Ouster Inc

NYSE:OUST

Earnings Call Transcript 2024-Q3

[Operator]

Hello and welcome to Ouster's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] The call today is being recorded and a playback 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, Vice President of Strategic Financial and Treasurer. Please go ahead.

[Chen Geng, executive]

Good afternoon, everyone. Thank you for joining us for our third 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 third quarter 2024 results. An investor presentation was published and is available on the Investor Relations section of Ouster's website.

Today's earnings call and press release reflect management's views as of today only and will include statements related to our competitive position, anticipated industry trends, our business and strategic priorities, our financial outlook and our revenue guidance for the fourth quarter of 2024, all of which constitute forward-looking statements under the federal security laws. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business.

For a discussion of the material risks and other important factors that could impact our actual results, please refer to the company's SEC filings and today's press release, both of which can be found on our Investor Relations website.

Any forward-looking statements that we make on this call are based on assumptions as of today and, other than as may be required by law, we undertake no obligation to update these statements as a result of new information or future events. Information discussed on this call concerning Ouster's industry, competitive position and the markets in which it operates is based on information from independent industry and research organizations, other third-party sources and management's estimates. These estimates 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. These estimates are based on reasonable assumptions and computations made upon reviewing such data and Ouster's experience and knowledge of such industry and markets. By definition, assumptions are subject to uncertainty and risk, 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, 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, an overview of the market and an update on our strategic priorities. Mark will cover our financial results in more detail before I close with some final thoughts.

Ouster reported strong third quarter results with record revenue and gross margin, reinforcing our position as a leader in the lidar industry. We delivered $28 million in revenue, representing the seventh straight quarter we have met or exceeded our guidance.

We built Ouster with a focus on operational efficiency, technology leadership and product differentiation and this is reflected in record GAAP gross margin of 38% in the third quarter. We have also built one of the industry's most resilient balance sheets. After repaying all outstanding balances on our revolving credit line, we ended the quarter with $154 million of cash.

Lidar adoption is expanding and I'm excited to see more customers move into production. Many of our largest wins during the third quarter were production stage deals with robotics customers. These customers are accelerating and scaling deployment of autonomous solutions from the golf course to protecting our troops and solving real-world challenges with increased precision, efficiency and safety.

During the quarter, we received the largest purchase order in Ouster's history with a leading global technology company. This customer is upgrading to REV7 for its autonomous mobile robots, enabling them to operate flexibly in a dynamic environment. Powered by REV7, these robots alleviate the need for employees to move carts weighing almost 1,000 pounds, helping this customer with its goal to improve workplace productivity while reducing stress and injury. We also continued to build momentum in our software business, where we are engaged with municipalities across the country to solve critical safety challenges.

October was National Pedestrian Safety Month. In 2023, more than 7,000 pedestrians were killed by drivers, with nearly 80% of accidents occurring at night. Ouster's BlueCity solution is the first traffic technology capable of detecting pedestrians reliably in all lighting and weather conditions.

In Florida, BlueCity detects pedestrians and extends crosswalk timers to allow them to cross safely. In Nashville, BlueCity activates beacon flashes when pedestrians are on the street, alerting drivers of their presence, especially crucial in low lighting conditions.

With lidar, our customers are overcoming many of the shortcomings of traditional traffic control solutions such as range, accuracy, cost and low light performance. BlueCity provides detailed safety and conflict analytics, essential data for cities to improve road safety and achieve Vision Zero goals. Ouster is making the physical world safer with BlueCity.

Turning to our strategic business priorities for 2024. Our first priority is to increase software sales and grow our installed base. In the third quarter, our BlueCity traffic management solution successfully passed the requirements of NEMA TS2 as a detection system for traffic actuation and is the first NEMA TS2 certified solution with Buy America certified lidar. During the quarter, we integrated our Ouster Gemini digital lidar perception solution with Genetec Security Center. This enables customers to fuse lidar and video surveillance into a single interface for seamless security operations.

We also continued to increase installations of Ouster Gemini. In smart infrastructure, a global technology company is utilizing Ouster Gemini to improve safety and operational efficiency at their distribution hubs. In addition to perimeter security, our solution is used to improve vehicle queuing and wait times when loading and unloading trucks. Gemini is deployed at roughly 5% of their global footprint and this customer estimates current savings of over $1 million per week.

Turning to our digital lidar hardware road map. During the third quarter, we turned on our first L4 powered OS sensor prototypes, which generated rich point clouds, a major milestone in our hardware road map. Development on our next-generation Chronos chip also remains on track. Both L4 and Chronos are expected to unlock new verticals while significantly enhancing the performance, reliability and manufacturability of the Ouster product family.

Finally, we continue to execute on our path to profitability. Since the first quarter of 2023, we have expanded our gross margin from negative 2% to 38% and have reached our target of 35% to 40%. We are continuing to improve the execution of the business and look forward to delivering on the other 2 parts of our long-term framework: one, achieving 30% to 50% annual revenue growth; and two, maintaining a low-cost structure.

In summary, our execution was strong in the third quarter and we added a number of features that further strengthened our product portfolio.

I'll now turn the call over to our CFO, Mark Weinswig, to provide more context on our financial results for the third quarter.

[Mark Weinswig, executive]

Thank you, Angus and good afternoon, everyone. In the third quarter, we shipped approximately 3,900 sensors and recognized a record $28 million in revenue. This represents our seventh straight quarter of revenue growth. The robotics vertical was the largest contributor to revenue with large shipments from mapping and last mile delivery customers. Smart infrastructure was the second largest contributor to revenue, driven by demand for perimeter security.

Third quarter gross margin improved to 38% on a GAAP basis and 45% on a non-GAAP basis, both record highs for Ouster. The gross margin improvement was primarily due to favorable product and customer mix as adoption of our REV7 sensors increases. In Q3, our gross margin reached our long-term framework target of 35% to 40%. Going forward, we continue to view this range as an appropriate annual gross margin target for our business. On a quarter-to-quarter basis, we may see a degree of variability in our margins due to customer shipment schedules, product mix and other factors.

Over the past 2 years, we have made substantial progress in our operations and we will continue to pursue additional opportunities to improve our performance.

GAAP operating expenses of $38 million in the third quarter were down 1% over the prior year and up 11% sequentially. The sequential increase was primarily driven by higher litigation expenses. Excluding litigation expenses of $4 million, operating expenses were down 4% year-over-year and up 4% sequentially. We expect operating expenses to fluctuate on a quarterly basis, largely due to the timing of R&D project spending and litigation costs.

Moving to the balance sheet. Our balance sheet is among the strongest in the industry with cash, cash equivalents, restricted cash and short-term investments of $154 million at September 30. During the third quarter, we received approximately $14 million of proceeds from our ATM and utilized $44 million of cash to fully repay and close our revolving credit line, reducing our interest expense by approximately $3 million per year.

Moving to guidance. For the fourth quarter, we expect to achieve between $29 million and $31 million of revenue.

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

[Charles Pacala, executive]

Thanks, Mark. The Ouster team delivered a strong third quarter, achieving sequential revenue growth and margin expansion for the sixth quarter in a row. Our robotics segment had the best quarter in its history and software attached sales set a new high. Development of our next-gen L4 and Chronos chips is progressing well and we strengthened our solution offerings with BlueCity's NEMA TS2 certification and Ouster Gemini's Genetec Security integration.

Ouster was founded on the premise that lidar will be universal. I am excited to see this thesis play out as each quarter, more of our customers are ramping production for different use cases across the world. Since our inception, we have shipped over 100,000 sensors and are a clear leader in lidar solutions.

Scaling production does not happen overnight nor does developing the trusted customer relationships necessary to solve their groundbreaking challenges. Over time, we have accumulated an extraordinary amount of knowledge about designing a best-in-class product, building a strong supply chain, setting up an efficient manufacturing process, providing top-tier customer support and maintaining a robust financial foundation. These insights come through the real-world manufacturing and shipment of products, not prototypes.

With these learnings, we have become a trusted supplier to many of the largest companies in the world today. I look forward to helping our customers solve increasingly complex problems as a growing number of industries join the autonomous revolution.

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

[Operator]

[Operator Instructions] Your first question comes from the line of Kevin Garrigan (sic) [ Cassidy ] with Rosenblatt Securities.

[Kevin Cassidy, analyst]

Let me echo or let me congratulate you guys on all the progress. So, it looks like your sensor shipments were down sequentially for -- I think it was the second straight quarter. But you were able to hit your revenue guidance. So can you just talk about the puts and takes there? Was it just kind of the record high software sales that helped?

And I think ASPs kind of hit a high also. So can we just expect these ASPs to continue to grow, especially as you add in software? Or is this mainly just kind of shipping better product mix and they revert back to normal, if you will?

[Charles Pacala, executive]

Yes. Thanks for the question, Kevin. So yes, I mean, you really nailed it with the favorable product mix as customers have adopted REV7. I mean there's really been terrific feedback universally as customers have gotten their hands on that product. And so we have just really significant adoption of it and that's helped our ASPs first.

But then the software has definitely started to come into play and that's been -- a huge high point in the last quarter was just the record software attached sales. This is -- we've gotten a lot of new customers on board with both BlueCity and Gemini in the last 2 quarters. And I was able to get on to calls with a number of them and just get direct customer feedback and it's been terrific. Really, really exceptional feedback on that product. And yes, that is also helping kind of just give us this expansion in margin and affects the dynamics of the unit counts versus the overall revenue growth and margins.

[Kevin Cassidy, analyst]

Okay. Perfect. And then as a follow-up, Angus, again you guys noted robotics and smart infrastructure where you saw the largest deals during this quarter. Can you just kind of talk about how big these contracts are compared to, let's say, a year ago and how they've grown? I mean, are customers kind of increasing orders as they look to add in automation? Any kind of color on these larger contracts would be helpful.

[Charles Pacala, executive]

Yes, absolutely. So robotics and smart infrastructure are 2 very different markets, obviously. Robotics is mobile industrial robots, things that are moving around parts and packages and warehouses or manufacturing floors. And there, I mean, we're really just at the tip of the iceberg here.

Like, we've barely -- we've barely scratched the surface on what robotic deployments at our customers look like. And yet we are getting record sales done from our robotics customers in the last quarter. So we're definitely seeing that customer base growing.

There are hundreds of thousands, if not millions, of robotics platforms being deployed into the logistics supply chain even at present. And now those devices are becoming more intelligent, automated and flexible. And Ouster is providing a key component, the eyes of those vehicles to allow them to be more flexible and capable than ever before.

So, yes, definitely have seen strong growth there, repeated orders from recurring customers and expansion of our customer base as well. But there's a lot more to come, like I said.

And then on smart infrastructure, a little bit different. There we're seeing the strength come from the turnkey solutions that we're providing into the space, both Gemini for security and yard management and things like that and then BlueCity for the traffic and ITS space. And there, again, we're just scratching the surface.

We introduced these products last year. They're less than 2 years old at this point. And these are all new markets for lidar sensors. Mature markets when it comes to kind of camera saturation and kind of legacy deployments. But now we're bringing something totally new, real-time 3D digital twins into these new domains.

So definitely seeing strong growth there. Again, it was a record quarter for software attached sales, but there's a lot more to come and a lot of ways for Ouster to push our product road map now both hardware and software to further accelerate that market.

[Operator]

[Operator Instructions] At this time, there are no further questions. I will now turn the call back over to your host for closing remarks.

[Charles Pacala, executive]

Great. Well, Ouster has built a diversified and robust business model. We're working on the most exciting set of hardware and software products in the company's history. And I really see nothing but growth on Ouster's path to profitability and our long-term financial model. So I want to thank the entire Ouster team for putting together another fantastic quarter and thank you all for joining the call. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.