Symbotic Inc. (SYM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Symbotic First Quarter 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the conference over to your host, Mr. Jeff Evanson, Vice President of Investor Relations. Please go ahead.

Thank you, Valerie. Good afternoon, everyone. Welcome to Symbotic's First Quarter 2023 Results Webcast. As Valerie mentioned, I am Jeff Evanson, Symbotic's VP of Investor Relations. Our press release and discussion today will include forward-looking statements, based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements, including as a result of factors described in the cautionary statements and risk factors in Symbotic's financial release and regulatory filings with the SEC, by which any forward-looking statements made during this call are qualified in their entirety. In addition, during this call, we will discuss certain financial measures that are not recognized under U.S. generally accepted accounting principles, which the SEC refers to as non-GAAP measures. We believe these non-GAAP measures assist management in planning, forecasting and evaluating our business and financial performance, including allocating resources. Reconciliations of these non-GAAP measures to their most comparable reported GAAP measures are included in our financial press release, which is available in the Investor Relations section of our website and is on file with the SEC. These non-GAAP measures may not be comparable to measures used by other issuers. Today, we will provide guidance for the second quarter, including revenue and adjusted EBITDA. These are not -- we are not providing guidance for net loss today, which is the most comparable GAAP financial measure to adjusted EBITDA. We're not able to provide reconciliations of adjusted EBITDA to GAAP financial measures because certain items required for such reconciliations are outside of our control and/or cannot be reasonably predicted, such as the provision for stock-based compensation. On today's call, we are joined by Rick Cohen, Symbotic's Founder, Chairman and Chief Executive Officer; and Tom Ernst, Symbotic's Chief Financial Officer. These executives will discuss our first quarter 2023 results, our outlook, and then we'll follow up with Q&A. So with that, Valerie -- oh, I'm sorry, Rick, go ahead.

Thanks, Jeff. 2023 is off to a great start, and we are excited about our outlook. Again, our results reflect strong execution of our growth opportunity. In our first quarter, the Symbotic team delivered triple-digit revenue growth and improved both gross profit and adjusted operating margins. I thank our entire team for their hard work and excellent execution. Last quarter, we highlighted our plans to build on our existing base of outsourcing partners. During this quarter, we added additional Tier 1 suppliers to build capacity to meet our growing demand as well as to ensure supply chain and redundancy. These outsourcing partners now span our full deployment process for manufacturing of bots, cells and [ lists ] to construction and installation. We're excited about our partners growing contributions as they help us accelerate delivery of systems while maintaining our extraordinary rate of growth. These partnerships will also help us to reduce system costs and streamline deployments and reduced deployment time creates the capacity to satisfy the high demand of our solutions. In summary, our supply chain continues to improve, also moderating, and we continue to attract top talent. Demand for our solutions continues to grow, and our contracted backlog now stands at $12 billion. Now Tom will discuss our financial performance and outlook. Tom?

Thank you, Rick. Our first quarter revenue of $206 million grew 168% over the prior-year period. We initiated 6 new system deployments during the quarter and, as planned, advanced one system to fully-functional production operations. We now have 22 active system deployments with multiple customers, up from 17 systems last quarter and 9 systems in the first quarter of last year. Our extraordinary revenue growth was driven by both progress on deployments already underway and the 6 deployments started during the quarter. We are gaining efficiency in our deployments by standardizing our systems, streamlining our deployment processes and realizing the benefits of outsourcing. Our cash and equivalents, including marketable securities, grew $94 million sequentially to $448 million due to favorable working capital performance. Looking forward, we believe last quarter's balance of $353 million will be a low watermark. We believe we have more than adequate resources on hand to achieve our strong growth plans and remain very well capitalized to execute our strategy. Recurring revenue grew 25% sequentially as deployments have begun to move to production operations. We now have 8 systems operating at customer sites. In the near to midterm, we expect recurring revenue to be small relative to our rapidly growing systems revenue. Over time, as system completions waterfall, recurring revenue should grow to have a much higher gross margin than systems revenue as well as become an increasing share of our revenue mix to provide powerful operating leverage to our business. Our first quarter gross margin increased 230 basis points sequentially. These results still reflect significant costs associated with rapidly scaling our operations and the burden of elevated pass-through steel costs. In the first quarter, operating expenses, excluding stock-based comp, declined sequentially, demonstrating the cresting of expenses that we had anticipated. Despite this, we still have ongoing redundant costs associated with ramping partners and ongoing investments in our innovation initiatives, such as SymBot and BreakPack. Operating leverage improved as we achieved a record 7.9% adjusted EBITDA loss rate compared to 27.6% in the first quarter a year ago, driven by our revenue growth and moderating operating expenses. Our backlog increased this quarter to $12 billion. Cost-adjusted pricing, the addition of UNFI as a customer and an additional non-Walmart existing customer deployments start contributed to the 8% sequential increase. Turning to our outlook for the second quarter of fiscal 2023, we expect revenue of $205 million to $230 million and an adjusted EBITDA loss of between $13 million and $17 million. This represents 126% revenue growth year-over-year at the midpoint of our revenue guidance range. In closing, 2023 is off to a great start, and our team is energized. We are excited about the year ahead and our opportunity to transform the supply chain. We'll continue to scale our business and innovate rapidly to deliver against our $12 billion revenue backlog. We look forward to speaking with you again next quarter to provide an update on our progress. We now welcome your questions. Operator, will you please open the Q&A?

[Operator Instructions] Our first question comes from Matt Summerville of D.A. Davidson.

A couple of questions. First, on gross margin and OpEx, how should we be thinking about those items kind of scaling from here? You mentioned OpEx kind of cresting last quarter, so things seemingly moving in the right direction with more efficiencies to be gained. And then maybe put a finer point on gross margin, how we should think about that rolling forward from here? And how much steel is still maybe diluting that margin? And then I have a follow-up.

Yes. Thank you for the question, Matt. So first on the OpEx side, we reported an adjusted OpEx of $52 million. That was lower in both of the prior quarters as we had fewer third-party expenses. So I think a way to think about that is some of that is structural as we're shifting to outsourcing partners, and some of it is just the quarterly variability of our engineering projects. Looking through to that, our headcount is up about 9% quarter-on-quarter. So you can see we're still investing and hiring heads as we're able to make a benefit of less dependency on third-party resources to grow and scale our business. Perhaps shifting over to the gross margin side. Quarter-on-quarter system gross margin, which drives our overall gross margin, improved sequentially by 250 basis points. This really is an attenuation of some of the effects that we saw last quarter in terms of some of those scaling and project costs that have made their way into gross margin. We began to see some of those received. And so generally, we expect that trend to continue as we look forward over the coming quarters, although quarterly progress on that can be stair-step. So I won't predict and give you guidance for exactly how we make progress against that. But the general trend over the coming quarters, you should expect us to see some of those effects of -- some of those costs that are in gross margin associated with scale in the business begin to attenuate, along with steel costs begin to flow through as less of a headwind. A way to think about that steel as well, don't forget that we do lock in much of our steel pricing 12 months prior to the start of an installation. So if you look at the steel price indexes, the steel prices have really been lower for about 5 to 6 months. So we expect kind of the benefit of lower steel prices to wash and over the coming few quarters rather than right away. Does that answer the question, Matt?

That makes sense. Yes, that does. And then just as a follow-up, from here forward, what are the key incremental steps Symbotic needs to take, from an outsourcing standpoint, to further accelerate system implementations? And when do you think the company will reach an optimal sort of implementation rate?

Yes. So we spent this last quarter a lot of face-to-face time with suppliers. So we're pretty much locked in our suppliers. We have a couple of very good suppliers that are going to be ramping up in the second and third quarter. So we're pretty well set with our outsourcing supplier mix. And we're seeing -- as they learn to make the systems better and a little competition, we're seeing the pricing come down. We're also seeing efficiencies of rollout. And as we work with the suppliers and redesign small components of it, we're finding that the installs will happen faster. So I think the next 3 to 6 months, you should see a full benefit of the outsourcing of the suppliers.

And I'll add to that, Matt, as we just think about the long term, we see this as a continuous opportunity for us to -- where the system can be engineered for faster deployments. Our partners are going to gain efficiency, we're going to gain speed with it. So we think that, in addition to Rick highlighting these 3 to -- next 3 to 6 months, are huge for us. There's gains that we can have over the coming years to continue to speed deployments and get more efficient.

Our next question comes from the line of Andrew Kaplowitz of Citi.

Can you give us a little more color into the revenue ramp that you're seeing? I'm sure you want to be conservative. But at the bottom of your revenue guidance for Q2, you're predicting flat sequential revenue despite your system deployments and Symbotic rapidly scaling its business. So is there something that could hold you back or are you just being conservative, given you never know supply chain constraints come back? Or is there any risk of customers slowing down deployments, given macro concerns?

Yes. Thanks for the question, Andrew. So you're right. We're growing rapidly. Our number of systems under deployment, as you highlighted here, now at 22%. That's up 5% net of the one that went into full production from last quarter. That translates into 126% year-on-year revenue growth, which we think is quite rapid. So we're planning to deliver and scale against that rapid growth. I think something -- one of the things we talked about in our last earnings call was these first few systems -- first wave of the few systems we delivered did see somewhat of kind of a stacking of the key concentration of revenue, deliver those systems over the -- really the prior quarter, a little bit into Q3 as well. As we begin to deliver more and more waves of systems, they're going to be more uniformly spaced, and we'll begin to see some of that quarterly variations and revenues smooth out a bit. But really, what you're seeing is a function of our sequential growth is more just to do with the concentration of the stacking of some of the smaller number of systems actually in the meat of their deployment.

Got it. That's helpful. And then you mentioned backlog of $12 billion. Obviously, it continues to go up. I think you talked about [ upgrading ] than $11 billion last quarter. So is this just more addendums to sort of existing contracts that you have? Or do you continue to win work with new customers? Obviously, we know, eventually, revenue will begin to eat into that backlog, given it's so big. But how are you thinking about backlog at this point? Should it begin to go down now as revenue ramps up? Or still more new awards to be had?

Yes. Thanks for the question, Andrew. So you're right, backlog did increase net of the revenue out in the quarter by about $900 million in the quarter. So that really reflects a couple of things. It reflects the new UNFI relationship that we announced on last quarter's earnings call that was signed during this quarter. It also reflects an additional existing customer, new deployment we started in the quarter. And then finally, it reflects cost-adjusted pricing for the existing backlog in the quarter that we expect that you'll see once a year when we start each calendar year. So a little bit different average cost per system in the backlog. How you should think about the backlog? Our strategy hasn't shifted. We're thrilled with the $12 billion backlog. Our goal is really not to drive backlog growth so much, but really to drive our customers to being [ ragingly ] happy and having -- and the scale against the opportunity we have. We're looking to add new customers more by the 1 or 2 per year rather than add to the backlog as our primary strategy here in the near term, given that we do have such a strong demand for our systems that we can control as the backlog as we want them.

Our next question comes from the line of Mark Delaney of Goldman Sachs.

Rick, I think your decision to retake the CEO role on, as I understood it, was to streamline the touch points that your customers have and hopefully create some more efficiencies in that sort of relationships. Could you elaborate if that's materializing as you expected?

Yes. It's -- I mean I've been the CEO for most of the time, except for really a short period of time. The interaction -- so yes, it's playing out the way I thought. Customers want to talk to me. They've been talking to me for a long time. I'm really the Chief Product Development Officer. And so when I just talk to customers, one of the things they're asking is, because of my deep distribution background, is they think some of the products that they're thinking about are viable. And so it just makes the logical, the sales cycle, the proof-of-concept piece of selling these big pieces of equipment and then the follow-through logical. So it's playing out pretty much exactly the way I thought it would.

That's very helpful. And then my second question was around how to think about the cadence of systems going forward. And maybe help us better understand what's contemplated in the guidance, perhaps in terms of number of new installations that may be started and if you think you'll move any other systems into full completion this coming quarter baked into guidance.

Yes. Thanks for the question, Mark. So we do anticipate adding more systems each quarter. It's a little bit less predictable on a given quarterly basis exactly how many we'll add. But you should expect that as you look forward over coming quarters, we continue to add systems and potentially in growing numbers as we look forward. Those systems that get added in the quarter don't add as much revenue as the systems that have already been on the books for a couple or a few quarters. I think you know that our value that we deliver and thus the revenue that we carry from those systems is recognized and reported on a percentage completion basis, but it's not linear. The revenue actually has a bit of a concentration to the middle part of the -- the middle of the second half part of the contract when we're doing the meat of the installation and testing of the system. So those early systems do benefit quarterly revenue production, but not as strong as the systems that are well into the meat of installation.

Our next question comes from the line of Nicole DeBlase.

Maybe just on the outsourcing initiative. It sounds like from the opening remarks that you guys have made really good progress on that. So if we were to talk about it in baseball terms, I guess, what inning are you in with all of your projects on outsourcing?

Yes. So in baseball terms, I would say, we have -- I would say we're probably in the fifth, sixth inning on outsourcing. We will -- we -- the partners are doing a good job, and -- but we haven't finished the process yet. So I think we're bringing on some new -- we haven't announced them yet. We've announced some of it internally. We're bringing on some new, very experienced manufacturing partners to help us work the outsourcing part of the business. So we feel really good about it, where the game plan is probably gone a little bit better than we thought, which is a nice thing to say. And no showstoppers. The world out there of our particular partners is interested in warehouse automation and in making EVs. And we right now have a lot of interest because of our big backlog and warehouse automation. So we're very happy with the attention we're getting from suppliers, quite frankly, all over the world. So that was not the case a year ago. So I guess, fifth inning, sixth inning, maybe even seventh inning. We're pretty happy with where we are.

Got it. Rick, that's helpful. And then one more question for you guys is just -- I know you talked about OpEx cresting. Is that also the case for the subcomponent of R&D.? Is that also expected to crest, just trying to think about all of the innovation initiatives that you guys also have underway?

Thanks for the question, Nicole. So I would expect modest growth in our OpEx, particularly near term. Our OpEx we reported in this quarter was relatively light in terms of third-party expenses and kind of special projects. But if you take the last 3 quarters overall, that general comment about crested is generally right maybe with moderate growth, looking forward. In terms specifically with R&D, yes, it applies to R&D as well.

Our next question comes from the line of James Ricchiuti of Needham & Company.

I think you referenced an order from an existing customer. Was this one of your legacy customers?

Yes. Thanks for the question, James. It was. And in fact, we disclosed in our proxy filing that, that customer is C&S Wholesale Grocers.

Got it. And I'm wondering, as you talk about the supply chain and the contract manufacturing capability that you're bringing on and you expect to see ramp, can you talk about the interest you're getting from new customers and your ability, your capacity to maybe take on newer business? And specifically, I'm wondering, most of your business has been in the U.S., North America. And is there the potential over the next couple of quarters for you to potentially take on some business in Europe, for instance?

Yes. We -- it's a fairly long sales cycle, but we've had interest from Mexico. We've had interest from Europe. So we -- and the numbers are pretty promising. I made a trip to Japan to visit SoftBank. That's a very promising -- these high-cost labor markets are interesting. So nothing to announce, nothing probably to announce for a while, but a lot of interest. And what we're doing with the supply chain partners, actually, some of the partners are in Europe, places like Italy, Germany. And so they're actually out there kind of help them sell for us, legitimizing our product. We do have a number of international customers coming to visit in the next 3 to 6 months to go visit sites. And one of the things that we're doing with the outsourcing partners is as we ramp them up, it allows us to complete sites faster. And if we can complete sites faster, we can do more sites. And also, one of the things that we're looking at is outsourcing partners, in particular from Europe, that would be good partners and doing European installs.

I'll just reiterate, James, that while we're working to create that additional capacity, our operating strategy is to add new customers slowly, kind of 1 to 2 per year.

Okay. And final question for me. When would you anticipate completing the next fully-functional system from your backlog, if you can say?

Sure. Thanks for the question, James. It's hard to predict on a given quarterly basis. But as we look forward over the coming quarters, we do anticipate that you'll begin to see us get into a pattern of moving systems from deployment to fully-functionally complete -- hit the customer with increasing regularity.

Our next question comes from the line of Michael Latimore of Northland Capital Markets.

Okay. Yes. Great results here. Just in terms of the deployment time frames, what are you seeing now? How long do you anticipate deployments to take, given some of the added outsourcing capacity here?

Yes. Thanks for the question, Michael. So we continue to make progress on this front. We are definitely beginning to feel the benefits of having done it many times now, along with beginning to get support from our outsourcing partners that are helping this trend in the right direction. And as you would expect, Michael, our first wave of systems take longer than what we expect that those next couple of waves to take, particularly in the light of having an extended supply chain where we got out in the front and made sure that we started those systems early with an extended supply chain. So we are making progress. I think we're generally on track with our plans and where we thought it would be a year ago. And to the points of Rick's comments just a minute or 2 ago, working with these outsourcing partners in the next few months really help us unlock the ability to move faster here over just the coming 4, 5, 6 quarters.