Q3 2024 Symbotic Inc Earnings Call

July 29, 2024

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Operator: Good day, and thank you for standing by. Welcome to the Symbiotic Third Quarter Fiscal 2024 Financial Results. At this time, all participants are in a listen-only mode.

Speaker Change: Good day and thank you for standing by. Welcome to the Symbiotic Third Quarter Fiscal 2024 Financial Results.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers. Jeff Evanson, Vice President of Investment Relations. Please go ahead.

Speaker Change: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.

Speaker Change: To withdraw your question, please press star 1 again. Please provide that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Jeff Evanson, Vice President of Investment Relations. Please go ahead.

Jeff Evanson: Thank you, Victor. Hello. Welcome to Symbiotics' third quarter 2024 financial results webcast. I am Jeff Evanson, Symbiotics VP of Investor Relations. Some of the statements that we make today regarding our business operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our forms 10-K and 10-Q, including the risk factors. We undertake no obligation to comply with any form of local or state law.

Jeff Evanson: Thank you, Victor. Hello. Welcome to Symbiotics Third Quarter 2024 Financial Results Webcast.

Jeff Evanson: I am Jeff Evanson, Symbiotics VP of Investor Relations.

Jeff Evanson: Some of the statements that we make today regarding our business operations and financial performance may be considered forward-looking.

Jeff Evanson: Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially.

Jeff Evanson: Please refer to our Forms 10-K and 10-Q including the risk factors.

Jeff Evanson: We undertake no obligation to update any form of voting statements.

Jeff Evanson: In addition, during this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's Earnings Press release, which is distributed and available to the public through our investor relations website located at ir.symbiotic.com. On today's call, we're joined by Rick Cohen, Symbiotics Founder, Chairman, and Chief Executive Officer, and Carol Hibbard, Symbiotics Chief Financial Officer.

Jeff Evanson: In addition, during this call, we will present both GAAP and non-GAAP financial measures.

Jeff Evanson: A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our investor relations website located at ir.symbiotic.com.

Speaker Change: On today's call, we're joined by Rick Cohen, Symbiotics Founder, Chairman and Chief Executive Officer, and Carol Hibbard, Symbiotics Chief Financial Officer.

Speaker Change: These executives will discuss our third quarter fiscal 2024 results and our outlook, followed by Q&A. Rick, I will now turn the call over to you. Thank you, Jeff. Good afternoon, and thank you for joining us to review our most recent results.

Jeff Evanson: These executives will discuss our third quarter fiscal 2024 results and our outlook, followed by Q&A. Rick, I will now turn the call over to you. Thank you, Jeff. Good afternoon, and thank you for joining us to review our most recent results. The third quarter reflects record revenue growth, a strong Recurring Revenue Gross Margin, and Careful Management of Operating Expenses. However, our system gross margin reflects elongated construction schedules and implementation costs associated with last quarter's rapid pace of innovation.

Jeff Evanson: For example, during the quarter, we decided to retrofit all SimBots in the field with our new sensor array to enhance performance capabilities at the majority of our customer sites. While we believe much of the cost growth is now behind us, we could continue to see some impacts in the coming quarters as we focus on scaling high-quality deployments for our customers. As you recall, two years ago, we embarked on a strategy to outsource much of the manufacturing and installation of our system to the U.S.

Richard B. Cohen: A third quarter reflects record revenue growth, strong recurring revenue growth margin, and careful management of operating expenses.

Richard B. Cohen: However, our system gross margin reflects elongated construction schedules and implementation costs associated with last quarter's rapid pace of innovation.

Richard B. Cohen: For example, during the quarter we decided to retrofit all SIMBOTS in the field with our new sensor array to enhance performance capabilities at the majority of our customer sites.

Richard B. Cohen: As you recall, two years ago we embarked on a strategy to outsource much of the manufacturing and installation of our systems.

Jeff Evanson: This approach enabled us to scale at a rapid pace. Based on our key learnings over multiple deployments, we plan to reabsorb a portion of the construction management process, starting this quarter, which will reduce costs. We believe bringing some of these functions back in-house will help us put a sharper focus on the implementation process and reduce costs further.

Richard B. Cohen: This approach enabled us to scale at a rapid pace. Based on our key learnings over multiple deployments, we plan to reabsorb a portion of the construction management processing starting this quarter, which will reduce costs.

Richard B. Cohen: We believe bringing some of these functions back in-house will help us put a sharper focus on the implementation process and reduce costs further.

Richard B. Cohen: In the short term, our revenue growth may slow as we make these changes. Our backlog demonstrates that demand continues to be very strong for our systems, but we will always prioritize execution on existing deployments ahead of chasing growth. On the innovation front, we made important progress on a new minibot that will populate our second break pack installation and advanced our non-ambient system development. We also began deployment of the first Symbiotic System for Greenbox.

Richard B. Cohen: On the innovation front, we made important progress on a new minibot that will populate our second break pack installation and advanced our non-ambient system development work.

Richard B. Cohen: We also began deployment of the first Symbiotic System for Greenbox. While this did not contribute a significant amount of revenue in the quarter, the Greenbox deployment is on schedule.

Richard B. Cohen: While this did not contribute a significant amount of revenue in the quarter, the green box deployment is on schedule. I'm confident that we are making the right choices to quickly return to higher system gross margin and faster growth. Thank you to all Symbionic employees, partners, and investors for your efforts and support. Now, Carol will discuss our financial results outlook. Thank you, Rick. Third quarter revenue grew to $492 million, 58% compared to the same quarter last year.

Carol J. Hibbard: I am confident that we are making the right choices to quickly return to higher system gross margin and faster growth. Thank you to all Symbiotic Employees partners and investors for your efforts and support. Now Carol will discuss our financial results and outlook.

Carol J. Hibbard: Thank you, Rick. Third quarter revenue grew to $492 million, up 58% compared to the same quarter last year. The strong revenue growth is driven by steady progress across our 39 systems in the process of deployment.

Carol J. Hibbard: Strong revenue growth is driven by steady progress across our 39 systems in the process. As planned, system starts re-accelerated in the third quarter, starting five new system deployments and completed three systems, bringing us up to 21 fully operational. We expect quarterly system starts to increase in the fourth quarter. Our backlog of committed contracted orders of $22.8 billion remained consistent with last quarter, as finalized pricing on contracts already in the backlog was offset by the revenue recognized during the quarter. As Rick mentioned, system growth margin fell below expectations due to schedule growth and higher labor costs during the quarter.

Carol J. Hibbard: As planned, system starts re-accelerated in the third quarter. We started five new system deployments and completed three systems, bringing us up to 21 fully operational systems.

Carol J. Hibbard: We expect quarterly system starts to increase in the fourth quarter.

Carol J. Hibbard: Our backlog of committed contracted orders of $22.8 billion remained consistent with last quarter, as finalized pricing on contracts already in the backlog was offset by the revenue recognized during the quarter.

Carol J. Hibbard: As Rick mentioned, system growth margin fell below expectations due to schedule growth and higher labor costs during the quarter. We are focused on improving our planning, speed of implementation, and project management to enhance performance of the business.

Carol J. Hibbard: We are focused on improving our planning, speed of implementation, and project management to enhance the performance of the business. We continue to improve our operating leverage with a focus on prudent expense management. During the quarter, we generated $50 million in cash from operations. In total, our cash and equivalents declined to $81 million, sequentially to $870 million.

Richard B. Cohen: We continue to improve our operating leverage with a focus on prudent expense management.

Richard B. Cohen: During the quarter, we generated $50 million in cash from operating activities.

Richard B. Cohen: In total, our cash and equivalents declined to $81 million sequentially to $870 million. This was driven in part by a first investment in Greenbox as they begin operations.

Operator: This was driven in part by a first investment in Greenbox as they began operations. For the fourth quarter of fiscal 2024, we expect revenue of $455 to $475 million and adjusted EBITDA between $28 and $32 million, representing Temporary Lease Load Revenue Growth and System Gross Margin Returning to Historical Levels during our fourth quarter. Finally, we believe our first quarter of fiscal 2025 should reflect reaccelerating year over year. We now welcome your

Richard B. Cohen: For the fourth quarter of fiscal 2024, we expect revenue of $455 to $475 million and adjusted EBITDA between $28 and $32 million.

Richard B. Cohen: representing temporarily slowed revenue growth and system gross margin returning to historical levels during our fourth quarter. Finally, we believe our first quarter of fiscal 2025 should reflect re-accelerating year-over-year revenue growth.

Operator: Operator, please begin the Q&A. Thank you. And at this time, we'll conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for a name to be announced to withdraw your question. Please press star 11 again.

Richard B. Cohen: We now welcome your questions.

Speaker Change: Operator, please begin the Q&A.

Speaker Change: Thank you and at this time we'll conduct a question and answer session. As a reminder to ask a question you will need to press star 1 1 on your telephone and wait for a name to be announced to withdraw your question. Please press star 1 1 again. Please stand by while we compile the Q&A roster. One moment for our first question.

Operator: Please stand by while we compile the Q&A roster. One moment for our first question, the first question will come from the line of Andy Kaplowitz from Citigroup. Your line is open. Good afternoon, everyone.

Speaker Change: Our first question will come from the line of Andy Kaplowitz from Citigroup. Your line is open.

Andrew Alec Kaplowitz: Rick or Carol, can you give a little more color on what happened with system gross margin and why it will rebound in Q4? Are you basically saying that, in some cases, outsourcing is not working for your deployments? And maybe what happened to convince you to take construction management again in-house?

Andrew Alec Kaplowitz: Good afternoon, everyone.

Andrew Alec Kaplowitz: Hi Andy.

Andrew Alec Kaplowitz: Rick or Carol, can you give a little more color into what happened with system gross margin and why it will rebound in Q4? Are you basically saying that in some cases outsourcing is not working for your deployments? Maybe what happened to convince you to take construction management again in-house and what is the visibility into your Q4?

Carol J. Hibbard: And what is the visibility into your Q4 expected margin? Yeah, so I'll start and then Rick can chime in in terms of some of the things we're putting in place to improve growth margin going forward. So on outsourcing, as we talked about outsourcing, our primary reason why we chose outsourcing over a year ago was to go ahead and scale. And so we did that across multiple areas of our supply chain so that we could also have redundant. We're looking at bringing back in-house just one element, which is the EPC. So the Engineering, Procurement, and Construction piece of that. And we continue to own a piece of that.

Speaker Change: Expected Margin Improvement.

Speaker Change: Yeah, so I'll start and then Rick can chime in in terms of some of the things we're putting in place to improve gross margin going forward.

Richard B. Cohen: On the outsourcing, as we talked about outsourcing, our primary reason why we chose outsourcing over a year ago was to go ahead and scale. And so we did that across multiple areas of our supply chain so that we could also have redundancy.

Speaker Change: We're looking at bringing back in-house just one element, which is the EPC, so the Engineering Procurement Construction piece of that.

Carol J. Hibbard: So we actually Symbiotic continued to deploy at some of our sites, and then we had multiple supply chain partners do that. What we're finding is why that's not a significant item in terms of the overall cost of the system.

Speaker Change: And we continue to own a piece of that, so we actually, Symbiotic continued to deploy at some of our sites, and then we had multiple supply chain partners off doing that.

Speaker Change: What we're finding is why that's not a significant item in terms of the overall cost of the system. It's a significant item in terms of that final mile of installation when you're...

Carol J. Hibbard: It's a significant item in terms of that final mile of installation. We're extremely focused on making sure that everything comes together. We're finding that focus on schedule and focus on cost, that's a critical part. So that's one of the elements that we're going to bring back in-house so that we have more control over that overall integration. In terms of the other things that really drove our gross margin performance in the last in this quarter, Rick mentioned we've had delays in construction creating inefficient. So some of our more complex projects, we've had delays around, for example, permits.

Speaker Change: It's extremely focused on making sure that everything comes together. We're finding that focus on schedule and focus on cost, that's a critical point for us.

Speaker Change: So that's one of the elements that we're going to bring back in-house so that we have more control over that overall integration.

Speaker Change: In terms of the other things that really drove our gross margin performance in the last, in this quarter, Rick mentioned we've had delays in construction creating inefficiencies.

Richard B. Cohen: And so, some of our more complex projects, we've had delays around, for example, permits. And when you talk about a delay in the construction phase, this is after we've already deployed resources to each of those sites, which is extremely inefficient.

Carol J. Hibbard: And when you talk about a delay in the construction phase, this is after we've already deployed resources to each of those sites, which is extremely expensive. And our projects are taking longer. I think last quarter I referred to some of the projects that we had in flow where we're not always going to see that 20 month deployment because I think I called them stragglers. And what we're seeing now is some of those complex systems where they're just taking. Longer system deployment creates higher costs.

Richard B. Cohen: and our projects are taking longer. I think last quarter I referred to some of the projects that we had in flow where we're not always going to see that 20 month deployment because I think I called them stragglers. And what we're seeing now is some of those complex systems where they're just taking longer.

Carol J. Hibbard: And then we talked about the other contributor to gross margin being the implementation of system improvements. There are several cases where we're going to go ahead and make that decision to go ahead and deploy and retrofit now, which might drive costs. So in terms of some of the things we're focused on going forward, Rick, do you want to, do you want to add any other color to that?

Richard B. Cohen: Longer system deployment creates higher cost.

Richard B. Cohen: And then we did talk about the other contributor to gross margin is implementation of system improvements. There are several cases where we're going to go ahead and make that decision to go ahead and deploy and retrofit now, which might drive cost.

Richard B. Cohen: So in terms of some of the things we're focused on going forward, Rick, do you want to add any other color to that? Yeah, I think the most important thing is we're not, I mean, our margin is down, but we're not...

Richard B. Cohen: Yeah, I think the most important thing is we're not, I mean, our margin is down, but we're not, we're not a retail company. So we're not discounting. We're getting, we're getting the gross profits that we want, but the projects have been costing more than we anticipated. Keep in mind, we've done about 40 projects so far; we have hundreds ahead of us. We've strengthened our supply chain team. We now have a lot of these people that we've been looking for for the last year on board.

Richard B. Cohen: We're not a retail company, so we're not discounting. We're getting the gross profits that we want, but the projects have been costing more than we anticipated. Keep in mind, we've done about 40 projects so far. We have hundreds ahead of us.

Speaker Change: We've enhanced our supply chain team. We now have a lot of these people that we've been looking for for the last year on board. We have a lot of talent.

Richard B. Cohen: We have a lot of talent, and so we simply think we can do it better than some of the partners that we needed to use because we didn't have the resources, and we wanted to hit our sales targets. For me, hitting our sales targets, and driving sales is something that is critical. For 50 years, I've been used to running a business on a one and a half percent margin and a six percent gross profit. So I have no concerns about getting these costs under control.

Speaker Change: And so, we just simply think we can do it better than some of the partners that we needed to use because we didn't have the resources and we wanted to hit our sales targets.

Speaker Change: For me, hitting our sales targets, pushing sales.

Speaker Change: is something that is critical.

Speaker Change: for 50 years.

Speaker Change: I've been used to running a business on a one and a half percent margin and a six percent gross profit, so I have no concerns about getting these costs under control. What I want to make sure

Richard B. Cohen: What I want to make sure is that we keep our customers brightly happy and that we continue to roll out our sales. So I think we have made some choices. We could have fought with the customers over who paid for some of these things, but we said, let's just keep the customer happy. Let's keep the sales rolling. Some of these things will be expenses now, and some of these things will not be expenses in the future.

Speaker Change: is that we keep our customers brightly happy and that we continue to roll out our sales. So I think we made some choices.

Speaker Change: We could have fought with the customers over who paid some of these things, but we said let's just keep the customer happy, let's keep the sales rolling.

Speaker Change: Some of these things will absorb now, and some of these things will not be expenses in the future. I fully well expect our margin to come back, and our goal is to enhance the margin further. But just getting back to where everybody expected us to be would be a good place in the near term.

Richard B. Cohen: I fully expect our margin to come back, and our goal is to enhance it further. But just getting back to where everybody expected us to be would be a good place in the near term. Now, that's fair, Rick.

Richard B. Cohen: And should we think about it, though, as sort of like, in quotes, one time in Q3, and that's why it comes back in Q4? Because you're talking about normalized margins, you know, just in this current quarter. Yeah, I think I'll let Carol speak, but things like delays because things weren't placed on time, and you have 200 people standing around the site. That's just not acceptable, and we don't expect that to happen in the future.

Richard B. Cohen: Now, that's fair, Rick. And should we think about it, though, as sort of like, in quotes, one time in Q3, and that's why it comes back in Q4, you know, because you're talking about normalized margins, you know, just in this current quarter, basically.

Richard B. Cohen: Yeah, I think I'll let Carol speak, but things like delays because...

Carol J. Hibbard: So it's not like we'll go to zero immediately, but most of this stuff should go away from what we're seeing and the people that we hired in the fourth quarter. And our guide implies, Andy, that we're going to return to, you know, more gross margins similar to our historical average. Now, as Rick said, we've got future plans for improving that gross margin, which we've talked about. And so there might be some pressure on those gross margins still in the fourth quarter. We're not going to be at the levels that we were.

Speaker Change: Things weren't placed orders on time and you have 200 people standing around the site. That's just not acceptable.

Speaker Change: And we don't expect that to happen in the future, so it's not like we'll go to zero immediately, but most of this stuff should go away from what we're seeing in the people that we've hired in the fourth quarter.

Speaker Change: And our guide implies, Andy, that we're going to return to, you know, more gross margins similar to our historical.

Speaker Change: Now, as Rick said, we've got future plans of improving that gross margin, which we've talked about. And so while there might be some pressure on those gross margins still in the fourth quarter, we're not going to be at the levels that we were this quarter.

Carol J. Hibbard: And Carol, how do we interpret the commentary that you're going to have accelerating deployments from the five you had in Q3, and then, you know, revenue will accelerate in Q1 25, with the commentary that improving your deployment process may temporarily slow your revenue growth? Like, you know, obviously, those two are kind of competing. So how do we sort of interpret that as you move Yeah, so I'll interpret that as we had three system starts last, which was one of our loans.

Speaker Change: Got it. And then, Carol, how do we interpret the commentary that you're going to have accelerating deployments from the five you had, you know, in Q3, and then, you know, revenue will accelerate in Q1 25, with the commentary that improving your deployment process may temporarily slow your revenue growth? Like, you know, obviously, those two are kind of competing. So how do we sort of interpret that as you move forward?

Carol J. Hibbard: Yeah, so I'll interpret that as we had three system starts last quarter.

Carol J. Hibbard: So that's impacting revenue in the fourth quarter. We ramped that up to five this quarter, and you should expect to see that five continue to grow incrementally quarter over quarter as we finish out our backlog. All right, thank you. Thanks, Sandy.

Speaker Change: which was one of our lows and so that's impacting the revenue in the fourth quarter. We ramped that up to five this quarter and you should expect to see that five continue to grow incrementally quarter over quarter as we finish out our backlog.

Speaker Change: All right, thank you.

Damian Carras: Thank you. One moment for our next question. Our next question will come from Damian Carras from UBS. Your line is open. Hi, good evening, everyone.

Andrew Alec Kaplowitz: Thanks, Andy.

Speaker Change: Thank you. One moment for our next question.

Speaker Change: Our next question will come from Damian Carras from UBS. Your line is open.

Damian Carras: Hi, good evening, everyone.

Richard B. Cohen: I think in your commentary on Greenbox, you noted that everything's kind of on track there. I was wondering if maybe you could just kind of, you know, peel back the onion a little bit and give us some additional color on, you know, what all you're seeing for Greenbox, JV. Yeah, so we, we have our first install at a site in California. So we're ramping that up. That's our first installation. We have several sites where we are now talking to landlords about leasing space.

Speaker Change: and Damian.

Damian Carras: I think in your commentary on Greenbox, you noted that everything's kind of on track there. I was wondering if maybe you could just kind of, you know, peel back the onion a little bit and give us some additional color on, you know, what all your, what you're seeing for Greenbox, JV.

Speaker Change: Yes, so we we we have our first

Speaker Change: Install in a site in California.

Speaker Change: So we're ramping that up. That's our first install. We have several sites where we're now talking to landlords about leasing space, and we're spending a lot of time interviewing, building out the management team.

Richard B. Cohen: And we're spending a lot of time interviewing and building out the management team. So, we're pretty excited about where we are in terms of rolling it out and building out the sales force, but right now, what we're doing is focusing on a couple of critical sites that are in the right geographies, sizing the system, specing the systems, finding the real estate, and then building the management team to operate the site. And then, we have started having numerous discussions with potential customers to be anchor customers for GreenBox. So, it's going at a good pace. I'm sure everybody wants it to go faster, but we're pretty happy with the pace.

Speaker Change: So, we're pretty excited about where we are in terms of rolling it out and building out the sales force, but right now,

Speaker Change: What we're doing is focusing on a couple of critical sites.

Speaker Change: that are in the right geographies.

Speaker Change: Sizing the system, specing the systems, finding the real estate.

Richard B. Cohen: We're thoughtful. I think we're excited about the potential for the business. Great, glad to hear it.

Speaker Change: and then building the management team to operate the site. And then we have started having numerous discussions with

Speaker Change: potential customers to be anchor customers for Greenbox. So, it's...

Speaker Change: It's going on a good pace, I'm sure everybody wants it to go faster, but we're pretty happy with the pace, we're thoughtful, I think we're excited about the potential for the business.

Carol J. Hibbard: And Carol, you have made a comment that you're kind of executing some prudent expense management. I was wondering if you might be able to elaborate on that. Was that kind of tied to the insourcing that you also spoke to? Or kind of what all did you mean by prudent expense controls? It's not tied to insourcing.

Speaker Change: Great, glad to hear.

Speaker Change: And Carol, you had made a comment.

Carol J. Hibbard: that you're kind of executing some some prudence expense management was wondering if you might be able to elaborate on that was that

Speaker Change: of tied to the insourcing that you also spoke to, or what all did you mean by this prudent expense controls?

Carol J. Hibbard: The commentary there is if you look at our miss on gross profit this quarter, it is entirely a story around system gross margin. So when you look at our SG&A and R&D, we continue to manage those expenses as we grow. So we did not see any one-time impact in the quarter associated with adjusted EBITDA like we might have seen in other quarters around restructuring. We did not have any of that this quarter because we're managing our expenses appropriately. I understand. Thank you. Thanks, Damian.

Speaker Change: Yeah, it's not tied to the insourcing. The commentary there is if you look at our miss on gross profit this quarter, it is entirely a story around system gross margin.

Speaker Change: So when you look at our SG&A and R&D, we continue to manage those expenses as we grow, so we did not see any one-time impact in the quarter.

Speaker Change: associated with adjusted EBITDA like we might have seen in other quarters around restructure. We did not have any of that this quarter that we're managing our expenses appropriately as we grow.

Speaker Change: Understood. Thank you.

Damian Carras: Thanks, Damian.

Speaker Change: One moment for our next question.

Matt J. Summerville: One moment for our next question. Our next question will come from Matt Summerville from DA Davidson. Your line is open.

Speaker Change: Our next question will come from Matt Summerville from D.A. Davidson. Your line is open.

Carol J. Hibbard: I have a couple of questions. As I think about kind of the commentary coming out of the last quarter, the messaging from the Analysts' Day, I guess, was this something that developed, really late in the quarter that you felt kind of blindsided by because I guess I thought some of the challenges and growing pains if you want to call it that growing pains associated with increasing your concurrent deployment capability I guess I was under the impression that this quarter was going to sort of be a proof point that a lot of that stuff was in the rear.

Matt J. Summerville: I have a couple of questions. As I think about kind of the commentary coming out of the last quarter, the messaging from the Analysts' Day, I guess, was this something that developed

Matt J. Summerville: Really late in the quarter that you felt kind of blindsided by? Because I guess I thought some of the challenges and growing pains, if you want to call it that, growing pains associated with increasing your concurrent

Matt J. Summerville: Deployment capability, I guess I was under the impression that this quarter was going to sort of be a proof point that a lot of that stuff was in the rear view.

Carol J. Hibbard: Yeah, I mean, I think with construction costs and delays, a lot of it shows up right at the end. And so we did not anticipate this, and we're pretty we're not happy about it that's why we're taking over some of the management ourselves we're acting very quickly I mean this is not like this is not not acceptable but yeah a lot of this stuff came at the end and and we just had to deal with it right at the end of the I am not said the end but but certainly after Investor Day well after Investor Day, And then the other thing I'll add, Matt, is one of the things we're putting in place is, as we scale, one of the things we're finding is that a focus on overall program management and schedule integration across all of our projects and flow is a critical skill set that we need to put more resources against. And I think when you talk about, was it a surprise?

Speaker Change: Yeah, I mean, I think with construction costs and delays, a lot of it shows up right at the end.

Speaker Change: And so we did not anticipate this.

Speaker Change: And we're pretty, we're not happy about it. That's why we're taking over some of the management ourselves. We're acting very quickly. I mean, this is not like, this is not, not acceptable.

Speaker Change: But yeah, a lot of this stuff came at the end, and we just had to deal with it right at the end of the, I don't know, not at the end, but certainly after Investor Day, well after Investor Day.

Speaker Change: And then the other thing I'll add, Matt, is one of the things we're putting in place is, as we scale, one of the things we're finding is that a focus on overall program management and schedule integration across all of our projects and flow is a critical skill set that we need to put more resources against.

Matt J. Summerville: And I think when you talk about was it a surprise, not a surprise.

Carol J. Hibbard: Not a surprise, but it's those final elements associated with putting the installation together. As Rick said, you get to the final completion of implementation. We need a better view across all of our program management to predict when those delays might be impacting, which is one of the reasons why that EPC role is so critical, because they're the ones receiving equipment on site. They're the ones who will have the first visibility in terms of a potential delay. And that's why we want to bring that back in-house.

Speaker Change: But

Speaker Change: It's those final.

Speaker Change: Elements associated with putting the install together, as Rick said, you get to the final completion of implementation.

Speaker Change: We need a better...

Richard B. Cohen: view around all of our program management to predict when those delays might be impacting, which is one of the reasons why that EPC role is so critical.

Speaker Change: because they're the ones receiving equipment on site. They're the ones who will have the first visibility in terms of a potential delay, and that's why we want to bring that back in-house. That is a critical element for us that we perhaps weren't getting the visibility we need.

Carol J. Hibbard: That is a critical element for us that perhaps we weren't getting the visibility. So, my follow-up question is: one, do you have that role, an individual in that role that is the head of what you just described?

Carol J. Hibbard: So there's organizational accountability as we speak about what's going on. And to that, my point, has anything that's happened here impacted the performance of the systems in the eyes of the, No, that's what we've protected against. I think the analogy that comes to mind is, our offense is working great, we had five minutes left in the fourth quarter, and the defense blew a couple plays.

Speaker Change: So, as my follow-up, one, do you have that role, an individual in that role, that is the head of what you just described, so there's organizational accountability as we speak,

Speaker Change: On what's going on, and to my point, has anything that's happened here impacted the performance of the systems in the eyes of the customer?

Speaker Change: No, that's what we've, that's what we really protected against. I think, I think the analogy that comes to mind is our offense is working great.

Speaker Change: We had five minutes left in the fourth quarter and the defense blew a couple plays. And so I think that's the way we look at it. We have been hiring.

Richard B. Cohen: And so, I think that's the way we should look at it. We have been hiring. People in the supply chain, in the EPC space, for the last six months, and they've finally got in place, and they're actually the ones that are saying we should do this ourselves. Our partners that we picked on supply chains got the work done, but then they came in with extra bills at the end, and that's just, that's a part of the business we have to manage, and we have to make sure we play defense, but it's not what drives the business.

Speaker Change: people in the supply chain, in the EPC space.

Speaker Change: Over the last six months, and they finally got in place, and they're actually the ones that are saying we should do this ourselves. Our partners that we picked on supply chains, they got the work done, but then they came in with extra bills at the end. And that's just, that's, uh...

Speaker Change: It's a part of the business we have to manage.

Speaker Change: And we have to make sure we play defense, but it's not what drives the business. We just got to shore it up.

Richard B. Cohen: We just, we just got to shore it up, and so that's my answer, and yes, it does come when you finish a project and you're saying, okay, we're ready to gear it up, and they say, no, no, no, these parts aren't here, and you have people, hundreds of people standing around the site for weeks. That's, that's the problem. So the systems are running well, and they just took longer to bring online than we thought, and we're not going to tolerate that. I got it.

Speaker Change: and so that's my answer and yes it does come when you finish a project and you're saying okay we're ready to gear it up and they're saying no no no these parts aren't here and you have people hundreds of people standing around the site for weeks that's that's the problem so the systems are running well

Speaker Change: And they just took longer to bring online than we thought.

Speaker Change: And we're not going to tolerate that.

Speaker Change: Got it. Thank you guys.

Pat: Yeah. Thanks, Pat.

Pat: Thank you. One moment for our next question.

Operator: Thank you, guys. Thank you. One moment for our next question. Our next question will come from the line of Ross Sparenblek from William Blair. Your line is open. Hey, good evening, guys. Hi Ross.

Pat: and others.

Speaker Change: Our next question will come from the line of Ross Sparenblek from William Blair, your line is open.

Ross Riley Sparenblek: Hey, sticking on the insourcing, can you maybe help frame, I know you provided some impressive numbers at your investor day in May on bringing those down, and then maybe just try to get a sense also on, you know, as you bring those commissioning hours down, what does that provide in closing the gap on your longer term gross margin targets? I'd say the commissioning is done by a different group of people than the EPC.

Unknown Attendee: Hey, good evening, guys.

Unknown Attendee: Hi, Ross.

Unknown Attendee: Hey, sticking on the insourcing, can you maybe help frame...

Unknown Attendee: How this has impacted, if it has, your ability to reduce commissioning hours. I know you've provided some impressive walk at your Investor Day in May on bringing those down. And maybe just try to get a sense also on, as you bring those commissioning hours down, what does that provide on closing the gap on your longer-term gross margin targets?

Ross Riley Sparenblek: And so that walk that you heard Walt talk quite a bit about at our investor day, that remains on track. And so the commissioning, think about that as the, you know, the final mile; we're talking about the allocation of resources throughout that installation process. And that's where we've seen some of the cost growth and schedule impact around that portion of the bill. Yeah, the actual building of the bots, which was a big problem for us before; actually, we are very happy with our partners in building bots. And we have a very competitive situation. Some of the part suppliers to some of the bots could do a little better. But the actual assembly of the bots is critical.

Walt: I'd say the commissioning is done by a different group of people than the EPC. And so that walk that you heard Walt talk quite a bit about at our Investor Day.

Speaker Change: That remains on track, and so the commissioning, think about that as the, you know, the final mile, we're talking about the directing of resources throughout that installation process, and that's where we've seen some of the cost growth and schedule impact around that portion of the bill.

Walt: Yeah, the actual building of the bots, which was a big problem for us before, we're actually very happy with our partners on building bots, and we have a very competitive situation. Some of the part suppliers to some of the bots,

Carol J. Hibbard: It's the actual big setting up the structure, the construction part of the business that is really going to be, we got to be boringly good at that. And so in this process, I think we've learned that, yeah, there's a couple things we should be doing differently. There's timing on the sites. But the most critical thing would be building the bots and building the robotic palletizing cells, and those we've been pretty happy with. It's just when it all comes together; so many people standing around at the end.

Walt: Maybe could do a little better, but the actual assembly of the bots is critical. It's the actual big setting up the structure, the construction part of the business that is really going to be, we've got to be boringly good at that.

Walt: And so, in this process, I think we've learned that, yeah, there's a couple of things we should be doing differently, there's timing on the sites, but the most critical thing would be building the bots.

Walt: and building the

Walt: robotic palatizing cells and those we've been pretty happy with it's just when it all comes together so many people standing around at the end.

Richard B. Cohen: All right, got it. And maybe on something a little bit more optimistic, Richard, can you just provide any updates on where you guys are with the European Salesforce expansion, and any commentary you're willing to provide on what those early customer conversations have looked like in the region? Yeah, so we've had a lot of conversations in Europe. We have, I've been to Europe a bunch of times.

Greg: All right. Got it. And maybe on, you know, something a little bit more optimistic. Richard, can you just provide any updates on where you guys are with the European Salesforce expansion? And any commentary you're willing to provide on, you know, what those early customer conversations have looked like in the region?

Richard B. Cohen: We've hired some Europeans to actually do sales work. We've hired a couple of consulting firms. All the big suspects, especially in the food space in Europe, are now engaged in conversations.

Richard: Yeah, so we've had a lot of conversations in Europe . We have

Richard: [inaudible]

Richard: I've been to Europe a bunch of times, we've hired.

Richard: Some

Richard: Europeans to actually do sales work. We've hired a couple of consulting firms, all the big suspects, especially in the food space.

Richard B. Cohen: We've also had some conversations with some of the port operators, whether it's Greenbox or Symbiotic Systems that we've been helpful with, and we continue to recruit and look at hiring more sales folks. But we've hired a couple of very good sales people from some of our competitors that we're delighted with. So I mean, just really quick to follow on there. Maybe I under appreciated the dual nature of the supply chain. Are you going to need engineering exposure in Europe as well?

Richard: and Europe are now we're engaged with conversations on we've also had

Richard: some conversations with some of the port operators, whether it's Greenbox or Symbiotics Systems that we've been helpful with, and we continue to recruit and look at hiring more sales folks.

Richard: But we've hired a couple of very good salespeople from some of our competitors that we're delighted with.

Speaker Change: So, I mean, just really quick on the following there, maybe I underappreciated the dual nature of the supply chain. Are you going to need the engineering exposure in Europe as well? So there's going to be another layer of hiring once these orders do start to come in on delivering the deployments?

Richard B. Cohen: So there's going to be another layer of hiring once these orders do start to come in on delivering the deployment? No, no, the engine, the systems, our systems are pretty much cookie cutters that were designed. And so, and within our expense package, we're actually increasing the amount of money and the number of people we have for R&D. But what we're doing is actually figuring out how to make these things simpler and easier, so that there are just fewer people doing basically construction work. I'll leave it be.

Speaker Change: No, no, the systems, our systems are pretty much cookie cutters, that's design.

Speaker Change: And so, and we continue within our expense.

Speaker Change: We're actually increasing the amount of money and the amount of people we have in R&D. But what we're doing is actually figuring out how to install these things simpler and easier so that there's just less people doing basically construction work.

Operator: Thanks, guys. Thank you. One moment for our next question. Our next question comes from Greg Palm on behalf of Craig Hammond. Your line is open.

Speaker Change: That's perfect. I'll leave it there. Thanks, guys.

Speaker Change: Thanks!

Speaker Change: Thank you. One moment for our next question.

Speaker Change: Our next question comes from Greg Palm from Craig Hallam. Your line is open.

Gregory William Palm: Yeah, thanks. I guess I'm still a little bit confused, just in terms of the revenue and profit bridge in the quarter, you know, you completed three systems, you started five; you actually outperformed revenue by a pretty wide margin relative to the guide. And so I'm trying to tie the statements about deployment delays and construction implementation delays to, you know, the fact that revenue actually outperformed quite a bit, which obviously implies that you were able to recognize the revenue. So can you maybe just dig into that a little bit more?

Speaker Change: Yeah, thanks. I guess I'm still a little bit confused just in terms of the revenue and profit bridge in the quarter. You know, you completed three systems, you started five, you actually outperform revenue by a pretty wide margin relative to the guide.

Speaker Change: And so I'm trying to tie the statements about deployment delays and construction implementation delays to, you know, the fact that actually revenue outperformed quite a bit, which obviously implies that you were able to recognize the revenue. So can you maybe just dig into that a little bit more?

Carol J. Hibbard: Yeah, so if you start with current revenue, that strong revenue is based on the progress of the 39 systems in deployment, many of which we had higher SOW signatures. If you think about 2Q of 23, 3Q of 23, we had signed five and six SOWs back in that timeframe. Right now, we are heavy into the implementation. So the bulk of our revenue is coming from projects that we signed about a year ago, and so that's driving the strong revenue. There are a couple things driving our 4Q guide lower. The first one is that we had fewer system starts last quarter. So we had three starts.

Speaker Change: Yeah, so if you start with current revenue, that strong revenue is based on the progress of the 39 systems in deployment.

Speaker Change: Many of which we had a higher SOW signature. If you think about 2Q of 23, 3Q of 23, we had signed 5 and 6 SOWs.

Speaker Change: back in that time frame. Right now, we are heavy into the implementation. So the bulk of our revenue is coming from projects that we signed about a year ago. And so that's driving the strong revenue performance.

Speaker Change: There are a couple things driving our 4Q guide lower. The first one is we had fewer system starts last quarter. So we had three starts.

Carol J. Hibbard: And so that, you know, the start of those systems, we're starting to see the ramp-up of revenue that would occur in the fourth quarter. And so the lower system starts is the first driver of why 4Q is down. The second is when we talk about construction delays and how that impacted our performance this quarter. Those construction delays that started on systems over the last quarter are going to delay revenue recognition for implementation milestones in the next quarter.

Speaker Change: And so that, you know, start of those systems, we're starting to see the ramp up of revenue would occur in fourth quarter. And so the lower system starts is the first driver of why 4Q is down.

Speaker Change: The second is when we talk about construction delays and how that impacted our performance this quarter.

Speaker Change: Those construction delays that started on systems over the last quarter, that's going to delay revenue recognition for implementation milestones in the next quarter, and that's another significant driver in terms of why revenue is down.

Carol J. Hibbard: And that's another significant driver in terms of why revenue is down. And then the last one Rick talked about is the technology we're improving that has slowed some things down. So that's also going to slow the milestones that we would have received revenue recognition for next quarter, and that's going to shift out. So those are the big drivers why you see the dip. That outlook is temporary. So as we look and plan for, you know, the beauty of having the backlog that we've got and being able to look at what we have in deployment, we can, we're getting better at predicting our revenue as long as we, Okay, that so maybe a little bit of a lag. So I guess that that makes sense. And did I hear that right?

Richard B. Cohen: And then the last one is Rick talked to is the technology we're improving that's slowed some things down. So that's also going to slow milestones that we would have received revenue recognition on next quarter and that's going to shift out.

Richard B. Cohen: So.

Speaker Change: So those are the big drivers why you see the dip down. That outlook is temporary, so as we look and plan for, you know, the beauty of having the backlog that we've got and being able to look at what we have in deployment, we can, we're getting better at predicting our revenue as long as we remain on schedule.

Speaker Change: Okay that so maybe a little bit of a lag so I guess that that makes sense and did I hear it right was there a cost associated as well with you know upgrading or retrofitting some of the bots that are that were in the field already was that an impact as well that was unforeseen or was that expected?

Carol J. Hibbard: Was there a cost associated as well with, you know, upgrading or retrofitting some of the bots that were in the field already? Was that an impact as well? That was unforeseen? Or was that expected?

Carol J. Hibbard: That was unforeseen. Some of the cables that enable the vision enhancement on the bots, which is one of the ways that we use vision to connect to our boards and use AI, a lot of those cables came in late. So we shipped the bots to the customer so they could still do 90% of what they were supposed to do. And then we made the decision to retrofit the cables in the field, which was expensive. I got it.

Speaker Change: That was unforeseen. Some of the cables...

Speaker Change: that enabled a vision enhancement on the bots, which is one of the ways that we use vision to connect to our boards and use AI. A number of those cables came in late.

Speaker Change: So we shipped the bots to the customer so they could still do 90% of what they were supposed to do. And then we made the decision to retrofit the cables in the field, which was expensive.

Carol J. Hibbard: Okay, now in line at our spot producer, but we made the conscious decision to go ahead and retrofit. Follow-up on what's already in. Yep, okay. And then, you know, just lastly, if I think back, you know, a few quarters to your fiscal Q1, your slow deployment, your slow deployments, I guess it was for differing but similar reasons, but that ended up really being, at least at that point, a one-quarter issue. So what is your visibility?

Speaker Change: Got it, okay.

Speaker Change: So now in line at our thought producer, but we made the conscious decision to go ahead and retrofit.

Carol J. Hibbard: You know, you're talking about, you know, reacceleration in fiscal Q1. Do you have pretty strong visibility that suggests, I mean, what else unforeseen could happen between now and then that would maybe impact that timing? So in terms of the visibility of new system starts, we get with our customers and try and map out from around our backlog; we try and do a six month and a 12 month outlook. And we stay in lockstep with our customers because we've talked before about why we may be ready to go full steam ahead and start deployment at a particular site.

Speaker Change: Follow-up on what's already in the field.

Speaker Change: Yep, okay. And then, you know, just lastly, you know, if I think back, you know, a few quarters to your fiscal Q1, your slow deployment, your slow deployments, I guess it was

Speaker Change: for differing but similar reasons, but that ended up really being, at least at that point, a one-quarter issue. So what is your visibility? You know, you're talking about re-acceleration in fiscal Q1.

Speaker Change: Do you have pretty strong visibility that suggests, I mean, what else unforeseen could happen between now and then that would maybe impact that timing?

Speaker Change: So in terms of the visibility in new system starts,

Speaker Change: We get with our customers and try and map out from around our backlog, we try and do a 6-month and a 12-month outlook, and we stay lockstep with our customers, because we've talked before about why we may be ready to be full steam ahead and start deployment at a particular site. It's a joint decision with our customer.

Carol J. Hibbard: It's a joint decision with our customers, and so we look ahead 12 months and map that out. What can cause issues with that are construction delays in one phase may start, may delay the start of another phase of that project. And so when you talk about those unforeseen things, that's the piece that we've got to remain on schedule so that you can continue the deployment in that phase. So we have pretty good visibility. Once the permits are issued, it just flows.

Speaker Change: And so we look out 12 months and map that out. What can cause issues with that are construction delays in one phase may start, may delay start of another phase of that project. And so when you talk about those unforeseen things.

Speaker Change: That's the piece that we've got to remain on schedule so that you can continue the deployment in that phased approach.

Carol J. Hibbard: And most of the things that we're talking about, I think in the first quarter, we're pretty confident. Okay, perfect. I will leave it there. Thanks.

Speaker Change: So we have pretty good visibility once the permits are issued that it just flows and most of the things that we're talking about I think in the first quarter we're pretty confident of.

Speaker Change: Okay, perfect. I will leave it there. Thanks.

Operator: Thank you. One moment for our next question. Our next question will come from Jim Ricchiuti from Needham. Your line is open.

Speaker Change: Thanks.

Speaker Change: Thank you. One moment for our next question.

Speaker Change: Our next question will come from Jim Ricchiuti from Needham. Your line is open.

James Andrew Ricchiuti: Hi, thank you. So when you talk about revenue growth accelerating in fiscal Q1, should we anticipate a pickup in margins? I mean, you're already suggesting there's going to be a recovery, some recovery back to historical levels in Q4 margins. I'm just wondering, though, as we start seeing an acceleration in revenue, do we then potentially have some cost issues that could impact margins in the near term beyond Q4? So in terms of revenue acceleration, you're going to see 4Q will be our lowest year-over-year revenue growth. So when we refer to getting back to 1Q, 4Q is going to be our lowest point when you look at that.

James Andrew Ricchiuti: Hi, thank you. So when you talk about the revenue growth accelerating in

James Andrew Ricchiuti: fiscal q1 should we anticipate

James Andrew Ricchiuti: a pickup in in margins. I mean, you're already suggesting there's going to be a recovery, some recovery back to historical levels.

Speaker Change: and Q4 margins. I'm just wondering, though, as we start seeing an acceleration in revenue, do we then potentially have some cost issues that could impact margins in the nearer term beyond Q4?

Speaker Change: So in terms of revenue acceleration, you're going to see 4Q will be our lowest year-over-year revenue growth.

Speaker Change: So when we refer to getting back to OneCue.

Carol J. Hibbard: In terms of gross margin impact, the accelerations we're talking about are not accelerating schedules where we're dumping resources to complete ahead of schedule. I'm not sure if that was the nature of your question, but you should expect to see gross margin incrementally get better as we deploy systems. So the other thing impacting our gross margin is we have lower margin projects in flow right now. The longer they take to deploy, the longer those lower margin projects stay with us.

Speaker Change: 4Q is going to be our lowest point when you look at that. In terms of gross margin impact,

Speaker Change: The accelerations we're talking about are not accelerating schedule where we're dumping resources to expend.

Speaker Change: to complete ahead of schedule. I'm not sure if that was the nature of your question.

Speaker Change: But you should expect to see gross margin incrementally get better as we deploy systems. So the other thing impacting our gross margins.

Speaker Change: is we have lower margin projects in flow right now. The longer they take to deploy, the longer those lower margin projects stay with us. So we've got to get that deployed so that we can start moving into a higher concentration of our higher margin business.

Carol J. Hibbard: So we've got to get that deployed so that we can start moving into a higher concentration of our higher margin. And just a follow-up question on what you're doing in-house with EPC. As you begin to accelerate, I mean, you're talking about a significant acceleration in deployments over the mid to longer term, and I'm wondering if that's going to require a scale-up in EPC resources as well. Maybe not immediately, but it sounds like as you start doing more of this in-house and as the deployment really starts to ramp, you're going to require more resources in-house. Is that how I'm thinking about it? Yeah, I think in terms of perspective, so let me, let me just step back for a second.

Speaker Change: And just a follow-up question on...

Speaker Change: What you're doing in-house with EPC.

Speaker Change: As you begin to accelerate, I mean, you're talking about...

Speaker Change: Significant acceleration in deployments over the mid to longer term, and I'm wondering if that's going to require...

Speaker Change: scale up in EPC resources as well. Maybe not immediately, but it sounds like as you start doing more of this in-house and as the deployment really starts to ramp you're going to require more resources.

Speaker Change: I think in perspective, so let me just step back a second.

Richard B. Cohen: So we basically doubled the sales of this company in two years. And so, I mean, it's not, I mean, it's like, we hope we wouldn't hit a speed bump, and but I think this is, I mean, it's pretty minor. This was actually our highest EBITDA quarter ever. So it's pretty minor. I don't have any below-the-line adjustments.

Speaker Change: Doubled the sales of this company in two years.

Speaker Change: and so I mean it's not I mean it's like we hope we wouldn't hit a speed bump and but I think this is I mean it's it's pretty minor this is actually our highest EBITDA quarter ever

Speaker Change: So, it's pretty minor. I don't have any below-the-line adjustments. But, yeah, we're going to continue to

Richard B. Cohen: But yeah, we're going to continue to scale up on some resources. We're also going to scale down on other resources. We'll do a good job controlling our expenses. And now, what we need to do is control the construction costs at the site. So this was a good learning quarter for us, although it was a little bit painful.

Speaker Change: scale up on some resources. We're also going to scale down on other resources. We'll do a good job controlling our expenses.

Speaker Change: And now what we need to do is control the construction costs at the site. So this was a good learning quarter for us. It was a little bit painful. If the growths had been good,

Speaker Change: Based on the sales, we would have been delighting the people we're talking to today. So we took our hits, we cleaned it up, and we're done.

Speaker Change: Okay, thank you.

Operator: One moment for the next question. Our next question comes from Nicole DeBlase from Bank. Your line is open.

Jeffrey K. Evanson: and Jeffrey Evanson. Bye.

Speaker Change: One moment for the next question.

Speaker Change: Our next question comes from the line of Nicole DeBlase from Bank. Your line is open.

Nicole Sheree DeBlase: Yeah, thanks. Good evening, guys. Hi. Just maybe kind of putting all of this together, thinking about, you know, the ramp to 2025, talking about, you know, your view that revenue should kind of get back on track and reaccelerate in the first quarter, margins following that, and then the ability to kind of hold costs constant. Does that mean that it's fair to assume that EBITDA margins in 2025 will move above this mid-single-digit level that you're expecting for the fourth quarter of this year?

Speaker Change: Yeah, thanks. Good evening, guys.

Speaker Change: Hi, just maybe kind of putting all of this together, thinking about, you know, the ramp to 2025, talking about, you know, your

Nicole Sheree DeBlase: Review that. Revenue should kind of get back on track and re-accelerate in the first quarter, margins following that, and then ability to kind of hold costs constant. Does that mean that it's fair to assume that EBITDA margins in 2025 move above this mid-single-digit level that you're expecting for the fourth quarter of this year?

Nicole Sheree DeBlase: You're definitely going to see higher returns to EBITDA than where we are this quarter. We should be above the mid single digits and then on its trajectory to continue to improve that gross margin and EBITDA margin going forward. Okay, got it. Thank you. That's very helpful.

Speaker Change: You're definitely going to see...

Speaker Change: return to EBITDA higher than where we are this quarter. We should be above mid-single digits.

Speaker Change: And then on a trajectory to continue to improve that gross margin and EBITDA margin going forward.

Carol J. Hibbard: And then just on steel costs, they've been coming down for some time. Do you think that's reflected in your growth margins yet? Or is that an additional help as we move into future quarters? I'd say it is.

Speaker Change: Okay, got it. Thank you. That's very helpful. And then just on steel costs, they've been coming down for some time. Do you think that's reflected in your growth margins yet? Or is that an additional help as we move into future quarters?

Carol J. Hibbard: So what we've gotten a lot better at is locking in our steel prices at the same time we go ahead and sign an individual contract or an individual project with our customers. When there's a lag, that's when we either get the benefit of steel prices, or we get the impact of steel prices. So what we've gotten better at is locking in a commitment, and our supply chain team is focused on with that stronger visibility in terms of what's in our backlog, we've been able to lock in commitments with our steel partners further out. A lot of these projects we're doing now were locked in price almost 18 months ago when steel was higher. So I can't predict what steel is going to do.

Speaker Change: I'd say it's reflected. So what we've gotten a lot better at is locking in our steel pricing at the same time we go ahead and sign an individual contract or an individual project with our customers.

Speaker Change: When there's a lag is when we either get the benefit of steel pricing or we get the impact of steel pricing. So what we've gotten better at is locking in a commitment.

Speaker Change: And our supply chain team is focused on, with that stronger visibility in terms of what's in our backlog, we've been able to lock in commitments with our steel partners further out. A lot of these projects we're doing now, we locked in prices.

Speaker Change: Almost 18 months ago, when steel was higher, so I can't predict what steel...

Speaker Change: This is going to do, but if you think...

Speaker Change: but we expect it to come down lower and that would be reflected in the in the future. But sites that we're doing now, we actually locked in steel 18 months ago. So we're not buying on the spot market or we are buying on the spot market. It's for delivery at a price 18 months from now.

Carol J. Hibbard: But if you think we expect it to come down lower, and that would be reflected in the future budget sites that we're doing now, we actually locked in steel 18 months ago. So we're not buying on the spot market, or we are buying on the spot market. It's for delivery at a price 18 months from now. Got it. Thank you guys. I'll pass it on.

Speaker Change: Got it. Thank you guys. I'll pass it on.

Operator: Thank you. One moment for our next question. Our next question comes from Mark Delaney from Goldman Sachs. Your line is open. Yes, good afternoon.

Speaker Change: Thank you. One moment for our next question.

Speaker Change: Our next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.

Mark Trevor Delaney: Thanks for taking the question. Last quarter, the company said it expects to begin the installation of its second break pack solution with a customer this summer. I think you mentioned today progress with the mini bot, but can you comment on when you expect to deploy the second break pack and how the break pack more broadly is going?

Mark Trevor Delaney: Yes, good afternoon. Thanks for taking my question. Last quarter, the company said it expects to begin the installation of its second break pack solution with a customer this summer. I think you mentioned today progress with the mini bot. But can you comment on when you expect to deploy the second break pack and how break pack more broadly is going?

Richard B. Cohen: Yeah, so we're, we're hitting it. So the answer is it's going well. We're meeting our customers' expectations. The second system will start construction in our next fiscal year, and I think it gets rolled out in 2025 or thereabouts.

Speaker Change #100: Yeah, so we're hitting, so the answer is it's going well. We're meeting our customers expectations. The second system will start construction

Richard B. Cohen: But we've redesigned the mini bot; we took it in house. We put a lot of new technology in the bot, and customers are really excited. I actually think it's going to be a growth opportunity for us. Thanks for that. My other question was hoping to better understand the top line. And can you please remind us what percent of revenue recognition comes from procurement, installation, and commissioning of the system? Thanks.

Mark Trevor Delaney: [inaudible]

Speaker Change #101: Our next fiscal year, and I think it gets rolled out in 2025 or thereabouts, but we've redesigned the minibot. We've taken it in-house.

Speaker Change #101: We've put a lot of new technology in the box, customers are really excited. I actually think it's going to be a growth opportunity for us.

Speaker Change #102: Thanks for that, Rick. And my other question was hoping to better understand the top line, and can you please remind us what percent of revenue recognition comes from procurement, installation, and commissioning of the system? Thanks.

Carol J. Hibbard: So our revenue curve, because I think this is where you're going, Mark, is a much more significant part of our revenue is coming from system deployment near about 12 months into the install. So I think your question, though, is what percent of that overall revenue is driven by the EPC in terms of if we're bringing that back in house, how much of the revenue drive? thriving, it's that is not a significant contributor to cost.

Speaker Change #103: So, our revenue curve, because I think this is where you're going, Mark,

Speaker Change #104: is a much more significant part of our revenue is coming from system deployment near about 12 months into the install.

Speaker Change #105: So, I think your question though is what percent of that overall revenue is driven by the EPC in terms of, if we're bringing that back in-house, how much of the revenue drives it?

Speaker Change #106: thriving it's that is not a significant to contribute a cost

Carol J. Hibbard: And so the focus there for each individual system is a very small percentage of what that overall cost curve is, but it's such a critical element, which is why we're bringing this. Thank you. I'll pass it along.

Speaker Change #106: And so the focus there for each individual system, it's a very small percentage of what that overall cost curve is, but it's such a critical element, which is why we're bringing it back.

Operator: Thank you. One moment for our next question. Our question comes from Rob Mason from Baird. Your line is open. Yes, good afternoon.

Speaker Change #107: Thank you. I'll pass it along.

Speaker Change #108: Thank you. One moment for our next question.

Speaker Change #108: Our question comes from Rob Mason from Baird. Your line is open.

Robert W. Mason: Rick, I was gonna see if you could update us on, maybe it's early, but if you could update us on progress on the non-ambient effort that you have ongoing, and how you see that timeline, and just referencing that, you know, one of your large customers in the quarter made some commentary around their implementation of, I guess, a vendor they've been working with on that effort, you know, at least since 2018, but maybe how Yeah, so we are working on it. We have a couple of CNS sites that we're able to experiment with in perishables in Massachusetts, and so we're continuing to work on that. We're learning a lot. We don't see any showstoppers.

Robert W. Mason: Yes, good afternoon. Rick, I was going to see if you could update us on...

Robert W. Mason: Maybe it's early, but if you could update us on progress on the non-ambient effort that you have ongoing, and how you see that timeline. And just referencing that one of your large customers in the quarter made some commentary around their implementation of, I guess, a vendor they've been working with on that effort, at least since 2018. But maybe how you see your opportunity unfolding in the non-ambient space with either new or existing customers.

Speaker Change #110: Yeah so we we are working on we have a couple of

Speaker Change #111: These are friendly CNS sites that we're able to experiment with in perishables in Massachusetts, and so we're continuing to work on that.

Speaker Change #111: We're learning a lot. We don't see any showstoppers, the perishable.

Richard B. Cohen: The perishable system for bots is pretty well designed for. It's just we're so busy right now selling the ambient systems, but we're continuing to spend a lot of money on R&D here. Everybody should know that.

Speaker Change #111: system for bots we're pretty well designed for.

Speaker Change #111: [inaudible]

Speaker Change #111: It's just we're so busy right now selling the Ambien systems, but we're continuing to spend a lot of money on R&D here. Everybody should know that, that we haven't cut back any of that, and that's reflected in our numbers. It's a perishable...

Richard B. Cohen: That we haven't cut back on any of that, and that's reflected in our numbers, but the perishables development. It continues to go well. A lot of what we do in ambient is relevant for perishables, so we don't have any deployments, but we do have some potential customers that are very interested in deployments, and we think that's going to be a big part of it. Very good.

Speaker Change #111: That development continues to go well. A lot of what we do in Ambien is relevant for perishables, so we don't have any deployments, but we do have some potential customers that are very interested in deployments. We think that's going to be a big business.

Carol J. Hibbard: And Carol, just real quick, you made the commentary around funding for Greenbox. How does that tie into a couple of the larger outlays that were on the cash flow statement in the quarter either around strategic investments or the distributions for symbiotic holdings? Is that related? Yeah, it's at the symbiotic holdings is not related to Greenbox.

Speaker Change #112: The Distributions for Symbiotic Holdings. Is that related?

Carol J. Hibbard: But I'll touch on the two things that impacted our cash for the quarter. So you see, you know, an $81 million reduction quarter over quarter in terms of cash balance. And so there were two unusual events this quarter.

Carol J. Hibbard: In terms of cash balance. And so there were two unusual events this quarter. The first one being this is our first quarter with our Greenbox investment. And so if you may recall from our overall Greenbox LLC agreement,

Carol J. Hibbard: The first one being that this is our first quarter with our Greenbox investment. And so, if you may recall from our overall Greenbox LLC agreement, each partner would contribute to the initial capital call associated with that investment. And so that initial capital call that is not related to the systems happens, And so that was one element of what you saw from the cash flow. The second element you referenced, which was, you know, in our press release and the financial distribution to SIM Holding LLC, the non-controlling interest.

Carol J. Hibbard: Each partner would contribute to the initial capital call associated with that investment, and so that initial capital call that is not related to the system happened this quarter.

Carol J. Hibbard: And so that was one element of what you saw from the cash burn.

Carol J. Hibbard: The second element you referenced, which was, you know, in our press release in the financials, distribution to SIM holding LLC, the non-controlling interest. This has to relate to our SIM LLC

Carol J. Hibbard: This has to do with our SIM LLC. We make a distribution to the members in the year that we believe we will become profitable for tax. So associated with that distribution, you saw a $48 million cash impact. And that that run rate will not continue at that rate. We actually had an April and a June payment that both hit in the quarter. So we had double the impact in one particular quarter. You're not going to see that run rate going forward.

Carol J. Hibbard: We make a distribution to the members in the year that we believe we will become profitable for tax purposes.

Carol J. Hibbard: And so, associated with that distribution, we saw a $48 million cash impact. That run rate will not continue at that rate. We actually had an April and a June payment that both hit in the quarter. So, we had double the impact in one particular quarter. You're not going to see that run rate going forward.

Operator: Thank you. Thank you. One moment for our next question. Our next question will come from Ken Newman from KeyBank Capital. Your line is open.

Speaker Change #113: Thank you, that's helpful.

Speaker Change #114: Thank you. One moment for our next question.

Speaker Change #116: Our next question will come from Ken Newman from KeyBank Capital. Your line is open.

Ken Newman: Hey guys, thanks for taking the question. You know, I appreciate all the color so far, all the moving pieces for, you know, system gross margin, quarter, but I'm just curious. Carol, could you just quantify exactly how large those impacts were in the quarter?

Ken Newman: Hey guys, thanks for taking the question here.

Ken Newman: You know, I appreciate all the color so far, all the moving pieces for, you know, system gross margin into this quarter, but I'm just curious.

Carol J. Hibbard: Carol, could you just quantify exactly how large those impacts were in the quarter?

Carol J. Hibbard: You know, that way we get a better sense of just what EBITDA margin would have been had these costs not kind of crept up on you late into the quarter. And then it helps us bridge how much of that is expected to roll off in your 4Q guide. And so what you're seeing is that the entire impact, if you think about how we were at 15.6% gross margin, we had, you know, that full impact from what we would have been predicting at about 20%, which is what we're trying to get back to in terms of the fourth quarter. That full impact comes from the three elements we talked about.

Ken Newman: That way we get a better sense of just what EBITDA margin would have been had these costs not kind of crept up on you late into the quarter, and then just helping us bridge how much of that is expected to roll off in your 4Q guide.

Speaker Change #117: And so what you're seeing is that the entire impact, if you think about, we were at 15.6% gross margin.

Speaker Change #119: We had, you know, that full impact from what we would have been predicting at about 20%, which is what we're trying to get back to in terms of fourth quarter. That full impact comes from the three elements we talked about.

Speaker Change #117: And I'm not going to split out between the three, but it's overall cost growth, construction delays, and the going ahead and rolling forward the innovation that we had talked about last quarter. So those were the impacts driving that gross margin.

Carol J. Hibbard: And is it fair to say, I mean, it sounds like you're not expecting the full impact or that to roll off here into the fourth quarter. But as I think about just the timing here, is there a sense that, you know, you get back to 20% plus gross margins beginning in the first quarter of 25, or is that still too hard of a hurdle? Now that's what we're predicting.

Speaker Change #117: Okay.

Speaker Change #118: And is it fair to think, I mean, it sounds like you're not expecting the full impact or that to roll off here into the fourth quarter, but as I think about just the timing here, is there a sense that, you know, you get back to 20% plus gross margins beginning in the first quarter of 25, or is that still too hard of a hurdle?

Carol J. Hibbard: So our guide reflects getting back to 20% in the fourth quarter. And I'll just do a quick go back on the three categories of what impacted our overall margin. To summarize, the vast majority of that is labor. We talked about inefficiencies, we talked about schedules. The bulk of that is people costs, people being ready for work, but then the work and the equipment didn't show up. So our guide for 4Q, our expectation is we'll be back to 20%. But is that where we wanted to be? No.

Speaker Change #120: Now that's what we're predicting. So our guide reflects getting back to 20% in the fourth quarter. And I'll just do a quick go back on the on the three categories of what impacted our overall margin. To summarize that, the vast majority of that is labor related.

Speaker Change #118: We talked about inefficiencies, we talked about schedule, the bulk of that is people costs.

Speaker Change #118: People being ready for work, then the work and the equipment did show up.

Speaker Change #118: So our guide for 4Q, our expectation is we'll be back to 20%. Was that where we wanted to be? No. So we're lower than what we would have planned at the beginning of the year and that's why we're saying there's still some impact heading into the fourth quarter but our guide reflects that.

Carol J. Hibbard: So we're lower than what we would have planned at the beginning of the year. And that's why we're saying there's still some impact heading into the fourth quarter, but our guide reflects that. Okay.

Carol J. Hibbard: And then just real quickly for my follow-up here, just looking at this pre-cash statement, I mean, it looks like CapEx did step up kind of decently sequentially here this quarter. Any thoughts on free cash flow or, you know, CapEx expectations into year end? And, you know, is it fair to think that you'd still expect to be free cash flow positive in the fourth quarter? Yeah, we still expect to be free cash flow positive going into 4Q. What you're seeing on CapEx is a couple things.

Speaker Change #121: And then just real quickly for my follow-up here, just looking at this pre-cash statement, I mean, it looks like CapEx did step up kind of decently sequentially here this quarter.

Speaker Change #122: Any thoughts on where free cash flow or, you know, CapEx expectations into year-end and, you know, is it fair to think that you'd still expect to be free cash flow positive in the fourth quarter?

Speaker Change #123: Yeah, we still expect to be free cash flow positive going into 4Q, what you're seeing on CapEx.

Carol J. Hibbard: So we're going ahead and investing in additional equipment, as we're ramping up R&D. And then we also talked last quarter about our move from some equipment out of deferred costs into PP&E. And that's what you're seeing. So I think the run rate for this quarter is indicative of what you'll see going forward. Thanks.

Speaker Change #124: is a couple things. So we're going ahead and investing in additional equipment.

Speaker Change #124: As we're ramping up R&D. And then we also talked last quarter about our move from some equipment out of deferred cost into PP&E, and that's what you're seeing. So I think the run rate for this quarter is indicative of what you'll see going forward.

Speaker Change #124: Thanks.

Speaker Change #125: Thank you. One moment for our next question.

Operator: Thank you. One moment for our next question. Our next question comes from Derek Soderberg from Cantor Fitzgerald. Your line is open. Yeah, hey, everyone.

Speaker Change #126: Our next question comes from Derek Soderberg from Cantor Fitzgerald. Your line is open.

Derek John Soderberg: Thanks for taking the questions. I wanted to ask about Greenbox. Is there any way you can quantify the interest level you're getting for Greenbox today?

Derek John Soderberg: Yeah. Hey, everyone. Thanks for taking the questions.

Derek John Soderberg: I wanted to ask about Greenbox. Is there any way you can quantify the interest level you're getting for Greenbox today? Is that pipeline growing? And then how would you characterize the size of the firms you're getting interest from today? Is it more mom-and-pop shops, mid-size, or large regionals? And then I've got a follow-up.

Richard B. Cohen: Is that pipeline growing? And then how would you characterize the size of the firms you're getting interest from today? Are they more mom and pop shops, midsize, or large regionals?

Speaker Change #128: Mostly what we're getting interest at this point is medium and large regionals.

Richard B. Cohen: And then I've got a follow-up. Mostly, what we're getting interest in at this point are medium and large regions. And what we want to do is develop a sales force to go after the mom and pop shops, which is where we think there's more margin, but we need anchor tenants. So we've had a number of incomings as people are still trying to understand what we're doing, how this all works, but medium and large reach. Rick, what do you think they're waiting for to hop on board with that first anchor customer? You know, what are they looking for when that solution goes live?

Speaker Change #129: And what we want to do is develop a sales force.

Speaker Change #129: to go after the mom-and-pop shops, which is where we think there's more margin, but we need anchor tenants, so we've had a number of incomings as people are still trying to understand what we're doing, how this all works, but medium and large regionals.

Richard B. Cohen: What are you hearing from them in terms of feedback? You know, I guess just what are they watching from that first customer? I think, I think they were waiting for the first Symbiotic site and Greenbox site to become available.

Speaker Change #129: And Rick, what do you think they're waiting for to hop on board with that first anchor customer? You know, what are they looking for when that solution comes live? You know, what are you hearing from them in terms of feedback? You know, I guess just what are they watching from that first customer? Thanks.

Richard B. Cohen: So we'll be able to tour people through that, but I think they're just waiting for us to announce the locations, which we plan to do shortly for the next couple of sites. Thanks, Derek.

Richard B. Cohen: But I think I think there

Speaker Change #130: They were waiting for the first Symbonic site and Greenbox site to become available, so we'll be able to tour people through that. But I think they're just waiting for us to announce the locations, which we plan to do shortly, of the next couple sites.

Operator: Thank you. One moment for our next question, and our next question will be from the line of Joe Giordano from TD Kallen. Your line is open.

Derek John Soderberg: Great. Thanks, Derek.

Derek John Soderberg: And our next question for will be from the line of Joe Giordano from TD Kallen. Your line is open.

Joseph Craig Giordano: Hey guys, um, I wanted to start, I wanted to start on just back on the EPC thing. So I just want to make sure I understand this right; you're dealing with companies that do this as like their core competency, I guess. So, how, what gives you the comfort that bringing this in house, like to do something that's not like your, I guess, your core of what you do, like you'd be able to do it that much better.

Joseph Craig Giordano: Hey, guys.

Joseph Craig Giordano: I wanted to start back on the EPC thing, so I just want to make sure I get this right.

Richard B. Cohen: And like, wouldn't you be hiring, like kind of the same people that you're working with, like kind of poaching people from those EPCs? So I just want to make sure I understand that whole dynamic. And, you know, what gives you the confidence that that improves significantly? Yeah, so actually, what we did, Joe, fair question is, a lot of the people that we had hired when we were doing this ourselves were then hired by some of the general contractors who probably are better at defense work than our kind of work.

Joseph Craig Giordano: You're dealing with companies that do this as like the core competency, I guess, so like, how, what gives you the comfort that bringing this in-house

Joseph Craig Giordano: like to do something that's not like your, I guess your core of what you do, like that you'd be able to do it that much better. And like, wouldn't, would you be hiring, like kind of the same people that you're working with, like kind of poaching people from, from those EPCs. So I just want to make sure I understand that whole dynamic. And, you know, what

Speaker Change #132: What gives you the confidence that that improves significantly in health?

Speaker Change #132: Yeah, so actually what we did, Joe, fair question, is a lot of the people that we had hired when we were doing this ourselves.

Speaker Change #132: We're then hired by some of the general contractors.

Speaker Change #133: who probably are better at defense work than our kind of work.

Richard B. Cohen: And so, and we, some of these, some of these contractors that we will then go back and take over will actually reduce the price. And we're finding that we're spending a lot of time managing the contractors and what we've done. So that's one thing. The other thing we did was we've actually been able to hire people that have done this from some of the large automation firms that do this in-house. And so that's given us real comfort that we don't need, in some cases, the middleman.

Speaker Change #133: and so it was so we some of these so some of these contractors that we will then go back and take over will actually reduce the price

Speaker Change #133: And we're finding that we're spending a lot of time managing the contractors and what we've done.

Speaker Change #133: So that's one thing. The other thing we've done is we've actually been able to hire people that have done this from some of the large automation firms that do this in-house.

Speaker Change #133: And so that's given us real comfort that we don't need, in some cases, the middleman, and in some cases, we're just better off to hire people ourselves.

Richard B. Cohen: And in some cases, we're just better off to hire people ourselves. So it's simply I guess the answer is simply that we've been disappointed at the performance of some of the suppliers that we've hired. And we know we can do it better ourselves. Are you ultimately using the same method as construction firms; you're just taking a part of the function away? Like, do you plan on keeping the same kind of mix of partners, though?

Speaker Change #133: So, it's simply...

Speaker Change #133: I guess the answer is simply we've been we've been disappointed at the performance for some of the suppliers that we've hired and we know we can do it better ourselves.

Speaker Change #135: Are you ultimately using these same, like, construction firms, you're just taking a part of the function away? Like, do you plan on keeping the same kind of mix of partners, though?

Richard B. Cohen: Yeah, so for instance, there's a company that installs All Our Rack, which is one of the largest contracts that we order in terms of labor. And so we turned those over to the general contractor, and the general contractor used them and did a worse job managing them than we did. So we'll just take them back.

Speaker Change #133: Yeah, so, for instance, there's a company that installs All Our Rack, which is one of the largest

Speaker Change #133: contracts that we order in terms of labor

Speaker Change #134: And so we turn those over to the general contractor, and the general contractor used them and did a worse job managing them than we did. So we'll just take them back. We'll also...

Richard B. Cohen: We'll also, and on the electrical side, we've learned a lot about electrical. And so that's been another part, but yes. So it's them not managing the sub, it's them not managing the sub, and sub-contracting it out.

Speaker Change #134: And on the electrical side, we've learned a lot about electrical, and so that's been another part, but yes.

Richard B. Cohen: Well, and that's the capability that you have more, more. Yeah. Okay.

Speaker Change #134: So it's them not managing the sub, it's them not managing the sub, subbing it out well, and that's the capability that you think you can bring more, more effective use of power by the executive? Okay.

Richard B. Cohen: Yep, when we took this over, and I think we told the group that we thought these people were going to manage all the subs better, we're going to bring in new subs, it just hasn't happened. Okay, and then my follow-up here, and I think this was brought up, but I just want to clarify it like I know that you're frustrated by this, you know, I'm sure investors are frustrated by this.

Speaker Change #136: Yep, when we took this over, and I think we told the group that we thought these people were going to manage all the subs better, we're going to bring in new subs, it just hasn't happened.

Speaker Change #138: Okay, and then my follow up here, and I think this was brought up, but I just want to clarify it. Like, I know that you're frustrated by this, you know, I'm sure investors are going to be somewhat frustrated by this. But like, if I'm talking to your customers,

Richard B. Cohen: But like, if I'm talking to your customer, is this, am I getting kind of different reactions like, do they know, do they see this on their side, are you bumping up against kind of like timelines that you need to hustle to get to now, like what's the difference between like the conversation we're having right now and the ones that you're having? Yeah, so what we've done, and this is one of the reasons why And so we, we certainly the customers, are leaning in to pay for some of it. Some of it we're paying.

Speaker Change #136: Like, is this, oh, am I getting kind of different reactions? Like, do they know, do they see this on their side? Are you bumping up against kind of like timelines that you need to hustle to get to now? Like, what's the difference between like the conversation we're having right now and the ones that you're having with your customers on site?

Richard B. Cohen: And, and we're working with the customers to make sure it goes away. And also, I think we're educating our customers that they have to have some of these sites ready ahead of time, and clean ahead of time, and some of them have been lagging with their contractors getting power to the building, and, and that stuff. So we're all learning together. But I'm confident this is a very short-term problem.

Speaker Change #137: Yeah, so what we've done, and this is one of the reasons why we spend more money, is we've tried to, we've tried to, as much as we can, isolate our customers. We think this is a short-term problem.

Speaker Change #137: And so, we certainly, the customers are leaning in to pay some of it, some of it we're paying, and we're working with the customers to make sure it goes away. And also, I think we're educating our customers, they have to have some of these sites ready.

Speaker Change #137: ahead of time, clean ahead of time, and some of them have been lagging with their contractors getting power to the building and that stuff. So we're all learning together, but I'm confident this is a very short-term problem.

Richard B. Cohen: Thanks, guys. Thank you. I'm showing no further questions in the queue.

Jeff Evanson: Now I'd like to turn the call back over to Jeff Evanson for any closing remarks. Thank you everyone for joining our call tonight. We appreciate your interest in Symbiotic, and we look forward to seeing many of you during the quarter at the various investor conferences we will be attending. Good night.

Speaker Change #137: Thanks guys.

Speaker Change #137: Thank you. I'm showing no further questions in the queue. And now I'd like to turn the call back over to Jeff Evanson for any closing remarks.

Jeff Evanson: Thank you everyone for joining our call tonight. We appreciate your interest in Symbiotic and we look forward to seeing many of you during quarter at the various investor conferences we will be attending.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day. ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? , , , , , , , , , , , , Good day, and thank you for standing by.

Speaker Change #139: Good night.

Speaker Change #140: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

Operator: Welcome to the Symbiotic Third Quarter Fiscal 2024 Financial Results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I will now turn the conference over to your speakers today, Jeff Evanson, Vice President of Investment Relations. Please go ahead.

Speaker Change #141: Good day and thank you for standing by. Welcome to the Symbiotic Third Quarter Fiscal 2024 Financial Results.

Speaker Change #143: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.

Speaker Change #141: To withdraw your question, please press star 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Jeff Evanson, Vice President of Investment Relations. Please go ahead.

Jeff Evanson: Thank you, Victor. Hello. Welcome to Symbiotics Third Quarter 2024 Financial Results Webcast.

Jeff Evanson: I am Jeff Evanson, Symbiotics VP of Investor Relations.

Speaker Change #142: Some of the statements that we make today regarding our business operations and financial performance may be considered forward-looking.

Speaker Change #142: Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties.

Speaker Change #142: Actual results could differ materially.

Speaker Change #142: Please refer to our Forms 10-K and 10-Q including the risk factors.

Speaker Change #142: We undertake no obligation to update any forward-looking statements.

Jeff Evanson: In addition, during this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's Earnings Press release, which is distributed and available to the public through our investor relations website located at IR.Symbiotic.com. On today's call, we're joined by Rick Cohen, Symbiotics Founder, Chairman, and Chief Executive Officer, and Carol Hibbard, Symbiotics Chief Financial Officer.

Speaker Change #142: In addition, during this call, we will present both GAAP and non-GAAP financial measures.

Speaker Change #142: A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our investor relations website located at ir.symbiotic.com.

Speaker Change #144: On today's call, we're joined by Rick Cohen, Symbiotics Founder, Chairman and Chief Executive Officer, and Carol Hibbard, Symbiotics Chief Financial Officer.

Speaker Change #144: These executives will discuss our third quarter fiscal 2024 results and our outlook, followed by Q&A.

Jeff Evanson: These executives will discuss our third quarter fiscal 2024 results and our outlook, followed by Q&A. Rick, I will now turn the call over to you. Thank you, Jeff. Good afternoon, and thank you for joining us to review our most recent results. The third quarter reflects record revenue growth, strong recurring revenue gross margin, and careful management of operating expenses. However, our system gross margin reflects elongated construction schedules and implementation costs associated with last quarter's rapid pace of innovation. For example, during the quarter, we decided to retrofit all SimBots in the field with our new sensor array to enhance performance capabilities at the majority of our customer sites.

Speaker Change #145: Rick, I will now turn the call over to you.

Richard B. Cohen: Thank you, Jeff. Good afternoon, and thank you for joining us to review our most recent results. Our third quarter reflects record revenue growth, strong recurring revenue growth margin, and careful management of operating expenses.

Richard B. Cohen: However, our system gross margin reflects elongated construction schedules and implementation costs associated with last quarter's rapid pace of innovation.

Richard B. Cohen: For example, during the quarter, we decided to retrofit all SIMBOTS in the field with our new sensor array to enhance performance capabilities at the majority of our customer sites.

Richard B. Cohen: While we believe much of the cost growth is now behind us, we could continue to see some impacts in the coming quarters as we focus on scaling high-quality deployments for our customers. As you recall, two years ago, we embarked on a strategy to outsource much of the manufacturing and installation of our system. This approach enabled us to scale at a rapid pace. Based on our key learnings over multiple deployments, we plan to reabsorb a portion of the construction management process, starting this quarter, which will reduce costs. We believe bringing some of these functions back in-house will help us put a sharper focus on the implementation process and reduce costs further.

Richard B. Cohen: As you recall, two years ago we embarked on a strategy to outsource much of the manufacturing and installation of our systems.

Richard B. Cohen: This approach enabled us to scale at a rapid pace.

Richard B. Cohen: Based on our key learnings over multiple deployments, we plan to reabsorb a portion of the construction management processing starting this quarter, which will reduce costs.

Richard B. Cohen: We believe bringing some of these functions back in-house will help us put a sharper focus on the implementation process and reduce costs further.

Richard B. Cohen: In the short term, our revenue growth may slow as we make these changes. Our backlog demonstrates that demand continues to be very strong for our systems, but we will always prioritize execution on existing deployments ahead of chasing growth. On the innovation front, we made important progress on a new mini-bot that will populate our second break-back installation and advance our non-ambient system development. We also began deployment of the first semiotic system for Greenbox.

Richard B. Cohen: On the innovation front, we made important progress on a new minibot that will populate our second break pack installation and advanced our non-ambient system development work.

Richard B. Cohen: We also began deployment of the first emotic system for Greenbox. While this did not contribute a significant amount of revenue in the quarter, the Greenbox deployment is on schedule.

Richard B. Cohen: While this did not contribute a significant amount of revenue in the quarter, the Green Box deployment is on schedule. I'm confident that we are making the right choices to quickly return to higher system gross margin and faster growth. Thank you to all Symbiotic Employees, partners, and investors for your efforts and support. Now Carol will discuss our financial results outlook. Thank you, Rick. Third quarter revenue grew to $492 million, up 58% compared to the same quarter last year.

Carol J. Hibbard: I'm confident that we are making the right choices to quickly return to higher system gross margin and faster growth. Thank you to all Symbiotic Employees partners and investors for your efforts and support. Now Carol will discuss our financial results and outlook.

Carol J. Hibbard: Thank you, Rick. Third quarter revenue grew to $492 million, up 58% compared to the same quarter last year.

Carol J. Hibbard: The strong revenue growth is driven by steady progress across our 39 systems in the process of deployment.

Carol J. Hibbard: As planned, systems starts re-accelerated in the third quarter. We started five new system deployments and completed three systems, bringing us up to 21 fully operational systems.

Carol J. Hibbard: We expect quarterly system starts to increase in the fourth quarter.

Carol J. Hibbard: As Rick mentioned, system growth margin fell below expectations due to schedule growth and higher labor costs during the quarter.

Richard B. Cohen: We are focused on improving our planning, speed of implementation, and project management to enhance performance of the business.

Richard B. Cohen: We continue to improve our operating leverage with a focus on prudent expense management.

Richard B. Cohen: During the quarter, we generated $50 million in cash from operating activities.

Speaker Change #146: In total, our cash and equivalents declined to $81 million sequentially to $870 million.

Carol J. Hibbard: This was driven in part by a first investment in Greenbox as they began operations. For the fourth quarter of fiscal 2024, we expect revenue of $455 to $475 million and adjusted EBITDA between $28 and $32 million, representing temporarily slowed revenue growth and system gross margin returning to historical levels during our fourth quarter. Finally, we believe our first quarter of fiscal 2025 should reflect reaccelerating year over year. We now welcome your questions.

Speaker Change #146: This was driven in part by a first investment in Greenbox as they begin operations.

Speaker Change #146: For the fourth quarter of fiscal 2024, we expect revenue of $455 to $475 million and adjusted EBITDA between $28 and $32 million.

Speaker Change #146: Representing temporarily slowed revenue growth and system gross margin returning to historical levels during our fourth quarter.

Speaker Change #146: Finally, we believe our first quarter of fiscal 2025 should reflect re-accelerating year-over-year revenue growth.

Carol J. Hibbard: Operator, please begin the Q&A session. Thank you. And at this time, we'll conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for a name to be announced.

Speaker Change #146: We now welcome your questions.

Speaker Change #147: Operator, please begin the Q&A.

Speaker Change #148: Thank you. At this time, we'll conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for a name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. One moment for our first question.

Operator: To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. One moment for our first question, the first question will come from the line of Andy Kaplowitz from Citigroup. Your line is open. Good afternoon, everyone.

Speaker Change #149: Our first question will come from the line of Andy Kaplowitz from Citigroup. Your line is open.

Andrew Alec Kaplowitz: Hi Andy. Rick or Carol, can you give a little more color on what happened with system gross margin and why it will rebound in Q4? Are you basically saying that in some cases outsourcing is not working for your deployments? And maybe what happened to convince you to take construction management again in-house?

Andrew Alec Kaplowitz: Good afternoon, everyone.

Speaker Change #150: Expected Margin Improvement.

Speaker Change #151: Yeah, so I'll start and then Rick can chime in in terms of some of the things we're putting in place to improve gross margin going forward. So on the outsourcing, as we talked about outsourcing, our primary reason why we chose outsourcing over a year ago was to go ahead and scale. And so we did that across multiple areas of our supply chain so that we could also have redundancy.

Speaker Change #152: We're looking at bringing back in-house just one element, which is the EPC, so the Engineering Procurement Construction piece of that.

Carol J. Hibbard: So we actually Symbiotic continued to deploy at some of our sites, and then we had multiple supply chain partners doing that. What we're finding is why that's not a significant item in terms of the overall cost of the system. But it's a significant item in terms of that final mile of installation when you're

Richard B. Cohen: And we continue to own a piece of that, so we actually, Symbiotic continued to deploy at some of our sites, and then we had multiple supply chain partners off doing that.

Richard B. Cohen: What we're finding is why that's not a significant item in terms of the overall cost of the system. It's a significant item in terms of that final mile of installation when you're...

Carol J. Hibbard: We're extremely focused on making sure that everything comes together. We're finding that focus on schedule and focus on cost, that's a critical part. So that's one of the elements that we're going to bring back in-house so that we have more control over that overall integration. In terms of the other things that really drove our gross margin performance in the last quarter, Rick mentioned we've had delays in construction creating inefficient. So some of our more complex projects, we've had delays around, for example, permits.

Richard B. Cohen: It's extremely focused on making sure that everything comes together. We're finding that focus on schedule and focus on cost, that's a critical point for us. So that's one of the elements that we're going to bring back in-house so that we have more control over that overall integration.

Richard B. Cohen: In terms of the other things that really drove our gross margin performance in the last, in this quarter, Rick mentioned we've had delays in construction creating inefficiencies.

Richard B. Cohen: And so some of our more complex projects, we've had delays around, for example, permits. And when you talk about a delay in the construction phase, this is after we've already deployed resources to each of those sites, which is extremely inefficient.

Richard B. Cohen: And then we talked about the other contributor to gross margin being the implementation of system improvements. There are several cases where we're going to go ahead and make that decision to go ahead and deploy and retrofit now, which might drive costs. So in terms of some of the things we're focused on going forward, Rick, do you want to, do you want to add any other color to that?

Richard B. Cohen: Longer system deployment creates higher cost.

Richard B. Cohen: So in terms of some of the things we're focused on going forward, Rick, do you want to do you want to add any other color to that? Yeah, I think the most important thing is we're not, I mean, our margin is down, but we're not

Richard B. Cohen: We're not a retail company so we're not discounting. We're getting the gross profits that we want, but the projects have been costing more than we anticipated. Keep in mind we've done about 40 projects so far. We have hundreds ahead of us.

Speaker Change #153: We've enhanced our supply chain team. We now have a lot of these people that we've been looking for for the last year on board. We have a lot of talent.

Richard B. Cohen: So we simply think we can do it better than some of the partners that we needed to use because we didn't have the resources, and we wanted to hit our sales targets. For me, hitting our sales targets, and pushing sales is something that is critical. For 50 years, I've been used to running a business on a one and a half percent margin and a six percent gross profit. So I have no concerns about getting these costs under control.

Speaker Change #153: And so we just simply think we can do it better than some of the partners that we needed to use because we didn't have the resources and we wanted to hit our sales targets.

Speaker Change #153: For me, hitting our sales targets, pushing sales.

Speaker Change #153: is something that is critical.

Speaker Change #153: for 50 years.

Speaker Change #154: I've been used to running a business on a 1.5% margin and a 6% gross profit, so I have no concerns about getting these costs under control. What I want to make sure is that we keep our customers brightly happy and that we continue to roll out our sales. So, I think we made some choices.

Speaker Change #154: We could have fought with the customers over who paid some of these things, but we said let's just keep the customer happy, let's keep the sales rolling, some of these things will absorb now, and some of these things will not be expenses in the future, and I fully well expect our margin

Richard B. Cohen: I fully expect our margin to come back, and our goal is to enhance the margin further. But just getting back to where everybody expected us to be would be a good place in the near term. No, that's fair, Rick.

Speaker Change #154: To come back and our goal is to enhance the margin further, but just getting back to where everybody expected us to be would be a good place in the near term.

Speaker Change #154: Now, that's fair, Rick. And should we think about it, though, as sort of, like, in quotes, one time in Q3, and that's why it comes back in Q4? You know, because you're talking about normalizing margins, you know, just in this current quarter, basically.

Speaker Change #154: Yeah, I think I'll let Carol speak, but things like delays because...

Carol J. Hibbard: So it's not like we'll go to zero immediately, but most of this stuff should go away from what we're seeing and the people that we hired in the fourth quarter. And our guide implies, Andy, that we're going to return to, you know, more gross margins similar to our historical average. Now, as Rick said, we've got future plans for improving that gross margin, which we've talked about. And so there might be some pressure on those gross margins in the fourth quarter. We're not going to be at the levels that we were.

Carol J. Hibbard: Things weren't placed orders on time, and you have 200 people standing around the site. That's just not acceptable, and we don't expect that to happen in the future. So it's not like we'll go to zero immediately, but most of this stuff should go away from what we're seeing and the people that we've hired in the fourth quarter.

Carol J. Hibbard: And our guide implies, Andy, that we're going to return to, you know, more gross margins similar to our historical.

Carol J. Hibbard: Now, as Rick said, we've got future plans of improving that gross margin, which we talked about. And so, while there might be some pressure on those gross margins still in the fourth quarter, we're not going to be at the levels that we were this quarter.

Carol J. Hibbard: Got it. Tara, how do we interpret the commentary that you're going to have accelerating deployments from the five you had in Q3, and then, you know, revenue will accelerate in Q1 25, with the commentary that improving your deployment process may temporarily slow your revenue growth? Like, you know, obviously, those two are kind of competing. So how do we sort of interpret that as you move? Yeah, so I'll interpret that as we had three system starts left. It was one of our loans.

Carol J. Hibbard: Got it. And then, Carol, how do we interpret the commentary that you're going to have accelerating deployments from the five you had, you know, in Q3, and then, you know, revenue will accelerate in Q1 25, with the commentary that improving your deployment process may temporarily slow your revenue growth? Like, you know, obviously, those two are kind of competing. So how do we sort of interpret that as you move forward?

Carol J. Hibbard: Yeah, so I'll interpret that as we had three system starts last quarter.

Carol J. Hibbard: So that's impacting revenue in the fourth quarter. We ramped that up to five this quarter, and you should expect to see that five continue to grow incrementally, quarter over quarter, as we finish out our backlog. All right, thank you. Thanks, Sandy.

Speaker Change #155: which was one of our lows and so that's impacting the revenue in the fourth quarter. We ramped that up to five this quarter and you should expect to see that five continue to grow incrementally quarter over quarter as we finish out our backlog.

Damian Carras: Thank you. One moment for our next question. Our next question will come from Damian Carras from UBS. Your line is open. Hi, good evening everyone. Hi Damian.

Speaker Change #156: All right, thank you.

Andrew Alec Kaplowitz: Thanks, Andy.

Speaker Change #157: Our next question will come from Damian Carras from UBS. Your line is open.

Richard B. Cohen: I think in your commentary on Greenbox, you noted that everything's kind of on track there. I was wondering if maybe you could just kind of, you know, peel back the onion a little bit and give us some additional color on, you know, what all you're seeing for Greenbox, JB. Yeah, so we we have our first install at a site in California. So we're ramping that up. That's our first installation. We have several sites where we are now talking to landlords about leasing space.

Damian Carras: Hi, good evening, everyone.

Damian Carras: Damien

Richard B. Cohen: And we're spending a lot of time interviewing and building up the management team. So, we're pretty excited about where we are in terms of rolling it out and building out the sales force, but right now, what we're doing is focusing on a couple of critical sites that are in the right geographies, sizing the system, specing the systems, finding the real estate, and then building the management team to operate the site. And then, we have started having numerous discussions with potential customers to be anchor customers for GreenBox. So, it's going at a good pace. I'm sure everybody wants it to go faster, but we're pretty happy with the pace.

JB: Yeah, so we have our first install in a site in California.

JB: So we're ramping that up. That's our first install. We have several sites where we're now talking to landlords about leasing space, and we're spending a lot of time interviewing, building out the management team.

JB: So, we're pretty excited about where we are in terms of rolling it out and building out the sales force, but right now,

JB: What we're doing is focusing on a couple of critical sites.

JB: that are in the right geographies.

JB: Sizing the system, specing the systems, finding the real estate.

Richard B. Cohen: We're thoughtful. I think we're excited about the potential for the business. Great, glad to hear it.

JB: and then building the management team to operate the site.

JB: And then we have started having numerous discussions with...

JB: potential customers to be anchor customers for Greenbox. So...

Speaker Change #159: It's going on a good pace, I'm sure everybody wants it to go faster, but we're pretty happy with the pace, we're thoughtful, I think we're excited about the potential for the business.

Speaker Change #159: Great, glad to hear. And Carol, you have made a comment.

Carol J. Hibbard: that you're kind of executing some prudent expense management. I was wondering if you might be able to elaborate on that. Was that kind of tied to the insourcing that you also spoke to?

Speaker Change #160: And what all did you mean by this prudent expense controls?

Carol J. Hibbard: The commentary there is if you look at our myths on gross profit this quarter, it is entirely a story around system gross margin. So when you look at our SG&A and R&D, we continue to manage those expenses as we grow. So we did not see any one-time impact in the quarter associated with adjusted EBITDA like we might have seen in other quarters around restructuring. We did not have any of that this quarter because we're managing our expenses appropriately. I understand. Thank you. Thanks, Damian.

Carol J. Hibbard: Yeah, it's not tied to the insourcing. The commentary there is if you look at our miss on gross profit this quarter, it is entirely a story around system gross margin.

Speaker Change #161: So when you look at our SG&A and R&D, we continue to manage those expenses as we grow, so we did not see any one-time impact in the quarter.

Speaker Change #161: Associated with adjusted EBITDA like we might have seen in other quarters around restructure we did not have any of that this quarter that the we're managing our expenses appropriately as we grow.

Operator: One moment for our next question, which will come from Matt Summerville from D.A. Davidson.

Speaker Change #162: Understood. Thank you.

Damian Carras: Thanks, Damian.

Speaker Change #163: One moment for our next question.

Speaker Change #164: Our next question will come from Matt Summerville from D.A. Davidson. Your line is open.

Matt J. Summerville: Your line is open. Thanks. A couple questions is I think about kind of the commentary coming out of the last quarter, the messaging from the Analysts' Day, I guess, was this was this something that developed, really late in the quarter that you felt kind of blindsided by because I guess I thought some of the challenges and growing pains if you want to call it that growing pains associated with increasing your concurrent deployment capability I guess I was under the impression that this quarter was going to sort of be a proof point that a lot of that stuff was in the rear.

Speaker Change #165: Really late in the quarter that you felt kind of blindsided by because I guess I thought

Speaker Change #166: Some of the challenges and growing pains, if you want to call it that, growing pains associated with increasing your concurrent deployment capability, I guess I was under the impression that this quarter was going to sort of be a proof point that a lot of that stuff was in the rear view.

Matt J. Summerville: Yeah, I mean, I think with construction costs and delays, a lot of it shows up right at the end. And so we did not anticipate this, and we're pretty we're not happy about it that's why we're taking over some of the management ourselves or acting very quickly I mean this is not like this is not not acceptable but yeah a lot of this stuff came at the end and and we just had to deal with it right at the end of the I'm not at the end but but certainly after Investor Day well after Investor Day, And then the other thing I'll add, Matt, is one of the things we're putting in place is, as we scale, one of the things we're finding is that a focus on overall program management and schedule integration across all of our projects and flow is a critical skill set that we need to put more resources against. And I think when you talk about, was it a surprise? Not a surprise, but it's those final elements associated with putting the install together. As Rick said, you get to the final completion of implementation.

Speaker Change #167: Yeah, I mean, I think with construction costs and delays, a lot of it shows up right at the end.

Speaker Change #168: And so we did not anticipate this.

Speaker Change #169: And we're pretty, we're not happy about it. That's why we're taking over some of the management ourselves. We're acting very quickly. I mean, this is not like, this is not, not acceptable.

Speaker Change #169: But, yeah, a lot of this stuff came at the end, and we just had to deal with it right at the end of the... I don't know, not at the end, but certainly after Investor Day, well after Investor Day.

Speaker Change #169: And then the other thing I'll add, Matt, is one of the things we're putting in place is, as we scale, one of the things we're finding is that a focus on overall program management and schedule integration across all of our projects and flow is a critical skill set that we need to put more resources against.

Matt J. Summerville: And I think when you talk about, was it a surprise, not a surprise.

Carol J. Hibbard: We need a better view across all of our program management to predict when those delays might be impacting, which is one of the reasons why that EPC role is so critical, because they're the ones receiving equipment on site. They're the ones who will have the first visibility in terms of a potential delay. And that's why we want to bring that back in house.

Speaker Change #169: Bye.

Speaker Change #170: It's those final...

Speaker Change #170: Elements associated with putting the install together, as Rick said, you get to the final completion of implementation.

Speaker Change #170: We need a better view around all of our program management to predict when those delays might be impacting, which is one of the reasons why that EPC role is so critical.

Carol J. Hibbard: That is a critical element for us that perhaps we weren't getting the visibility. So it is my follow-up. One, do you have that role and an individual in that role that is the head of what you just described?

Speaker Change #171: because they're the ones receiving equipment on site. They're the ones who will have the first visibility in terms of a potential delay, and that's why we want to bring that back in-house. That is a critical element for us that we perhaps weren't getting the visibility we need.

Speaker Change #172: So, as my follow-up, one, do you have that role, an individual in that role that is the head of what you just described? So, there's organizational accountability as we speak,

Speaker Change #173: On what's going on, and to my point, has anything that's happened here impacted the performance of the systems in the eyes of the customer?

Speaker Change #174: No, that's what we've, that's what we really protected against.

Speaker Change #175: I think the analogy that comes to mind is our offense is working great.

Speaker Change #175: We had five minutes left in the fourth quarter, and the defense blew a couple plays. And so I think that's the way we look at it. We have been hiring.

Richard B. Cohen: And so, I think that's the way we look at it. We have been hiring people in the supply chain, in the EPC space, over the last six months, and they finally got in place. And they're actually the ones that are saying we should do this ourselves.

Speaker Change #173: People in the supply chain, in the EPC space.

Speaker Change #173: Over the last six months and they finally got in place and they're actually the ones that are saying we should do this ourselves.

Richard B. Cohen: Our partners that we picked on supply chains got the work done, but then they came in with extra bills at the end. And that's just, that's a part of the business we have to manage, and we have to make sure we play defense, but it's not what drives the business. We just, we just have to shore it up. And so that's my answer. And yes, it does come when you finish a project, and you're saying, okay, we're ready to gear it up, and they're saying, no, no, no, these parts aren't here.

Speaker Change #173: Our partners that we picked on supply chains, they got the work done, but then they came in with extra bills at the end, and that's just, that's, that's, uh...

Speaker Change #173: It's a part of the business we have to manage.

Speaker Change #173: And we have to make sure we play defense, but it's not what drives the business. We just got to shore it up.

Speaker Change #173: And so, that's my answer, and yes, it does come, when you finish a project.

Richard B. Cohen: And you have people, hundreds of people standing around the site for weeks. That's, that's the problem. So the systems are running well. And they just took longer to bring online than we thought, and that's not going to tolerate. Got it. Thank you, guys. Thank you. One moment for our next question. Our next question will come from the line of Ross Sparenblek, from William Blair. Your line is open. Hey, good evening,

Speaker Change #173: And you're saying, OK, we're ready to gear it up. And they're saying, no, no, no, these parts aren't here. And you have people, hundreds of people, standing around the site for weeks. That's the problem. So the systems are running well. And they just took longer to bring online than we thought.

Speaker Change #176: And we're not going to tolerate that.

Speaker Change #177: Got it. Thank you, guys.

Speaker Change #176: [inaudible]

Speaker Change #178: Our next question will come from the line of Ross Sparenblek from William Blair. Your line is open.

Ross Riley Sparenblek: Hey, sticking on the insourcing, can you maybe help frame, I know you provided some impressive numbers at your investor day in May on bringing those down, and then maybe just try to get a sense also on, you know, as you bring those commissioning hours down, what does that provide in closing the gap on your longer term gross margin target? I'd say the commissioning is done by a different group of people than the EPC.

Unknown Attendee: Hey, good evening, guys.

Unknown Attendee: Hi, Ross.

Ross Riley Sparenblek: Hey, sticking on the insourcing, can you maybe help frame...

Speaker Change #182: How this has impacted, if it has, your ability to reduce commissioning hours.

Speaker Change #180: I know you've provided some impressive walk at your investor day.

Speaker Change #181: And May, I'm bringing those down, and then maybe just try to get a sense also on, you know, as you bring those commissioning hours down, what does that provide on closing the gap on your longer-term gross margin targets?

Walt: I'd say the commissioning is done by a different group of people than the EPC. And so that walk that you heard Walt talk quite a bit about at our Investor Day.

Speaker Change #183: That remains on track, and so the commissioning, think about that as the, you know, the final mile, we're talking about the directing of resources throughout that installation process, and that's where we've seen some of the cost growth and schedule impact around that portion of the bill.

Walt: Maybe it could do a little better, but the actual assembly of the bots is critical. It's the actual big setting up the structure, the construction part of the business that is really going to be, we've got to be boringly good at that.

Walt: and building the.

Walt: robotic palletizing cells and those we've been pretty happy with it's just when it all comes together so many people standing around at the end.

Richard B. Cohen: All right, got it. And maybe on something a little bit more optimistic, Greg, could you just provide any updates on where you guys are with the European Salesforce expansion, and any commentary you're willing to provide on what those early customer conversations have looked like in the region? Yeah, so we've had a lot of conversations in Europe. I've been to Europe a bunch of times.

Walt: All right, got it. And maybe on something a little bit more optimistic, Rich, if you can just provide any updates on where you guys are with the European Salesforce expansion and any commentary you're willing to provide on what those early customer conversations have looked like in the region.

Rich: Yeah, so we've had a lot of conversations in Europe , we have

Speaker Change #185: I've been to Europe a bunch of times, we've hired.

Speaker Change #185: [inaudible]

Speaker Change #185: Europeans to actually do sales work. We've hired a couple of consulting firms, all the big suspects, especially in the food space.

Richard B. Cohen: We've also had some conversations with some of the port operators, whether it's Greenbox or Symbiotic Systems that we've been helpful with, and we continue to recruit and look at hiring more sales folks. But we've hired a couple of very good sales people from some of our competitors that we're delighted with. So I mean, just really quick on the following there. Maybe I under appreciated the dual nature of the supply chain. Are you going to need engineering exposure in Europe as well?

Speaker Change #185: and Europe are now we're engaged with conversations on we've also had

Speaker Change #185: some conversations with some of the port operators whether it's Greenbox or Symbiotics Systems that we've been helpful with and and we continue to recruit and look at hiring more sales folks.

Speaker Change #185: But we've hired a couple of very good salespeople from some of our competitors that we're delighted with.

Speaker Change #186: So, I mean, just really quick to follow on there, maybe I underappreciated the dual nature of the supply chain. Are you going to need the engineering exposure in Europe as well, so there's going to be another layer of hiring once these orders do start to come in on delivering the deployments?

Richard B. Cohen: So there's going to be another layer of hiring once these orders do start to come in on delivering the deployment? No, no, the engine, the systems, our systems are pretty much cookie cutters that were designed. And so, and we continue within our expense package, we're actually increasing the amount of money and the number of people we have in R&D. But what we're doing is actually figuring out how to make these things simpler and easier, so that there are just fewer people doing basically construction work. Perfect. I'll leave it there.

Speaker Change #187: No, no, the engine, the systems, our systems are pretty much cookie cutters, that's design.

Speaker Change #188: And so, and we continue within our expense.

Speaker Change #188: We're actually increasing the amount of money and the amount of people we have in R&D, but what we're doing is actually figuring out how to install these things simpler and easier so that there's just less people doing basically construction work.

Speaker Change #189: That's perfect. I'll leave it there. Thanks, guys.

Operator: Thanks, guys. Thank you. One moment for our next question. Our next question comes from Greg Palm on behalf of Craig Hammond. Your line is open.

Speaker Change #189: Thanks.

Speaker Change #190: Thank you. One moment for our next question.

Speaker Change #191: Our next question comes from Greg Palm from Craig Hallam. Your line is open.

Gregory William Palm: Yeah, thanks. I guess I'm still a little bit confused just in terms of the revenue and profit bridge in the quarter. You know, you've completed three systems, you started five, and you actually outperformed revenue by a pretty wide margin relative to the guide. And so I'm trying to tie the statements about deployment delays and construction implementation delays to, you know, the fact that revenue actually outperformed quite a bit, which obviously implies that you were able to recognize the revenue. So can you maybe just dig into that a little bit more?

Gregory William Palm: Yeah, thanks. I guess I'm still a little bit confused just in terms of the the revenue and profit bridge in the quarter, you know, you completed three systems, you started five, you actually outperform revenue by a pretty wide margin relative to the guide,

Speaker Change #193: And so I'm trying to tie the statements about deployment delays and construction implementation delays to, you know, the fact that actually revenue outperformed quite a bit, which obviously implies that you were able to recognize the revenue. So can you maybe just dig into that a little bit more?

Speaker Change #194: Yeah, so if you start with current revenue, that strong revenue is based on the progress of the 39 systems in deployment, many of which we had a higher SOW signature. If you think about 2Q of 23, 3Q of 23, we had signed five and six SOWs back in that time frame.

Speaker Change #194: Right now, we are heavy into the implementation. So the bulk of our revenue is coming from projects that we signed about a year ago. So that's driving the strong revenue performance.

Speaker Change #194: There are a couple of things driving our 4Q guide lower. The first one is we had fewer system starts last quarter. So we had three starts.

Speaker Change #194: And so that, you know, start of those systems, we're starting to see the ramp up of revenue would occur in fourth quarter. And so the lower system starts is the first driver of why 4Q is down.

Speaker Change #194: The second is when we talk about construction delays and how that impacted our performance this quarter.

Speaker Change #194: Those construction delays that started on systems over the last quarter, that's going to delay revenue recognition for implementation milestones in the next quarter, and that's another significant driver in terms of why revenue is down.

Carol J. Hibbard: So that's also been a slow milestone that we would have received revenue recognition on next quarter, and that's going to shift out. So those are the big drivers why you see the dip. That outlook is temporary, so as we look and plan for, you know, the beauty of having the backlog that we've got and being able to look at what we have in deployment, we can, we're getting better at predicting our revenue as long as we, Okay, that so maybe a little bit of a lag.

Richard B. Cohen: So those are the big drivers why you see the dip down.

Richard B. Cohen: That outlook is temporary, so as we look and plan for, you know, the beauty of having the backlog that we've got and being able to look at what we have in deployment, we can, we're getting better at predicting our revenue as long as we remain on schedule.

Carol J. Hibbard: So I guess that that makes sense. And did I hear that right? Was there a cost associated as well with, you know, upgrading or retrofitting some of the bots that were in the field already? Was that an impact as well? Was that unforeseen? Or was that expected? That was unforeseen. Some of the cables that enable the vision enhancement on the bots, which is one of the ways that we use vision to connect to our boards and use AI, a lot of those cables came in late. So we shipped the bots to the customer so they could still do 90% of what they were supposed to do. And then we made the decision to retrofit the cables in the field, which was expensive.

Speaker Change #195: Okay that so maybe a little bit of a lag so I guess that that makes sense and did I hear it right was there a cost associated as well with you know upgrading or retrofitting some of the bots that are that were in the field already was that an impact as well that was unforeseen or was that expected?

Speaker Change #196: That was unforeseen. Some of the cables that enable the vision enhancement on the bots, which is is one of the ways that we use vision to connect to our boards and use AI, a lot number of those cables came in late.

Speaker Change #197: So we shipped the bots to the customers so they could still do 90% of what they were supposed to do. And then we made the decision to retrofit the cables in the field, which was expensive.

Carol J. Hibbard: Got it. Okay, now in line at our spot producer. But we made the conscious decision to go ahead and retrofit, follow up on what's already, "Yep, okay." And then, you know, just lastly, if I think back, you know, a few quarters to your fiscal Q1, your slow deployment, your slow deployments, I guess, were for differing but similar reasons, but that ended up really being, at least at that point, a one-quarter issue. So what is your visibility?

Speaker Change #198: Got it, okay.

Speaker Change #198: So now in line at our thought producer, but we made the conscious decision to go ahead and retrofit.

Speaker Change #198: Call it on what's already in the field.

Speaker Change #199: Yep, okay. And then, you know, just lastly, you know, if I think back, you know, a few quarters to your fiscal Q1, you slowed deployment, you slowed deployments, I guess it was...

Speaker Change #200: for differing but similar reasons, but that ended up really being, at least at that point, a one-quarter issue. So what is your visibility? You know, you're talking about re-acceleration in fiscal Q1.

Speaker Change #201: Do you have pretty strong visibility that suggests, I mean, what else unforeseen could happen between now and then that would maybe impact that timing?

Speaker Change #202: So in terms of the visibility in new system starts,

Carol J. Hibbard: We get with our customers and try and map out our backlog; we try and do a six month and a 12 month outlook, and we stay lockstep with our customers because we've talked before about why we may be ready to go full steam ahead and start deployment at a particular site. It's a joint decision with our customers. And so we look out 12 months and map that out. What can cause issues with that are construction delays in one phase may start, may delay the start of another phase of that project.

Speaker Change #203: We get with our customers and try and map out around our backlog. We try and do a 6 month and a 12 month outlook and we stay lockstep with our customers.

Speaker Change #203: because we've talked before about why we may be ready to be full steam ahead and start deployment at a particular site. It's a joint decision with our customer.

Speaker Change #203: And so we look out 12 months and map that out. What can cause issues with that are construction delays in one phase may start, may delay start of another phase of that project. And so when you talk about those unforeseen things.

Carol J. Hibbard: And so when you talk about those unforeseen things, that's the piece that we've got to remain on schedule so that you can continue the deployment in that phase. So we have pretty good visibility. Once the permits are issued, it just flows.

Speaker Change #203: That's the piece that we've got to remain on schedule so that you can continue the deployment in that phased approach.

Carol J. Hibbard: And most of the things that we're talking about, I think in the first quarter, we're pretty confident. Okay, perfect. I will leave it there. Thanks.

Speaker Change #205: So we have pretty good visibility. Once the permits are issued, it just flows. And most of the things that we're talking about, I think, in the first quarter, we're pretty confident of.

Speaker Change #204: Okay, perfect. I will leave it there. Thanks.

Operator: Thank you. One moment for our next question. Our next question will come from Jim Ricchiuti from Needham. Your line is open. I thank you.

Speaker Change #203: Thanks.

Speaker Change #203: Our next question will come from Jim Ricchiuti from Needham. Your line is open.

James Andrew Ricchiuti: So when you talk about revenue growth accelerating, fiscal Q1, should we anticipate a pickup in margins? I mean, you're already suggesting there's going to be a recovery, some recovery back to historical levels in Q4 margins. I'm just wondering, though, as we start seeing an acceleration in revenue, do we then potentially have some cost issues that could impact margins? in the New York term, beyond Q4.

James Andrew Ricchiuti: Hi, thank you. So when you talk about the revenue growth accelerating in

James Andrew Ricchiuti: Fiscal Q1. Should we anticipate

James Andrew Ricchiuti: a pickup in in margins. I mean, you're already suggesting there's going to be a recovery, some recovery back to historical levels.

Speaker Change #206: Thank you for margins. I'm just wondering, though, as we start seeing an acceleration in revenue, do we then potentially have some cost issues that could impact margins in the near term beyond Q4?

Carol J. Hibbard: So in terms of revenue acceleration, you're going to see 4Q will be our lowest year-over-year revenue growth. So when we refer to getting back to 1Q, 4Q is going to be our lowest point when you look at that. In terms of gross margin impact, the accelerations we're talking about are not accelerating schedules where we're dumping resources to complete ahead of schedule. I'm not sure if that was the nature of your question, but you should expect to see gross margin incrementally get better as we deploy systems. So the other thing impacting our gross margin is we have lower margin projects in flow right now. The longer they take to deploy, the longer those lower margin projects stay with us.

Speaker Change #207: So in terms of revenue acceleration, you're going to see 4Q will be our lowest year-over-year revenue growth.

Speaker Change #208: So when we refer to getting back to OneCue.

Speaker Change #207: 4Q is going to be our our lowest point when you look at that. In terms of gross margin impact,

Speaker Change #210: The accelerations we're talking about are not accelerating schedule where we're dumping resources to expend.

Speaker Change #210: to complete ahead of schedule. I'm not sure if that was the nature of your question, but you should expect to see gross margin incrementally get better as we deploy systems. So the other thing impacting our gross margins.

Speaker Change #207: is we have lower margin projects in flow right now. The longer they take to deploy, the longer those lower margin projects stay with us. So we've got to get that deployed so that we can start moving into a higher concentration of our higher margin business.

Carol J. Hibbard: So we've got to get that deployed so that we can start moving into a higher concentration of our higher margin, and just a follow-up question on what you're doing in-house with EPC. As you begin to accelerate, I mean, you're talking about significant acceleration in deployments over the mid to longer term. And I'm wondering if that's going to require a scale up in EPC resources as well. Maybe not immediately, but it sounds like as you start doing more of this in-house and as the deployment really starts to ramp, you're going to require more resources in-house. Is that how I'm thinking about it? Yeah, I think in perspective, so let me, let me just step back a second.

Speaker Change #209: And just a follow-up question on...

Speaker Change #209: What you're doing in-house with EPC.

Speaker Change #211: As you begin to accelerate, I mean, you're talking about, um...

Speaker Change #212: significant acceleration in deployments over the mid to longer term and I'm wondering if that's going to require

Speaker Change #213: We're looking at a scale up in EPC resources as well. Maybe not immediately, but it sounds like as you start doing more of this in-house and as the deployment really starts to ramp, you're going to require more resources.

Speaker Change #214: I think in perspective, so let me just step back a second.

Speaker Change #214: Doubled the sales of this company in two years.

Speaker Change #215: And so, I mean, it's not, I mean, it's like, we hope we wouldn't hit a speed bump, and, but, I think this is, I mean, it's pretty minor, this is actually our highest EBITDA quarter ever.

Speaker Change #215: So, it's pretty minor, I don't have any below the line adjustments, but yeah, we're going to continue to

Speaker Change #215: scale up on some resources. We're also going to scale down on other resources. We'll do a good job controlling our expenses.

Speaker Change #216: And now what we need to do is control the construction costs at the site. So this was a good learning quarter for us. It was a little bit painful. If the growths had been good,

Richard B. Cohen: If the gross had been good, based on the sales, we would have been delighting the people we're talking to today. So, you know, we took our hits, we cleaned it up, and we're done. Okay, thank you. One moment for the next question. Our next question comes from the line of Nicole DeBlase from Bank. Your line is open. Yeah, thanks. Good evening, guys.

Speaker Change #216: Based on the sales, we would have been delighting the people we're talking to today. So we took our hits, we cleaned it up, and we're done.

Speaker Change #217: Okay, thank you.

Speaker Change #218: and their families. Thank you. Bye-bye.

Speaker Change #218: One moment for the next question.

Speaker Change #219: Our next question comes from the line of Nicole DeBlase from Bank. Your line is open.

Nicole Sheree DeBlase: Hi. Just maybe kind of putting all of this together, thinking about, you know, the ramp to 2025, talking about, you know, your view that revenue should kind of get back on track and reaccelerate in the first quarter, margins following that, and then abilities to kind of hold costs constant. Does that mean that it's fair to assume that EBITDA margins in 2025 will move above this mid-single-digit level that you're expecting for the fourth quarter of this year?

Nicole Sheree DeBlase: Yeah. Thanks. Good evening, guys.

Speaker Change #220: Thank you.

Nicole Sheree DeBlase: Hi, just maybe kind of putting all of this together, thinking about, you know, the ramp to 2025, talking about, you know, your

Speaker Change #221: Review that. Revenue should kind of get back on track and reaccelerate in the first quarter, margins following that, and then ability to kind of hold costs constant. Does that mean that it's fair to assume that EBITDA margins in 2025 move above this mid-single-digit level that you're expecting for the fourth quarter of this year?

Nicole Sheree DeBlase: You're definitely going to see higher returns to EBITDA than where we are this quarter. We should be above mid single digits and then on a trajectory to continue to improve that gross margin and EBITDA margin going forward. Okay, got it. Thank you. That's very helpful.

Speaker Change #222: You're definitely going to see...

Speaker Change #223: return to EBITDA higher than where we are this quarter. We should be above mid single digits.

Speaker Change #223: And then on a trajectory to continue to improve that gross margin and EBITDA margin going forward.

Carol J. Hibbard: And then just on steel costs, they've been coming down for some time. Do you think that's reflected in your gross margins yet? Or is that an additional help as we move into future quarters? I'd say it is.

Speaker Change #224: Okay, got it. Thank you. That's very helpful. And then just on steel costs, they've been coming down for some time. Do you think that's reflected in your growth margins yet? Or is that an additional help as we move into future quarters?

Speaker Change #225: I'd say it's reflected. So what we've gotten a lot better at is locking in our steel pricing at the same time we go ahead and sign an individual contract or an individual project with our customers.

Speaker Change #225: When there's a lag is when we either get the benefit of steel pricing or we get the impact of steel pricing. So what we've gotten better at is locking in a commitment and our supply chain team is focused on, with that stronger visibility in terms of what's in our backlog, we've been able to lock in commitments with our steel partners further out.

Speaker Change #225: A lot of these projects we're doing now, we locked in prices.

Speaker Change #225: Almost 18 months ago, when steel was higher, so I can't predict what steel...

Speaker Change #225: This is going to do, but if you think...

Speaker Change #225: but we expect it to come down lower and that would be reflected in the in the future but sites that we're doing now we actually locked in steel 18 months ago so we're not buying on the spot market or we are buying on the spot market it's for delivery at a price 18 months from now

Speaker Change #226: Got it. Thank you guys. I'll pass it on.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open. Yes, good afternoon.

Speaker Change #227: Thank you. One moment for our next question.

Speaker Change #228: Our next question will come from the line of Mark Delaney from Goldman Sachs. Your line is open.

Mark Trevor Delaney: Yes, good afternoon. Thanks for taking my question. Last quarter, the company said it expects to begin the installation of its second break pack solution with the customer this summer. I think you mentioned today progress with the mini bot. But can you comment on when you expect to deploy the second break pack and how break pack more broadly is going?

Richard B. Cohen: Yeah, so we're, we're hitting. The answer is it's going well, we're meeting our customers' expectations. The second system will start construction in our next fiscal year, and I think it gets rolled out in 2025 or thereabouts.

Speaker Change #229: Yeah, so we're hitting, so the answer is it's going well. We're meeting our customers expectations. The second system will start construction

Carol J. Hibbard: But we've redesigned the mini bot, and we took it in house. We put a lot of new technology in the bot, and customers are really excited. I actually think it's going to be a growth opportunity for us. Thanks for that. My other question was hoping to better understand the top line. And can you please remind us what percent of revenue recognition comes from procurement, installation, and commissioning of the system? Thanks.

Speaker Change #229: [inaudible]

Speaker Change #230: Our next fiscal year.

Speaker Change #231: and I think it gets rolled out in 2025 or thereabouts, but we've redesigned the minibot, we've taken it in-house.

Speaker Change #231: We put a lot of new technology in the box, customers are really excited. I actually think it's going to be a growth opportunity for us.

Speaker Change #232: Thanks for that Rick. My other question was hoping to better understand the top line and can you please remind us what percent of revenue recognition comes from procurement, installation, and commissioning of the system? Thanks.

Operator: So our revenue curve, because I think this is where you're going, Mark, is a much more significant part of our revenue is coming from system deployment near about 12 months into the install. So I think your question, though, is what percent of that overall revenue is driven by the EPC in terms of if we're bringing that back in house, how much of the revenue drive? thriving, it's that is not a significant contributor to cost.

Speaker Change #233: So our revenue curve, because I think this is where you're going Mark, is a much more significant part of our revenue is coming from system deployment near about 12 months into the install.

Speaker Change #234: So, I think your question though is what percent of that overall revenue is driven by the EPC in terms of, if we're bringing that back in-house, how much of the revenue drives it?

Operator: And so the focus there for each individual system is a very small percentage of what that overall cost curve is, but it's such a critical element, which is why we're bringing this. Thank you. I'll pass it along.

Speaker Change #235: thriving it's that is not a significant to contribute a cost

Speaker Change #235: And so the focus there for each individual system, it's a very small percentage of what that overall cost curve is, but it's such a critical element, which is why we're bringing it back.

Robert W. Mason: Thank you. One moment for our next question. Our question comes from Rob Mason from Baird. Your line is open. Yes, good afternoon.

Speaker Change #236: Thank you. I'll pass it along.

Speaker Change #237: Thank you. One moment for our next question.

Speaker Change #237: Our question comes from Rob Mason from Baird. Your line is open.

Richard B. Cohen: Rick, I was gonna see if you could update us on, maybe it's early, but if you could update us on progress on the non-ambient effort that you have ongoing and how you see that timeline, and just referencing that, you know, one of your large customers in the quarter made some commentary around their implementation of, I guess, a vendor they've been working with on that effort, you know, at least since 2018, but maybe how you Yeah, so we are working on it. We have a couple of CNS sites that we're able to experiment with in perishables in Massachusetts, and so we're continuing to work on that. We're learning a lot. We don't see any showstoppers.

Robert W. Mason: Yes, good afternoon. Rick, I was going to see if you could update us on...

Robert W. Mason: Maybe it's early, but if you could update us on progress on the non-ambient effort that you have ongoing and how you see that timeline. And just referencing that, you know, one of your large customers in the quarter made some commentary around their implementation of, I guess, a vendor they've been working with on that effort, you know, at least since 2018. But maybe how you see your opportunity unfolding in the non-ambient space with either new or existing customers.

Speaker Change #240: Yeah, so we we are working on, we have a couple of

Speaker Change #238: These are friendly CNS sites that we're able to experiment with in perishables in Massachusetts, and so we're continuing to work on that.

Speaker Change #238: We're learning a lot. We don't see any showstoppers, the perishable.

Speaker Change #239: system for bots we're pretty well designed for.

Speaker Change #239: It's just we're so busy right now selling the Ambient Systems, but we're continuing to spend a lot of money on R&D here, and everybody should know that, that we haven't cut back any of that, and that's reflected in our numbers, but the perishable

Carol J. Hibbard: That we haven't cut back on any of that, and that's reflected in our numbers, but the perishables development. It continues to go well. A lot of what we do in ambient is relevant for perishables, so we don't we don't have any deployments, but we do have some potential customers that are very interested in deployments, so we think that's going to be a big thing.

Speaker Change #239: That development continues to go well. A lot of what we do in Ambient is relevant for perishables, so we don't have any deployments, but we do have some potential customers that are very interested in deployments. We think that's going to be a big business.

Carol J. Hibbard: Very good. And Carol, just real quick, you made the commentary around funding for Greenbox. How does that tie into a couple of the larger outlays that were on the cash flow statement in the quarter either around strategic investments or distributions for Symbiotic Holdings? Is that related? Yeah, it's at that Symbiotic Holdings is not related to Greenbox.

Speaker Change #241: Very good. And Carol, just real quick, you made the commentary around funding for Greenbox. How does that tie into a couple of the larger outlays that were on the cash flow statement in the quarter, either around strategic investments or the distributions for symbiotic holdings? Is that related?

Carol J. Hibbard: Yeah, it's at the Symbiotic Holdings is not related to Greenbox, but I'll touch on the two things that impacted our cash for the for the quarter. So you see, you know, an $81 million reduction quarter over quarter in terms of cash balance. And so there were two unusual events this quarter. The first one being this is our first quarter with our Greenbox investment.

Carol J. Hibbard: The first one being that this is our first quarter with our Greenbox investment. And so, as you may recall from our overall Greenbox LLC agreement, each partner would contribute to the initial capital call associated with that investment.

Carol J. Hibbard: And so if you may recall from our overall Greenbox LLC agreement.

Carol J. Hibbard: And so that initial capital call that is not related to the systems happens, And so that was one element of what you saw from the cash. The second element you referenced, which was, you know, in our press release and the financial distribution to SIM Holding LLC, the non-controlling interest. This has to do with our SIM LLC. We make a distribution to the members in the year that we believe we will become profitable for tax. So associated with that distribution, you saw a $48 million cash impact. That run rate will not continue at that rate.

Carol J. Hibbard: And so that was one element of what you saw from the cash burn.

Carol J. Hibbard: We make a distribution to the members in the year that we believe we will become profitable for tax purposes.

Speaker Change #242: And so associated with that distribution, you saw a $48 million cash impact. That run rate will not continue at that rate. We actually had an April and a June payment that both hit in the quarter. So we had double the impact in one particular quarter. You're not going to see that run rate going forward.

Carol J. Hibbard: We actually had an April and a June payment that both hit in the quarter. So we had double the impact in one particular quarter. You're not going to see that run rate going forward.

Operator: Thank you. One moment for our next question. Our next question will come from Ken Newman from KeyBank Capital. Your line is open.

Speaker Change #243: Thank you, that's helpful.

Speaker Change #244: Thank you. One moment for our next question.

Speaker Change #245: Our next question will come from Ken Newman from KeyBank Capital. Your line is open.

Ken Newman: Hey guys, thanks for taking the question. Um, I appreciate all the color, uh, so far on all the moving pieces for, you know, system gross margin, quarter, but I'm just curious. Carol, could you just quantify exactly how large those impacts were in the quarter?

Ken Newman: Hey guys, thanks for taking the question here.

Ken Newman: You know, I appreciate all the color so far, all the moving pieces for, you know, system gross margin into this quarter, but I'm just curious.

Carol J. Hibbard: Carol, could you just quantify exactly how large those impacts were in the quarter?

Carol J. Hibbard: You know, that way we get a better sense of just what EBITDA margin would have been had these these costs not kind of crept up on you and led into the quarter. And then just helping us bridge how much of that is expected to roll off in your 4Q guide. And so what you're seeing is the entire impact. If you think about how we were at 15.6% gross margin, we had, you know, that full impact from what we would have been predicting at about 20%, which is what we're trying to get back to in terms of the fourth quarter. That full impact comes from the three elements we talked about.

Carol J. Hibbard: That way we get a better sense of just what EBITDA margin would have been had these costs not kind of crept up on you late into the quarter, and then just helping us bridge how much of that is expected to roll off in your 4Q guide.

Carol J. Hibbard: And I'm not going to split out between the three, but it's overall cost growth, construction delays, and the going ahead and rolling forward the innovation that we talked about last quarter. So those were the impacts driving that gross margin. Okay. And is it fair to think, I mean, it sounds like you're not expecting the full impact or that to roll off here into the fourth quarter? But as I think about just the timing here, is there a sense that, you know, you get back to 20% plus gross margins beginning in the first quarter of next year, or is that still too hard of a hurdle? Now that's what we're predicting.

Speaker Change #246: And so what you're seeing is that the entire impact, if you think about, we were at 15.6% gross margin.

Speaker Change #247: We had, you know, that full impact from what we would have been predicting at about 20%, which is what we're trying to get back to in terms of fourth quarter. That full impact comes from the three elements we talked about.

Speaker Change #247: And I'm not going to split out between the three, but it's overall cost growth, construction delays, and the going ahead and rolling forward the innovation that we had talked about last quarter. So those were the impacts driving that gross margin.

Speaker Change #247: Okay.

Speaker Change #248: And is it fair to think, I mean, it sounds like you're not expecting the full impact or that to roll off here into the fourth quarter, but as I think about just the timing here, is there a sense that, you know, you get back to 20% plus gross margins beginning in the first quarter of 25, or is that still too hard of a hurdle?

Carol J. Hibbard: So our guide reflects getting back to 20% in the fourth quarter. And I'll just do a quick go back on the three categories of what impacted our overall margin. To summarize, the vast majority of that is labor. We talked about inefficiencies, we talked about schedules. The bulk of that is people costs. People were ready for work, but then the work and the equipment didn't show up.

Speaker Change #249: Now that's what we're predicting. So our guide reflects getting back to 20% in the fourth quarter. And I'll just do a quick go back on the three categories of what impacted our overall margin. To summarize that, the vast majority of that is labor related.

Speaker Change #249: We talked about inefficiencies. We talked about schedule. The bulk of that is people cost.

Carol J. Hibbard: So our guide for 4Q, our expectation is we'll be back to 20%. But was that where we wanted to be? No.

Speaker Change #249: People being ready for work, but then the work and the equipment didn't show up.

Speaker Change #249: So our guide for 4Q, our expectation is we'll be back to 20%. Was that where we wanted to be? No. So we're lower than what we would have planned at the beginning of the year and that's why we're saying there's still some impact heading into the fourth quarter but our guide reflects that.

Carol J. Hibbard: So we're lower than what we would have planned at the beginning of the year, and that's why we're saying there's still some impact heading into the fourth quarter, but our guide reflects that. And then just real quickly, for my follow-up here, looking at this free cash statement, it looks like CapEx did step up kind of decently sequentially here this quarter. Any thoughts on where free cash flow or, you know, CapEx expectations into year end are?

Speaker Change #250: Got it. And then just real quickly for my follow-up here, just looking at this pre-cash statement, I mean, it looks like CapEx did step up kind of decently sequentially here this quarter.

Speaker Change #251: Just any thoughts on where free cash flow or, you know, CapEx expectations into year-end and, you know, is it fair to think that you'd still expect to be free cash flow positive in the fourth quarter?

Carol J. Hibbard: And, you know, is it fair to think that you'd still expect to be free cash flow positive in the fourth quarter? Yeah, we still expect to be free cash flow positive going into 4Q. What you're seeing on CapEx is a couple things.

Speaker Change #252: Yeah, we still expect to be free cash flow positive going into 4Q, what you're seeing on CapEx.

Carol J. Hibbard: So we're going ahead and investing in additional equipment, as we're ramping up R&D. And then we also talked last quarter about our move from some equipment out of deferred costs into PP&E, and that's what you're seeing. So I think the run rate for this quarter is indicative of what you'll see going forward, Double.

Speaker Change #253: is a couple things. So we're going ahead and investing in additional equipment.

Speaker Change #253: As we're ramping up R&D. And then we also talked last quarter about our move from some equipment out of deferred costs into PP&E, and that's what you're seeing. So I think the run rate for this quarter is indicative of what you'll see going forward.

Operator: Thanks. Thank you. One moment for our next question. Our next question comes from the line of Derek Soderberg from Cantor Fitzgerald. Your line is open. Yeah. Hey, everyone.

Speaker Change #253: Thanks.

Speaker Change #253: Our next question comes from Derek Soderberg from Cantor Fitzgerald. Your line is open.

Derek John Soderberg: Thanks for taking the questions. I wanted to ask about Greenbox. Is there any way you can quantify the interest level you're getting for Greenbox today?

Derek John Soderberg: Yeah, hey everyone, thanks for taking the questions. I wanted to ask about Greenbox. Is there any way you can quantify the interest level you're getting for Greenbox today? Is that pipeline growing? And then how would you characterize the size of the firms you're getting interest from today? Is it more mom-and-pop shops, midsize, or large regionals? And then I've got a follow-up.

Richard B. Cohen: Mostly, what we're getting interest in at this point are medium and large regions. And what we want to do is develop a sales force to go after the mom and pop shops, which is where we think there's more margin, but we need anchor tenants. So we've had a number of incomings as people are still trying to understand what we're doing, how this all works, but medium and large enterprises. And Rick, what do you think they're waiting for to hop on board with that first anchor customer? You know, what are they looking for when that solution goes live?

Speaker Change #254: Mostly what we're getting interest at this point is medium and large regionals.

Speaker Change #255: And what we want to do is develop a sales force.

Speaker Change #256: to go after the mom and pop shops, which is where

Speaker Change #256: We think there's more margin, but we need anchor tenants, so we've had a number of incomings as people are still trying to understand what we're doing, how this all works, but medium and large regionals.

Speaker Change #256: And Rick, what do you think they're waiting for to hop on board with that first anchor customer? You know, what are they looking for when that solution comes live? You know, what are you hearing from them in terms of feedback? You know, I guess just what are they watching from that first customer? Thanks.

Richard B. Cohen: So we'll be able to tour people through that, but I think they're just waiting for us to announce the locations, which we plan to do shortly, of the next couple sites. Thanks, Derek.

Richard B. Cohen: But I think I think there

Operator: Thank you. One moment for our next question, and our next question will be from the line of Joe Giordano from TD Kallen. Your line is open.

Derek John Soderberg: Great. Thanks, Derek.

Speaker Change #257: And our next question for will be from the line of Joe Giordano from TD Kallen. Your line is open.

Joseph Craig Giordano: Hey guys, um, I wanted to start, I wanted to start on just back on the EPC thing. So I just want to make sure I understand this right; you're dealing with companies that do this as like their core competency, I guess. So how, what gives you the comfort that bringing this in house, like to do something that's not like your, I guess, your core of what you do, like you'd be able to do it that much better?

Joseph Craig Giordano: Hey guys.

Joseph Craig Giordano: I wanted to start back on the EPC thing, so I just want to make sure I get this right.

Richard B. Cohen: And like, wouldn't, would you be hiring, like, kind of the same people that you're working with, like, kind of poaching people from those EPCs? So I just want to make sure I understand that whole dynamic. And, you know, what gives you the confidence that that improves significantly?

Joseph Craig Giordano: You're dealing with companies that do this as like the core competency, I guess. So like, how, what gives you the comfort that bringing this in-house?

Joseph Craig Giordano: to do something that's not, I guess, your core of what you do, that you'd be able to do it that much better? Would you be hiring the same people that you're working with, poaching people from those EPCs? I just want to make sure I understand that whole dynamic.

Richard B. Cohen: Yeah, so actually, what we did, Joe, fair question is, a lot of the people that we hired when we were doing this ourselves were then hired by some of the general contractors who probably are better at defense work than our kind of work. And so, and we, so we, some of these, so some of these contractors that we will then go back and take over will actually reduce the price.

Speaker Change #258: What gives you the confidence that that improves significantly in health?

Speaker Change #258: Yeah, so so actually

Joseph Craig Giordano: What we did, Joe, fair question, is a lot of the people that we had hired when we were doing this ourselves,

Joseph Craig Giordano: We're then hired by some of the general contractors.

Joseph Craig Giordano: who probably are better at defense work than our kind of work.

Speaker Change #259: And so, some of these contractors that we will then go back and take over will actually reduce the price and we're finding that we're spending a lot of time managing the contractors

Richard B. Cohen: And we're finding that we're spending a lot of time managing the contractors and what we've done. So that's one thing. The other thing we've done is we've actually been able to hire people that have done this from some of the large automation firms that do this in-house.

Speaker Change #259: And what we've done...

Speaker Change #259: So that's one thing. The other thing we've done is we've actually been able to hire

Speaker Change #259: people that have done this from some of the large automation firms that do this in-house.

Richard B. Cohen: And so that's given us real comfort that we don't need, in some cases, the middleman, and in some cases, we're just better off to hire people ourselves. So, it's simply, I guess the answer is simply that we've been disappointed at the performance of some of the suppliers that we've hired, and we know we can do it better ourselves. Are you ultimately using the same construction firms; you're just taking a part of the function away? Like, do you plan on keeping the same kind of mix of partners though?

Speaker Change #259: And so that's given us real comfort that we don't need, in some cases, the middleman, and in some cases, we're just better off to hire people ourselves. So I'd simply

Speaker Change #259: I guess the answer is simply we've been we've been disappointed at the performance for some of the suppliers that we've hired.

Speaker Change #259: and we know we can do it better ourselves.

Speaker Change #260: Are you ultimately using these same like construction firms, you're just taking a part of the function away? Like, do you plan on keeping the same kind of mix of partners though?

Richard B. Cohen: Yeah, so for instance, there's a company that installs all the Iraqi equipment, which is one of the largest contracts that we order in terms of labor. And so we turned those over to the general contractor, and the general contractor used them and did a worse job managing them than we did. So we'll just take them back. We'll also, and on the electrical side, we've learned a lot about electricity. And so that's been another part, but yes. So it's them not managing the sub, it's them not managing the subordinate, and subs it out.

Speaker Change #260: Yeah, so for instance, there's a company that installs All Our Rack, which is one of the largest.

Speaker Change #260: contracts that we order in terms of labor

Speaker Change #261: And so we turned those over to the general contractor, and the general contractor used them and did a worse job managing them than we did.

Speaker Change #261: So, we'll just take them back. We'll also...

Speaker Change #260: [inaudible]

Speaker Change #260: And on the electrical side, we've learned a lot about electrical, and so that's been another part, but yes.

Richard B. Cohen: Well, and that's the capability that you have more, more. Yeah. Okay. Yeah, when we took this over, and I think we told the group that we thought these people were going to manage all the subs better, we're going to bring in new subs. It just hasn't happened.

Speaker Change #262: So it's them not managing the sub, it's them not managing the sub, subbing it out well and that that's the capability that you think you can bring more, more effective use to it.

Speaker Change #260: Yep, when we took this over, and I think we told the group that we thought these people were going to manage all the subs better, we're going to bring in new subs, it just hasn't happened.

Richard B. Cohen: Okay, and then my follow up here. And I think this was brought up, but I just want to clarify it like I know that you're frustrated by this, you know, I'm sure investors are, frustrated by this. But like if I'm talking to your customer is this am I getting kind of different reactions like do they know do they see this on their side are you bumping up against kind of like timelines that you need to hustle to get to now like what's the difference between like the conversation we're having right now and the ones that you're having, Yeah, so what we've done, and this is one of the reasons why we spend more money, is we've tried to, we've tried to as much as we can isolate our customers, we think this is a short term problem.

Speaker Change #263: Okay, and then my follow up here, and I think this was brought up, but I just want to clarify it. Like, I know that you're frustrated by this, you know, I'm sure investors are going to be somewhat frustrated by this. But like, if I'm talking to your customers,

Speaker Change #263: Like, is this, oh, am I getting kind of different reactions? Like, do they know, do they see this on their side? Are you bumping up against kind of like timelines that you need to hustle to get to now? Like, what's the difference between like the conversation we're having right now and the ones that you're having with your customers on?

Richard B. Cohen: And so we, certainly the customers, are leaning in to pay some of it; some of it we're paying. And, and we're working with the customers to make sure it goes away. And also, I think we're educating our customers; they have to have some of these sites ready ahead of time, clean ahead of time, and some of them have been lagging with their contractors getting power to the building, and, and that stuff. So we're all learning together. But I'm confident this is a very short-term problem.

Speaker Change #263: [inaudible]

Speaker Change #264: Yeah, so what we've done, and this is one of the reasons why we spend more money, is we've tried to, we've tried to, as much as we can, isolate our customers. We think this is a short-term problem.

Speaker Change #264: And so we certainly, the customers are leaning in to pay some of it.

Speaker Change #264: Some of it we're paying.

Speaker Change #264: And we're working with the customers to make sure it goes away. And also...

Speaker Change #264: I think we're educating our customers, they have to have some of these sites ready ahead of time, clean ahead of time, and some of them have been lagging with their contractors getting power to the building and that stuff, so we're all learning together.

Speaker Change #264: But I'm confident this is a very short-term problem.

Richard B. Cohen: Thanks, guys. Thank you. I'm showing no further questions in the queue.

Now I'd like to turn the call back over to Jeff Evanson for any closing remarks. Thank you everyone for joining our call tonight. We appreciate your interest in Symbiotic, and we look forward to seeing many of you during the quarter at the various investor conferences we will be attending. Good night. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

Speaker Change #265: Thanks guys.

Speaker Change #265: Thank you. I'm showing no further questions in the queue. And now I'd like to turn the call back over to Jeff Evanson for any closing remarks.

Jeff Evanson: Thank you everyone for joining our call tonight. We appreciate your interest in Symbiotic and we look forward to seeing many of you during the quarter at the various investor conferences we will be attending.

Speaker Change #266: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

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