AutoStore Holdings Ltd
OSE:AUTO
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Earnings Call Analysis
Q3-2023 Analysis
AutoStore Holdings Ltd
The company reported revenues of $145 million, marking a slight decrease of 2% from the third quarter of the previous year. However, this dip was accompanied by a promising statistic: approximately two-thirds of this quarter's revenue stemmed from new customers. While the overall revenue guidance was revised down to $640 million, reflecting cautious customer behavior and postponed projects, the backlog remains robust with no customer churn or order cancellations noted. In particular, the U.S. region showcased an impressive 85% year-over-year revenue growth, signaling positive market development and potential for leading a global economic recovery.
The company's gross profit for the quarter rose to $99 million, up from $80 million in the same quarter of the previous year, signifying a notable margin improvement of 10 percentage points. This margin increase to 68% was attributed to strategic pricing actions and reduced costs for key components. Adjusted EBITDA also saw a strong performance, reaching $69 million, evidencing high margins and the potential for operating leverage as revenues grow.
The company boasts a secure backlog of $293 million for 2024, with a reported 99% conversion rate, providing a clear visibility on future revenues. Despite some order delays due to customers exerting more caution with their capital expenditures, particularly in the face of macroeconomic uncertainties, the backlog remains strong. The majority of recent order intake is slated for delivery in 2024 with significantly reduced lead times from previous years, offering flexibility and responsiveness to customer needs.
The company continues to utilize its partner network for market access and has seen the fruits of its efforts as business development managers contributed to roughly 25% of revenues. Additionally, a price increase of 3% has been implemented, with deadlines for order placement set before the end of November to avoid the increase. This adjustment was strategically planned and is not expected to significantly affect order intake, suggesting a balance between competitiveness and profitability.
The standard segment of the business has remained resilient, contributing substantially to the quarter's outcome. The company observes more variability in high throughput projects due to their larger scale. E-commerce continues to be a promising area with active discussions among major retailers; the overall sentiment is positive with a view that automation investment timing is the current challenge, not interest or relevance.
The company operates in a still-emerging market of warehouse automation, with only approximately 20% of global warehouses currently automated. This untapped potential, coupled with the company's leading technology and efficient go-to-market strategy, forms the basis of a confident outlook for continued strong, profitable growth.
Although the company has explored an OpEx-based pay-per-pick model, adoption has remained low. This outcome reinforces the attractiveness of the company's current offerings and the significant return on investment they provide customers, with alternative models seeming less compelling in comparison.
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Good morning, and welcome to AutoStore Third Quarter 2023 Presentation. My name is Jo Christian Lund-Steigedal. I am glad to be here, stepping in an Investor Relation officer at AutoStore while Hiva Flaskjer is on maternity leave. Today's presentation is hosted from Oslo in Norway, and I'm joined by 2 members of our executive team, Mats Hovland Vikse, AutoStore's CEO; and Paul Harrison, the Chief Financial Officer.
Moving on to the disclaimer. As usual, we would like to remind you all of the disclaimer with regards to our forward-looking statements, which you can read here at your convenience. Looking at the agenda, we will first have Mats and Paul providing you with an update on the business and discuss the third quarter results in particular. As a reminder, all our financials are stated in U.S. dollars, and the management's discussion will then be followed by a Q&A session with participants joining via the earnings call on phone and on the webcast. For webcast participants, please submit your questions at any time in the webcast player. We will then conclude the session with some final remarks from Mats.
And with that, Mats, please take the floor.
Thank you, Jo Christian. So looking at the highlights of this quarter. As you can see on this page, the team has delivered yet another solid quarter, especially bearing in mind the macro landscape we're in. On the financial highlights, in the third quarter of 2023, we achieved revenue of $145 million compared to $147 million in Q3 '22. As we communicated in August, revenue in this quarter was sequentially slightly lower than Q2 due to the project nature of our business and given customer project delivery schedules. At the same time, we continue to deliver a very strong gross margin of 68%, which is 14 percentage points higher than Q3 of '22. For the last 3 quarters, gross margin has been at a high but also sustainable level. And this here is a result of active actions like price increases and good cost control.
Correspondingly, we delivered a strong EBITDA margin of 47%, which means that we continue to be around historical and industry-leading margins. On the order intake side, we're happy to report sequential growth of 11% to $152 million, taking our backlog to $464 million. The order intake was roughly evenly split between new and existing customers, and the vast majority was related to brownfield projects, meaning the automation of existing warehouses. As we've noted before, in this challenging macro environment, we have seen certain project deliveries being shifted from 2023 to '24. Consequently, we are updating our '23 revenue guidance to around $640 million.
On the operational highlights, in the quarter, we released our fast-charging new R5 Pro robot. It's longer battery capacity offers significant efficiency gains for our customers and further improves our position in the high throughput segment of the market. In this quarter, we also introduced a new price increase of net 3%, whereby we removed the grid surcharge completely and replace it with a fixed general price increase. And finally, on the highlights. I'm extremely happy to introduce our new CFO, Paul Harrison. When we got to know Paul, his background and experience from global and rapidly growing businesses really stood out, and I'm super excited about partnering with Paul in this next chapter of AutoStore's growth journey.
So moving on, as you'll see on this page, we have a unique, well-established and powerful global platform for further growth. And remember that only around 20% of the market for warehouse automation is currently penetrated. We are strongly positioned to grow for the foreseeable future and as we've demonstrated, our financial model is extremely powerful with high gross margins, high operating margins and strong cash flow conversion. So let me highlight some of the numbers.
To date, we've sold more than 1,350 systems and over 61,000 robots in 52 countries. This is a scale and reach unlike any other player in the industry, spanning all key geographies, virtually all end markets and crossing all system types. We have an efficient go-to-market model where we sell through a network of now 23 distribution partners. And together with them, we have built a scaled global platform with now more than 950 unique end customers.
And this area has doubled over the last few years, representing a fantastic platform to grow from. Around 45% of our sales are to existing customers seeking to expand their AutoStore estate either through extensions of existing sites or through new installations. And this then converts into strong financial KPIs. We have high growth with 50% CAGR since 2017, around 80% annual growth over the last 2 years and 10% in a declining market this year, meaning we keep gaining market shares. And not only high revenue growth, we have done this with industry-leading profitability. The last couple of quarters, our EBITDA margin levels has been around 50%, and we also have high cash conversion of 79% in Q3.
So let's move on to order intake and backlog. And it is fair to say that in the market environment we're in, it's affecting the timing of investments among our customers. And given this backdrop, it is good to report a sequential growth in order intake of 11%. The market activity and interest in our system remains very high, but we continue to see some customers deferring commitments. Looking geographically, we see North America being somewhat stronger than Europe and APAC. At the end of Q3, our order backlog was $464 million of which $293 million relates to 2024. And the quality of the backlog remains high, and we have not experienced any cancellations of orders to date. Historically, we have seen a 99% conversion rate from order backlog to revenue.
We continuously innovate on the hardware and software side to further improve our technology, and we're not standing still. Our most recent product launch was the R5 Pro. This is the latest version of our field-proven robot featuring significantly faster charging capabilities and better battery capacity. This new robot is designed to address specific demands of large-scale e-commerce operations, enable better space usage, higher performance and reduce total ownership costs for companies running multi-shift operations at scale. In total, we see efficiency gains of up to 18% in these type of applications, which just further strengthens our position in the high throughput segment of the market.
So let's now reflect in our customer portfolio, which today count roughly 950 unique customers globally. We've included a small selection of them here on this page. And the key message looking at this picture is that we are very well diversified across a wide range of end markets. We support e-commerce and omnichannel fulfillment across different end markets. And in addition, we serve end markets like industrials, automotive, health care and even libraries, as we say. As long as your product fits inside our bin, we offer a great solution. And clearly, at this time, we know you're interested in learning about their exposure to consumer and retail.
And even though this part of the market has been on the soft side the last few quarters, we regard a solid footprint, not only among the largest online retailers of the world, but also many of the world's most innovative companies as a great strength, given the long-term attractiveness of the sector. Our own calculations indicate that approximately half of our business is exposed to e-commerce omnichannel. And one of the logos on this page is DHL, a customer we've supported for many years. This week, we announced a deeper partnership with them, which is a great endorsement from a world-leading logistics player. So let's have Markus Voss, the CIO and COO of DHL Supply chain, tell us more about it.
I'm delighted to celebrate an enlarged an enriched partnership with AutoStore today. We have more than 600,000 employees working for us, operating in 220 countries, and we are offering a comprehensive portfolio of logistics solutions for our customers. We're also leading in terms of innovation, automation and scaling digital solutions. And digitalization indeed mitigates a lot of the things that keep us and our customers awake. AutoStore, providing a standardized and modular technology; DHL, providing the scalability and adaptability, and with our partnership, we'll be able to cut the implementation time line by half.
Since 2012, we have already 12 of these sites operation across the globe. And shortly, we'll have more than 1,000 of these robots performing work for us. We serve blue chip companies as well as rising startups. And what they all like is the high throughput for e-com, for retail, and it is well suited to the spare parts industry. We've seen great improvements like 5x higher productivity when we have implemented these solutions. We have seen throughputs of 500 units per hour, increased efficiency, accuracy and also visibility. And our colleagues love the solution and the economics of it. The user friendliness. And not only that, they're also saving 12 kilometers of walking distances per day, and that is quite something. So I'm very excited see many, many more of these solutions implementing across the globe for our customers. Thank you.
This is great to see, and we're looking forward to many years of partnership with DHL, supporting their growth and digitalization journey. So let me, with that, hand the word over to Paul to take us through the financials of this quarter.
Thank you, Mats. It's great to be here with you today and to take up my role as CFO of AutoStore. This may only be my second week, and I've still a lot to learn about the business. But these first few days have underlined my strong conviction when I accepted this role that I have joined a fantastic business, offering strong secular growth and great operating leverage. I'm also delighted to join a really dedicated and talented and ambitious team. With that said, let's look at the financial highlights on the next slide.
As Mats has already stated, we delivered another solid quarter in a challenging market. We're reporting revenue of $145 million, a 68% gross margin and a 47% adjusted EBITDA margin. It's particularly important in this quarter to reflect on the leverage of AutoStore. Despite the revenue challenges in this environment that Mats has discussed, EBITDA remains strong and cash conversion remains high. As I said, this is indeed a robust and attractive financial model. Additionally, as Mats has talked about, our order intake has returned to sequential growth of 11% in quarter 3.
With a clearer line of sight to the end of the financial year, you will see that we have revised our revenue guidance to $640 million. This reflects the caution we've observed with certain customers postponing projects into 2024. Despite these postponements, we have seen no order cancellations nor any customer churn.
So on the next slide, I'll go into more details on the key financials. As expected and indeed as previously communicated, Q3 revenues were lower than in the second quarter. Revenues of $145 million were 2% lower than Q3 last year. I find it really interesting to see that approximately 2/3 of revenue this quarter came from new customers. Now that makes sense in what is still an early stage market. And of course, it provides great potential for further business from this growing installed base over the coming years.
The right-hand side of the slide shows the geographical split. We see here a sequential decline in revenue in the EMEA region, as Mats mentioned, corresponding with our comments earlier this year relating to a relatively soft order intake in this region. As the chart clearly shows the U.S. is showing good development with 85% year-over-year revenue growth, which resonates well with the macro picture and the potential for the U.S. to lead the global economic recovery. Our third region, APAC, is stable. So if we move on to the next slide, from revenues to gross profit and adjusted EBITDA. On the left-hand side of this slide, you'll see that Q3 gross profit ended up at $99 million, up from $80 million in the same quarter in 2022. This corresponds to a gross margin of 68% in the third quarter compared to 54% in the third quarter of 2022.
In line with our comments in previous quarters, our gross margin has gradually improved to a sustainable and high level. This has been driven by the successful execution of our strategic pricing actions and reduced grid and robot costs. Adjusted EBITDA on the right-hand side of this slide also remains strong. Adjusted EBITDA was $99 million -- was $69 million in the third quarter, representing an EBITDA margin of 47%. This represents a margin improvement of 10 percentage points against the corresponding period last year. These strong financials are enabled by our highly competitive product set, long-term focus on standardization and an effective partner base go-to-market model.
Our lean business model is designed to enable high margins and operating leverage as revenue grows. All in all, we are delivering growth in order intake and clearly continuing to capture market share. Market dynamics remain intact, and our competitive position is very strong, and we remain optimistic about the future.
So with that, I'd like to pass back to Jo Christian, who is now going to lead the Q&A.
Thank you very much, Paul and Mats. For those who are on the webcast, please submit questions through the webcast player, continue to do so. But for now, we'll open up for the questions from the phone lines. So please, operator, I'll now hand it over to you to moderate the questions from the phone.
[Operator Instructions]
The first question will be from the line of Luke Holbrook from Morgan Stanley.
A couple of questions. The first one, I just wanted to get an understanding of how your order intake trended through Q3, month from month, month-to-month and into the November period now? And secondly, you're increasing your price by 3% in December. Has this resulted in any pull forward you believe of order intake in Q3 or the start 0f Q4 and what has customer reaction been to that price increase?
So on the first one, we saw a gradual growth throughout Q3 on the order intake level. And start of this quarter has remained similar as we've seen in the last few quarters. When it comes to the price increase, obviously, for the last couple of years and particularly in 2021, we saw big pull-in of orders. And I know that there is activity out there trying to get orders in before the price increase comes into effect. But of course, a net 3% is not at the same high level as we've seen in previous years.
Understood. And just from the postponement into next year, can customers then later cancel those orders? Or when they postpone them, are they effectively committing to that order backlog?
So historically, we have a 99% conversion from order backlog into revenue. There are cancellation clauses in the contracts, et cetera. But historically, we've seen that, that backlog has always converted, and we remain committed together with our end customers.
Next question will be from the line of Eirik Rafdal from Carnegie.
On the sequential step-up in orders from Q2, are you kind of confident that Q2 was a trough in terms of orders? And also, what sort of visibility do you have on final investment decisions among your end customers now in the short term both leading up to Christmas, but also for early next year.
So the leading indicators in the business remain very strong. We see a high activity level and the amount of offers that has been issued across our network is at all times high. Of course, conversion remains a challenge in this tough macro environment. But as I said, this quarter has started similarly as previous quarters. But all in all, the amount of activity in the market and the projects we're working on, remains strong. And of course, we're staying close to our customers, together with our partners on all of those opportunities.
And just 1 final question for me. Your underlying OpEx base is essentially flat from Q4 2022 and until Q3 '23. When should we expect that to start to kind of ramp investments again on the OpEx level?
Well, over the course of this year, we've obviously added talent to the business, and you should expect to see a small annualization effect of that on that operating cost base over time. But I mean, stepping back, fundamentally, the EBITDA margin, which is what's important here is, as we believe, as we said, is sustainable.
The next question will be from the line of Lucas Ferhani from Jefferies.
I just wanted to confirm on the new guidance. Is the main driver for those delays into 2024 also simply the weaker demand or weaker conversion than what you expected before?
I'll take that. The driver is those deferments into 2024.
The next question will be from the line of Toby Ogg from JPMorgan.
Welcome, Paul. I know it's only been a short period of time, Paul, since you started, but what have been some of your key observations on the business? Any kind of low-hanging fruit or way things that are done that you think could represent some opportunities for improvement? And then just secondly, again, Paul, just on your priorities, how should we be thinking about what some of your early priorities are likely to be?
Well, thank you. It is my second week, so accept please these observations with the appropriate caution. But listen, I think I'm lucky to have joined a fantastic business. I'm really struck by the comment that Mats shared with you in his presentation, which is, this is still an underpenetrated market. So I fundamentally believe good as the past has been with the business, the best is still to come. I mentioned in my words a little earlier that this opportunity over time to drive further business from our existing installed base is a phenomenal opportunity. And of course, the business remains a highly innovative business, as Mats has talked about.
The team, I should say, I'm delighted to become part of the team. It's a really talented, humble, but very ambitious team for the business. So these are the impressions I had when I accepted the offer to join the business and nothing has changed in that. I'm very excited about it. My early priority is humbly -- my early priorities are to learn this business to get around, to build the partnership with Mats so that I can be more than the person that counts the numbers, but somebody that can truly partner with Mats and bring some fresh challenge based on my past experience of the business. So very excited to be here, and thank you for your question.
Perfect. And just 1 follow-up actually. Just around the visibility you have at this point in the year. Obviously, you've got a backlog of $293 million already for 2024 could you perhaps just give us a sense, either Paul or Mats, for how you're thinking about the level of visibility you have into 2024 on the revenue side at this point and how that visibility looks versus sort of the normal visibility that you would typically have at this point in the year historically?
So listen, I'll go first. This is obviously the Q3 announcement. So we're not updating at this stage on 2024. Our comments on 2024 will be informed by the close to quarter 4 of 2023. And of course, internally, as you might expect at this time, we have our own budget exercise. So I'm certainly going to hold off on any comments on '24 until we close '23.
The next question will be from the line of [ Emilie Engen from DNB. ]
First, I was just wondering if you could share some of the nature of the project delays that you are experiencing? And also, if you can say something about the development of the cancellations you've seen over time, is there any differences from kind of this year and to the historical levels that you are referring to?
Thank you, again. I'll take the question. I think the nature of the delays relates principally to customers exercising stronger control on CapEx. What I mean by that is that CapEx type decisions, which, of course, effect AutoStore going all the way up to Boards of Director levels, and that's putting delay into the system and caution given the macro backdrop. But it is important to say that we have not seen any cancellations. So that backlog number, as Mats referred to it earlier, with its 99% conversion remains a very robust backlog.
And there is also, of course, being exposed to projects and project execution, we've seen practically things like building construction delays, approval delays, delays on other adjacent equipment going around, going around the AutoStore, which is typical things that we've also seen historically within our backlog.
And any comment on the cancellation versus the historical level last year?
We have not seen any cancellations, which is consistent with how it's been in the history.
And my second question is, on LinkedIn, you have several sales and sales-related positions. Are there any changes to kind of your go-to-market strategy or how you work together with partners?
Our go-to-market strategy remains the same. Through the partner network, we're gaining unique market access and have very strong capacity globally. For the past few years, we've complemented that partner network with our own business development managers. And that has been a very good investment for us where we are developing projects and opportunities that we then hand over to the partners.
And obviously, growing from zero, we're seeing that this year, both business development managers represent roughly 25% of our revenues. And as we have said, we will continue to invest in this business targeted particularly around sales and R&D as this will help us realize the strong growth prospects of this business.
Perfect. And just the last, if I may, there have been some chatter in the industry about AutoStore solutions being for sale in the secondary market. Is this something that you are seeing as well?
We have not seen AutoStore systems in the secondhand market.
The next question will be from The line of Tim Lee.
This is Tim from Barclays. So first of all, can I just follow up a little bit about the past delays as you commented, the customers are exercising stronger control on CapEx. So are you seeing customers are all willing to go towards the OpEx model. That means like the pay-per-pick model, are you seeing more interest from the end customers on this kind of new project models? And secondly, regarding the previous news about Amazon is using your system, right, the fulfillment center at Long Island, I'm not sure whether you can comment a little bit on this about the project details or like any further conversation, cooperations with Amazon in the future?
So on the OpEx model, the pay-per-pick model that we've had, we've had multiple conversations, but we still see relative low adoption. We've sold it to a few clients, but adoption overall is still quite low, which is also natural if you think about it, given the strong returns profile of investing in an AutoStore system. When it comes to Amazon, we can confirm that we've installed a project on Long Island. And now we're fully focused on delivering value for our customer on that side.
As there are no more questions in this call, I'll hand it back to the speakers for any written questions online.
Thank you so much for the questions from the phone lines. So we have a few questions also from the webcast. So let's go down to that. A couple of ones also on the price increase of 3% that you talked about. When did customers need to place those orders to avoid the price increase? And also a couple of questions around the topic of how -- to what extent this impacted the order intake in Q3 and whether you also expect it to affect order intake in Q4 in a significant way.
So the price increase is structured so that customer needs to place orders by end of November to avoid the price increase. So first of December, price increases affected. We didn't really see any pull forward of orders in Q3. But as I mentioned earlier, there is activity in the market now. But of course, with the net 3%, it's not to be expected that you'll see the same amounts as we did in, for instance, '21.
Are you planning any additional price adjustments in the near future?
We're always monitoring the market, our input costs and the competitiveness of our product. But at present, we don't have any concrete plans of changing prices in the near term.
Right. So you guide for $640 million of revenue for 2023, which implicates around $170 million for Q4. What is the reason for this return to growth, right, on a quarterly basis?
We are exposed to a project-based business. And this is all about when customers has planned to take delivery. So the remaining revenues is in the backlog, it's firm, and we're going to deliver according to schedule.
Thank you. When you look at our numbers, you can see a pattern that you typically have somewhat -- robots deployed per installation looks down compared to Q3. Is there anything in the market that you can comment on, which indicates or which leads that development?
So we've talked about the differences across high-throughput segments, standard segment, et cetera. We've seen that the standard segment has remained quite strong in this quarter. But of course, we're still working on many high throughput projects. But logically, it's more lumpiness given the larger sizes of those projects.
Okay. So just 1 question on the e-commerce market. Are there any sort of signs of green shoots, so to speak, in that market the way you read it at the moment?
So e-commerce overall. As I've mentioned before, we're having active discussions with a big, big majority of large retailers out there and investing in automation is still super relevant. So this is a timing issue, and we remain very positive about the outlook related to our e-commerce.
Thank you. Then we have 1 question on receivables. One for you, Paul. Your revenues are down approximately 2% now, but you see an increase in receivables. Can you comment on the driver for that or any reason for that?
Yes, certainly I mean the first thing to say is the bad debt experience with a high-quality customer base in this business has been extremely low historically, and we expect that to continue. The reason why you see receivables growing ahead of revenues in this period goes to my earlier comments about decision-making being delayed, going up to Boards of Directors and, therefore, seeing a greater proportion of business at the period end, hence, the buildup of receivables.
One more question on the order intake and order backlog. Can you say anything about the intake you saw in Q2 and Q3, how much is actually for delivery in 2024 now? Any comments on that.
Yes. So obviously, the projects that we've signed over the past months is to a large extent, been for 2024 and the closer we move towards year-end, the more goes into '24. We've talked about it before, but our standard lead times has reduced a lot over the past year or so. So we have that flexibility for customers to take delivery very quickly, but majority of order intake lately has been for '24.
Can you give some color on region, how the various region is developing in your backlog?
So as we've seen, we've seen Europe being slightly softer on the back of difficult macro environment, whilst the U.S. has shown good performance. Looking at the backlog, we're seeing a similar picture. Of course, Europe, we see signals of strength also in the Europe region, but U.S. continues to be a good performer.
Yes. There's 1 more question, actually, specifically on the U.S., where there is a decline in construction of warehouses according to the question. So how do you see in a way, in general, the outlook for the U.S. and also into '24, if you may.
So I think the question was around new warehouse construction, et cetera. If you look at it, historically, around 70% of what we've installed has gone into existing warehouse buildings. And this quarter alone, the big, big majority of orders we got was for projects going into existing buildings because take 2 steps back and look at it. That's 1 of the key selling points we have relative to other technologies.
You can easily fit an AutoStore into an existing building, even if it has oddly shaped forms, pillars inside the building, we in AutoStore can fit all of that with standard components. So for us, the brownfield side of the market is hugely important. And when construction goes down, that advantage becomes even stronger.
Thank you. There's 1 more question here, and feel free to submit additional ones if you have. How do you see the threat of Ocado now after your settlement announced earlier this year? To what extent are they strengthened and how do you see that competitive situation?
So the settlement with Ocado represented a status quo commercially technically whilst we got this litigation process behind us and are able to focus on our 2 respective businesses. For us, everything else remains unchanged.
Thank you, Mats. Thank you, Paul. I think those were the questions we have received. So then I think it's time for you Mats to end with a few remarks.
So I want to end with a few key takeaways. First of all, we are the pioneer and global leader in cubic storage, and we operate in a market that's still in its early stages of development. Even though more and more warehouses are automated, still only around 20% of warehouses globally are automated today, leaving plenty of space for growth. Within this market, we have a leading technology and a proven growth strategy with an efficient and scalable go-to-market model.
And last, we have a long track record of delivering strong revenue growth at high margins. For all of these reasons, we at AutoStore are both proud of what we have achieved and what we are achieving in the current market conditions. So we remain very excited and optimistic about our future and remain confident in our ability to continue delivering strong, profitable growth.
So thank you again for spending the morning with us. We look forward to providing you with future updates.