but I would just be curious to know what that sort of wallet share expansion opportunity is, again, with your current customers, not necessarily with customers that you haven't won to date with something else?

So I'll start, and then Rick can share his thoughts. We have not put a number out there in terms of sizing the TAM from our existing customer base. But we've indicated that our current backlog does not include that particular opportunity. Each of our customers has the opportunity to go ahead and expand to non-ambient. We consider that a significant opportunity for Symbotic going forward.

Yes. I guess I think the TAM is very large. I probably shouldn't be more specific than that right now. There are more ambient facilities than there are refrigerated facilities. So, that's one thing. But the economics of refrigerated are such that if you have a 200,000-square-foot perishable building and you want to expand it, maybe you can't expand it enough and you have to build a whole new building. Our system is a very good solution for that. So if we have a $23 billion backlog on ambient, I would say perishables probably not as big as our existing backlog, but it's very large.

And if I could just sneak in one more clarification. Carol, I think you said to expect growth in operations services revenue going forward. Was that sequentially off of the $20 million in revenue that you just put up in Q2?

No, because there are some one-time events that I referred to. So there's a percentage of this quarter's revenue that we put up for operations that won't be repeatable.

Our next question will be coming from Mike Latimore of North Capital Markets.

Congratulations on the results and outlook. Regarding BreakPack, could you share more about its prospects? What level of interest are you observing from current customers? Is it leading to more discussions with new clients? Also, could you clarify whether it is included in the Walmart backlog at this time?

I'll begin by saying that BreakPack is included in the Walmart backlog, and Walmart views it as a key component for future deployment. As mentioned earlier, this will be our second BreakPack initiative. We also believe there is significant market potential for BreakPack among all of our customers, as it will be available for sale. Additionally, BreakPack is integrated with GreenBox and could serve all GreenBox customers. Furthermore, I am confident there is a broader market for BreakPack beyond our existing customer base.

The BreakPack solution in the Walmart application is designed for items that enter the store but aren't sold in full cases. Walmart supercenters have pharmacies and drugstores, making them ideal for large pharmacy chains, and it may also appeal to dollar stores. We believe this market is substantial, though we haven't highlighted it much because our BreakPack offering stands out from existing solutions. Its uniqueness lies in the advanced software and vision technology we utilize in our SymBot. We now have a mini bot that performs similar tasks even more effectively in handling smaller packages. While we see significant potential in this market, we feel that many people are still unaware of this capability, but awareness will grow soon.

Got it. Regarding the ability to initiate more system starts, does that require ongoing efforts in refining outsourcing, or will there be additional requirements for improving outsourcing efficiency?

No. Our ability to start new systems is not dependent on outsourcing. We focused on outsourcing to scale, and we believe we've achieved that. We are outsourced and have the capability to continue to expand. I'd say the slowing that we saw for this quarter on new starts, that's going to change in the back half of this year, and you'll see that number continue to grow. Just reflective of the $23 billion backlog we have. When you look at the timing of when we plan on deploying that, the system starts will start to pick up.

And the next question will be coming from Robert Mason of Baird. Your line is open.

Just a question about GreenBox. How do you view their ability to quickly ramp up considering the current schedule of existing customers? I'm curious about how quickly they could add new customers, like CNS, on top of the existing schedule.

So as we talk about GreenBox and our first deployment next quarter, we are identifying the management team. So, we're picking the leaders to put in place. GreenBox will then go ahead and begin ramping up with the additional resources. They're in the process of growing that team. We believe our ability to ramp GreenBox will be over the course of the next several quarters, and you'll continue to see new additions to our GreenBox deployments.

Just to clarify, when we've talked about the first revenue from this first GreenBox order, we are talking about revenue in the June quarter.

Okay. Okay. Very good. And just maybe a clarification question around BreakPack. It sounds like that you can market that system to customers who do not or would not necessarily be required to already own or have one of your current case handling systems. Am I understanding that correctly?

Many of the customers using BreakPack still need to store boxes. Eventually, they will open the box and distribute its contents. This means they may not require a BreakPack or a storage solution as extensive as some of our current offerings, but they will still need to store boxes. They will continue to need the standard SymBot units and likely require some solution for palletizing the totes once they are removed. It could be a smaller system, but it will still be essential to our overall setup to ensure functionality.

Our next question is coming from Joe Giordano of TD Cowen.

I guess I'll start, Rick, on the SymBot and some of the innovations you've put in there now that you're standardized on it. Just curious, of the 18 sites that you're running, I assume that there are bots that have been deployed that are not like the most vision-enabled using the current technology. What's your obligation to go back and kind of backward integrate, like the newest and greatest into existing facilities?

Yes. We have been careful about what we sold for a long time, especially before this significant growth period when we knew we would change the bot. Currently, there are about four warehouses with pre-SymBots, and part of the restructuring charge involves addressing the remaining issues. One reason for our accelerated progress is that everything is now standardized. We no longer have any legacy bots, just those four early sites, including the CNS side and a few others. Moving forward, we've made a decision and taken the charge; this is how we want to operate the business. We don't want to manage various versions of the bot. For example, all Walmart systems now use the same bot, and everyone has been standardized on the same bot for the last two years. We've made that choice, and we are now very standardized.

Perfect. Regarding GreenBox and the CNS side, is this essentially an outsourced single-tenant site where CNS will utilize the entire capacity? I'm curious about your perspective on the balance of GreenBox in leveraging existing large customers for that purpose versus multi-tenant sites. For those multi-tenant sites, do you believe there are still software engineering capabilities that need to be developed to ensure smooth onboarding and offboarding?

Yes. So, this is primarily going to be a CNS-only site, but not necessarily in the future. We have extra capacity; we'll bring other customers, GreenBox will bring other customers into the site. One of the things that makes Symbotic so special in this space is that we have perfect inventory management. By perfect, when we ship 1 million boxes in a week, we might have one mistake, and we can't figure out how, but it's six or seven Sigma accuracy. There'll be some onboarding of additional customers, but we have that pretty well figured out. This first site could be 100% CNS or it could be 80% CNS and other customers if we have room. The model would be for other customers to look at CNS and say, 'Oh, now I understand GreenBox. If I want to take a building, I could be an anchor tenant and say, 'I'll take 50% of the building in GreenBox; you'll go sell the rest of the building.' That's exactly what we want out in the marketplace. So it could be an anchor customer or, in some places, it could be 100 customers and no customer is bigger than 10% of the capacity. That's what we're going to begin selling out there now.

The technology as it currently exists can support in a theoretical facility lots of different customers with no anchor, and they're all really small. I would imagine that that population changes fairly often. The businesses are moving, expanding, or going away; the capability exists to bring on and bring off customers into a site like that that already exists?

Yes. We would have to build a management team to handle the customer relations. But in our structure, you could have 100 boxes in a row, and we would have perfect traceability. It could be 100 different customers with owning 100 boxes in an aisle. We have perfect traceability. So that part of it, the technology is already there. We have to build out the customer management piece.

And our next question is coming from Derek Soderberg of Cantor Fitzgerald.

Just piggybacking off of one of the last questions with the new hardware and software innovations, will all of those be pushed out to systems currently in operation and any new systems? Or is it more of an optional add-on for customers? And then I'm wondering whether or not the new hardware or software innovations turn into either cash payments or upside to existing contract terms or anything like that? And then I've got a follow-up.

So I'll start, and then Rick can add at the end. So it depends. The innovations that we have in flow, we typically focus on several things. We're innovating for looking at R&D and additional enhancements to our systems. We do view those as potential opportunities in the future for additional revenue and additional sales. We also continue to innovate and look at R&D for how we're going to make the systems more efficient from an operational perspective and focus on reliability. Some of those enhancements are being rolled out to the systems we have in flow today and will be part of what's in our contracted backlog. The third, which we've talked quite a bit about, is we're focused on innovations that will drive costs out of either system deployment or system operations. There's a mix in there. Some of the innovation that we're working on absolutely is driven to our current customer set, but others would be growth going forward.

Yes. We have always considered that if we can make the bots operate at twice the speed, resulting in a need for half as many bots, we need to determine who benefits from that income. We could either charge less for maintenance, or if we maintain the same number of bots working at double speed, and our palletizing cells are able to handle twice the workload, we would be entitled to a recurring income stream for the extra work we are performing. This has always been part of our plans, but we have not reached that point yet.

Got it. And then as my follow-up, just to clarify some of your commentary, Carol, I think you said there are some lower-margin projects out there. Can you talk a bit about what's changing on the project front that would characterize a project as low margin at this point? And what kind of step-up in gross margins might we see after some of these low-margin projects work through this year? I'm just looking for you to clarify some of that.

Yes. We've got projects in flow that were our earlier innovation projects, some of them fairly early systems, proof of concepts are included in there. As they burn off, you'll start to see our gross margin step up. I'm not going to tie a specific timeline to those because the schedules vary. You should expect into next year gross margin to start stepping up.

And this does conclude the Q&A session for today. I would now like to turn the call back over to Jeff for closing remarks. Please go ahead.

Thank you, Lisa, and thank you, everyone, for joining our call today. We appreciate your interest in Symbotic, and we look forward to seeing you online for our Investor Day. Goodbye.

This does conclude today's conference call. Thank you for joining. You may all disconnect.