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

So yes, thanks for joining us for this session with Ouster as part of Deutsche Bank's Global Auto Conference. We're continuing our series of presentation and fireside chats from lidar companies. Again, my name is Winnie Dong, and I'm part of the U.S. auto and autotech research team here at DB. Ouster invented a digital lidar in 2015, is a leading manufacturer of high-resolution digital lidar sensors using industrial elevation, smart infrastructure, robotics and the auto industry. The company is looking to be a major mobility disruptor with a large focus on non-auto end market than many of its lidar competitors and then recently completed a merger with Velodyne as well. I'm very pleased to be joined by Angus Pacala, CEO, for a fireside chat and Q&A.

So I guess we'll dive right in. To start, can you walk us through the rationale behind the merger with Velodyne and what benefit this provides with you over time? And how would it reshape your portfolio?

Sure. So Velodyne Lidar was one of -- is really the founding company in the space just as background. They were a dominant player in lidar for the first kind of 10 years of the industry and -- but had increased competition in the last 5 years. And so it made sense for both companies to combine revenue streams, combine customer bases and combine cash balances to make a single company that was financially strong and that was virtually guaranteed to continue to grow into the future and had a -- was better positioned to support a combined customer base. One of the things that's similar between Velodyne and Ouster is that we both had a diversified set of customers across these 4 verticals: auto, industrial, smart infrastructure and robotics. Velodyne got to that diversification kind of through being the first mover in the space and just having the early offerings that had a broad set of customers come and purchase sensors. Ouster has always kind of built that diversity into our strategy. But the end result is that we were able to kind of seamlessly support both customer bases under the Ouster model as a result of this merger. And we've already seen some of the positive effects of that in the first quarter, the merger. We had an expanded revenue base. We did $17 million in revenue. We have now signed multiple deals with customers that combine Ouster and Velodyne products. We had one such -- May Mobility just announced that they're using both, a combination of historically Velodyne products and Ouster products. So we're able to better support customers, give them a smooth transition between the Velodyne products and long term, most likely digital lidar sensors from the Ouster technology set, and yes and build a financially strong business.

Can you discuss -- because you talked about the synergy that you guys are providing. Can you dive a bit more into how the various hardware and software offerings between the 2 serve the various different end markets? And any risk of cannibalization between the 2? And then what is like your longer-term outlook for the mix between...

Sure. Yes. So we publicly stated that the long-term road map for Ouster is digital lidar sensors from the kind of Ouster side of the equation, the OS line of sensors. And we're going to continue to invest in the digital lidar road map and stop all of the kind of road map associated with Velodyne's historic sensors. So we're continuing to support the VLS-16, 32 and 128, which made up 95% of Velodyne's revenue premerger. But what we're doing is moving that manufacturing of those products to Fabrinet Thailand to improve their margin structure. That was kind of the problem with Velodyne was they were operating with a negative margin. But we see line of sight to changing that significantly. And that means that we can support that -- those 3 products long term. And that's great for customers because it gives them a smooth transition. We've been clear, long term, go with Ouster, but you don't have to do it today. You can do it over the course of a year or 2, making that transition. And so it's less about like which product is better for which space. We leave that up to the customer. But increasingly, the OS sensors are superior on kind of all fronts compared to the legacy Velodyne products. Some of those products were developed a decade ago at this point. So there are reasons why we can get superior performance out of the newer stuff.

So I mentioned in my introduction, right, Ouster is much more involved in non-auto end markets. And it might not be very intuitive to some people versus like competition and things like that. Could you go into more details about the motivation for that? What are some of the large opportunities there? And then any concrete wins that you can point to that will ramp -- that might be ramping up soon.

Sure. So I've been working in lidar since 2012. I co-founded another company in the space called Quanergy Systems, and I was the Director of Engineering there for almost 3 years. So I have a lot of context coming into founding Ouster in 2015 with my co-founder, Mark. And then one of the things that we knew was that there was a much broader market for lidar than just automotive. So thinking back to 2015, the hype cycle for investment into robotaxi start-ups was at its peak. And that meant that peripheral technologies to robotaxis and the investment there was at its peak. So virtually every other lidar company started in that period went after automotive exclusively, but Ouster, just because we have been working in the industry previously and had the context, I knew that there was an opportunity in industrial, smart infrastructure and robotics and actually more opportunity ultimately in those venues than in automotive just by virtue of kind of scale of application. Vastly more sensors, camera sensors are sold into industrial, smart infrastructure applications than into the automotive industry today. So why would that be any different if lidar is an advanced sensor technology that applies to machines? Why would that be any different? And lo and behold, Ouster has the most revenue of any Western lidar maker started in this -- in that period. And we have 75% of all of our revenue generated in our non-auto markets. Even in our automotive market, we have more revenue than almost any player, even though it's only 25% of our revenue at this point. So yes, the reason was simply because of the utter conviction that diversification would lead to faster revenue ramp, less risk and ultimately a much stronger business because I also point out that automotive margins are always going to be lower, in my view, than the industrial sector, than the smart infrastructure sector, completely different dynamics going on between those markets. And that's why I think also we've operated with one of the industry's largest positive margins historically.

Thanks for the insight. So in recent quarters, you've seen customers in select end markets potentially pushing out decisions due to more difficult macro environment. First of all, can you confirm whether that's true? And how do you see that playing out by different region or end market? And what are your expectations for improvement going forward? How is it tracking so far this year?

Yes. I think that Ouster went through this cycle and probably we saw the correction from our customer set in early 2022. And we changed -- we had to revise our guidance halfway through 2022 as a result of -- and so -- and what was impacted mostly was the companies driven by R&D dollars, by investment dollars, and they were driving it into R&D. They were pre-revenue, roughly customers of ours. So things like the venture-backed robotaxi companies, the venture-backed robotics companies. They pulled back and very significantly changed their ordering. But as a result of that, we also corrected midyear last year and focused much more exclusively on the major industrial companies that we knew were more recession-proof that were investing in like a long-term road map with a significant balance sheet. These are companies like Konecranes, Liebherr, John Deere, Caterpillar. Not all of these are necessarily customers of ours, but give you an example of the type of company that we see as good, strong, long-term customers that are continuing to build their orders at Ouster. And by the end of last year, we were driving 60% of our revenue through the industrial and robotics customer set. So I think that, that strategy, and that shift has been working. And I don't see any further correction needed. We're not anticipating some additional shift. That all happened in 2022.

Yes. And you talked about margin being more diversified because of your various end markets. Can you talk about the progression of gross margin throughout the year? And can you go into more in-depth about how specifically it varied across different end markets and [indiscernible].

Yes, sure. So we haven't broken out margin by vertical ever, but we operated with a 27% gross margin last year. And then -- but we've had a little bit of -- we've made it complicated for folks because at the end of last year, our margins were down because we haven't released -- we were working on the next generation of product, the REV7 product, which I'd love to talk a little bit more about. But as a result of not shipping, not getting out that product out in volume, we had 17% margin at the end of the year. So it looked like it caused people to ask some questions. Come to Q1, we released the REV7. It was a huge success. Our ASPs went from $3,600 a unit to $5,700 a unit on the back of this extreme performance improvement of our new product line. And our non-GAAP gross margins were way back up. So they're 25%. We had to do non-GAAP margins because we also merged with Velodyne and had a bunch of onetime costs that actually turned our GAAP margins to negative 4%. But we do expect margins long term to rebound to above the 27% average that we had in 2022. Our goal is to be a 30-plus percent margin business ideally, approaching 40% margin as a blended company. My expectation on our auto business is that we'll look like other auto businesses and operate with a 20% margin or something for exclusively OEM-driven business long term. We're just being realistic, but that's okay. Ouster is diversified, and that changes the equation for us.

I guess let's talk about REV7. You did recently launch the REV7 OS sensor, which is your highest performing sensor to date. What kind of advantage does this provide over your earlier iterations? How does integration of the L3 chip support it? You also indicated that it could potentially double your serviceable market. How does it allow for such kind of expansion?

Yes. And this gets to like why is Ouster the largest company in this space? Why are we driving more revenue than almost anyone -- like almost all these other Western or U.S.-based companies combined? And it goes back to the technology. We have built a digital lidar technology that has put lidar onto a complex custom silicon chip. But the complexity does not -- it saves costs. The silicon is cheap. The design is complex. And we've iterated the design of the silicon chips very rapidly. And it's really the nimbleness in our silicon iteration that has allowed us to consume more and more and more of the market and expand our TAM significantly over the last 8 years. So the REV7 product line is the seventh iteration of our products. Most companies in this space have released a single product, maybe a second product over the same time frame. So silicon allows you to iterate rapidly. You can adopt the next semiconductor process roughly yearly or every 2 years. And that's -- the semiconductor processes allow us to drive more performance and more features into the same die area each and every year. So REV7 doubled our range. It doubled our precision, improved the accuracy of the underlying point cloud that our products create, but it didn't change the product family itself. We swapped in the silicon chip. We didn't have to like rearchitect the products themselves. So it's cost-effective and nimble to do that iteration just like it's cost-effective and nimble for Apple to release a new A series processor in the iPhone every year. And we've leveraged that into expanding our customer base and also expanding our ASPs as we drive better and better performance over time.

So then moving on to your L4 chip, which is slated to come out later this year, right, to support your OS sensors, what kind of cost and performance improvement can be enabled with this?

I don't think we committed to L4 coming out later this year, but L4 is the next -- so we've had 3 chip architectures, L1 through 3. L3 went into the REV7 sensor suite. L4 is the next chip architecture. It will use -- yes, it's just a brand-new architecture for the chip. It will drive improved performance on a number of fronts, but not going to share stuff before those products get released. But the point here is that the road map continues because it's driven by Moore's Law. It's driven by the global investment in semiconductor technologies from companies like TSMC. And we are working with top 5 foundries when we tape out our chips, and we typically get early access to their advanced node. So the L3 chip, as an example, was a backside -- really the -- so it was a backside-illuminated processor that combined 100 million transistors' worth of signal processing logic and the advancement in backside-illuminated technology developed for the camera industry. And we were one of the first companies to get access to that new semiconductor process from our partner. So L4 chip is going to continue on that trend and will be coming relatively shortly.

In terms of your ultimate price target per unit by market, is there -- are you already there? Are you targeting something that's more favorable for your end consumers? And then how much do you need to [indiscernible] to make it more achievable?

Yes. What's interesting is that we are there for a large portion of our customers. If we're selling a product on to -- the types of equipment that we deploy on, gantry cranes at docks, airplanes, dump trucks in mines, $10 million haulers that are operating in a mine, and the price points for the technology that they put on to those vehicles is fundamentally different than what goes on to a consumer vehicle. So for a large portion of our customer base, they -- it's not that they're not trying to negotiate down the cost, but it's just a completely different equation that they're working on. They much rather kind of reliability and a strong partner than $1,000 off the ASP of the sensor that we sell them though they never tell you that, right? But some evidence of this is that there are some established industrial lidar companies that have been around for a couple of decades. SICK lidar is an example of that out of Germany, and they operate with very high ASPs and have for a couple of decades and serve an exclusively industrial customer base with a much lower-performing technology. So I think we'll have robust ASPs across a large swath of our customer base. Smart infrastructure is another good example of that. Traffic devices, whether they're cameras, radars, controllers are very kind of resilient to pricing pressure.

I guess with the predominant part of the business in auto, what is the reason to stay in auto, given that the margin is lower than the average portfolio? Pricing perhaps, on an average basis, you might still have further room to go. What is the ultimate reason to still stay there?

Yes. I think that there is still money to be made. So -- and the overall optimization of will we build a bigger, stronger company with the investment we know we need to make to specifically win the auto industry weighed against the overall revenue and margin opportunity that exists in that industry and our chances of winning it, we think that's a good trade. And we should go and continue to try to win it. We think we're going to win it because we're developing solid-state silicon-based technology, which is what has won basically every other sensor type in the auto industry for the history of time. So we think we have the right product there. We're not going to try to get there first. We're just going to try to get there with the end-state product suite, and we can talk about that. We have a DF line of sensor specifically targeted at auto. That should be cheaper and more capable than what's being offered right now. But yes, it's just the cost benefit still is in the favor of going and trying to win that business. But we also know we're not beholden to it. I think that the rule in the auto industry has been delays and difficulty deploying the technology. And so we want to make sure that even if there is a continued multiyear delay in auto and deploying the technology and revenue being generated that Ouster is on a path that's going to be -- make us a success long term regardless. And I think we're already there. I mean, the majority -- the vast majority of our revenue and margin is coming outside of auto anyway.

So you've shipped your initial DF series A sample in 2022. I think you're preparing for B sample for later this year, right? What else will need to happen sort of in that preparation process? Can you give us some sort of example of ideas?

Yes. Thankfully, not a lot. So the B sample -- the DF sensor suite is called the Digital Flash suite of sensors. So historically, we sold an OS series of sensors, which is a product suite. There's like a number of different SKUs, and those are rotational sensors that give panoramic imagery like 360-degree field of view. That's not really what the consumer automotive industry wants. And so we've taken the digital lidar technology and just packaged it into a nonspinning directional form factor. Doing that in practice is an immense amount of investment in the semiconductor design. But the end result is a simple system that's got a chip that kind of looks like an image sensor and a lens and no moving parts and then a big laser array to flash the scene. So that's why it's called Digital Flash. And so it's simple, simple to manufacture because it's very few parts, there's no moving parts, truly solid state. And it's more performance, got 10x the data rate generated because of the silicon design kind of parallelizing the data capture like a camera. And then we're releasing it as a product family. So one of the ways that we're differentiating is that we're lower cost. And that means that we can provide for the same value or for the same pricing or overall price of a package of sensors like 3 sensors or 5 sensors instead of a single sensor, allowing a vehicle to see left, right, behind the vehicle and do more complex maneuvers in an automated way. The problem with like having a single lidar pointed forward in a vehicle is that it just doesn't allow you to do hands-free, eyes-free, potentially napping in the car type maneuvers to the left and right. You can't lane change if you don't have something looking to the left, right? And so a suite of sensors is what we're trying to enable by going to much lower price points than just selling 3 or 5 on the car.

I'm going to ask about more high-level industry question. Given that there are so many lidar makers in the market now, how do you see the competitive landscape materializing over the course of the decade? I asked this question in the previous session as well. Like do you think it will consolidate into a few players across end markets or have numerous players that are more specialized with more optimal use cases? Do you think we're already there? Is there more room to...

I think -- no. I think, well, yes, we are definitely already there. We just merged with Velodyne. So if anyone has consolidated this industry then yes. But at the industry level, I think there's going to be 5 more years of consolidation before it's kind of looking like the mature industry that it should. I think looking at the balance sheets of most companies in this space, everyone kind of is looking for the next set of funding. And the -- with the exception of Ouster is not -- we were able to execute this merger. We have $257 million on the balance sheet. We're generating significant margin on the products we sell with a good revenue base. And we've committed by Q3 earnings to providing a long-term financial model of how we get really concrete lead to profitability. So yes, yes. We kind of forward projected what was happening in this industry back last year, realized that a merger like the one we just executed with Velodyne was necessary to be a long-term winner in the space.

So we had Mobileye with us yesterday, and we asked them this question about should Tesla decide to really license their FSD technology, and this is more related to the auto market, obviously. What do you think is going to happen to sort of like the ADAS providers? Do you think from an industry perspective, this is that neutral for lidar providers? And any sort of...

I don't think it could be good for lidar providers if they somehow succeeded and then licensed it to the whole space. But luckily, I get to kind of brush that existential threat off because it -- for us, it is not an existential threat. If somehow like lidar was irrelevant to automotive, Ouster would be a strong and profitable company eventually on the back of our 3 other verticals. There are plenty of industrial companies that have amazing -- I mean, SICK lidar has incredible financials as an industrial-only player, but we're talking about bringing this technology into smart infrastructure as well in robotics. And there's huge opportunities there. I mean, smart infrastructure, there's $32 billion worth of security cameras sold every year. And there's $60 billion worth of traffic control equipment sold every year. So these are huge industries that are really well suited for new technology adoption.

Any sort of initial market share information that you can give us like sort of end market, anything like that?

Market -- I mean, small fraction, single-digit percentage market share of any of these industries. They're all dominated by camera technology, yes. We're very much at the beginning of a trajectory.

In terms of your quoting activity, are you expecting major auto lidar production contracts to be able -- maybe in the 6 to 12 months or so? And can you give us a sense of how much business you're quoting on right now?

How much business we are...

Quoting on?

Oh, yes, counting on. I -- well, I'm sure something will be decided in the next 12 months. We are not counting on it to succeed. Like our long-term model will not incorporate major automotive revenue ramp because no one can predict when it will happen. There -- everything has been delayed. It has been delayed for years. So it's not a good way to build a business model. So I would view that as kind of an opportunity on top of whatever kind of outlook we provide. I would say that we are winning some major automotive business today. It's just not in consumer space like with robotaxis. And so we announced an exclusive long-term partnership with Motional, supply them with -- exclusively with long-range lidar through 2026 for their major robotaxi fleet rollout. We announced with May Mobility a complete suite of products that we're supplying to outfit all their vehicles. So some strong long-term agreements starting to happen with the robotaxi, robotrucking industry. And on that front, like we have good forward indicators on the growth of the business. We did $70 million worth of bookings last year on $41 million in revenue. In the first quarter, we did $33 million in bookings on $17 million in revenue. So our book-to-bill ratio is very strong, showing that we are continuing to grow even post-merger.

Yes. Can you dive a bit more into sort of -- because we've talked to a lot of providers into the automotive business, but not so much sort of like various different end markets. How is the quoting and bidding process different in non-auto market? Would you say your run rate is higher across these different verticals? And how easy is it to come to fruition?

I think it's actually roughly the same. I mean, there's less focus on the cost side. Obviously, the pricing targets are just completely different. But the long duration of the quoting process and the fact that customers kind of fall by the wayside and decide that no one can supply them with what they need at this point in time for a number of reasons. But that's true in auto, and it's true in non-auto. There's just far more companies to actually work with. There's 1,000 major industrial companies that build OEM equipment that can benefit from autonomy, and there's only 25 automakers that are putting out these RFIs and RFPs. So the dynamics of it are actually pretty similar. Yes, it's just the volume is different. So if your win rate is one a year or 1 out of 10 that you get in auto, but you have 10x more, it just allows you to build the business faster.

Yes. How do you plan to combine the Gemini and BlueCity to build an industry-leading software stack? What kind of revenue opportunities does it represent over time?

Yes. So we...

I'm so sorry. Something [indiscernible].

So we've invested into software solutions in the smart infrastructure space. So basically, what we -- what our thesis is that the success of a company like Mobileye in automotive is maybe hard to replicate. Building complete systems with software integration and owning the data stream or kind of creating a software updatable learning machine, it's tough to break into that market because automakers are too smart at this point to hand over that opportunity. But that concept is applicable to the industrial space and the smart infrastructure space. You can build amazing systems and solutions in those spaces with much more receptive audiences. Most infrastructure companies are not trying to own the data stream, and they're just fundamentally different. They're not tech companies. They're not aspiring to be tech companies. They're not -- they don't have a Tesla to go look at and be like, we need to be like them. So that's why we took that model, and we are applying it first to smart infrastructure. So we've released the Gemini software solution, which is for surveillance and analytics and the BlueCity traffic solution for intersections. And those are basically, it's like both a lidar system onto a traffic pole and the compute box with our software running and to build a smart intersection where the traffic is controlled by this lidar system, which has the eyes of an autonomous vehicle now packaged to be bolted onto a pole. It's really effective. It's -- clearly, there's a performance benefit. We've already shown that it's cost effective compared to digging up the road. And actually, the government has taken notice. The infrastructure bill names lidar as a critical new technology in infrastructure. ARPA-I was just created as a new infrastructure ARPA division to fund these kinds of efforts. And so I think there's a lot of growth that could happen there. Again, $60 billion a year goes into traffic infrastructure alone, let alone the surveillance and the crime analytics side of the business. I mean, we're deployed at JFK Airport. Right now, we're at Newark Airport. We're at San Antonio Airport. We're at Charles de Gaulle. So I think that there's a lot of other public infrastructure that can benefit from situational awareness coming from lidar sensors.

Can you -- because you mentioned Motional. So can you maybe go into a bit more detail about the win with that? What kind of pricing, what kind of volume, any sort of initial financial discussions that I can talk about?

Yes. There's not much to say because Motional doesn't want to reveal their plans for their fleet rollout. So the details that we have put out, it's an exclusive agreement through 2026 for the long-range lidar on the top of their IONIQ 5 vehicle. It's a major new platform for Motional. So I guess, Motional is one of the remaining well-funded robotaxi plays in the industry. There aren't that many left, but Motional is really a top player. They have enough funding to really move aggressively like Waymo, Cruise and Zoox have. But they're the last to deploy a major fleet or one of the last to deploy a next-generation larger fleet. So that shows -- and now they're doing it, and we're the lidar provider on that. So it's a big opportunity because they're doing the same thing as these other robotaxi companies in that regard. And then I would say that this is a -- I view this as an opportunity to now go out and sell the same solution to other robotaxi companies. We're really, I think, well positioned. We just signed a contract with May Mobility, as I mentioned, basically replicating that sale for another similar customer. And I think we can do that again and again in the next couple of years.

Awesome. And conscious of time, I want to see if the audience has any more questions. Okay. All right. Thank you. Awesome.

Thank you.

Thank you so much for being with us.