Ouster, Inc. — Q2 2023 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2023. Ouster develops and sells digital lidar sensors and related software for industrial automation, smart infrastructure, robotics and automotive markets. The February 10, 2023 Velodyne merger substantially expanded the product portfolio and business; 2023 results include Velodyne from the acquisition date, so comparisons with 2022 are not like-for-like. Ouster reported $13.4 million of Velodyne revenue from February 10 through June 30.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $19.4 million | $10.3 million | $36.6 million | $18.9 million |
| Gross profit (loss) | $0.2 million | $2.8 million | $(0.2) million | $5.4 million |
| Gross margin | 1% | 27% | (1)% | 28% |
| Net loss | $(122.7) million | $(28.0) million | $(300.0) million | $(60.4) million |
| Net loss per share | $(3.19) | $(1.60) | $(8.84) | $(3.49) |
Q2 revenue rose 88%, primarily due to the Velodyne merger and higher OS sensor sales, including REV7. Cost of revenue rose faster than sales, reflecting the acquired business and REV7 transition costs. Q2 operating expenses were $123.2 million, including $67.3 million of goodwill impairment; six-month impairment charges totaled $166.7 million, leaving no goodwill at June 30. The impairment followed a decline in Ouster’s share price and market capitalization. Six-month stock-based compensation was $38.2 million.
Six-month cash used in operating activities was $86.5 million, compared with $55.4 million in 2022. Cash, cash equivalents and short-term investments totaled $224.4 million at June 30 ($91.2 million cash and equivalents and $133.2 million short-term investments). Debt was $40.1 million. The Hercules loan carries a 17.9% effective interest rate, has a $60 million minimum-liquidity covenant, and matures May 1, 2026. The additional $10 million facility tranche is no longer available because specified revenue and profit conditions were not met. The company reported covenant compliance.
Changes, outlook and material risks
- Revenue increased substantially after the merger, but gross margin fell sharply year over year. Management cited merger-related costs, REV7 transition expenses, excess and obsolete inventory charges, and competitive pressure on average selling prices as factors affecting margins.
- Management expects operating results, revenue and gross margins to remain variable while customers evaluate and commercialize lidar applications. It expects unit costs to decline over time with higher volumes and manufacturing scale, but gave no specific financial guidance. Management believes existing liquidity can fund operations for at least 12 months from issuance of the statements; further capital may be needed if losses continue, and additional financing is not assured.
- Merger-related restructuring included workforce reductions and closure of the India facility. Six-month employee termination and associated benefits were $15.2 million, with $3.6 million accrued at June 30. The company also reported a $5.1 million inventory write-down for the six-month period.
- Ouster has $25.3 million of non-cancelable purchase commitments to contract manufacturers and $4.8 million to other vendors. Operating lease liabilities totaled $29.8 million.
- Ouster’s patent-infringement claims against Hesai are proceeding before the ITC; a related federal case is stayed pending the ITC matter. Hesai disputes the claims and has separately sought arbitration over a Velodyne settlement agreement. Outcomes and potential financial effects are uncertain.
- Management concluded disclosure controls were not effective at June 30 because of material weaknesses in internal controls over financial reporting, including staffing and accounting expertise, period-end reporting controls and IT general controls. Remediation work is underway but requires continued implementation and testing.
- Supply-chain constraints, customer adoption and production timing, pricing competition, integration execution, and interest-rate and inflation pressures could affect results. The filing reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported growth and future sales reflects acquired Velodyne products versus organic demand, and whether customer programs progress to serial production.
- Whether gross margins improve as REV7 transitions, manufacturing scales, and merger integration and inventory-related costs develop.
- Cash burn, available liquidity, the $60 million loan covenant, repayment timing and the company’s need for additional financing.
- Potential dilution: common shares outstanding increased to 39.3 million at June 30 from 18.7 million at year-end, largely reflecting the merger; also review outstanding warrants and equity awards.
- Progress and outcomes of the Hesai proceedings, merger integration and restructuring, and remediation of the disclosed control weaknesses.