Ouster Q3 23 – The corner.

Turns the corner but no one is listening.

• Ouster reported good results and strongly signalled that it has turned the corner, but the uninhabited conference call gave a strong impression that no one cares.
• Q3 revenues / net income were $22m / LOSS$35m which were ahead of both the company’s guidance and my own expectations.
• Given how little this stock is now covered by the street, it is difficult to rely on the consensus estimate.
• Key to this set of results were some milestone achievements as well as long-term expectations that return Ouster to the kind of expectations that were set when the company originally listed via its SPAC.
• These were firm orders of $38m during the quarter, $120m of cost savings since Q3 2022, successful integration of the Velodyne and Ouster software platforms and a return to 30%-50% growth with 35% – 40% gross margins in the long term.
• The company expects to make meaningful progress on those long-term goals over the next 18 months meaning that the next two years should see an acceleration from the virtual standstill suffered in 2023.
• The $120m cost savings claim also looks a little odd as the OPEX of Ouster in Q3 2023 looks pretty much the same as it did in Q3 2022.
• What one has to remember is that Q3 2022 did not contain Velodyne and it is pretty clear what has happened.
• Velodyne was not really an acquisition but a rights issue as its technology was becoming obsolete, but it had some customers and a large cash balance,
• Essentially what Ouster has eliminated is the cost base of Velodyne, leaving it with pretty much what it had before the acquisition took place but also $200m in cash ($160 net cash).
• Ouster is not and has never really been about automotive Lidar (although it will hit automotive grade with its next-generation) but is much more about the automation of everything else.
• Ouster is selling lidars for industrial robots, forklifts, toll booths, logistics mapping and so on and this is the real story of the company as opposed to the more headline-grabbing autonomous driving and ADAS story.
• Here, there are hundreds of customers already signed up but so far very few have purchased Lidars for commercial deployment but instead have been tinkering and experimenting.
• The rampant inflation and weakness in the global economy caused them to pause the migration from tinkering to commercial deployment which in turn forced Ouster to acquire Velodyne to ensure it had enough money to ride out the bad macro.
• Given the company’s commentary, this now looks to be in the rearview mirror and the company can get on with fulfilling the opportunity ahead of it.
• Factoring in the medium-term expectations that Ouster is putting into the market, I can get to $20 a share without trying very hard.
• This is mainly because, at $5, the company is trading at a market capitalization of $195m or an enterprise value of $55m.
• Even on 2023’s tough year, this represents an EV/Sales of 0.7x.
• The problem is that no one appears to be listening as the conference call was almost uninhabited and so it is going to take some time and a series of excellent quarterly results before anyone cares enough to look beyond the awful share price chart.
• I have a position in Ouster which I substantially increased about 6 months ago at $3.7 per share but there is still a long way to go before I break even.
• However, I think that the outlook for the company to return to $20 a share looks pretty good on a DCF basis.
• I am happy with my position and am sitting tight although it has been very bumpy.