Ouster Inc

NYSE:OUST

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Hello, and welcome to Ouster Second Quarter 2024 Earnings Conference Call. [Operator Instructions] 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.

[Chen Geng, executive]

Good afternoon, everyone. Thank you for joining us for our second 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 second 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 reflects 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 market in which it operates is based on information from independent industries 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.

[Charles Pacala, executive]

Hello, everyone, and thank you for joining us today. I'll start with a brief recap of the quarter, overview of the market and update on our strategic priorities. Mark will cover our financial results in more detail before I close with some final thoughts.

Our second quarter results showcased solid execution as our GAAP gross margin increased to 34%, setting a new operating record for Ouster. We reported revenues of $27 million, representing the sixth straight quarter we have met or exceeded our guidance. We are also making our business more efficient.

Since the first quarter of 2023, we have reduced our inventory levels by over 30% and improved our annualized inventory turns to over 3.5x from under 2.5. Alongside the continued improvement in our operating results, we have built one of the mystery's most resilient balance sheets and diversified business models. Subsequent to the end of the quarter, we repaid all outstanding balance on our revolving credit line with cash on hand.

During the second quarter, we saw strength in our robotics vertical, which accounted for many of our largest deals. We secured and expanded our relationship with Serve Robotics, a leading developer of advanced AI-powered delivery robots. Ouster's REV7 sensors are designed to support a Level 4 capable fleet that makes on-demand delivery more affordable and accessible. We look forward to supporting Serve's planned fleet expansion across multiple U.S. markets by the end of 2025.

Also within robotics, we won deals with 2 of the world's leading mapping companies to improve how their billions of users explore the world. These customers are expanding their REV7 deployments to refresh and upgrade their mapping fleets with increased range, accuracy and precision. REV7 took mapping to a whole new level at the Paris Olympics where fans engaged in new immersive experiences that brought them closer to the games.

Reflecting our focus on software solutions. Software attached sales were a highlight in the quarter as we won deals to power perimeter security, intelligent transportation systems and crowd analytics. With Ouster Gemini, our customers are able to detect and classify objects, conduct real-time tracking, protect secure zones and automate alerts for security threats.

Compared to traditional security solutions, Gemini can significantly decrease false alarms, reduce labor constraints and enhance intrusion detection capabilities in a wide range of environmental conditions. I am excited about the additional software opportunities we have in the pipeline for the second half of 2024.

Touching on the current demand environment more broadly. We are encouraged to see expanding deployment with existing customers as well as evaluation projects with new customers. Consistent with broader macroeconomic and industry trends, we have also seen some customer schedules pushed to the right. Despite these scheduled changes, which may soften near-term growth, we expect our strong margin and operating expense performance to keep us on track to deliver on our path to profitability.

Turning to our strategic business priorities for 2024. Our first priority is to expand software sales and grow our installed base. In the second quarter, we secured deals to supply Ouster Gemini, our smart infrastructure software solution, to one of the world's largest consumer technology companies as well as a global telecommunications company.

During the quarter, our software team also improved movement detection for security customers, optimize software processing requirements and enhanced our deep learning perception model to support new use cases, which is identifying unauthorized individuals tailgating into restricted areas. The second quarter also marked one of our best quarters for software attached sales. We increased our deployments at distribution yards as Gemini and REV7 are helping drive the immediate ROI for our customers, in addition to providing safety and operational optimization. We signed Gemini deals for multiple other use cases such as material handling, crowd analytics and perimeter security applications.

Turning to our digital LiDAR hardware roadmap. We have taped out our automotive-grade custom silicon Chronos chip and expect to integrate Chronos into our solid-state digital flash DF sensors in the next year. Concurrently, we advanced the development of our next-generation custom silicon for OS sensors, DL4 chip. DL4 silicon is back from fab and validation testing is underway. Both Chronos and L4 are expected to open up new verticals and bring significant improvements in performance, reliability and manufacturer ability to the Ouster product family.

Finally, our second quarter results demonstrate solid execution and progress on our path to profitability. Our gross margins are now approaching the range provided in the long term financial framework, and we have maintained a low cost structure while achieving significant year-over-year revenue growth. We remain on track to deliver the financial metrics necessary to reach profitability.

In summary, the second quarter showcased our execution 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 second quarter.

[Mark Weinswig, executive]

Thank you, Angus, and good afternoon, everyone. In the second quarter, we recognized a record $27 million in revenue, shipping over 4,000 sensors. Revenue increased 39% over the second quarter of 2023 and 4% over the first quarter of 2024. The smart infrastructure vertical was the largest contributor to revenue followed closely by robotics.

Since launching our software solutions in the first quarter of 2023, smart infrastructure has been our fastest-growing vertical and this quarter comprised roughly 1/3 of total revenues. Our gross margin improvement over the past 18 months is a key highlight for Ouster. Second quarter gross margins set record levels, both on a GAAP and non-GAAP basis. GAAP gross margin was 34% in the second quarter of 2024 compared to negative 2% in the first quarter of 2023 and is nearing the range provided in our long-term framework of 35% to 40%.

Non-GAAP gross margin improved to 40% in the second quarter. Gross margin benefited from further adoption of our high-performing REV7 sensors, favorable product mix and lower manufacturing costs. We see a slight normalization of these factors and expect our margins to be relatively flat sequentially. I am proud of our progress in expanding gross margin since the merger. The strong performance illustrates our ability to drive revenue growth while, at the same time, significantly reducing overhead costs and streamlining our manufacturing operations.

In addition, we have simultaneously reduced our inventory levels by almost $10 million, increasing our working capital efficiency. GAAP operating expenses of $34 million were lower by 72% year-over-year and up 3% sequentially. The sequential increase was driven by higher stock-based compensation and increased litigation expenses. We expect operating expenses to fluctuate on a quarterly basis, largely due to the timing of R&D project spending and litigation activities and to remain at or below third quarter 2023 levels.

Moving to the balance sheet. Our balance sheet is industry leading with cash, cash equivalents, restricted cash and short-term investments of $186 million at June 30. During the second quarter, we received approximately $16 million from ATM sales. In August, consistent with our strategy to improve our capital structure, we utilized $44 million to fully repay the outstanding balance on our revolving credit line. This action further strengthens our financial position and provides Ouster with a resilient balance sheet.

Now moving to guidance. For the third quarter, we expect to achieve between $27 million and $29 million of revenue. We anticipate steady sequential revenue growth for the remainder of the year.

I'll now turn the call back to Angus for his closing remarks.

[Charles Pacala, executive]

Thanks, Mark. The Ouster team delivered solid execution in the second quarter. This is now the fifth straight quarter of expanding margins and increasing revenue. Non-GAAP gross margin reached 40% for the first time in our history. We had one of the best quarters for software attached sales, added new features to our software product portfolio and both of our next-generation custom silicon chips are progressing.

Ouster stands out as a fundamentally differentiated LiDAR company that is shaped by our exceptional employees, customers and technology. We are relentlessly focused on building the highest quality products and providing best-in-class support to help solve our customers' cutting-edge challenges.

I'm excited to see the use cases for LiDAR expand as the world is automating to solve an ever-increasing number of modern challenges, whether it's industrial companies delivering more efficiency or cities deploying technology for safer roads, Ouster's Digital LiDAR is increasingly the center of choice. With LiDAR adoption still in its infancy, we are just beginning to tap into our growth, and I see a tremendous opportunity still in front of us.

With that, I'd like to open the call for Q&A.

[Operator]

[Operator Instructions] Your first question comes from Kevin Cassidy with Rosenblatt Securities.

[Kevin Cassidy, analyst]

Congratulations on the great results. Yes, moving up to 40% gross margin is quite an accomplishment. I just want to understand some of the moving parts in doing that. Is it the unit volumes that are up and costs may be coming down with that? Or is it because you're selling more software and maybe you can give a ranking of which one affected the gross margins the most?

[Mark Weinswig, executive]

Yes. Thanks for the question, Kevin. We're very proud of the gross margin, definitely one of the highlights of really the past year. But over the past 18 months, we took significant actions. We moved more product to our contract manufacturer. We took cost out of the business. We shut down facilities.

And those actions and the revenue growth and the product mix shift have allowed us to really see a significant increase in our overall gross margins. We provided our long term framework of between 35% and 40% in terms of a growth margin target and we're, right now, knocking at the door of being able hit those levels.

[Kevin Cassidy, analyst]

Great. And maybe to understand the software strategy a little more. You're selling it as an attach feature now and getting an extra price, I would think. And with other maintenance contracts along with that, if you have a long term where you continually update the software for your customers?

[Charles Pacala, executive]

Yes. That's a great follow-on question on the -- and it really relates to the gross margins as well. The software strategy that we put in place of basically driving software attached sales through our solutions business is really starting to pay off. We had a record revenue quarter for software attached sales. That's a customer that's buying a combination of hardware and software from Ouster. And this is not an overnight success. We've been investing in Gemini and Blue City now for over 2 years and made major investments last year and integrating those 2 products after the merger and a unified software stack.

And we're seeing customers respond. So Blue City, we see customers now expanding from pilot phase into real deployments into municipalities that could impact the safety and improve congestion of the towns and cities that you and I live in. So we're really excited about that. That adoption is starting to show legs and drive actual revenue, significant revenue and expanding gross margins. About 1/3 of our revenue this quarter came from the smart infrastructure vertical. And again, we sell software solutions into that vertical specifically. And that's all just creating this great flywheel of success in that vertical and for our gross margin expansion.

[Operator]

Your next question comes from the line of Kevin Garrigan with Westpark Capital.

[Kevin Garrigan, analyst]

Let me echo my congrats on the progress. Angus, you noted some contracts that were pushed to the right at some of your customers. Kind of a 2-part question. Do you guys have agreements with customers that are noncancelable? And then what end markets do you see the pushouts in?

[Charles Pacala, executive]

Yes. So just to answer that. So we absolutely have contracts that are noncancelable with customers. That's the bookings -- the definition of a booking is a noncancelable PO or contract that we have in hand. And in last year, we had a great bookings year, book-to-bill ratio of 1.7x. So significant customers -- significant number of customers are under contract with Ouster, which gives us a lot of confidence in the long-term kind of view of the top customers of Ouster. And so overall, I mean, to the question of where are we seeing slowdown or expansion, I really want to step back and stress how positive the outlook is for Ouster's business across each one of our verticals.

All we see is growth in the future for Ouster. We have created a flywheel across 4 key industries. And each one of those industries is adopting more automation, more digital lighter sensors from Ouster and building stronger ties and more mature business models. To give some examples, Serve Robotics, we mentioned in the call, that's a customer we've been working with for over 5 years.

They've been at smaller pilot stage for a long time, and now they've made the leap to a 2,000 unit expansion of their business. That's a novel business model, last mile delivery starting in L.A. and 2,000 units is nothing to sniff at. That's bigger than Waymo's deployment in any city in the U.S. So we're seeing customers like that in novel domains like robotics expanding. But -- and we're also seeing customers moving out of pilot stage or development stage with some of our software solutions.

So Blue City, I mentioned municipalities now talking about tens or hundreds of intersections being deployed with the technology where we've been in the pilot stage across hundreds of different sites in the last couple of years. Same thing true for our Gemini solution. We now have customers that are using Gemini as a core part of their business, driving cost savings for logistics players, security -- providing security at sites.

So yes, I really want to stress, overall Ouster -- what we see is growth in our future. Obviously, we're guiding up for next quarter. And we're committed to the long-term model that we provided with 30% to 50% growth annually on a path of profitability.

[Kevin Garrigan, analyst]

And then as a follow-up, kind of going off of Kevin's software question. I mean, it looks like this quarter, you mentioned you had signed much larger customers kind of looking at your pipeline. Do you have or are any other large companies in the pipeline? And are any on the edge? And what can you kind of do to get them over the finish line?

[Charles Pacala, executive]

Yes. So the software attach sale is a key part of Ouster's strategy. We've outlined that at the beginning of the year, and it's really focused on the smart infrastructure vertical. And we have 2 products there. Blue City for traffic management and the Gemini as a crowd analytics -- a more generalized solution for crowd analytics, logistics and security.

And this is the first year that we really had a significant go-to-market strategy with a mature product. And already we're at a point where 1/3 of our revenue this quarter was software attach sales -- or excuse me, was from the smart infrastructure vertical and we had a record quarter for software attached sales in the quarter. And this is just the beginning. I really -- I think that there's potential for us to have the majority of our sales within the smart infrastructure vertical be software attached.

Again, these products have been out for, in many cases, under a year. And we're adding to these products all the time. So the difference with hardware and software is we're able to incorporate new features, address customer demand and drive value at a faster cadence with this customer base because it's software we can deliver over the air versus shipping new hardware and developing new hardware on a longer time frame. So I think there's big things to come here, and we're going to continue to give insights into how customers are adopting this as the year goes on.

[Operator]

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

[Richard Shannon, analyst]

I'm going to follow up on one that was asked earlier. I think there was different perspectives to the response. I just want to be more specific here. And Angus, you talked about some delays and pushouts you're seeing here, which is not a surprise given what we've heard from other companies that were reporting so far this season here.

Maybe you can characterize where you're seeing that by industry, by geography. And then maybe as a corollary or a follow-on to that market comments about what this might mean be for the fourth quarter. I didn't catch the specific language, but it made it sound like you're expecting kind of a flattish revenue in the fourth quarter versus the third. Just I just want to clarify what that means.

[Mark Weinswig, executive]

Yes. So Richard, I'll go first just because I want to make sure that I don't -- that any words that I said are not mischaracterized at all. So what my comments were is that we do anticipate steady sequential revenue growth for the remainder of the year. And as Angus mentioned, we are going to grow. We are continuing to grow. It's our focus to grow. We've got a very strong book of business. And you should expect that we are going to grow within the framework that we put together, which is the 30% to 50% annual revenue growth.

[Charles Pacala, executive]

Yes. And then on the question on push out by industry. The nature of having hundreds of customers and being a diversified business, is there really isn't a single industry where there is a trend of pushouts. We have a certain fraction of customers that always delay. That's the nature of adopting new complex technology. And there's nothing wrong with that if you've built a business that incorporates that reality and is resilient to it. And actually, I view that delay -- when you go and look at the customer, survey the customers that are delaying and again, it really is broad-based across our industries.

The common thread is that the delay is coming from technical development of their total solution. And that means software. That means software integration, validation. And so it really is an opportunity for Ouster to go and build more of those solutions across our verticals. And so we started in the smart infrastructure vertical, building total solutions. And as a result, we don't have delays of that nature for our software attached sales for the customers in that domain.

And so I think that there's an immense capacity to start building out solutions that address these challenging technical problems, software and hardware working in concert, complex AI technology that's safety-critical in industrial or robotics or automotive and building that software and expanding our revenue base as a result and also speeding time to market for the tail of customers that's struggling with that kind of technology. So hopefully, that gives you some color. This is really not an industry-by-industry trend at all. It's the nature of having hundreds of customers and having a diversified business.

[Richard Shannon, analyst]

Okay. And I apologize, I may have misinterpreted your initial comments, but you're not attributing these pushouts in any way to any macroeconomic activity but delays and complex technical developments. Is that accurate, Angus?

[Charles Pacala, executive]

There will always be some level of macroeconomics that plays with some of our customers. But Ouster is expecting to grow. We guided up. We're expecting to have growth through the end of the year and continue to grow in line with our long-term model. So I don't want you to have the wrong takeaway here. We see nothing but up and to the right for the revenue at Ouster.

[Richard Shannon, analyst]

Okay. Great. My second question here, I guess, a follow-up on the software topic in response to the last question you were talking about within the smart infrastructure space, seeing a majority of your hardware sales being software attached. It sounded like a forward-looking comment as opposed to something you're seeing here now or expecting in the near future. But maybe you can expand on this and help us maybe think about maybe just within the smart infrastructure space, is there visibility into 10%, 25% of that vertical being software driven at some point?

[Charles Pacala, executive]

Yes. I fumbled my words on that answer. So just to clarify, we did about 1/3 of our revenue from the smart infrastructure vertical this quarter. And we had a record quarter for software attached revenue. Now the fact is we really only sell smart infrastructure software. So we had a strong quarter in smart infrastructure from a software attached sales basis and just from an overall basis as a mix of the industry.

And if you go back and reread some of my comments from late last year, early this year, I -- software attach sales were under 20% of the revenue for a couple of quarters there. That really set the expectation that we -- there's the capacity for us to outgrow or -- yes, out grow faster in the smart infrastructure vertical than others. Why? It's for 2 reasons. One is because we're building these total solutions in-house. And like I said, that allows you to sidestep some of the tricky issues with customer integrations. The second is because these verticals are immense. IPS traffic solutions industry is billions of dollars globally. 150,000 signalized intersections in the United States alone. Likewise, the security industry, security solutions, the hardware video management solutions, tens of billions of dollars, hundreds of millions of cameras are sold every year into that vertical.

So we're entering major markets with turnkey software, hardware solutions. So I think that smart infrastructure as a vertical has -- still has the capacity to outgrow our other verticals or become a larger share over time. And I do think that at least an internal goal is for the majority of those sales to be software attached just because of the nature of the products that we're -- the software products that we have. Gemini and Blue City, I see is encompassing the vast or a majority of use cases in the smart infrastructure vertical.

[Operator]

Your next question comes from the line of Itay Michaeli with Citi.

[Itay Michaeli, analyst]

Just 2 questions. First, on gross margin. With 40% non-GAAP this quarter, and I think, Angus, you're mentioning the opportunity ahead the increase of software-attached sales, what would prevent upside over time to the 35% to 40% range you provided? And if you do see some upside, could there be an opportunity for the company to even invest some of that back into price to drive volume? And just secondly, maybe for Mark. I was hoping you could expand a bit more on the decision to pay down the revolver in Q3 and kind of what went behind that decision?

[Mark Weinswig, executive]

Thanks for the questions, Itay. So just moving first to the gross margin side. We're very, very happy by the performance this quarter. We did have a couple of tailwinds that impacted us. We saw strong revenue growth. We had a favorable product mix. We saw lower cost. We've guided or we've noted that we have this long-term framework of 35% to 40%. We have not made any changes to that.

As we see more of the business move to potentially higher-margin verticals, we may update that in the future. At this point, we're sticking with kind of that framework that we've laid out. And going back to your other point, which is that there might be opportunities to look at opportunities from the fact that we may have higher margins in certain verticals and other verticals. So it's something that we have discussed and it's something that we are looking at.

[Charles Pacala, executive]

Yes, the question is being kind of on investing some of that margin back into volume with certain customers. I think that that's an apt observation in question. There's certainly a set of customers that we could invest in per se if we see a major volume opportunity. And I think that that's -- that's built into to some degree, our long-term model.

I do want to make it clear, we're committed to the 35% to 40% margins. Now where we end up in that regime could be determined by how much we are investing in a particular vertical that might need a different type of pricing in order to reach an order of magnitude more scale. We're certainly in a position with the balance sheet we have and the progress we've made to move aggressively and -- in a couple of directions, if that makes sense, for the business and for the long term profitability of the business.

[Mark Weinswig, executive]

And then moving over to the balance sheet and the decision to pay down the debt that we had outstanding, the $45 million of debt. Part of the business, which might not be as flashy, but -- which I enjoy, is really looking at the balance sheet, focusing on efficiency working capital management.

Over the last year, 1.5 years, we've lowered our DSOs by 60%. We've reduced our inventory by $10 million, increasing our inventory turns 2x, significantly reduce the cash conversion cycle. So every one of our working capital metrics, just looking very, very positive. That, along with the fact that we had a very strong ending cash amount of about $186 million as of the end of June, it gave us the confidence to be able to pay down that debt so that we have what we believe is the most resilient balance sheet of anybody in the industry. And we think that's a competitive advantage.

[Operator]

And your next question comes from the line of Kevin Cassidy with Rosenblatt Securities.

[Kevin Cassidy, analyst]

The L4 coming out. When it came out with REV7, it was a real game changer and you're still benefiting from that. What do you think with L4, are you addressing higher end markets or different markets with that? Or do you expect this to be more or less a cannibalization of the current product?

[Charles Pacala, executive]

Thanks for the question. I was waiting for a product question. So still the core of Ouster is our digital LiDAR technology and our road map based around silicon chips. So -- and really, the promise here is that Ouster's projects -- products are going to continue to become -- to be exponentially better based on the Moore's Law improvement and the underlying semiconductor technologies. And we've seen that across multiple generations of chip most recently with the L3 chip doubling the range of all of our products just by swapping out that silicon.

So our customers can expect to benefit from continued exponential improvement in our products. L4 is going to deliver on that promise again. And -- but it's not just about producing higher end products. We can also simultaneously reduce cost in the system by absorbing even more complexity of the system onto the silicon chips. And that applies to the L4, but also to the Chronos chip, which notably has taped out and will be coming back for incorporation into the DF sensors. So the promise of digital LiDAR and the silicon-based road map that Ouster has is continuing with both the L4 and the Chronos. And customers will benefit immensely from improvements in performance features and affordability as a result of that investment.

[Operator]

There are no further questions at this time, so I will hand it back over to Mr. Pacala for closing remarks.

[Charles Pacala, executive]

Great. Well, I want to thank the Ouster team for another great quarter and thank everyone for joining the call. And I hope everyone has a great evening. Cheers.

[Operator]

Thank you. This does conclude today's conference call. You may now disconnect.