Hello and welcome everyone to Ouster’s Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] And just a reminder, today’s call is being recorded and a replay of the call will be available on the Ouster Investor Relations website an hour after the completion of this call. I’d now like to turn the conference over to Ms.

Sarah Ewing, Director of Investor Relations. Sarah, please go ahead..

Thank you and good afternoon, everyone. Thank you for joining us for our 2022 fourth 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 fourth quarter and fiscal year 2022 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 forecasts, targets, statements from its press release, potential future customer orders and shipments, near and long-term revenue opportunities, strategic customer agreements, market share trends, anticipated synergies from the company’s merger with Velodyne, ability to recognize the benefits of cost savings initiatives, future products, anticipated benefits and applications of new product releases, technological advancements and commercial paths, potential future market opportunities, customer traction and the company’s business outlook and first quarter 2023 financial guidance and trajectory are forward-looking statements 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.

Thus, while these statements represent management’s expected future results and performance, Ouster’s actual results are subject to several 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 its most recent annual report on Form 10-K and other reports that the company files with or furnishes with 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 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, which exclude the effects of events and transactions we consider to be outside of our operations as outlined in today’s press release. 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 recently comparable GAAP measures, please refer to today’s press release. Finally, please be advised that we will only cover historical Ouster financial results as well as forward-looking statements for the combined company.

We will not report on nor provide standalone results for Velodyne. I’d now like to turn the call over to Angus..

execute on our digital lidar roadmap; develop a robust software ecosystem to accelerate lidar adoption; and build a financially strong business to support our long-term growth and deliver value to shareholders.

Our differentiated digital lidar technology supports a uniquely diversified business model with the ability to drive near and long-term revenue growth and scale across multiple markets.

In the fourth quarter, we released our new REV7 sensors, the highest performing family of sensors on the market, delivering dramatic improvements in range, precision and accuracy across our entire OS lineup. Our OS0 delivers 1.5x more range and 6x higher resolution than competitors.

Our OS1 delivers 2x more range and 4x higher resolution than competitors. And our OS2 not only achieved a greater than 200 meter range on 10% reflective objects, but now has a maximum range of over 400 meters. Additionally, the OSDome Hemisphere 180-degree field of view delivers 4x higher resolution than competitors.

The REV7 sensor suite improves our overall competitiveness across markets, opens up new opportunities and cements our position as the industry leader for high-performance lidar. The early feedback from customers has been extremely positive. We closed new and expanded deals for REV7 sensors shipping to 29 customers in the fourth quarter.

We also booked orders with customers such as Cyngn and Vecna for warehouse automation; Parafix for speed enforcement; torque robotics for trucking; and RYSE for aerial drone inspection as well as a major mapping customer, a large European OEM and another European OEM using REV7 on mining trucks.

We believe the REV7 sensors will more than double our serviceable market driven by new opportunities for long-range and mapping applications. As such, we expect REV7 to be a major growth catalyst for Ouster in 2023.

Looking forward, we also expect the Digital Flash or DF Series for high-volume series production automotive programs, to also be a major catalyst for growth.

We released our first A samples in 2022, which demonstrated that our solid-state digital flash architecture could achieve the stringent performance requirements of the automotive industry at a competitive cost. In the second half of the year, we plan to release final form factor early B samples of our DF sensors.

This is a critical milestone on our automotive roadmap and in our commercial engagements with automakers, including our strategic OEM partner. For the first time, we will be placing DF sensors in OEM hands to represent the final size, shape and performance of the DF product line.

I can’t wait to demonstrate the performance, cost and flexibility advantage of the DF product line. Turning to software. Building a robust software ecosystem remains an important part of our product roadmap to catalyze new growth.

This includes best-in-class development tools to simplify development for customers as well as our new software solutions business built on Ouster Gemini and BlueCity targeting the smart infrastructure vertical.

The market for lidar across smart infrastructure applications is fast and growing, driven by government initiatives to build safer, more sustainable cities by modernizing public infrastructure and transportation systems as well as emerging opportunities for lidar in security and crowd analytics to enhance the guest experience, boost revenue and simplify operations.

With millions of signalized intersections around the world and the global market for end system security cameras already estimated at $32 billion, there is a multibillion dollar market opportunity for lidar and smart infrastructure. As lidar technology becomes increasingly prevalent on critical infrastructure across the U.S.

from airports and shipping ports to our country’s most populated cities and traffic roadways, Ouster is proud to be one of the few companies offering By American certified centers. To build on this momentum, we recently released the Ouster Gemini Smart Infrastructure Perception Platform and added the BlueCity Traffic Management Solution.

With the successful early rollout of Ouster Gemini in the second half of 2022 and after closing deals with more than 10 companies, we officially released Ouster Gemini in January 2023. A handful of these customers are already using Ouster Gemini in live deployments across the U.S. and Europe to improve retail operations, security and roadway safety.

BlueCity is a turnkey lidar-based solution for intelligent transportation systems with over 100 active deployments in 2022.

As part of our plans to unify our software solutions for the smart infrastructure vertical, BlueCity will be underpinned by Ouster Gemini to add OS under compatibility, more features and better overall performance to BlueCity customers.

With the launch of our game-changing REV7 centers, new software solutions for smart infrastructure applications and early B samples for the DF series as well as key benefits from our merger with Velodyne, including an expanded team, customer base, product portfolio and partner ecosystem, we believe Ouster is more competitive and poised to close exciting new deals in 2023.

In order to position the company for stable, near- and long-term growth, we are building a business model that is both competitive and resilient.

I’m happy to introduce Mark Weinswig as our new CFO to lead us through the integration with Velodyne to help us align our cutting-edge technology and market growth with a solid business foundation to support Ouster now and into the future.

And with that, I’ll now turn it over to Mark to update on our financial results for the fourth quarter and full year 2022 as well as provide further details on our near-term integration plans..

Thank you, Angus, and good afternoon, everyone. I am excited to be a member of the Ouster management team and look forward to aligning our differentiated digital lidar technology and diversified market approach with a business model that is in line with the lidar industry’s estimated growth trajectory.

Starting off with our fourth quarter 2022 results, we recognized nearly $11 million in revenue. Our industrial and robotics customers accounted for a combined 62% of sales in the fourth quarter which included substantial shipments for port automation, material handling vehicles, drone inspection and warehouse automation applications.

A key highlight of the quarter was the number of units shipped, reaching a record of 2,950 sensors in Q4, or a 23% increase over the fourth quarter of 2021. This includes the first commercial shipments of our new REV7 sensors to 29 customers. Further, we shipped sensors to nearly 90 new customers in the fourth quarter of 2022.

Ouster is entering 2023 in a great position with the newly released platform over 850 customers worldwide across all of our key markets and a strong balance sheet. Ouster continued to deliver positive gross margins in the fourth quarter of 2022, recording 17% gross margins.

Gross margins were lower in the fourth quarter, primarily driven by some large unit volume sales to certain commercial customers with lower ASPs as well as higher expenses associated with the manufacturing transition to the REV7 sensor platform and overhead underutilization from our lower build plan as part of the product transition to the REV7.

We expect to deliver higher margins over time after we complete the Velodyne integration and ramp up our manufacturing of the REV7 sensors. This transition to REV7 is a major catalyst for growth as this suite of sensors more than doubles our serviceable market opening up new opportunities and increasing our overall competitiveness in 2023.

Moving on to our full year results. We are very pleased with our progress over the past year. Ouster achieved both our revised revenue and gross margin targets for 2022, recording approximately $41 million in revenue and 27% gross margins for the year.

In total, we shipped over 8,650 sensors in 2022, which amounts to over 18,500 sensors shipped to date.

Across our target markets, Ouster saw strong traction in the industrial and robotics verticals, accounting for 35% and 34% of our sensors shipped in 2022, respectively, with strong demand for automation technologies across the supply chain continues from mines of farms to shipping ports and warehouses.

The automotive vertical accounted for 22% of sensors shipped primarily from robotaxis, robotrucking, shuttles and buses. Finally, 9% of sensors were shipped to customers in the smart infrastructure vertical in 2022.

This remains an area of significant opportunity with over 210 new programs awarded in 2022, representing demand for thousands of sensors, which will be deployed over the coming years as well as with the release of the Ouster Gemini software product in January 2023 and our new BlueCity offering.

In 2022, Ouster recorded $70 million in bookings with new and existing customers, demonstrating our growing traction across verticals even in the near-term.

Bookings represent binding contract orders from customers, which we believe is a more meaningful metric than strategic customer agreements or SCAs as the bookings metric captures orders from all customers. Ouster ended 2022 as a leading lidar company amongst our public lidar peer set based on both revenues and gross margins.

We believe this momentum is only strengthened by the merger with Velodyne, which showcases Ouster’s maturity in the industry and allows us to build a business model that can sustain near- and long-term growth. Turning to the Velodyne merger integration activities.

We are taking strategic steps to achieve the cost synergies that allow us to build a healthy business. The company is well capitalized with a combined approximately $315 million in cash, restricted cash, cash equivalents and short-term investments as of December 31, 2022.

We remain on track to exceed previously projected annualized cost synergies of $75 million within 9 months. The synergy estimate is baselined against the stand-alone cost structures of the two companies as of the third quarter of 2022.

We closed the merger with Velodyne on February 10, earlier than expected, and took immediate steps to significantly reduce costs. By the end of the first quarter of 2023, the company expects to have removed approximately $50 million in annual run rate costs compared to the third quarter of 2022.

We expect the first phase of integration to require one-time cash costs of approximately $12 million to $14 million with the majority paid by the end of March. These implemented cost reductions primarily focused on duplicative R&D programs, general and administrative activities and the creation of a joint operations team.

These activities include a headcount reduction of approximately 200 employees along with the closing of Velodyne’s facility in India. We expect to retain approximately 350 employees following the completion of our integration efforts.

We’re keenly focused on positioning the company for long-term success, and we will continue to identify additional cost synergies as we work through the integration. Through these activities, we are taking the first steps to realign our operating model to build a healthy, scalable business that can deliver value to our shareholders.

We look forward to providing further details over the next couple of quarters as we continue to develop and execute on our plan. Going forward, at this time, we plan to only provide quarterly guidance for revenue. For the first quarter of 2023, Ouster is targeting between $15 million and $17 million in revenue.

We expect the first quarter to experience some margin pressure due to the merger integration work including the ongoing work to outsource manufacturing for Velodyne sensors as well as the manufacturing transition and start-up costs from the REV6 to REV7 OS sensors.

That said, we remain highly confident in our long-term trajectory and continued traction in the market. With a strong balance sheet, increased scale and new product offerings, we believe 2023 will be a transformational year for this company. And with that, I would like to turn the call back over to Angus..

Thank you, Mark. 2023 is going to be a major year for Ouster driven by new hardware and software solutions that we believe will accelerate lidar adoption and the new operating model aimed to put us on a path to profitability in line with our long-term growth plans.

lidar is quickly becoming an essential technology on our roads, across our supply chain and throughout our critical infrastructure. Ouster is well positioned with the technology, team and strategic approach to make lidar ubiquitous to build a safer, more efficient future. With that, I’d like to open it up for Q&A..

Thank you, Mr. Pacala. [Operator Instructions] We will take our first question this afternoon from Andres Sheppard at Cantor Fitzgerald..

Hi. Good afternoon, everyone. Congratulations on the quarter and thanks for taking our questions. Maybe to start off, I just wanted to see if you could provide a little more color on gross margins, right? So Q4 margin came in a little bit lower than historical numbers.

I realize you don’t provide guidance for 2023, but can you give us a sense of whether this last number is a bit of an outlier or whether we should expect similar gross margins over the – in 2023? Thank you..

number one was higher start-up costs associated with the manufacturing transition from the REV6 to REV7 sensors, which we do believe will deliver higher margins over time.

Number two was some large volume, lower ASP deals with key commercial customers; and then number three was a reduced bill plan, which led to lower manufacturing absorption and a reduced operating leverage. Those were some impacts for the fourth quarter.

Looking at the first quarter, obviously, we’re going to have some additional opportunities or pressures related to the merger integration with Velodyne. That will include some ongoing work to outsource manufacturing and for the start-up costs associated with manufacturing those products over in Thailand.

We will continue to see some additional manufacturing transition costs associated with the move from the REV6 to REV7 sensors and then potentially some one-time merger-related costs, including items such as purchase accounting step-up relating to inventory.

But we do believe that the REV7 sensors will help us drive higher margins as we move through the rest of this year..

Yes. And I would also add that we do expect ASPs to be stabilized back at historic levels, not the lower levels of Q4, and that’s what we’re seeing in Q1. So I think overall, it was absolutely the right call to invest in the REV7 lineup, and there were costs associated with that, that did obviously impact the Q4 margin.

But the early response from the REV7 customers, we shipped to 29 customers in the quarter. We’ve had immense positive reaction from those products. And it set us up extremely well looking into 2023 on where we’re going with the business. So just a little helpful context on why we made that investment..

Got it. No, that’s very helpful and insightful. I appreciate that color. Maybe as a quick follow-up. Can you mind just reminding us on your capital needs, right? So the $315 million in liquidity, that includes the merger with Velodyne.

And so what does that mean going forward? Do you anticipate there being a need to raise additional capital? Or is that aggregate liquidity sufficient to give you significant runway? Thank you..

As you mentioned, as of December 31, we had a very healthy combined balance sheet if we take into account the cash that we received from the Velodyne merger with roughly $315 million. One of the key things is that we made – we took action on day 1 after the merger to reduce our cost structure.

We had committed to, as part of the merger, to exceed $75 million in cost synergies. As we mentioned in our prepared remarks, we’ve already removed $50 million exiting the first quarter.

There was some one-time cash costs associated with that with about $12 million to $14 million, but we do feel very good about the early-stage success of the integration. We see significant opportunities in the lidar space, and we do believe that our technology and products should enable us to win significant share in the future.

We are going to continue to make investments over time, but it is something that we our weighing, which is obviously making sure that we can put in place a healthy business model for the future. And so we are looking at opportunities to continue to reduce our cost structure and put us in a good position for that..

Wonderful. Thanks, again and congratulations on the quarter. I will pass it on..

Thank you..

Thank you. We go next now to Brian Dobson of Chardan Capital Markets..

Yes. Thanks very much. So I understand that you’re not issuing guidance. However, you did issue a combined pro forma outlook for the two companies just prior to the close of the deal.

Now that you’ve had some time to overview the businesses with the combined [indiscernible], how do you feel about those 2023 and 2024 revenue numbers? And should the Street still rely on them?.

Yes. We appreciate the question. Obviously, right now, we’re only giving our first quarter guidance, which was for this period, which is between the $15 million and $17 million. We are continuing to look at the combined business and what it’s going to look like. Obviously, we’re only 40 days into this merger.

So we’re just starting off with kind of looking at the opportunities to grow the business, for the opportunities to get our cost structure in line. So I look forward to updating you in future quarters as we continue to make more progress on some of these integration activities.

But for right now, we’re really just putting our heads down and focusing on the task at hand..

Yes. And I’d just add that we came out of 2022 with $70 million in bookings for the year. That’s an extremely strong number for us as a business, and that was built primarily from the REV6 product line. And obviously, we’ve invested and now we’re shipping REV7 products. They are a game changer for our customer base and for expanding our SOM.

And so the growth we saw in bookings, the growth we saw in revenue and shipments and won deals last year gives us a lot of confidence that we’re on the right trajectory for this year. And the merger from the work we’ve done in the last 4 weeks, we’re on track with the merger.

We’re on track with our product transition on the Velodyne side, Fabrinet to really supporting those products and that revenue base long-term as well. So I think in aggregate, we feel really good about where we are for the year..

Right.

And were those REV7 sales, were those contemplated in the pro forma numbers that you put out in the filing?.

Yes, absolutely. So absolutely, this year, REV7 will be a major catalyst for us winning new business and also expanding business with our existing customer sets. I can’t stress enough how much of a game changer the REV7 product line is.

We changed basically every component in those devices we upgraded starting with the L3 chip a much more advanced semiconductor node, hundreds of millions of transistors worth of logic that double the range of the entire product line with no drawback in power draw, size, form factor, cost structure to the product line.

And we also released a new form factor, the OSDome in the process. So not only are we improving our existing products, but we released this very differentiated OSDome product to expand more in our industrial and robotics space, but also give us a perfect sensor for all of our smart infrastructure solutions business.

I’m using it in a ceiling-mounted way, just like a security dome. So the REV7 is absolutely a part of the business. And I’d highlight that we have already announced head-to-head wins with the REV7 sensors, Cyngn and LASE R2 that we recently released one in industrial robotics, the other LASE in port automation.

And so the early product feedback has been incredibly promising..

That’s excellent to hear. Thank you for that color. Just one final question. In the filing, you have some pro forma revenue numbers for ‘23 for Velodyne and for Ouster. And then you have the combined entity.

And it seems like there is some leakage between those three numbers, and that’s probably due to, call it, redundant product lines or redundant customers.

The first quarter guidance you gave, that’s just for stand-alone Ouster, right? Would you expect combined results to be below that range?.

Well, I appreciate the question. So for the stand-alone guidance that we’re giving for the $15 million to $17 million of revenues, that includes any Velodyne products that we are shipping out after the merger date of February 10.

So that would include the existing Ouster business plus, the VLP-16, the VLP-32 and the VOS-128 product lines from Velodyne..

Okay. Alright, thanks very much..

We will go now to not to Tristan Gerra of Baird..

Hi, this is Tyler on for Tristan. Thanks for taking the questions.

Could you provide an update of the state of demand in China? Do you expect a second half recovery? And then also, could you just remind us what your revenue exposure is to China?.

Thanks for the question. Yes. So we’ve never broken out the China revenue base. We’ve invested significantly in the region. There is a ton of great business to be had in APAC as a region overall. We do have a presence in China, both Velodyne and Ouster did, and we continue to have a presence there.

We have a lot of great customers within China in the robotics and automotive space where there is been a ton of investment in kind of robotaxi and adjacent industries. But we’re also investing significantly into major other Asian markets like South Korea, Japan, Australia, Singapore.

And obviously, we have a big physical presence in Thailand as well with our manufacturing there. So we’re expecting to continue to invest in the entire region. It’s an important region for us.

We haven’t broken out the demand and don’t expect to, but really feeling good about the APAC region and their performance in 2022 and what we’re expecting from them in 2023..

Okay. Great. For my follow-up, you mentioned that 1Q ‘23 ASP should go back to historical levels. But how should we think about price declines expected for the rest of the year and then also compare that with your expected cost declines for the year..

Yes. So just stepping back, the fundamental kind of premise of the digital lidar sensors that our COGS are going to continue to decrease faster than our ASPs continues to be our expectation. Mark mentioned some of the headwinds that we will have as a part of the merger, as a part of the REV6 to REV7 transition, those are near-term effects.

But we do expect that REV7 will continue to march down this COGS trajectory while ASPs stay more stable.

And so we noted that ASPs were lower in the fourth quarter due to some higher volume, lower ASP customers, but we’ve already seen ASPs rebound for the REV6 products and the REV7 products are already coming in at higher ASPs, premium ASPs, than the REV6 products by design, given their premium performance..

Okay. Thanks, again..

Thank you. We go next now to Kevin Cassidy at Rosenblatt Securities..

Yes. Thank you for taking my questions. Just congratulations on the book-to-bill ratio that you had in 2022.

When you’re looking at the first quarter, are you continuing that type of book-to-bill ratio, assuming $16 million in revenue?.

Absolutely. I think that the book-to-bill is such a strong indicator for the business. You’ll recall going back even to when we went public, we talked about the importance of building binding relationships with our customers, signing contracts with our customers, and we continue to do that and expect to continue to succeed.

It’s better for customers to have visibility into their purchasing cycles, and it’s better for us in managing our supply chain and understanding where the business is going..

Okay. Great. And to just better understand the – getting the ASPs back up again, is that high-volume customers.

Are you still – are they still going to be in high-volume in 2023 and you’re just getting more lower volume, let’s say, higher ASP, so the mix is bringing the ASP back up? Or is that high-volume customer one-time shipments?.

It’s really a mix of both. And we have – things are – there is some volatility in ASPs, and we saw that through the quarters last year. There are the seasonal effects of Q4 in our business. We generally see higher volumes with slightly lower ASPs. It was a little more pronounced this year. But yes, I think that there is not too much to read into.

We have high-volume customers that are purchasing in all the quarters through the year..

Okay. Great. Congratulations on getting the merger done..

Thank you..

We will go next now to Richard Shannon of Craig-Hallum..

Hi, guys. Thanks for taking my questions. I guess my first one is for Mark here. Maybe give us some thoughts here how to build the cost model and cost structure. But just want to ask a direct question here of how you see your breakeven model from a gross margin, OpEx point of view..

Yes. I appreciate the question. And Rich, I can tell you that we’ve been focusing probably more time on that topic than on any other one. I can tell you that we are in the process of kind of building out our long-term modeling plans to make sure that we can take into account the combined company.

We obviously have – just 40 days ago, we obviously changed the entire dynamics of the organization with the combination. And obviously, we are very excited about that. In terms of kind of the near-term outlook, we are really focused on that $75 million of cost synergies. We have – we went into the merger with that on our mind.

We have really put a lot of effort onto it. We are very happy that really in just the first two months, we have already been able to obtain roughly 65% of those cost savings on a go-forward basis.

And we expect to continue to really drive the cost down from – as committed to in the merger agreement and continue to actually see additional opportunities to lower the cost structure from that perspective. In terms of the long-term business model, I mean we are doing a lot of work on the manufacturing side. Angus talked about it a little bit before.

I also had in my prepared remarks, which is this move of some of the historical Velodyne products over to Thailand to really increase margins. One of the things that Angus mentioned in his remarks was that the merger allowed us to actually expedite some of that work.

And you are going to start seeing more and more of the Velodyne products manufactured overseas, which should allow us to start to increase margins. There are some start-up costs associated with that. There is some capital that we have put in place.

But we are really excited about what this opportunity means in terms of being able to give us a higher gross margin business over the next few quarters, especially as we get through these early parts of the merger.

I know I am not answering your question exactly, but unfortunately, we are still 40 days, and I look forward to giving you more updates especially as we go through and we start getting more and more information under our belt..

Okay. I figured it might be a little early for that, but I appreciate your attempt at that one. I am sure I will ask again in the future. Maybe just a follow-up on the gross margin topic, your kind of two thoughts here, you talked about some REV7 transitional things as well as the Velodyne merger impact in the first quarter.

I would assume that the – at least the Velodyne merger part would affect the second quarter.

So, kind of when do we get rid of some of those effects and kind of get to a normal course of business? And then following up on that, as you talk about affecting the Velodyne manufacturing approach with what you have done at Ouster, where the gross margin is so good.

Is there any way or expectation that Velodyne products are still remaining can get to an Ouster-like gross margin structure that you reported in the last few quarters?.

Yes. So, looking at the gross margins and kind of what we are doing, first of all, on the – from some of the historical Velodyne products. And we will just call them the VLP-16, 32 and VLS-128 because we are really thinking about ourselves as one company.

And it’s – obviously, we are only 40 days into it, but it’s something that what we are focused on from just that communication perspective. We started the transition before the merger.

But after the merger, there has been a huge amount of increased efforts in terms of the – both the Velodyne and Ouster operations groups to continue to basically move that process forward. It will take a couple of quarters, additional quarters before we get through most of that transition.

Right now, we are expecting to be done sometime in the second half of this year. And that will allow those products to have a higher margin base. There are some intricate differences between the two different product lines, which Angus is – I am sure looking forward to discussing about some of the margin base.

But that’s something where – obviously, we do think that there is a better margin opportunity with some of the newer digital lidar products than what we have seen with some of the other existing historical products..

Yes.

Just to add on to that, I mean we quickly took a look at the time of the merger, what we could do on the Velodyne product base to increase margins quickly, efficiently and for the purpose of really supporting the existing customer base, and giving them a smooth transition that could be measured in years, not quarters, from analog lidar products to digital lidar products.

We are investing – when we look – when I just step back and continue to think about where this industry is going, digital lidar products have a fundamental cost structure advantage. And we are going to continue to invest in the R&D roadmap that’s behind those digital lidar products.

But we are in the fortunate position where we can provide really a supply guarantee to the Velodyne customers that they are going to be able to purchase these products for the VLP-16 and 32 and 128 products for the foreseeable future and give them a really smooth transition to digital products over a matter of years..

Okay. I appreciate those thoughts. And I guess one last quick question for Mark. I was just trying to estimate what your cash balance ending this quarter will be, and you are only eight days from the end, so I figured I would ask you if you could give us an estimate. I was kind of doing back envelope numbers to kind of get into around 270.

Is that in the right range?.

Yes. Obviously, we entered the quarter with $315 million – sorry, into the year. We look at it as a combined basis, both the historical Velodyne and historical Ouster. Obviously, we are burning at their typical run rates for that first 40 days. Since that time, we have continued to do a lot of these integration activities to lower the burn rate.

There are some cash costs associated with it. We publicly announced that it would be in this – just this first stage of integration, it would be roughly $12 million to $14 million of cash cost. We did note, though that would give us an annualized run rate savings of about $50 million per year.

But we are really looking at kind of making sure that we – our cash is going to be something that’s very, very important to us because we have a long runway in front of us.

We have a lot of investment that we want to do and so obviously, making sure that we can retain as much cash as we can, lower the burn rate and protect that asset is something that we are very much focused on..

Okay. Appreciate the thoughts guys. That’s all for me..

Thank you. Great. And I think that’s the – I am sorry, I am just checking if there are more questions..

We do have a couple of more questions, sir. We will go next now to Kevin Garrigan at WestPark Capital..

Let me echo my congrats on the merger completion and thanks for taking me in. Just two quick questions, so the first one, last quarter, or actually the last two quarters, the macroeconomic environment was impacting some customer cycles in some end markets.

Can you kind of update us on whether this is still a big factor? And are customers delaying decisions to deploy your lidar at all, or has macro improved and kind of will it be an impact in 2023?.

Yes. I think that we – looking back, our business came out of 2022 having weathered this environment quite well. And we expect – we are a diversified company. We highlighted the growth in industrial and robotics sector for the business in 2022.

Those are industries that really have a much more stable customer base than some of the R&D-focused emerging technologies that other companies in the space have kind of focused their companies on. And so diversification allowed us to complete the year with extremely strong bookings-to-bill ratio.

I really want to highlight, just kind of indicating how healthy this business is even in this macroeconomic environment. And again, you can see that the places that we are investing in the business are meant to continue to diversify and broaden our scope to build an even more, I guess robust company against any kind of macroeconomic trends..

Okay. Got it. That makes sense. And then just as a quick follow-up. The combined company is, I would say, a powerhouse in the non-automotive lidar market. We have heard from some other lidar companies that they are trying to break into non-auto.

Are you seeing any competitors making a big presence in non-auto, or any increased competition in this market?.

I have seen a lot of press releases and not a lot of products. And I hope that it’s just going back to how hard it is to release products in the lidar space, let alone competitive products, let alone gross margin-positive products. And now with REV7, it’s the seventh time we have done that.

So, I expect there to be head-to-head, more head-to-head competition. But we have shown in the past, and I am positive with the REV7 sensors, that we are going to continue to show that we are highly, highly competitive in the space.

And I would actually point to what Ouster is doing in automotive and bringing now, looking to 2023 with the DF sensor line finally coming with early B samples into the automotive market as an indication of the presence Ouster is going to have in this market that historically some of our competitors thought was safe.

And just to highlight some of the benefits that we are bringing to the market there. The DF sensor is really targeted at ultra-cost competitive, high performance modular sensors to go into the consumer vehicles that you and I drive.

And there is immense amount of technology that has gone into building the world’s highest performing solid-state digital lidar sensors in this DF product line and doing it at a cost point that is fundamentally shifting the entire kind of landscape of automotive lidar.

So, we mentioned on the prepared remarks, we are going to be releasing early B samples, final form factor devices with the final size, shape, performance of the devices that will go into cars ultimately just in this next year, in the next couple of quarters, actually.

And I have a ton of expectations for that and how it’s going to catalyze our automotive business, given all the feedback that we have gotten internally from automakers as we are released eight samples last year, communicated the DF roadmap and now finally putting the actual hardware into automakers’ hands..

Yes, that makes a ton of sense. Okay, thank you for that color. Great. That was all that I have. Thanks guys and congrats again..

And we will go next now to Colin Rusch at Oppenheimer..

Thanks so much for fitting me in guys.

First, could we talk a little bit about the ecosystem of non-hardware elements that you guys are merging here and how much progress in synergy there is within the software development tools or some of the other data and sensor fusion offerings that you guys are bringing to the table for your customers and how that’s being received by the customer base so far?.

Yes. I think the biggest thing to highlight here, this is a great question and it really targets where we are going as a business. I mentioned at the beginning how we have a multi-pronged strategy to really grow from a hardware lidar maker into a solutions provider, an autonomy solutions provider.

And we have the good fortune that both Velodyne and Ouster pre-merger had begun to invest in smart infrastructure solutions. And that’s the Ouster Gemini software platform that targets really the entire vertical, so, security, crowd analytics and intelligent traffic systems.

And then the BlueCity solution, which is a very focused solution just for traffic, analytics and management on the Velodyne side.

Since the merger, we actually now have combined those teams and I held a software summit in Canada, where we got both teams together and defined a unified roadmap where we could integrate BlueCity and Gemini into kind of a single software roadmap where now BlueCity is underpinned by the Gemini offering and both can be sold to their respective audiences.

And we have seen a ton of really great initial progress on this. We mentioned early traction with Gemini released just this quarter. We already have over 10 deployments with that software.

It sped the time to market for the customer set that we are selling into, really opened up new opportunities in crowd analytics, security and traffic, because we are selling to a customer that may not know about lidar specifically but wants to have an end capability.

And then BlueCity has been in the market actually for a couple of years now and announced that they had done over 100 deployments in 2022 alone.

And so we are combining – we now have a significant team devoted to these efforts and I see huge synergies as a result of the summit and the combined roadmap that came out of the summit that we held just last month..

Okay, that’s super helpful.

And just shifting away from the synergies that you guys are seeing from the organization to potential optimization of the balance sheet, can you talk a little bit about what you can do to lower the cost of capital overall for the organization and extend the runway given the scope and scale of the ambition for the combined entity?.

Yes. As we talked about before, obviously, we entered the year with a combined $315 million. As you mentioned, we are really focused on the cost synergies that we can take out of the business and making sure we can take those out as quickly as possible.

We are very pleased with the $50 million of annualized cost savings that we have taken out entering into the second quarter. For us, investment in new programs and new technologies is key. It’s one of the reasons why Ouster has been so successful.

The $70 million of bookings that we have as an organization that we got in 2022 is right from that investment. And so the lidar space is just starting off. These deployments that we are doing right now, while we are very excited about it, these are just the beginning and there will be additional investment that’s needed.

At the same time, we are putting together our business plan to make sure that we have the right operation structure or margin structure so that we can do what we can to get to a place where we feel that this is a truly successful business.

And it’s going to take some time, it’s going to take a lot of work, but we are very excited about the opportunity. And the merger really helped us in terms of putting together these two organizations, giving us additional scale and then allowing us to realign the overall cost structure..

Okay. I will take the rest of it offline. I have got some more detailed questions. Thanks, guys..

Thanks, Colin..

And Mr. Pacala, it appears we have no further questions today. I will turn the conference back to you..

Alright. Well, I just – I wanted to end by thanking all of our employees actually for a very strong 2022 and for putting in the work that positions Ouster for another incredible year in 2023. And I’d also like to thank everyone for attending the call today and for the questions asked..

Thank you. Ladies and gentlemen, that will conclude Ouster’s fourth quarter 2022 earnings conference call. Again, I’d like to thank you all so much for joining us and wish you all a great remainder of your day. Goodbye..