Hello. Welcome to Ouster's Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After today's presentation and remarks, there will be an opportunity to ask questions. [Operator Instructions] The call today is being recorded, and a replay of the call will be available on the Ouster Investor Relations website one hour after the completion of this call. I'd now like to turn the conference over to Mr. [Chen Geng], Vice President of Strategic Finance and Treasurer. Please go ahead, sir.

Thank you and good afternoon, everyone. Thank you for joining us for our 2023 third quarter earnings call. I am joined today by Ouster's Chief Executive Officer, Angus Pacala and Chief Financial Officer, Mark Weinswig. Before we begin the prepared remarks, we would like to remind you that earlier today, Ouster issued a press release announcing its third quarter 2023 results. The company also published an investor presentation, which is available on the Investor Relations section of ouster.com. I'd also like to remind everyone that during the course of this conference call, Ouster’s management will discuss certain forward-looking information regarding the company, including commentary regarding the company's growth strategy and go-forward financial framework, the company's fourth quarter 2023 financial guidance and other matters described in today's press release that are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. There is no guarantee that such plans, estimates, and expectations will be achieved. And Ouster's actual results are subject to risks and uncertainties that may cause actual results to differ materially from current expectations that we may share with you today. In addition to any risks highlighted during this call, you should carefully consider other important risk factors and disclosures that may affect Ouster's future results as described in the reports the company files with or furnishes to the SEC, except as required by law, rule, or regulation, the company undertakes no obligation to update any of these forward-looking statements for any reason after the date of this call. Information discussed on this call concerning the company’s industry competitive position, and the markets in which it operates is based on information from independent industry and research organizations, other third-party sources and management estimates, which are derived from publicly available information, released by independent industry analysts and other third-party sources, as well as data from the company’s internal research and are based on reasonable assumptions and computations made upon reviewing such data, and its experience in and knowledge of such industry and markets. By definition, assumptions are subject to uncertainty and risks, which could cause results to differ materially from those expressed in the estimates. During this call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures should be considered as a supplement to and not a substitute for measures prepared in accordance with GAAP. For a reconciliation of non-GAAP financial measures discussed during this call to the most directly comparable GAAP measures, please refer to today’s press release. I’d now like to turn the call over to Angus.

Hello, everyone, and thank you for joining us today. Ouster had a fantastic third quarter as we continue to realize the benefits of our merger with Velodyne. We exceeded guidance, recording over $22 million in revenue and maintained strong quarterly bookings of $38 million. We continue to improve gross margins across the board, in line with our expectations for the second half of the year. We shipped over 3,300 sensors, improved our product mix and recorded GAAP gross margins of 14% and non-GAAP gross margins of 33%. Importantly, we exceeded our cost reduction goal and did so a quarter sooner than expected achieving over $120 million in annualized cost savings and bringing our spending below pre-merger levels as compared to when we're a stand-alone company. On top of all this, we continue to execute on our product roadmaps for the OS and DF series and achieved major milestones that we believe will further advance our Software Solutions business. Finally, we built an operating model for the company in line with our growth strategy that we believe puts us on a clear path to profitability. Turning to our four strategic priorities for the business this year, which are to drive new business through a targeted sales approach to deliver near-term growth, execute on the digital lidar roadmap for OS and DF series to expand our serviceable market, develop a robust software ecosystem to accelerate lidar adoption and build a financially strong business to support our long-term growth. Ouster continued to drive new business, booking over $110 million in business with new and existing customers in the first three quarters of 2023, including $38 million in the third quarter alone. This includes a multi-million dollar award to supply REV7 sensors for use in a mapping application and demonstrates how REV7's enhanced range,…

Thank you, Angus, and good afternoon, everyone. Starting off with our third quarter 2023 results, we recognized a record $22.2 million in revenue, a 15% increase over the second quarter. The automotive, industrial, robotics and smart infrastructure verticals each accounted for approximately one-quarter of our revenues. In the third quarter, we booked $38 million in business with new and existing customers. This represents a book-to-bill ratio of 1.7 in the third quarter. Over the last three quarters, our book-to-bill ratio has averaged 2.0. Similar to the first half of 2023, the third quarter saw continued commercial traction driven by strong demand and improved product mix. We shipped over 3,300 sensors in the third quarter and ASPs increased slightly on a sequential basis. As anticipated, Ouster significantly improved its GAAP gross margins in the third quarter to 14%. Third quarter gross margins included certain expenses outside of our ordinary operations, including excess and obsolete costs and losses on firm purchase commitments of approximately $3 million primarily associated with the consolidation of product lines. Ouster's non-GAAP gross margins were 33% in the third quarter of 2023, up significantly from the prior quarter to a near record level as a public company. The higher gross margins were driven by an increase in product and software revenue, higher ASPs and a reduction in manufacturing costs, which reflects the actions we have taken over the past nine months to reduce our cost structure. We expect further improvements in our GAAP and non-GAAP gross margins. Given the transient nature of our integration-related activities, we will continue to break out merger integration, product transition and other expenses outside of our ordinary operations in an effort to provide a clear delineation between infrequent or unusual impacts and the fundamentals of the business to help baseline future operating performance.…

Thank you, Mark. Our business has tremendous revenue growth potential across all verticals. The use case for lidar continues to expand, and we believe that Ouster software products will accelerate adoption. As such, we aim to achieve an average annual revenue growth rate of 30% to 50% and see multiple opportunities to drive this growth. First, our strong bookings will serve as a tailwind as we enter 2024. For example, key customers in our mapping and automotive verticals have signed binding commitments tripled their purchases next year versus 2023 levels. These large multi-million dollar bookings will provide substantial momentum. Second, we are witnessing an expanding sales pipeline across multiple verticals as customer projects progress from a valuation to commercialization. For example, we are engaged with leading OEMs in the forklift industry, which manufactures over 2 million units annually. We estimate a 1% penetration rate in this single sub vertical representing over $50 million of annual lidar hardware revenue opportunity with substantial upside from retrofitting the installed base. Similar size opportunities exist with other large end markets like autonomous mobile robots, earthmovers and agriculture. Our pipeline includes robust engagements with multiple customers. These demand plans grow from initial purchases in the dozens of units to hundreds or thousands of units over 12 to 24 months. Third, we are encouraged by positive industry growth trends, two leading lidar industry analysts, Yole and ABI forecast volumes for logistics, smart infrastructure and non-automotive ADAS applications to grow at a 40% plus CAGR from 2023 through 2026. This broad adoption wave strongly supports our business. We firmly believe that the non-ADAS market opportunity is substantial and will not be a constraint on our long-term growth. Lastly, automotive ADAS is a major upside catalyst for our business. Our current operating model does not rely on an ADAS win to achieve success. We believe 2024 will represent the culmination of multiple years of developing the end-state architecture of automotive lidar with the fully solid-state DF series. We are confident in our ability to win high-volume series production programs based on the positive feedback from OEM and Tier 1 demos as we put increasingly mature DF hardware in their hands. So to recap, we are laser focused on three key areas to position Ouster for financial success as we proceed along our path to profitability. Growing revenues by 30% to 50% annually, by expanding current customer commitments, penetrating new market opportunities and capitalizing on growing demand for lidar technology, expanding our gross margins to 35% to 40% through improving our operations structure and a more favorable product mix and maintaining operating expenses at or below third quarter 2023 levels to capitalize on our operating leverage. I'll turn it back to Mark to provide our fourth quarter guidance.

Thanks, Angus. Our third quarter performance saw a number of financial improvements over the second quarter, including higher revenues, higher gross margins, lower operating expenses and a significantly improved net loss and adjusted EBITDA. We have sequentially increased our reported gross margins and revenues each quarter since the merger and see strong demand going into the fourth quarter. For the fourth quarter of 2023, Ouster is targeting between $23 million and $25 million in revenue, we are pleased at our growth over the past several quarters, driven by the strong bookings activities and key design wins. We expect to see continued progression on our gross margins as we complete the integration activities, transfer manufacturing of the Velodyne sensors and benefit from a favorable product mix. As we continue to make progress on these activities, we expect our GAAP results to further converge with non-GAAP results. And with that, I would like to turn the call back over to Angus for closing remarks.

Thanks, Mark. I'm extremely proud of our third quarter results, in addition to the massive effort by everyone at Ouster to support a successful integration following our merger with Velodyne in February. While we still have one more quarter to go, we have already made incredible progress against the goals we set earlier this year. We optimized our business operations, achieved significant cost savings, improved the unit economics of the Velodyne products through outsourcing, transition the manufacturing of our REV7 sensors, continued to execute on our OS and DF digital lidar road maps and unified and improved our software offerings to accelerate our solutions business. We did all of this while shipping more sensors, improving gross and recording growing quarterly revenues. We believe that Ouster's multi-market strategy and digital lidar roadmap, combined with the tailwind from Velodyne product sales and growing opportunities for software coupled sales, all backed by our new operating model puts us on a clear path to profitability and positions us as a top global lidar company today and to remain one well into the future. And with that, I'd like to open it up for Q&A.

Thank you. [Operator Instructions] We'll go first this afternoon to [Madison De Paola] at Rosenblatt.

Hi. This is Madison De Paola calling in for Kevin Cassidy. I was just wondering how much visibility does your order backlog give you? Or are your customers ordering beyond your lead times?

Thanks for the question. We actually have a really strong visibility into the future growth at Ouster. And it really starts with the bookings performance that we've had all year and including in Q3. We had a 1.7 book-to-bill ratio in Q3. We booked over $100 million worth of business in 2023 alone. And that gives us a lot of confidence now on kind of the multi-year view on where Ouster business is going. And I would say that we were very thoughtful also in our growth metrics in our long-term financial model, where we talk about a 30% to 50% growth trajectory as part of that. And so all of that – those numbers are based on the observations that we've had from our internal data in addition to the CAGRs that we see across the industries that are driving our business.

Thank you.

Thank you. We'll go next now to Kevin Garrigan at Westpark Capital.

Yes. Hey. Good afternoon, Angus and Mark. And thanks for taking my questions and congrats on the progress. Your Gemini and Blue City software, you had a strong bookings quarter. Can you kind of give us a sense of what bookings were for these platforms over the last few quarters? And now with the unification and added features, do you expect software revenues to kind of be a little bit ahead of what you were previously expecting?

Well, yes, let me start by saying, I mean, I'm very happy with where we are with our software business. We’re in the third quarter since releasing Gemini at the beginning of the year. We brought Blue City into the mix with the merger and have now completed the integration of Blue City into the Gemini software platform. So we've been moving extremely quickly on this front. And by the end of Q3, at this point, we put out a press release that talks about the multi-million dollars worth of bookings that we've closed with software coupled sales to this point in the year. I mean that's just – I couldn't be happier with where we're going with this business and the markets that we're tapping into, really multi-billion dollar markets that we are tapping into that are ripe for expansion with our software coupled sales. In terms of breaking out those sales by quarter or in more detail, not ready to do that yet. But my hope is that as we get our heads wrapped around exactly where this business is going, especially in the next year, then we'll start to get some more visibility into the numbers that are driving that side of the business specifically.

Okay. Perfect. And then I apologize if I missed this, but on your DF sensor, any comments you can make about how many automotive OEMs you're shipping to and what do customers kind of like about your sensor over the competition?

Yes. Thanks for the question. So in Q3, we met with a number of auto OEMs, Tier 1s and other partners across the world. I attended many of the meetings. I got to see direct feedback from those teams. And we got overwhelmingly positive feedback on the richness of the point cloud, the maturity of the architecture and the fact that we are building the end-state architecture for this industry. It's really important that our strategy was validated through customer feedback, seeing the product, understanding the technology and then acknowledging to us that they see the industry going towards these solid state digital first architecture sensors, of which DF is really the preeminent example. So I couldn't be happier with kind of the acknowledgment and of the benefits of DF from those kind of three key points: Compact, which means rugged, digital, and solid state, right? Those are the key points that allow us to commercialize this technology into automotive and create an end-state technology like other digital technologies, CMOS cameras, radar sensors and cars and just get this into every last car in the world. And I'm sorry, you had a follow-on question?

No. I was just wondering what customers like about your sensor over the competition, but you answered that. So I appreciate the detail.

Thank you. [Operator Instructions] And gentlemen, it appears we have no further questions today. Mr. Pacala, I'll hand things back to you for any closing comments.

Well, I'd just like to say, success in the lidar industry requires having a great technology, great strategy and team, but it also requires execution. And this is only the second full quarter since Ouster's merger with Velodyne. And our Q3 results, I think, speak for themselves. I'm incredibly proud of what our team has accomplished in short order, and I believe that Ouster is on a strong path of growth. So I want to thank everyone that joined the call today and thank the Ouster team for all of their hard work for this quarter.

Thank you. Ladies and gentlemen, that will conclude Ouster’s third quarter 2023 earnings conference call. I'd like to thank you all so much for joining us and wish you all a great remainder of your day. Goodbye.