OUST - Ouster: Deep Value But Hesitant To Load Up

2023-03-30 04:53:29 ET

Summary

• Ouster reported Q4'22 results, but the company provides limited details on the Velodyne Lidar business.
• The Lidar company closed the merger on February 10 with confirmed guidance for combined Q4'22 revenues of at least $23 million.
• Ouster guided to Q1'23 revenues of only $16 million without providing a complete picture of Velodyne Lidar revenues.
• OUST stock trades below 4x the '22 bookings of Ouster alone, yet the lack of combined pro forma financials leaves a lot of unanswered questions.

As with any stock, the first quarterly report after a change in a corporate structure can be very volatile. This was the case with Ouster ( OUST ) after finally reporting December quarter results following the merger with Velodyne Lidar. My investment thesis remains ultra Bullish on OUST stock, but the company did a poor job laying out the combined view of the business causing Ouster to dip to new lows.

Painting The Picture

In our view, Ouster failed to correctly paint the picture of the combined business with the combination with Velodyne Lidar. The big issue with the Lidar sensor space was the lack of businesses actually generating material revenues several years after announcing SPAC deals.

At the close of the merger, both Ouster and Veloydne Lidar were confirmed to have hit Q4'22 revenue guidance levels topping $10 million. Naturally, investors came into the earnings report at the end of March looking for December quarter numbers and March quarter guidance with revenue totals topping $20 million and possibly reaching towards $30+ million as follows:

• Velodyne: billings of $13 to $15 million
• Ouster: revenues of $10 to $25 million
• Total revenue: $25 to $40 million

Instead, the new company only provided Q4 numbers from the Ouster business alone and guided to Q1'23 numbers based solely on the revenues from Velodyne Lidar after the merger closed on February 10. In essence, investors were only given half the picture on the combined company and the stock predictably slumped.

The combination of Ouster and Velodyne Lidar was made to produce a powerhouse in the non-automotive Lidar sensor sector. The robotic and industrial sectors are moving forward faster with the implementation of production deals.

Hence, this is where the initial quarterly reports after corporations go public, merge or hire a new executive team are always volatile. A lot depends on how the management paints the picture of the business and whether a restructuring takes place to reset the public view of the company.

In this case, Ouster decided to not provide any financial details from the Velodyne Lidar business. If Velodyne beat guidance and Ouster met guidance, one would have to assume Q4'22 revenues were at least $24 million. With Ouster reporting Q4'22 revenues were actually $11.0 million, the combined company generated $24+ million in Q4'22 revenues.

In our view, the stock rallies on such news. The company not providing any confirmation of the pro-forma numbers left investors in the dark.

Even worse, Ouster guided to Q1'23 revenues of only $15 to $17 million. In the earnings release, the company left a footnote the revenue guidance excludes Velodyne numbers prior to the merger on February 10.

On the Q4'22 earnings call , the CFO made no statement about the exclusion of Velodyne numbers when originally providing guidance:

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.

Considering Ouster only generated $11 million in Q4'22 revenues and Q1 is a seasonally weak quarter, one would naturally assume the former Ouster business produced less than $10 million in Q1 revenues. In such a scenario, one would assume the former Velodyne Lidar would produce upwards of $6 million in revenues for the 2H of the quarter. In such a scenario, one should probably assume the Velodyne business would contribute another $5 to $6 million in Q1'23 for total revenue estimates of $20 to $23 million.

The market is likely far more constructive on the new Ouster under this revenue scenario than one where investors have to dig into the details and wonder why the company refused to provide the full financial picture. Ouster would be the clear early leader in the sector with a leading revenue picture in a sector mostly focused on automotive deals that will still take a few more years for big production deals to ramp up.

Possibly, the more important picture not painted by the new Ouster was a combined order book. The old Ouster confirmed the company secured $70 million in bookings for 2022.

From a traditional measurement, a book-to-bill ratio of 1.71 for 2022 would be impressive. The problem with the Lidar combination is that most of the business doesn't ramp into production until 2024 and beyond.

When reporting Q2'22 results, Ouster had promoted an order book of $575 million based on 80 Strategic Customer Agreements. The company further expanded the SCA total to 84 on the Q3'22 earnings report suggesting the contracted order book had grown towards $600 million level heading into the merger.

For its part, Velodyne Lidar had promoted an even higher order backlog at $800 million through 2025 prior to the new management team taking over in early 2021. The combined company should be able to provide an order backlog used by other players in the Lidar sector topping $1 billion.

Along with the amended loan agreement signed when the merger completed, Ouster submitted the following revenue targets via Schedule 7.19:

Based on the use of GAAP revenues, Ouster is only on the pace to have $38 million in trailing revenues to contribute to the Q2'23 total. The company would need to generate $32 million in quarterly revenues for the June quarter unless this calculation of GAAP revenues goes back and includes revenues from Velodyne Lidar prior to the merger close.

Depressed Stock Price

Ouster now trades solidly below $1. The stock has a market value of only $270 million following this dip.

On one hand, the stock is extremely cheap considering the Ouster business alone had a $575 million order backlog in mid-2022. In addition, the combined stock trades below 4x the confirmed billings of the smaller Ouster business of $70 million.

The company ended the year with $315 million in cash. The Craig-Hallum analyst estimated on the earnings call that the current cash balance is closer to $270 million. Even with a $75 million cost reduction plan after the merger, a big question is where the cash balance reaches before the new Ouster becomes cash flow positive.

Cantor Fitzgerald has the company needing to raise cash in 2024 before Ouster reaches cash flow positive. A big risk to shareholders is massive dilution from cash raised via equity at these depressed values.

Takeaway

The key investor takeaway is that the biggest issue holding back the stock price is the lack of information on the Velodyne Lidar business since Ouster took control. The stock only trades at 4x billings from just half the business in the indication of the deep value.

While being very bullish on the valuation, our view is to hesitate to buy more shares until Ouster provides more details on the financial view of the combined company.

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