Symbotic Inc. (SYM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Symbotic Second Quarter Fiscal 2023 Financial Results Conference Call. [Operator Instructions] As reminder, today's call is being recorded. I will now turn the conference to your host, Mr. Jeff Evanson, Vice President, Investor Relations and Corporate Development. Please go ahead.

Thank you, Valerie. Good afternoon, everyone. Welcome to Symbotic's Second Quarter Fiscal 2023 Results Webcast. 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 the result of the factors described in 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 GAAP measures may not be comparable to measures used by other issuers. Today, we'll provide guidance for our third quarter, including revenue and adjusted EBITDA. We're not providing guidance for a 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 second quarter 2023 results and our outlook, followed by Q&A. Now I'll turn the call over to Rick.

Thank you, Jeff. Hello, everyone. As I think about how to talk about and give perspective on our second quarter, it's interesting to look back 2 years to see the progress we've made since our second quarter of fiscal 2021. Back then, we were building individual prototype systems and in that quarter, posted $23 million of revenue. We had a vision back then to dramatically transform the supply chain. We knew we had lots of challenges to overcome, and we are successfully overcoming most of those challenges. Now just 2 years later, we have 9 systems in full operation at multiple customer sites. We are currently deploying 28 additional systems and reporting over $0.25 billion of revenue in the quarter. So in 2 years, we have grown from a company with a sub-$100 million revenue run rate to one with a $1 billion-plus revenue run rate. In addition to our significant revenue growth, our quarterly results also reflect improving adjusted gross margin, improving operating margin and additional liquidity. Our teams are working diligently to be more efficient as they keep our many deployment projects running on budget and on schedule and executing a new outsourcing strategy. We are now aggressively diversifying training and scaling up a network of supplier and contractor partners. We feel good about the progress so far and see many ways we can improve. As I said on our call last quarter, we are committed to building a team of world-class talent to help us remain a leader in transforming the supply chain. During the quarter, we added several key team members who are already making important contributions to operations. Scaling and execution are important in driving our near-term results, but we believe that constantly innovating can sustain those results over the long term. Thank you, everyone, for your support and interest in what we are doing and for helping us as we realize our vision, transforming the supply chain. It's exciting to see our plan coming together, and we have a long way to go, but we're making great progress. Thank you. Now, Tom will discuss our financial performance and outlook. Tom?

Thank you, Rick. Second quarter revenue of $267 million grew 177% compared to 1 year ago, driven by incredibly strong deployment progress. We initiated 7 new system deployments during the quarter and as planned, advanced one system to full operation. We now have 28 active system deployments in process with multiple customers, an increase from 22 systems last quarter, 9 systems in the second quarter of last year. Our rapid revenue growth was driven by progress on deployments with particular strength from physical installation at our customer sites. As Rick mentioned, we are gaining efficiency in our deployments by standardizing our systems, streamlining our deployment [Audio Gap] processes and realizing the benefits of outsourcing. Our cash and equivalents, including marketable securities and restricted cash grew $17 million sequentially to $465 million due to favorable working capital performance. We believe we have more than enough -- more than adequate resources on hand to achieve our strong growth plans and remain very well capitalized to execute our strategy. Recurring revenue continued to grow sequentially as deployments moved to production. We now have 9 systems operating at customer sites. Over time, as system completions cascade, 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 second quarter adjusted gross margin increased 100 basis points sequentially. These results still reflect significant costs associated with lower margin innovation initiatives, the burden of elevated pass-through steel costs and costs associated with rapidly scaling our operations. Adjusted system gross margin improved by 70 basis points sequentially after excluding $5.2 million of the $8.4 million in severance and restructuring charges that flowed through cost of goods sold. This charge was related to discontinued manufacturing activities in Montreal where we were manufacturing robotic inbound and outbound cells and curtailed manufacturing capacity in Wilmington, Massachusetts, where we manufacture bots. Our outsourcing success enables us to continue to drive strong deployment growth while also setting the stage for long-term cost savings and margin expansion. In the second quarter, operating expenses, excluding stock-based compensation, increased sequentially as we continue to invest in innovation that can drive sustained growth and margin expansion. Finally, operating leverage improved as we achieved a 4% adjusted EBITDA loss rate compared to 8% last quarter and 27% last year. This was driven by our revenue growth and expanding gross margin. Turning to our outlook. For the third quarter of fiscal 2023, we expect revenue of between $245 million to $265 million and an adjusted EBITDA loss of between $11 million and $8 million. We are through the midpoint of our fiscal 2023 and are excited about the second half as we continue to transform the supply chain. We are scaling our business and innovating rapidly to deliver for our customers. We look forward to speaking with you again next quarter to provide an update on our progress, and now welcome your questions. Operator, will you please open the Q&A?

[Operator Instructions] Our first question comes from Andrew Kaplowitz of Citi.

Rick or Tom, can you give us more color into the transition outsourcing that you continue to see in terms of the restructuring charge you took? It looks like you expect to see maybe a slight improvement in losses and slightly lower revenue in Q3 than Q2. But are you experiencing in Q3 any of the impact of the restructuring? And when would you expect to see the full impact of the restructuring benefit, the streamlining of manufacturing, your P&L and how much benefit could you see?

Yes. So as you saw, we took an $8 million restructuring charge. This included both inventories and property, plant and equipment as well as $3 million related to people-related severance. So that's a little bit over 100 full-time employees, along with a little bit over 100 contractors. That was executed and planned for at the end of the quarter. However, we really begin seeing the benefit of those savings as we get into our fiscal third quarter. Again, those restructurings were associated with the discontinued cell manufacturing operations in Montreal and then the significant curtailment of bot manufacturing in Wilmington, Massachusetts. This falls on the heels, as Rick mentioned, with -- of our successful transition of the manufacture of all these goods to outsourced partners.

And then I think last quarter, you talked about maybe being a little more predictable in your revenue ramp, but you'd just beat Q2 -- beat the street by $50 million, and now you're predicting $10 million lower in Q3 despite your deployments continue to rise. So did you just somehow pull forward any revenue in Q2? Or should we begin after Q3 to see more of a steady sequential increase? And I also noticed you didn't give us a backlog number, if it's possible to give us that?

Sure, Andy. So our backlog was $12.0 billion, same number as last quarter. So our contributions equaled the outflows in the period and that will match our remaining performance obligation that we expect to disclose when we file our 10-Q. Andy, I do think that our -- as we're growing scale here and deploying more systems, the revenue is becoming -- that quarterly variability is becoming smoother. However, we are still growing really fast, and we're ramping new outsourcing partners. So we clearly are still seeing some significant variability in terms of quarter-on-quarter growth. Maybe to give a sense for how this translates out, we do expect to grow rapidly, and that's driven by the 28 systems in deployment. However, even as we look here into the second half, the strongest contribution in the second half is going to be driven from the 9 systems that were started in the second half of 2022, for example. So minor timing differences in one or 2 or 3 of those 9 systems can have meaningful differences in terms of the actual quarterly revenue growth that we post. So as we have more systems in concurrent deployment, we continue to expect that those sort of quarterly variabilities in revenue will begin to diminish over time.

One moment please. Our next question comes from the line of Matt Summerville of D.A. Davidson.

A couple of questions. First, Tom, can you maybe comment on, based on the successes you're having with outsourcing and [Technical Difficulty] just when you believe the company will be -- achieve EBITDA positivity on a sustainable basis? And then I have a follow-up.

Yes. So we are certainly encouraged with the successes we're having with our outsourcing partners and continue to work that program. As I think Rick highlighted and I emphasized as well, we do believe that we'll begin to see benefits and leverage in the near to midterm. And we continue to believe that over the long term, that while certainly, it will help us achieve our primary goal in outsourcing, which was the ability to scale this business to a much greater scale that we think it will result in a higher long-term profitability as well. So we're not giving guidance, I think that consensus expectations in the street -- Many analysts are looking for profitability in Q4. So we're not looking forward to the full year. But what I can say is that we do believe that our operating leverage is quite high that, as we're able to scale revenue, we believe that we'll continue to benefit from expanding gross margins, and we'll continue to see OpEx growth be moderate. And in particular, in the near term, we think operating expense growth can be curtailed significantly through the benefits of the outsourcing restructuring plan we just put in place at the end of this last quarter.

And then maybe as a follow-up, can you talk a little bit about maybe some of the progress you're making with BreakPack and SymBot and when you think those solutions will kind of be ready for game time, if you will?

We're making -- so we're really pleased with the progress we've made on the SymBot. That was a big technology change for us. And though we are not realizing all the value that will come -- and it's going to come over time. There's some software that we're still releasing and some AI sourcing and predictive maintenance, all good things. So they'll be coming in the next year. But we're really pleased with 2 things. One, we have a great new product; 2, we successfully managed to prototype it and then move it to outsourcing partners. So that will continue to improve. So that was a big deal in the last 6 months, and nobody should underestimate successfully outsourcing without blowing up your supply chain. So that's all I'll say about that. We're very happy with how it's gone. On the BreakPack, we're -- I'm probably there 1 day a week, sometimes 2 days a week. That's going to be a great product for us. It's still rough. It's our first prototype. But we would expect in the next -- certainly in the next 6 months that we should see very good results out of that.

I'll just add to that, Matt, that we're still actively field testing SymBot today, too. So we haven't announced the final general release of that product, but we have many of those units out actually running in live production environments today at multiple sites and multiple customers.

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

The first one is on the bridge from the fiscal first quarter to the most recently completed fiscal second quarter. Revenue was up roughly $60 million sequentially. I think EBITDA improved about $5 million. Tom, I know you called out a number of pass-throughs that were impacting that such as steel. Could you elaborate a little bit more on how much that was impacting both revenue and EBITDA sequentially and any other key puts and takes?

Yes. So you're right, we did see gross margin, in particular, improve by about 100 basis points sequentially. So let me address it maybe in 2 points as far as the gross margin, then I'll talk about OpEx. There's a few factors that benefited the expansion in gross margin. First, recurring revenue margins are improving and recurring revenue is increasing as new deployments are water falling in. Steel, while it's still significantly above the 10-year average was actually a modest sequential benefit. So that actually was a part of the 100 basis point expansion as well. And finally, while we're still experiencing several hundred basis points of impact from rapid growth and innovation projects in our gross margin that are actually a headwind we've talked about consistently, quarter-on-quarter, those are dimension as well. So all 3 of those factors were directionally moving in the right way. OpEx increased by about $7 million, which is -- which goes counter to the overall EBITDA contribution margin. And as we think about OpEx, a couple of factors there. First, the restructuring plans we put in place really didn't have a material financial impact in the fiscal second quarter. Those will begin benefiting us in earnest in 3Q. Also, if you recall, when we talked about the second quarter, we had a lot less project and other variable work in the quarter. We had some more of that -- just project and variable type of activity in the fiscal second quarter. We're also continuing the long-term plan to upgrade, transform our talent overall. And so we are seeing a little bit higher average cost per employee. In particular, as we look at the transformation of our workforce, we've had a material shift towards technical talent and that was particularly strong in the second quarter. So those are the things that we think will materially benefit over the long run. And while we're not disclosing headcount numbers in detail, net, we actually saw an over 20 headcount increase in our engineering force despite the total company in terms of our full-time employees being down 20 head counts, for example.

The second one is on the backlog. Thank you for giving the update on where it stands in total. Could you comment any more on the composition of it in terms of what kind of gross margin you might think is embedded in the backlog relative to where you're running? And when you think about the backlog, how much is coming from hardware relative to subscription elements and software?

Sure. And as you know, Mark, our backlog disclosure we tied to our accounting remaining performance obligation disclosure. So therefore, our backlog only includes contractual commitments, which means it's heavily populated by systems revenue as some of our recurring revenue sources will have annual or only partial 10, 15 year type of contributions. And first -- the first part of your question, Mark?

The -- Anything you can share on the gross margin embedded in the backlog relative to where the company is currently running, if you're able to comment there?

Yes. So overall, gross margin is 18.3%. We continue to expect the structural gross margins implicit in that backlog are much closer to 30%. And the difference between that 18% and the high 20s percent is really the 3 factors that I talked about in -- relative to your first question, in particular, the biggest of which is the financial impact in our COGS of our rapid growth and our shift to outsourcing, along with our innovation projects that are heavily weighted in upfront revenues in that backlog. That close to 30% structural gross margin is structural for the systems revenue only. As we think about structural gross margins for the recurring component of that backlog, we see them well north of 50% into the 60% range. So you blend those 2 together to get something that's in the mid to high 40 -- high 30s.

One moment please. Our next question comes from the line of Nicole DeBlase of Deutsche Bank.

Maybe just starting on the restructuring. So with the continued focus on outsourcing, should we expect more of these restructuring charges to come? Or do you think this was more of a one-off? And any color at all on quantifying the benefit that we should see from what you spent in the quarter over the next several quarters?

Yes. So as I said in my prepared remarks, we -- the restructuring includes the complete discontinuation of manufacturing of our cells in Montreal and a significant curtailment in Wilmington. So while we don't have any others to talk about today, that's a significant portion of the manufacturing activity we had to date. Obviously, we're continuing to advance our outsourcing initiatives across the range of things that we do. So there may be more in the future, but we'll talk about those as it's time to talk about them.

And then just shifting to the steel dynamics. So steel inflation has continued to tick a bit higher year-to-date. Is the expectation that this quarter is kind of the maximum benefit that you should see from steel? You talked about it being a sequential good guy. Like does it then turn into a sequential bad guy in the second half of the year?

Yes. And you're right, if you pulled the steel chart, it's shown quite a bit of volatility. So no, based on what we've seen to date, our steel purchases tend to be dollar weighted in the 10 to 12 months prior to actual installation where the revenue is concentrated, the installation phase. So we would actually expect the max benefit quarter to be our fiscal Q4 before you begin to see some of the uptick that we've seen recently create some headwinds. So it is hard to predict where these things are going to go because of the nature, which is one of the fortunate things that our business model allows us to pass these costs on to -- largely passing costs on to our customers, and we'd be making our profit dollars very predictably even though it does have a gross margin impact in terms of what we report on a percentage basis.

One moment please. Our next question comes from the line of Jim Ricchiuti of Needham.

A question on gross margins. If -- you cited several factors that could be more about a tailwind to gross margins. But I'm also trying to understand where exactly you are in the ramp-up of your outsourcing partners. If you're making enough progress in the early days of this, that we're going to continue to see that -- the benefit in the next 1 to 2 quarters? Or is there still additional costs that you're incurring as you ramp these outsource inputs?

Yes. We do see more tailwinds as we look forward. Now we are still -- we still do have a lot of work to do with our outsourcing partners. So while we have significant outsourcing happening across our entire value chain, we're still working on acquiring more partners across each of those, so manufacturing and [Technical Difficulty]. We also expect [Technical Difficulty] with these partners in terms of collaboration and communication that's going to benefit our mutual operations together over time. And so this is something that we think will provide opportunity to improve our efficiency over a multi-quarter time frame rather than just a multi-week time frame. And then there's just some near-term benefits that, now that we have the confidence and the capacity up and running with these partners, we're able to do things like discontinue our own operations that provides some immediate benefits. So I'd say it's a mix, Jim, but we clearly have a significant road map of opportunity over many quarters.

And I don't know if you want to comment on this, but what I'm thinking -- also trying to understand is the rating which you're scaling. How many system deployments would you anticipate advancing in the current quarter?

Is the question, how many do we anticipate initiating in this current quarter?

Initiating. I'm sorry, yes. That's right.

Yes. So we initiated 7 system deployments in the last quarter we just reported, in our fiscal second quarter. We don't tend to guide for the one quarter forward. I do think that there can be quarter-on-quarter variability in those numbers. So as we think about multiple quarters over time, we look to grow that number. But Jim, you should assume that there will be some ups and downs in terms of quarters. And we feel like the 7 we did this quarter and the 6 we did last quarter is an exceptionally strong quarter relative to our growth plans.

One moment please. Our next question comes from the line of Mike Latimore of Northland Capital.

Just in terms of supply availability, is that improving? Is there further improvements that could occur? Can you just give some turn around that?

Yes. We do continue to believe that the supply chain environment is improving. It is still not a normal supply chain environment. So we are still clearly battling things that would have been atypical pre-COVID in terms of canceled orders and things like that. In addition to perhaps supply chain environment getting better, we are a much more formidable buyer. So we're getting the attention of suppliers, we're getting attention of partners. And so those we think as well are continuing to improve our ability to execute.