Hello, and welcome to Ouster’s Second Quarter 2025 Earnings Conference Call. [Operator Instructions] The call today 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 would now like to turn the conference over to Chen Geng, Senior Vice President of Strategic Finance and Treasurer. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining our second quarter 2025 earnings call. Today on the call, we have Chief Executive Officer, Angus Pacala; and Chief Financial Officer, Ken Gianella. As a reminder, after the market closed today, Ouster issued its financial news release, which was also furnished on a Form 8-K and is posted in the Investor Relations section of the Ouster website. Today's conference call will be available for webcast replay in the Investor Relations section of our website. Before I pass the call over to Angus for his opening remarks, I want to remind everyone that on this call, we will make certain forward-looking statements. These include all statements about our competitive position, anticipated industry trends, our business and strategic priorities and our revenue guidance for the third quarter of 2025. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause actual results and trends to differ materially from those contained in or implied by these forward-looking statements are set forth in the second quarter 2025 financial results release and in the annual and quarterly reports we file with the Securities and Exchange Commission. Any forward-looking statements that we make on this call are based on assumptions as of today, and other than as may be required by law, Ouster assumes no obligation to update any forward-looking statements, which speak only as of their respective dates. In today's conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the financial results release that was issued today. I would now like to turn the call over to Angus.

Hello, everyone, and thank you for joining us today. I'll start with a brief recap of the quarter, an overview of the market and an update on our strategic priorities. Ken will cover our financial results in more detail before I close with some final thoughts. Ouster delivered strong second quarter results with revenue just over $35 million, above the high end of guidance with a solid gross margin of 45%. This performance was driven by record sensor shipments, which surpassed 5,500 units in the quarter, bringing Physical AI to life across logistics, industrial and smart infrastructure sites around the world. We finished the second quarter with a robust balance sheet of $229 million of cash and equivalents and no debt, underscoring our continued financial strength. Proven in the field, our lidar solutions are enabling intelligent real-world autonomy across industries and driving tangible improvements in safety, efficiency and sustainability. Our strategic investments in AI algorithms and data training infrastructure are enabling new capabilities to unlock significant commercial opportunities. One of our long-time customers has deployed Ouster Gemini at hundreds of facilities and driven by performance improvements from new Gemini AI algorithms, this customer is now testing new high-value use cases, which require more than quadruple the number of sensors per site. Our ability to land and expand deals was a highlight during the quarter as we continue to convert customer pilots into large volume orders as they roll out deployments or move into production. In smart infrastructure, we successfully converted a pilot program with a Fortune 500 technology company into a multimillion-dollar global deployment. We are installing OSDome sensors in their retail locations worldwide to provide powerful analytics while ensuring personal privacy. With over 500 locations in more than 2 dozen countries, we see tremendous potential for future growth. In…

Thank you, Angus, and good afternoon, everyone. I'm thrilled to join Ouster at an exciting moment in the company's journey, and I look forward to working with Angus and the team towards Ouster's continued success. Turning to Slide 9 in the presentation. I will now give an overview of our second quarter 2025 results. First, we shipped a record 5,500 sensors in Q2 and generated just over $35 million in revenue. These results are right at the high end of our guidance range. Revenue growth was 30% year-over-year and 7% sequentially. Adjusting for the impact of patent royalty in the first quarter, sequential revenue growth was 13%. The industrial vertical was the largest contributor to second quarter revenue, followed by automotive. We shipped large volume deals to support applications in warehouse autonomy, robotaxi, yard logistics and defense. GAAP gross margin in the second quarter increased by 11 points year-over-year to 45%. Gross margin strength reflects the benefit of higher revenue, product mix and favorable employment tax refund. The refund had a positive impact of approximately 5 points on GAAP gross margin. While we are pleased with our operational execution this quarter, we continue to view 35% to 40% as an appropriate annual gross margin target for the business. Next, GAAP operating expenses were $43 million in the second quarter, up 24% over the prior year. The increase was primarily driven by higher stock-based compensation and litigation expenses. We remain vigilant on managing our operating expenses as we execute the business. While we do anticipate expenses fluctuating on a quarterly basis, these are largely driven by investment in our innovation, our go-to-market execution and other onetime investment in costs. Ouster is committed to our growth strategy and maintaining a disciplined path towards profitability. Next, turning to our balance sheet. Cash, cash…

Thanks, Ken. I'm proud of our team for delivering a record quarter as Ouster continues to drive the accelerating adoption of Physical AI. We have now delivered 10 straight quarters of revenue growth and meeting or beating our guidance. This is particularly fitting as we recently celebrated Ouster's 10-year anniversary. We have transformed from a lidar manufacturer to a Physical AI company, adding software solutions to our industry-leading hardware portfolio to enable intelligent real-world autonomy across industries. I am proud of our performance and achievements to date, but our most exciting chapter is just beginning. Our technology road map will bring the largest transformation to Ouster's product portfolio in our history, taking us into larger markets and more use cases than we've ever had. We are at the forefront of a monumental market transformation driven by lidar. And as our customers scale from prototype testing to commercial production, we are well positioned for continued growth. Our story is just getting started, and we have the team, customers and strategy to be a leader in Physical AI. With that, I'd like to open the call for Q&A.

[Operator Instructions] Our first question comes from the line of Colin Rusch with Oppenheimer.

Congratulations on all the progress. As you get into the latter part of the year and start getting ready to ship commercial volumes of the L4 chip, can you talk about that...

Apologies, sound cut-off out on the question.

Okay. Sorry for the trouble guys. Just want to get a sense of how quickly as you move the -- start ramping the L4 platform that you're going to be able to start moving customers onto that platform and really transition to the lower-cost modules.

Yes, absolutely. So I mean -- so the good thing is, Colin, that we've been through this before many times. The L4 is the fourth generation of our silicon. And there's a huge opportunity behind it, and we want to make sure that it's both the future for new opportunities and doubling the TAM of the company with its release, but also that it's -- we provide a smooth transition, like you said, for existing customers to move into greater scale, more applications, kind of land and expand opportunities with existing customers. Historically, we have many customers probably -- well, roughly half our customer base that takes a year to transition from one iteration to the next. And we're generally complete with the product transition, let's say, from REV6 to REV7 being the most recent in about 2 years. It's going to be a little different, though, with REV7 to REV8. We've been -- we provided more heads up for our customer base and more long-term commitments around how we manufacture this technology. We have many more customers in production with REV7 than we've ever had with REV6 to REV7. And so we're making sure that we're working with every single customer to not leave anyone behind on a previous generation platform. And that work started long before we ever talked about a future product release. So I think we're going to make this a graceful transition for everyone while we're also just expanding the overall opportunity for addressable markets with the L4 chips.

That's super helpful. And then you've talked about upwards of 1,000 customers and call it, 10% that are looking at production volumes and then really a limited number that are in production. Can you talk about some of the prototypes that are out there and how quickly some of these machinery or off-road vehicles or some of the other products might end up moving into volume production because it seems like a limited number of customers could start really leveraging some of the revenue growth here pretty meaningfully for you guys?

Yes. I mean it doesn't take -- this is a great question because what we said is Ouster is at the very early innings of Physical AI, automation, propagating into every moving machine on earth. And so at the scale that we're operating, 4,000 to 5,000 units plus a quarter, it doesn't take many customers each quarter to significantly expand our volumes and our shipments. And so we had almost 1,000 unit delta between Q1 and Q2 shipments and 1,000 units of an automated industrial platform is a big expansion for a single customer. So that's all to say we don't need 100 different customers to reach production to keep growing at the pace we're growing. We need single digits to continue on this really solid 10 quarters in a row of revenue expansion and keeping that going for the next couple of years. Obviously, we want to move as many customers as quickly into production as possible. And once in production, production also scales significantly from quarter-to-quarter. But yes, there's a lot -- the vast majority of our customer base and our -- on our customers that will move into production have not yet, and that's just going to fuel our growth to come.

Your next question comes from the line of Andres Sheppard with Cantor Fitzgerald.

Congrats on the quarter. This is Anand on for Andres. It looks like you've really cemented market leadership with this quarter, especially with the Blue UAS certification. And that seems to be a huge part of the story this quarter. So I was wondering perhaps what opportunities you're looking at there and how that could really translate for the company. I know you touched on that on the earnings call. And maybe potentially where could this go besides the first thing that comes to mind, the drones?

Yes. This is a great question. Thank you, Anand. The Blue UAS milestone for the OS1 was a big deal for us. We are the first 3D lidar sensor that got the certification. And that means that now we can be deployed on DoD aerial platforms as a sensor payload. So it's a big deal. We're the first company. And I think that's a trend for Ouster is we are a first mover in many different markets because we have the products and we have the strategy and we have the commercial team to get all of that done ahead of our competitors. So Blue UAS is part of a bigger expansion in kind of defense focus for the United States for our Western allies. I mentioned on the script, there's a lot of good progress here behind the scenes. We're already working with United States Navy. For instance, we are deployed now at a U.S. military base and Army base for perimeter security with not just our lidars, but with our full Gemini Physical AI solution. So there's a lot going on in the background. It's ultimately fueled by an investment from the U.S. government and from Western allies. And I think that's playing into our favor. And I don't think there's any company better positioned to serve that demand than Ouster right now.

Fantastic. That's very helpful. And I guess switching to another vertical. I was wondering, since autonomous vehicles are coming into play more nowadays and they're getting more popular here in the States, how you're seeing that opportunity play out for you guys? And if there's potentially anything that you're pursuing in that vertical or with an OEM?

Yes. So it's good to see that there's been an upsurge in -- an uptick in interest on autonomous vehicles. I think that's fueled by Waymo's proof points in the market showing that the technology is reaching a level of maturity where it becomes a business and not an R&D effort. And I think that's good for Ouster and the lidar sector at large. For a long time, Ouster has -- our strategy has been to be at the right place at the right time for this industry to emerge as viable. And I think that's starting to happen. So we have great products for these autonomous vehicle and automotive customers. Actually, this last quarter in Q2, automotive was our second largest vertical. So we're a big player in this space. We've had great positive announcements from long-time customers like May Mobility making big announcements with end customers like the rideshare companies. So it's not just that the technology is ready, but there's an ecosystem of players that are interested enough to make major commercial and business strategy shifts. And again, Ouster is really well positioned with products to play in this space. So I'm glad this is happening finally.

[Operator Instructions] The next question comes from the line of Kevin Garrigan with Rosenblatt Securities.

Congrats on the strong results. Angus, you spoke about several design wins using the FIFA World Cup as an example, can you give us a sense of who you kind of beat out with that contract? Was it more camera-based solutions or other lidar suppliers? And with AI everywhere now, is the competition getting any more competitive?

Yes. So that's -- it's interesting because -- so with the case of FIFA, there's typically some sort of competitive situation on all of these projects. And what Ouster has shown in the last year or so with BlueCity as it's reached a level of maturity we haven't really seen before is head-to-head on the core performance metrics of things like object perception accuracy, like are you counting the right number of cars, pedestrians, motorcyclists and trucks at your intersections, your traffic corridors. There's nothing that comes close to BlueCity and its accuracy. And it's for one very good reason, and this gets to your next question about AI. All of the advancements that you hear about in AI for cameras can apply to lidar if you take proper advantage of them. And so we actually put out a press release on this subject just the last quarter around Ouster's massive investment in AI data training, data collection, annotation and training for our BlueCity product. This product that's being deployed at the FIFA sites around the country and now being deployed at large and the Utah DOT and Chattanooga and all these other intersections. So Ouster is leading the way on investing in true Physical AI at the edge, running deep neural networks that we've trained on over 4 million annotated objects that we've pulled and extracted from a diverse geographic set of our deployed systems. And we're doing this constantly. So we're constantly improving our AI algorithms to make sure that we maintain this kind of best-in-class performance of perception accuracy, which is the foundation of all of these products that are doing traffic control and analytics in the field. So, yes. So your answer -- your insight that AI is improving everyone's capabilities, whether it's cameras or radar systems or lidar is correct. But we're making sure that we're not left behind. We're actually leading the way with a lot of these investments, and we're applying it to a far more capable sensor data stream with a lidar than a camera.

Got it. Okay. That makes sense. And then as a follow-up, can you just talk a little bit more about your distributor strategy? Are you looking to eventually have maybe a majority portion of your sales through the distribution channel? Or is your main focus still on dealing with the direct end customers?

Yes. Here, this -- the distribution strategy varies by vertical and even by subvertical. So we have our 4 major verticals: automotive, industrial, smart infrastructure and robotics. And what I talked about on the call is really a focus on the subvertical within smart infrastructure in traffic, and this is the BlueCity product. So there, we think it's an integrator, distributor heavy play. And we've already -- we embarked on a new strategy there a couple of years ago, and we now have 39 states where we have a selected exclusive distributor integrator for BlueCity. So we're well on our way to fully blanketing the United States in these regional distributors. And they're really value-add integrators of traffic technology with long-term established relationships with state, local and federal clients. Security, also a Gemini like solutions product for us. So the security industry mirrors in many ways, the traffic vertical and that there's a major set of technology integrators and established like distribution chains. So we're taking advantage of that as well. So it probably will skew again towards leveraging those partners versus a direct sales force. But outside of those 2 verticals or subverticals right now, Ouster has succeeded in identifying enterprise partners, having a direct sales force and just being a great direct partner given how critical typically lidar is to a customer like Komatsu or a major industrial OEM or automaker. They want a direct relationship and a direct kind of sales and commercial and support and technical support relationship with Ouster directly.

Your next question comes from the line of Richard Shannon with Craig-Hallum Capital Group.

Let me ask a couple of questions here. My first one is on the defense market here. If I caught the language right here, you mentioned defense is one of the key verticals or top verticals here, and I did a quick search. And I didn't find any mention of that in past conference calls about that being a leading contributor. Was the Blue UAS certification a driver of that or drones? Or can you kind of help us tie those things or not tie them together?

Yes. So Richard, I think what we’ve said is we didn't say that defense wasn't one of the top 2 verticals for us this quarter, but it was actually industrials and automotive that were the top 2 for this last quarter. We haven't specifically talked that much about defense in prior earnings calls as well. So you're picking up on that. But this is kind of some new -- this is new development for us. And like I said before, it's kind of a combination of both the federal and international interest in defense and new investments there in combination with advancements on our commercial side and our products. So getting things like the UAS certification. So I think that this is an opportunity for the future more than it had an outsized impact on our earnings this Q2.

Okay. Fair enough. Thanks for clearing that one up. Second question, Angus, is really as we ramp up the new products with the L4 and Chronos chips, I assume they're going to the same set of next products here. Can you talk about your pricing strategy here? I guess I would assume, given your -- you've talked about your gross margin profile as being very long term that I would assume it stretch beyond this product introduction here, you're probably going to take down pricing kind of commensurate with cost. But maybe you could just talk about your pricing strategy as that new product line comes out.

Sure. Yes. So the pricing strategy is because Ouster is diversified, it's hard to -- there are many different strategies, and it's a case by case by industry and sub-industry. So we have a lot -- I think we have a lot of flexibility here. And what I'm looking at in pricing strategy is, one, that we are maintaining strong gross margins. And there, I think that we're committed to the 35% to 40% gross margins as we approach profitability in the next couple of years. And so that's very important. And we're doing that by, a, expanding our volumes and lowering our costs over time, and that gives us some ability to drop pricing where needed to enable customer business models. So this is an important dynamic that when we drop price, many times, it's because we have assessed the customer business model and identified that there needs to be a lower cost for them to enter the market into production. And so it's a very measured -- there's a lot of control on the Ouster side and how that happens and a lot of working with the customer. This is not a commoditized market where we have to drop price just to stay in competitive situations. It's much more a dynamic where we're working with customers to give them a path to good commercial viability in the long term as they're going from R&D into production. That being said, there's always lower-priced applications for any technology. And so there is also just a core focus internally on dropping our costs so that we can enter some fundamentally new markets with lower pricing and just lower pricing overall. So things like some of the emerging robotics opportunities that could hit really high volumes, but may need a fundamentally different price point.

Your next question comes from the line of Tim Savageaux with Northland Capital Markets.

Congrats on the results. My first question, kind of going back to the defense opportunity and understanding this is something that's emerging for you guys. But is there anything you can share with us about total addressable market in that kind of drone defense area as it relates to your targeted TAMs across other verticals? And I'll follow up from there.

Yes. Thanks for the question. The -- traditionally, we have included our defense market in our -- it's absorbed into our robotics vertical. So when we've provided the TAM for robotics, it's actually defense has been just a subvertical within there, and it's absorbed and never broken out. That's really because defense is -- it's an emerging market, and it's rapidly evolving. And like even in the last year, there's been a huge shift in technology companies entering that space, new approaches being taken to old problems in defense. So there may be a point where we start breaking it out because there's enough of an ecosystem and the autonomy technology that has been developed in adjacent markets is now really starting to play in defense. But yes, I don't think we're quite there yet. So again, it's a great opportunity overall. There is an established market for things like drone payloads and just sensor payloads on drones, and that's where the Blue UAS certification kind of is a leading indicator of some of the early opportunities in defense. I think it will be a little while longer before some of the ground and other autonomous systems come to market and come to technology maturity and start building a TAM around those.

Great. Sorry. And shorter term, as you look at your guidance for Q3, are there any kind of particular verticals driving that expectation for sequential growth that you can call on?

Well, I think overall, the diversification at Ouster is what's leading to robust growth -- robust and consistent growth for 10 quarters straight now and hopefully going on 11 with our guidance. And so ultimately, I think industrial has been bread and butter for Ouster, and it's important that, that continues to grow, and we see a lot of tailwinds with the industrial sector embracing Physical AI, embracing AI solutions and new sensor technologies. So that I expect to continue to drive our growth. We have a lot of long-term industrial customers that are now entering production. And so -- and overall, we just have a huge amount of visibility into the demand for our technology across our verticals, just given the long-term relationships that we've built with our customer set. So the -- I'm very pleased to be able to guide up again confidently $35 million to $38 million next quarter. And that's just built on, I guess, the momentum from many, many years of playing in a diverse set of industries with high-quality customers.

Your next question comes from the line of Richard Shannon with Craig-Hallum Capital Group.

Well, next let me ask a follow-on. I just have one Angus here. I just want to touch on the automotive space here. I guess clarifying to the degree to which the -- this past quarter and kind of recent past year has been mostly related to robotaxis. And then as we look forward to your next-gen products, you called out the digital flash products enabled by the L4 chip here. How do we think about your go-forward strategy and kind of time frames you're expecting for broader volumes in the automotive space?

Thanks. And just one clarification. The L4 chip or the digital flash products are using the Chronos chip. So there's 2 pieces of silicon that we're working on right now, L4 and then Chronos and Chronos is the one that's going into the DF or digital flash units. So that's why we actually have an immense amount of activity going on in our product road map and development. And that's why I've said we're 2x in our TAM with the road map that we have under development right now. It's the most compelling road map Ouster has ever had as a company. So I'm still incredibly bullish about what we're working on internally. And so that goes to where will we be when ultimately the automotive ADAS or consumer ADAS market is ready. And my goal there -- so this is set apart from robotaxis and the comments around robotaxis being an interesting market that may come in the next couple of years. Consumer ADAS is still a very difficult market for us to predict, but we've been working for years on products that will be relevant in that market when OEMs are ready to adopt this technology set and mass. And that adoption looks like L2+ and L3 ADAS systems in consumer vehicles. So we're going to have the right products at the right time for them, but it's very difficult to predict exactly when the volumes are going to hit in the United States or in the Western world for that market. And it's why it's not built into really our long-term financial framework. We're confident we can hit our financial metrics or 30% to 50% revenue growth without needing a silver bullet like consumer ADAS.

And it seems that we have no further questions for today. I would now like to turn the call back over to Angus Pacala for closing remarks.

Well, thank you all for joining the call, and I look forward to speaking with you again on the third quarter. Thanks all.

This concludes the meeting. You may now disconnect your lines. Have a pleasant day.