Ouster, Inc. (OUST) Earnings Call Transcript & Summary

Good afternoon. I'm Samik Chatterjee, technology analyst at JPMorgan. For the next company in track to -- we are hosting Ouster, which is one of the lidar companies we are hosting in this conference. I would say kind of if I had to give a brief introduction of Ouster to the investors who are new to the story, really kind of the digital lidar word stands out to me as how I would introduce Ouster and I'll obviously let Angus, who's the CEO and Co-Founder, kind of go into more details about that. But as we've kind of talked to many lidar companies, I think that aspect stands out about Ouster, something that investors should tune into and kind of associate it with Ouster more and more. So Angus thanks a lot for taking the time to do this. I know you have a few slides or some prepared remarks you want to go through. But obviously, looking forward to a discussion and have a few questions for you as well. Thank you.

Great. Thank you, and thanks for having me in. Yes, I'll spend maybe 5 minutes going through some of the slides that we posted and then turn it over and have a conversation. But -- so if you're following along online, maybe just starting with Slide 5. There are really 3 aspects to Ouster's business that differentiate us from other peers that have gone public recently. And the first is this differentiated technology, which is a digital lidar technology. And our -- that really is the founding premise of Ouster was inventing a digital lidar technology, which sets us apart from the analog players in the space. And what that means is that we've taken the complexity, the hundreds of discrete off-the-shelf components in traditional analog lidar sensors and packed that all into a custom silicon chip, a CMOS digital silicon chip. And we get performance and affordability benefits and the simplification of the overall lidar architecture by condensing all of that complexity on to that piece of silicon. And that's really the strategy of Silicon Valley companies for the last 60, 70-odd years, is condensing historically analog systems or complex electromechanical systems into a single piece of silicon and then advancing that silicon at the rate of Moore's Law to build better and better versions of that digital product. So that's digital lidar in a nutshell. Now we paired kind of on the benefits of digital lidar and the flexibility of the platform, we've been able to, from the start, map out a diversified business strategy that spans 4 key markets and addresses a much larger overall TAM than just exclusively focusing on automotive. And so we're targeting the industrial, smart infrastructure, robotics and automotive markets. And our single digital lidar platform is able to kind of flexibly target the literally hundreds of different use cases across those markets and give us a much larger TAM that we're accessing as a result. And then finally, we do have this ability to execute that I think is second-to-none in the industry. Ouster started in 2015 around the same time as most of our lidar peers. And we have come much further in the intervening years than I think any of our competitors that were started around that time. So we have over 600 customers that we announced at our Q2 earnings earlier this week. We are guiding to $33 million to $35 million in revenue this year and have positive gross margins, absolute industry-leading positive gross margins at 26%. And we then outsource manufacturing to a contract manufacturing partner, Benchmark Electronics, and have expanded the global sales team to major regions in APAC, EMEA and the United States. And so we really have been able to execute on this vision of a diversified business built on this digital lidar technology, which is significantly differentiated from the rest of the players in the space. Now moving to Slide 6. This is one of the slides that I love because there's a graph on it. But Slide 6 shows how digital products disrupt industries and really focusing in on the camera industry. And digital cameras started to emerge in the early 2000s. And a digital camera technology advanced what it meant to even build cameras. What the advancement and form factor and reliability and power efficiency and scalability, durability, the resolution, frame rate, all of that, the combination of price and performance across many axis absolutely exploded the opportunities and use cases for digital cameras. And it really is that one platform, that digital platform and that single architecture in digital cameras was useful in your cell phone, in your car, in a kiosk, ATM kiosk or in a rover on Mars. And so that's the power and the flexibility of silicon to address many use cases with a single architecture. But we're applying that same exact strategy to digital lidar. We've built a single platform of products, all based on the digital architecture, which is vastly simplified and cost reduced and more manufacturable than the analog -- the kind of diverse set of analog technologies that are previously and continue to be brought to bear by our competitors, and we're addressing a large and diverse set of use cases with that single architecture. Now I -- just to hit on a couple of other slides. So Slide 10 in the PDF presentation covers just the fact that we are -- we have a platform of products, so we market scanning systems and true solid-state systems, both based on the digital architecture. And we are volume-manufacturing those products at our contract manufacturing partner, Benchmark in Thailand. We actually operate 2 manufacturing facilities, one right here in San Francisco and then a volume facility with Benchmark Thailand. And that facility has capacity for thousands of units a quarter right now and scaling to so many thousands of units a quarter by the end of the year. We actually shipped over 1,400 sensors in last quarter alone, which is up almost 3x from year-over-year this time last year. So we have this great capacity to scale. And we've also automotive certified both the facility to IATF 16949, so we're able to provide any kind of automotive quality in the manufacturing system. And we are on a path to automotive certify not just one of our products, but literally every product that we sell into the industry is going through automotive certifications. And so this kind of just informs like we have a very different product strategy than I think our peers where because the digital technology is so flexible, we're able to provide a platform of products, literally 75 different SKUs today that span different form factors, fields of view, resolutions and price points and allow our customers to choose what product makes the right sense for their end application. So the product base or the platform-based product portfolio has really been a powerful kind of addition to our product market fit, and we'll continue to expand that over time. So I think I'll pause there because my 5 minutes are now up and I'll turn it back to you, Samik.

Yes, Angus, thanks for that. Very helpful. So just as a reminder, investors or anyone in the audience who has a question, please feel free to send that in through the website. I guess, Angus, let me start on more kind of open, broad topic itself. I know like every investor today is hearing from multiple lidar companies at the same time, everyone talking about their differentiation in relation to technology. But if you really had to kind of hone down on how this digital CMOS technology that you are using defer somewhat that is -- what's offered by your competitors, how would you kind of outline that to a let's say a -- like a layman investor who is not really as in-depth into what a digital CMOS is, what does that allow you to do? And like what are the more kind of longer-term implications of it, be it in terms of the resolution or be it like cost, what is the longer-term implication versus what your competitors are offering?

Yes. And it's a great question. So really to understand the value of digital lidar, you have to understand the history of silicon. I mean Silicon Valley is named after CMOS digital silicon technology. And silicon has disrupted industry after industry since the 1960s, starting with Intel, and the first CP, it's the first integrated circuits. And so the core concept here is to boil down a complex system into a single digital chip, a custom digital chip that replaces all of that complexity with, in our case, over 100 million transistors with processing logic and computation and memory and actually the photo sensors themselves. So it's almost condensing a product that used to be complex into a silicon chip. And then the silicon chip itself, that technology is continuing to exponentially improve in cost and affordability at the rate of Moore's Law, which is this law about density improving and costs dropping exponentially over 2 years, and that's held true for the last 70 years. And so it's really -- the goal is aligning a product portfolio with Moore's Law, getting the entire product onto that silicon chip and then improving chips over time and aligning the road map with a chip-based road map instead of with almost like lidar-based road map where all of our competitors are kind of stuck. And so ultimately, we cannot compete on price and performance due to [ taking that ] strategy. It's a simpler system, it's a reduced BOM, it's easier to manufacture. The inherent BOM cost itself is lower, and then the performance comes almost for free because the incremental cost of adding complexity into silicon chips with the incremental cost of an additional 100,000 transistors to implement new capability and new features is effectively free in the world of silicon. And so that's the real power here. And we're not just on the first generation of the technology. We've been able to prove this now over multiple generations of our chipsets. And we just talked on earnings about how we're leading to our gen 3 chipset, which is another exponential improvement in our product capability, and that just continues to the L4, L5 or L6 chipsets which is -- it should be a familiar concept, Apple and other companies do this with their products where at the Apple iPhone is really dictated by the ASRs processors that go inside of it. And so that silicon road map is advancing the product road map in our case and [ the markets].

Angus, one thing I did want to kind of also get your views on and kind of get you to talk a bit deeper into is the gross margin here. Like I haven't heard of many companies reporting that level of gross margin, particularly even like if you take companies that have been in the lidar space doing test units for a while like Velodyne, that level of gross margin is still kind of alluding them. So like what is -- what in your view is driving it? Is it just that the BOM cost is quite reasonable when you -- based on the design that you have and hence, you don't have to really kind of cut down on pricing and you can kind of afford to get the right margin even when you're selling at low volume at this point? Or is there something else that I'm missing? Because to me, that stands out automatically when I compare across lidar companies as the gross margin even at low volume.

Yes. And this is something I'm incredibly proud about. And it just goes back to the inherent advantage of a digital architecture. If you choose the wrong analog architecture, you're optimizing to a local maximum that you can't ultimately compete against someone that has chosen a better architecture. And so that's just -- that's what's fundamentally going on here. Digital technology can be lower cost to build and low cost of the BOM and we've been able to advance it faster than our peers. And so we are incredibly price-competitive. So we are the most affordable sensors on the market across large [ spots ] of kind of the product portfolio. And yet we also have the best margins in the industry. And I have no reason to see that kind of trend turnaround. And in fact, I think we're the only company in the entire space who's gone public that is operating with a positive margin.

Yes. If we look a bit forward, is there -- when you think about the cost curve from here on, I mean, I see Slide 12 on the deck, you kind of outlined $1,000 for 5 sensors, whereas competitors are doing 1 sensor for $1,000. Obviously, there's a big difference already. But as you think forward, is there any argument you've made that digital can pursue the same cost curve that are like the improvement that analog can and keep up with the same? Or how would you think about the difference there between digital and analog?

Yes. I think there is just a paradigm shift in costs and the cost structure of digital and analog products that you can't break free up if you're an analog competitor. But there also is a cost curve that we are following. So the more that we can adopt the volumes -- the higher the volumes that we ship is really our biggest advantage at this point, given that we've taken this paradigm shift and jumped to a new architecture. Now it's mostly about volume. We still -- while we shipped a significant number of units compared to the rest of the industry with the exception of Velodyne even last quarter, that 1,460 units in a quarter is still relatively small in an electronic supply chain. And so VAM overhead and just kind of the low volume pricing still dominate our COGS and not all of that requires volume to kind of leverage down. But yes, but the ultimate -- the goal here is low $100 lidar, and that's absolutely achievable with a digital architecture.

Let's kind of change gears here a bit and talk a bit about the strategy that you're taking in reaching the automotive customers. We hear from a mix, like from the group of competitors that you have and some are taking the route of going directly through the OEM, some are rather kind of just partnering with Tier 1s and acting as a -- happy to act as a Tier 2, some would just license the technology and kind of, just call it, end there. So like what's your strategy here, particularly for the automotive market? And how are you kind of different in that sense from other lidar companies?

Yes. And the first and most significant way we're different is just that we can offer better performance at much lower cost than our competitors. We really do need to be selling something that is differentiated from a cost performance standpoint, and cost does dictate automotive to a great degree. If you can have equal performance to a competitor but offer it at a lower cost, we will win those deals. But in terms of Tier 1 versus OEM, I believe strongly you have to win OEM business direct with OEMs. They are the end customer. And the Tier 1 partnerships that I see are just at the partnerships, but Tier 1s are not customers, right? And so partnering with a Tier 1 makes sense for companies that maybe haven't commercialized their products yet. They have no manufacturing facility set up, which is the majority of companies that have gone public. But then you're ceding significant margin opportunity to that Tier 1 partner. And so Ouster is taking it differently. We want to win business for the OEMs and work with the Tier 1s that are the preferred choice of those OEMs. But in a more limited capacity, not necessarily as a manufacturing and industrialization partner to the same degree as these other companies. And we certainly -- our goal is not to just partner with Tier 1s upfront without clear business from OEMs that's tied to that partnership. Because Tier 1s are just as desperate for lidar business as everyone else. And so it makes sense for us to interact and engage directly with OEMs first.

Okay. Let me take the question that has come in from an investor. And so I think it's a long one. So I'll just try and -- to try to summarize the question. Essentially, the question is about when do you move from the focus on technology to focusing more on building a superior competitive ability in commercialization? And when do you get to a point where you start to see major gains in growth just because you exceed competition related to commercialization rather than just being focused on technology itself?

I'd like to think that we actually passed that threshold of focusing more on things outside of the technology years ago. That was one of my personal goals was despite being a technologist, knowing that ultimately what would dictate our success was execution on getting the products commercialized and sold. And that's no small feat. And so that goes back to our ability to execute is second-to-none. We're the only company significantly manufacturing outside with a contract manufacturer. We're selling thousand units a quarter, and that we have positive gross margins. And we have an efficient commercial machine that has been set up with -- I think we brought on now about 60 people into our commercial organization. We've made major hires right after going public with the SPAC. And so we're really investing on having the best commercial engine of any company, not just on the kind of upfront sales, but on customer support and success post sale and fostering of our customers. So I care deeply about that. We're entering into long-term agreements with our customers. And we want to support them and grow with them because a lot of the story, this is still a nascent industry, is about growing with our customers and fostering their products and technology to the market. And so, yes. I think it's just -- it's about the point in time and effort to it, yes.

Let's move to other areas here a bit, autonomous trucking, robotaxis. Those are again like interest areas for a lot of companies, including yourselves. So how do you think about the greater size of those opportunities as well as timing, particularly if I start comparing to like a consumer ADAS application?