Earnings Call Transcript - SYM Q4 2023

Operator, Operator

Good day and thank you for standing by. Welcome to the Symbotic Fourth Quarter and Fiscal Year 2023 Financial Results. At this time all participants are in a listen-only mode. After the speaker’s presentation there will be a question-and-answer session. Please note that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Evenson, Vice President of Investor Relations. Please go ahead.

Jeff Evenson, Vice President of Investor Relations

Hello. Welcome to Symbotic’s fourth quarter 2023 financial results webcast. I'm Jeff Evenson, Symbotic's VP of Investor Relations. Our press release and discussion today will include forward-looking statements based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements, including as the result of factors described in cautionary statements and risk factors in Symbotic's financial release and regulatory filings with the SEC, by which any forward-looking statements made during this call are qualified in their entirety. In addition, during this call, we will discuss certain financial measures that are not recognized under U.S. generally accepted accounting principles, which the SEC refers to as non-GAAP measures. We believe these non-GAAP measures assist management in planning, forecasting and evaluating our business and financial performance, including allocating resources. Reconciliations of these non-GAAP measures to their most comparable reported GAAP measures are included in our financial press release, which is available in the Investor Relations section of our website and is also on file with the SEC. These non-GAAP measures may not be comparable to measures used by other issuers. Today, we'll provide guidance for the first quarter of fiscal '24, including revenue and adjusted EBITDA. We do not provide guidance for net loss, which is the most comparable GAAP financial measure to adjusted EBITDA. We are not able to provide reconciliations to adjusted EBITDA to GAAP financial measures because certain items required for such reconciliations are outside our control, and/or cannot be reasonably predicted such as the provision for stock-based compensation. On today's call, we are joined by Rick Cohen, Symbotic's Founder, Chairman and Chief Executive Officer; Tom Ernst, Symbotic's Chief Financial Officer; as well as Carol Hibbard, our CFO successor designate. These executives will discuss our fourth quarter 2023 results and our outlook, followed by Q&A. Rick, would you take it away, please?

Rick Cohen, Founder, Chairman and CEO

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us to review our 2023 results and to discuss the year ahead. But first, I'd like to highlight some of our most important achievements in the past year. Fiscal 2023 was a year of doubles. By doubling our sites in deployment, our revenue nearly doubled and set us up for strong revenue growth in 2024. Our gross profit grew even faster, more than doubling as gross margins increased significantly, and the number of stores served by the Symbotic system nearly doubled as our technology now serves over 3,000 customer stores. Such growth presents a contrast to the annual revenue against many vendors of supply chain technologies are reporting and is a testament to the strong and growing demand for the Symbotic System. Today, Symbotic Systems are moving goods at a rated capacity of more than 400 million cases per year, and we are currently in the process of deploying additional capacity rated to move another 1.6 billion cases annually. This compares with the annual total U.S. addressable market of over 500 billion cases moved per year. So clearly, we see significant opportunities for continued strong revenue growth for many years to come. We recently welcomed our newest customer, Southern Glazer's Wine and Spirits to the Symbotic family. Southern Glazer's is the world's largest distributor of beverage alcohol. This announcement represents another win outside the food packaged goods verticals and demonstrates the capability of the Symbotic System to efficiently manage goods with a range of SKU profiles and with complex handling and loading challenges, all while operating in the regulated industry. Of course, with such high demand for our systems, our ability to scale operations is the primary governor on our revenue growth. To that end, we have continued to invest heavily in extending and strengthening our network of outsourcing partners and manufacturing and installation, so we can maintain our focus on innovation and product development. Concurrently, we have hardened our supply chain to position Symbotic for even faster deployments, continued revenue growth and steadily improving margins. We've continued to rapidly innovate and SymBot our ninth generation automated bot is now in full production approaching 1,000 units in operation. These units are running in the field every day, and they make our supply chain even more agile, accurate and efficient. With improved vehicle dynamics and navigation as well as improved case handling, SymBot boosts the number of transactions per hour that a bot can handle over our previous generation bot. Furthermore, SymBot is engineered to take advantage of the average 6 terabytes of data per day generated by a typical system. We expect our artificial intelligence and software enhancements to serve as an efficiency and reliability multiplier, and SymBot is purpose-built to realize these benefits over time. The first prototype of our case handling technology, BreakPack is now delivering to stores every day, and we're pouring our learnings from this system into our BreakPack prototype, while we continue to ramp and test. We've done all of this while delivering increased profitability and cash flow. Our gross margins have improved substantially. Our recurring revenue streams are now profitable, and we achieved a positive adjusted EBITDA, all while posting our fourth consecutive quarter of increased cash on hand. All of this success has been the result of greater problem-solving and the hard work of our team members. I'd like to thank the entire Symbotic team for making all this possible, and we continue to pursue additional talents to enhance and build the Symbotic team. Now turning to what we plan to achieve in 2024, our goal will be to do more of the same. That is to scale, execute and innovate to deliver for our customers in the new year. We'll maintain our focus on delivering great systems for customers while scaling for rapid growth as we continue to accelerate our time to deploy systems. We'll continue to invest in innovation to increase the capability of the Symbotic solution, introduce new products and drive profitability through expanding margins for both systems and recurring revenue streams. Turning to GreenBox, this will be an important year for our joint venture with SoftBank. GreenBox has been recruiting for its leadership team, and that is well underway. Inbound interest in GreenBox has exceeded expectations, and we continue to anticipate announcing the first GreenBox customer in 2024. Remember, GreenBox is just like any other customer for us because the sales to GreenBox is a sale, same as any other sale we make. But with the added benefit that we own 35% of GreenBox, which we believe will be a profitable investment that generates strong cash flow for Symbotic shareholders. Finally, we will continue to judiciously grow our team as we continue to focus on innovation in talent in the use of software and hardware engineering and artificial and data intelligence. Tom will talk more about the quarterly financial details. But before that, I would like to introduce Carol Hibbard, the newest member of our senior management team. Carol will take over the role of Chief Financial Officer from Tom next month as Tom begins his retirement. Thank you, Tom. We have been fortunate to have overlap between these two talented executives to ensure a smooth transition, and I would like to thank Tom for his hard work. So Carol, would you mind sharing a few words now?

Carol Hibbard, CFO successor designate

Thank you, Rick. I'm excited to join Symbotic. What Rick and his team are building is truly amazing. I look forward to helping to take Symbotic to the next level as we bring greater value to our customers and make the supply chain more agile and efficient for everyone. I look forward to meeting many of you soon. Tom, over to you to take us through the financial results.

Tom Ernst, CFO

Thank you, Carol. Welcome to the Symbotic team. But before I begin, I would like to personally thank the entire team at Symbotic. It has been an absolute honor and pleasure to work with such a talented team and to be part of our amazing journey. I'm proud of the progress made thus far and look forward to watching the journey to completely transform the supply chain. Turning to our quarterly results. Our fourth quarter revenue grew to $392 million, up 60% compared to a very strong fourth quarter a year ago. The revenue growth this quarter was driven primarily by faster execution on deployments. The pace of new system starts and the acceleration of system installations saw a marked improvement. We initiated four new system deployments during the quarter and advanced two systems to full operation. As of the end of the fourth quarter, we had 12 fully operational systems and 35 systems in the process of deployment. This represents an increase from 10 operational systems and 33 deployments in progress last quarter and seven operational systems and 17 deployments in process in the fourth quarter of last year. While some deployment starts were down slightly from last quarter, a more important way to think about deployment starts and our revenue growth is that with 35 systems in progress at quarter end, this represents over a 100% increase from the 17 systems in progress a year ago and leaves us very well positioned for strong revenue growth in the quarters ahead. Time to deploy a system is also important in driving revenue growth, and we continue to shrink the time of deployments with the help of our partnership initiatives as well as through our ongoing efforts to standardize our platform and streamline our deployment processes. As Rick mentioned, our network of outsourcing partners is executing well. We continue to see significant opportunities for efficiencies over time as we continue to add more partners to our outsourcing network. Our outsourcing partners are ramping so well that during the fourth quarter, we chose to end autonomous bot manufacturing operations in our Wilmington, Massachusetts location and established a $14 million restructuring reserve primarily associated with the dissolution of materials and inventory. Our backlog at the end of the fourth quarter was $23.3 billion, which includes the addition of the GreenBox joint venture we announced in August. Remember, the addition of our $11 billion of backlog from GreenBox is backed by the capital of GreenBox’s investors led by SoftBank and is a noncancelable commitment. Once these contracted GreenBox installations are complete, we expect that this agreement alone will contribute over $500 million of high margin recurring revenue per year to our overall revenue growth. Our sales and deployment progress for platform purchases continue at a rapid pace. For example, progress with Walmart continues to plan, and we recently started deployment of the second of five warehouse facilities with UNFI. It is important to note that as we scale, our customer base is becoming more diverse. The 35 deployments in progress are with six different customers. In total, all eight of our customers are generating revenue for us, and this is before considering the recently announced agreement with Southern Glazer's, which started in our fiscal first quarter of 2024. We reached an important milestone this quarter with our recurring revenue streams now reaching positive gross margin. This shows the high leverage in our business model that we can be profitable with such a small number of active sites with recurring revenue while also being invested for the much larger number of systems still in deployment. We continue to expect that as we scale over time, recurring gross margins can trend to over 60%. Our adjusted gross margin increased by 80 basis points to 19.1%, up from 18.3% last quarter, driven primarily by recurring revenue streams turning to profitability, along with a slight improvement in system gross margin. Our fourth quarter system adjusted gross margin increased 20 basis points sequentially from last quarter. These results still reflect significant costs associated with lower margin innovation projects, the burden of pass-through costs to protect gross profit dollars, but that can weigh on a reported gross margin percentage and costs associated with rapidly scaling our operations. Operating leverage improved again sequentially as we achieved a 3.4% adjusted EBITDA rate compared to a 1% loss rate last quarter. This was driven by our rapid revenue and gross profit growth along with slower operating expense growth. Our cash and equivalents, including marketable securities and restricted cash grew by $35 million sequentially. So we ended the year with $548 million on hand. These balances increased almost $200 million over the past year, driven by the positive working capital benefit of our customer and vendor invoicing terms. We also had some timing benefits in 2023 that provide a tough comparison in the first quarter of 2024. Otherwise, we anticipate seeing a working capital expansion again for 2024. In conclusion, we're continuing to scale our business and innovating rapidly to deliver for our customers. We look forward to speaking with you again next quarter to provide an update on our progress. I'd like to personally thank you for your interest in Symbotic as I hand the reins over to Carol. Carol will now provide our guidance for the first quarter.

Carol Hibbard, CFO successor designate

Thanks, Tom. For the first quarter of fiscal year 2024, we expect revenue of $350 million to $370 million and adjusted EBITDA between $11 million and $14 million, which represents revenue growth of 70% to 79% and adjusted EBITDA margin increasing over 11 percentage points, both on a year-on-year basis. We now welcome your questions. Operator, will you please open the Q&A.

Operator, Operator

Our first question will come from Matt Summerville from D.A. Davidson. Your line is open.

Matt Summerville, Analyst

I wanted to talk about some of the newer generation technology, SymBot. Rick, I think you mentioned the number of transactions that those bots handle on a per hour basis is higher than the eighth generation. I was wondering if you could give a little more numerical color behind that. I mean I'd be curious if you're able to disclose where you're trying to take the next generation of BreakPack, where you're trying to do more of the deep innovation in those systems? And then I have a quick follow-up.

Rick Cohen, Founder, Chairman and CEO

Sure. Thanks for the question. So the SymBot, which is what we transitioned to this past year, has NVIDIA chips; it has Xavier chips in it, and we now have cameras installed on these bots. We are in the process of being able to use the additional processing power to actually identify packages eventually, to actually identify bots. Currently, the bots are relatively blind; they're centrally controlled. But over time, they are going to be able to see each other, allowing them to actually go faster, which will essentially be collision avoidance. So that's a major project for us. Another advantage is the vision allows us to use AI, enabling recognition of packages even if they are slightly damaged, which means that the bots actually don't get stuck anymore, and therefore, they're continually running, leading to increased transaction rates. I won't talk right now about how much we expect those rates to go up, but over the next year, we expect them to increase significantly. Additionally, one of the things we are working on is the ability to remotely control the bot. So currently, the bots can make decisions. However, if a bot cannot make a decision or gets stuck, let's say when a box opens and spills its contents on the floor, our bots will essentially become drones. We can control those bots remotely over time anywhere in the world, and this capability is unmatched in the industry. We are applying similar software and logic on our minibot, which will allow our BreakPack solution to process lots of transactions in a very small area and to conduct essentially large batch picking of individual items. This means breaking open a case, taking a pack, putting it on a minibot, which then drives to the destination. These are all innovations that we’re working very hard on. The good news is that our talent pool is performing excellently, and we’re acquiring numerous new talents as well.

Matt Summerville, Analyst

Appreciate that color. And then either Tom or Carol, can you just talk about what the forward cadence looks like for gross profit—adjusted gross profit margin from here as we move through '24 and how that informs you about the longer-term potential for gross profitability?

Tom Ernst, CFO

Absolutely, Matt. Thanks for the question. So, we continue to see very strong leverage in the business, not only at the gross profit level, but in operating margin as well. So, what you should expect is, particularly when you're looking at a year-on-year basis, you should expect that the Company will continue to make steady progress. In individual quarters, you may see stronger performances and weaker performances due to the variability of the timing of improvements and ongoing initiatives that could impact the gross margin line. But this quarter, we just posted a 19.1% gross margin, reflecting a balance of healthy profitability while spending to move very fast. We are continuing to invest quite aggressively in new technologies such as SymBot and BreakPack, which are important innovations for us. Meanwhile, our outsourcing network is performing exceptionally well. We still have some redundant and inefficient spending as we ramp that network, and we expect to see strong leverage above that 19.1% as you look ahead, particularly on an annual basis and then in the mid-to-longer term.

Operator, Operator

And our next question will come from the line of Andy Kaplowitz from Citi. Your line is open.

Andy Kaplowitz, Analyst

Rick or Tom, can you give us a little more color into just Southern Glazer's your customer, but really the vertical? You really haven't spoken before. So if you could talk about the total addressable market. And despite your focus on GreenBox, could you continue to see this sort of one to two new customers such as Southern Glazer's in '24 and beyond?

Rick Cohen, Founder, Chairman and CEO

Yes. Thanks for the question, Andy. Symbotic solves a fundamental problem that exists across the broad economy: taking large concentrated homogeneous quantities of pallets and cases and getting the right case out to the next node in the supply chain. This problem exists clearly in our first several customers like Walmart, C&S Wholesale Grocers, and Albertsons, but it also exists fundamentally in liquor distribution as it does in other verticals that we see as the next step in our strategically addressed market. So, as you implied in your question, we do want to add one or two new customers per year that enable us to bring this technology to different verticals. We are excited about Southern Glazer's. Our strategy focuses on penetrating direct customers who will build captive systems with the aim of gaining one or two new customers per year. GreenBox provides us the ability to turbo-charge our market attack and reach customers more broadly, helping us penetrate the entire total addressable market.

Andy Kaplowitz, Analyst

And then, Tom, over the last few quarters, your quarterly revenue has been beating guidance by really an increasing amount. I know you want to be conservative, but can you talk about what has been getting better versus your expectations? I think you said it was the pace of deployments that's accelerating. And then, understanding there may be some seasonality in the business, why would revenue be sequentially down in Q1, '24 versus Q4 '23?

Tom Ernst, CFO

Yes, thanks for the question, Andy. I don't think you should expect a seasonality in our business. If there are any seasonal effects, that's something you need to see in the microscope. What we've experienced as 2023 has progressed is a combination of two things. We've seen very healthy improvement in our capacity to deliver across the spectrum of our build phase and installation phase of deployments, which has resulted in significant improvements in speed to execute that. As we look forward, we continue to expect that we will deliver systems quickly; however, this speed can come as a stair-step function. We don’t expect that we will see accelerations every quarter. In fact, we anticipate that some quarters may present challenges, not solely from our capabilities but also due to unexpected customer issues. So, you have to consider that things outside our control can impact our speed. There may have been minor timing effects that shifted some revenue from Q1 into Q4.

Operator, Operator

Our next question comes from the line of Nicole DeBlase from Deutsche Bank. Your line is open.

Nicole DeBlase, Analyst

Maybe just starting with the recurring revenue profitability that you pointed out in the prepared remarks: Is the expectation that now that those recurring revenues have turned positive from a profit perspective that this is sustainable from here?

Rick Cohen, Founder, Chairman and CEO

Thanks for the question, Nicole. We do think it's sustainable. It was a pretty significant sequential improvement in those margins. So again, on a quarterly basis, you may see some minor setbacks, but the general trend should be one of expansion. As we continue to ramp up to more systems generating recurring revenue—currently, we have 12 systems up and running—we expect that the ratio of recurring systems generating revenue to the number we are investing in will improve positively. Over the long run, we do think this mix of recurring revenues should push us closer to and eventually through a 60% gross margin.

Nicole DeBlase, Analyst

Got it. That's clear. And then just any thoughts on how you envision the SG&A line and the R&D line moving forward? Are we at a reasonable run rate to model going forward?

Rick Cohen, Founder, Chairman and CEO

Yes, thanks for the question, Nicole. We do believe we have a very strong level of investment in both operating expense lines, and we have the luxury of not needing to expand those significantly. We continue to feel like we are investing more in research and development than anybody else in supply chain technology. Not only that, but our R&D is extensively focused on new product innovation, whereas our competition has to invest heavily just to maintain what they currently have. Similarly, with our SG&A line, while certain parts of our SG&A will need to scale as we grow, there are other parts that are redundant spend, meaning we are in a fortunate position where we don’t need to expand them much. However, due to our market opportunity, you should expect that Symbotic will continue to modestly expand both of those lines as we scale operations. This is in contrast to our expectation of significantly stronger revenue growth.

Operator, Operator

Our next question will come from the line of Derek Soderberg from Cantor Fitzgerald. Your line is open.

Derek Soderberg, Analyst

I think you are really on an ongoing basis, finding areas where you can speed up the deployment timelines. Can you talk a little bit about where along the project you're seeing ways to sort of speed up that process? And maybe if you could just quantify how long the average deployment takes at this point?

Tom Ernst, CFO

Maybe I'll start with the quantification. When we first became a public company, we expected deployment timelines to be around two years or so from the start of a project to customer acceptance to full ramping usage. The first systems that went live were over 2.5 years, but we are now hitting the timeline on current deployments at around 22 months. We are continuously carving days out, and occasional innovations are carving weeks out. Looking long-term, we have meaningful opportunities—not just in terms of processes but also technology insertion that can significantly reduce our deployment timelines. Our ultimate goal is to reduce deployment time under 22 months, with an ambitious target of achieving this under six months over time.

Rick Cohen, Founder, Chairman and CEO

Yes, some of the improvements come from the increased volume, allowing us to continuously produce rather than starting and stopping. Our suppliers are getting better, and by building quality into components at the factory, we can reduce the inspection and installation time on-site. We are transitioning to a continuous flow of manufacturing to improve sequencing for deployments. Additionally, we have more stability in the supply chain as we move past COVID, allowing us to be more proactive.

Derek Soderberg, Analyst

Got it. Well, I really appreciate the detail. And then as a follow-up, just regarding your outsourcing initiative: it sounds like the plan is to gradually keep expanding that network. How many systems do you think today you can sort of concurrently deploy before augmenting or expanding that supplier base? I mean, can you get to 50 or 60 with the current supply base? Can you help us quantify that capacity?

Rick Cohen, Founder, Chairman and CEO

We believe we have solved for growth for the coming two to three years based on our existing network's capability. Our focus is on long-term growth and fostering a healthy level of innovation and competition among our partners, which will be necessary for our future data flow.

Operator, Operator

Our next question comes from the line of Greg Palm from Craig-Hallum. Your line is open.

Greg Palm, Analyst

Tom, congrats again on the retirement, and Carol, welcome to the Board.

Tom Ernst, CFO

Thank you, Greg.

Greg Palm, Analyst

I guess really good results, not a lot to really pick at. So I’ll maybe just choose one thing that I thought could have been a little bit better. Systems gross margin I think you mentioned is up slightly quarter-over-quarter, even though there's a pretty big jump in revenues. What were the headwinds relative to what you saw in Q3 from a cost absorption standpoint? I mean I know it's lumpy and over time, it tends to go up, but I was thinking it could have been a little bit better just based on the revenue jump.

Rick Cohen, Founder, Chairman and CEO

Yes. We see a ripe opportunity to be much more efficient in the costs and delivery of our systems. Some costs are borne by our customers, but others aren't. We have consciously chosen to grow rapidly and innovate extensively, which has created some inefficiencies resulting in gross margin pressure. Addressing this is a priority for our executive team, and we remain focused on identifying and rectifying inefficiencies to improve gross margins.

Greg Palm, Analyst

That makes sense. Appreciate the color. And I'm just thinking about the overall ramping up of deployment. It's been impressive, and it's clear that the outsourcing strategy has exceeded expectations. Is it time to think that you could be adding more than one to two customers a year based on your success over the last year, or do you still prefer to be conservative there?

Rick Cohen, Founder, Chairman and CEO

Our systems and deployments are up over 100% year-on-year. We are comfortable with the number of new customers we have added and the deployments we have underway with seven customers. With the addition of GreenBox, we feel that the one to two customers per year is still the right rate for us in the near term as we move forward. Keep in mind that GreenBox is one customer that we anticipate will add many additional customers down the line. It enables us to expand our customer base more efficiently, but for now, the focus is on the direct customers, meaning one or two per year.

Operator, Operator

Our next question comes from the line of Joe Giordano from TD Cowen. Your line is open.

Joe Giordano, Analyst

Tom, just a question about guidance. Now that you have double the project systems in deployment, given the nature of how these work, is guiding inherently more challenging now because you have so many more layers in and 35 versus 17 a year ago?

Tom Ernst, CFO

I don't think it's inherently more difficult. In fact, having 35 systems in deployment generating revenue provides us with a bit of averaging, minimizing the impact of surprises, positive or negative. However, growing as quickly as we are, along with key milestones that can vary by just a day or two at quarter-end can significantly affect revenue. So fundamentally, things are gradually improving in terms of visibility.

Joe Giordano, Analyst

Fair enough. And on GreenBox, obviously, as you went down this road, I'm sure you kind of tested the waters with some potential anchor tenants and customers. But I'd be curious what needs to be in place from a structural standpoint, management standpoint, and strategy standpoint at GreenBox for you to start producing for them and generating revenue?

Rick Cohen, Founder, Chairman and CEO

There’s a pattern to how we approach this. Last year was focused on scaling and availability with strong supplier relationships. I'm spending a lot of time traveling to meet potential customers and establishing core relationships. We’re in the interviewing stage for assembling an effective management team to lead GreenBox alongside SoftBank. We have some time as we are well-built for 2024. Our focus now is on identifying one or two core customers who may have different requirements than traditional Symbotic customers, helping us drive an efficient network. One of our goals is to assist customers transitioning into the automation space by offering a mix of in-house systems and GreenBox rentals, enabling them to diversify their operational bases. Our advanced automation technology is significantly superior to other options available in the market.

Operator, Operator

Our next question comes from the line of Ken Newman from KeyBanc Capital Markets. Your line is open.

Ken Newman, Analyst

I just wanted to circle back on the faster deployment this quarter. Tom, just any sense on how much closing the bot manufacturing facility affects fixed costs moving forward? And where do you see other opportunities to leverage those fixed costs further?

Tom Ernst, CFO

We ultimately foresee lower fixed costs, along with overall expanded gross margins. However, outsourcing decision was primarily motivated by an increase in the number of systems produced rather than just cost reduction. In the near term, we are optimistic about our progress within the outsourcing network. Just over a year ago, we chose to accelerate our investment, which did come at a higher cost at that time. But since then, we're retaining more confidence around long-term margin improvement.

Ken Newman, Analyst

Understood. And just for my follow-up. Some of your customers have expressed caution regarding consumer weakness during this earnings season. While it doesn't seem to have impacted you, could you clarify whether customers are asking to decelerate or delay deployments, or do you think the environment might drive them to accelerate their automation plans further?

Rick Cohen, Founder, Chairman and CEO

Our customers wish to proceed as quickly as possible. They recognize that there are potential headwinds and want to be at the forefront of lowering costs. Therefore, we are not seeing any slowdown; if anything, the demand is for acceleration.

Tom Ernst, CFO

Following the announcement of GreenBox, we have seen an uptick in inbound interest from potential customers, indicating a larger sales funnel than we observed a quarter ago.

Ken Newman, Analyst

Yes, if I could squeeze one more question in on free cash flow. Tom, if I remember correctly, you just mentioned that working capital is still going to be a use this year—any sense with the margins expected to improve structurally through the year? Should we anticipate a better free cash flow margin in 2024 compared to 2023?

Tom Ernst, CFO

Working capital was actually a positive contributor to our cash flow in 2023. I mentioned earlier that we faced some timing events this year that provided a tough comparison for Q1 moving forward. However, we expect expanded cash flow from positive working capital through 2024.

Operator, Operator

Our next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.

Mark Delaney, Analyst

Let me add my congratulations to both Tom and Carol. A quick question on systems margins. You spoke about ending SymBot production in-house. Can you help us better understand how much that should save or expand margins, and how long might it take to see those benefits? When thinking longer term about systems gross margins getting into the high 20s or even 30% levels, what are the key drivers? How much comes from cost reductions like what you announced today versus higher-priced backlog flowing through and volume?

Tom Ernst, CFO

Certainly, those are both drivers. Our experience in actuals so far has been that fiscal 2023 was a year of significant investment to help get SymBot out, with almost 4,000 units now tested in the field. There won't be a one-time jump in margins as we look ahead, but we do expect leverage from engineering changes and the release of new systems into the field, leading to better performance. Scale manufacturing with outsourcing partners will also lead to reduced costs and improved margins over time.

Mark Delaney, Analyst

Okay. That's helpful. My second question considers the backlog and expansion opportunities, particularly with Walmart being a significant customer. Can you talk about the plans for expanding engagement with existing customers like Albertsons and Target? What do you think it might take for some of those other customers to place new bookings?

Rick Cohen, Founder, Chairman and CEO

From a good example, Southern Glazer's—their first site, announced to be in Las Vegas, is large but regulated. It could happen that they desire smaller systems in various locations. We expect our other customers will also want smaller systems. The technological requirements for these smaller systems are slightly different; they must be more reliable, despite containing fewer parts. We've been focusing on the new chipsets and better artificial intelligence to enhance reliability, which will benefit many customers. Our discussions with customers point out that many of them favor smaller systems. We are actively engaging in conversations to determine the best approach to meet these varying needs.

Tom Ernst, CFO

We have deployments with seven customers actively in progress. Our approach is to provide systems to one customer at a time while maintaining consistent revenue generation.

Operator, Operator

Our next question comes from the line of Jim Ricchiuti from Needham. Your line is open.

James Ricchiuti, Analyst

When you talk about smaller systems, how much of a role, if any, does BreakPack play in this as you begin to think about different types of deployments?

Rick Cohen, Founder, Chairman and CEO

BreakPack is something we have discussed. Currently, only a few customers have been able to see it in operation, as it's still in prototype stage. We have gathered a lot of insight and are applying it to BreakPack 2. We have numerous customers expressing interest, asking us to inform them when it becomes ready.

James Ricchiuti, Analyst

So you don’t foresee BreakPack necessarily being the key element in your future offerings for smaller deployments? Should we be thinking instead about traditional systems scaled down?

Rick Cohen, Founder, Chairman and CEO

We see both pathways. You could sell a compact traditional system integrated with a BreakPack solution. For instance, if a customer ships slower-moving items, they could still require fast movers. A small system could provide storage, sortation, and selection, working in tandem with BreakPack to offer a comprehensive solution.

Operator, Operator

Our last question for today will come from the line of Rob Mason from Baird. Your line is open.

Rob Mason, Analyst

I had a question about your system starts. If I remember correctly, in 2022, new systems started with 13. This year, it seems to be around 23. Is that trajectory indicative of the high single digits to a low double-digit increase? Is that a reasonable expectation looking forward in terms of system starts year-to-year?

Rick Cohen, Founder, Chairman and CEO

Rob, I don’t think we quantify that figure going forward. Our focus remains on ensuring our customers are satisfied and realizing consistently positive outcomes. Our goal after that is to grow rapidly, as our customers want us to deploy as quickly as possible without compromising quality.

Rob Mason, Analyst

Just a question around Southern Glazer's as well. You mentioned BreakPack, but I'm curious if that's an opportunity with BreakPack considering the complexities they face in terms of mixed cases. Is that being considered?

Rick Cohen, Founder, Chairman and CEO

The technology is certainly applicable across a broad array of customers. Its versatility could cater to various challenges in different operations.

Rob Mason, Analyst

Just a quick question regarding the new senior VP for international regions. I'd like some commentary about your strategy and pursuit of international expansion. Are you considering existing customers first or seeking new ones for that expansion?

Rick Cohen, Founder, Chairman and CEO

We announced GreenBox as a global distribution network. We also believe we have significant global opportunities with Europe potentially being one of the most attractive markets. Thus, we felt it was an opportune moment to hire a leader to help us establish connections in Europe.

Operator, Operator

Thank you. That's all the time we have for questions for today. I would now like to turn it back to Jeff Evenson for any closing remarks.

Jeff Evenson, Vice President of Investor Relations

Thank you, Operator, and thank you, everyone, for joining our call tonight. We appreciate your interest in Symbotic and look forward to seeing many of you at investor conferences or facility tours or when we speak again next quarter. Thank you and goodbye.

Operator, Operator

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