View, Inc. (NASDAQ:VIEW) Q3 2022 Earnings Conference Call November 8, 2022 4:30 PM ET
Company Participants
Samuel Meehan – Head-Investor Relations
Rao Mulpuri – Chief Executive Officer
Amy Reeves – Chief Financial Officer
Conference Call Participants
Pavel Molchanov – Raymond James
Operator
Greetings and welcome to View, Inc’s Third Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Samuel Meehan, Head of Investor Relations at View. Thank you, Samuel. You may begin.
Samuel Meehan
Good afternoon, everyone and welcome to View’s third quarter 2022 earnings call. I’m Samuel Meehan, Head of Investor Relations at View. I’m here with Dr. Rao Mulpuri, our CEO; and Amy Reeves, our CFO.
Before we begin, I’d like to remind you that after, market closed today, View issued a press release announcing its third quarter 2022 financial results. You may access this press release in the Investor Relations section of view.com.
As today’s discussion includes forward-looking statements, please refer to our press release for a discussion of factors that could cause the company’s actual performance to differ materially from those forward-looking statements. These forward-looking statements involve risks and uncertainties, many of which are beyond our control and could cause actual results to differ materially from our expectations. These forward-looking statements apply as of today, and we undertake no obligation to update these statements after our call. For a more detailed description of certain factors that could cause actual results to differ, please refer to our Form 10-Q being filed with the SEC today, and our earnings release posted today on our website and file with the SEC on Form 8-k.
I would also like to remind you that during the call we will discuss certain non-GAAP measures related to View’s performance. You can find the reconciliation of these measures to the nearest comparable GAAP measures in the press release. Rao, over to you.
Rao Mulpuri
Thank you, Samuel and thank you all for joining us for View’s earnings call this afternoon. I’m very pleased with our results in the quarter and I’m proud of the View team as we continue to execute on our growth and track to our full year 2022 outlook. In our prepared remarks, I’ll address important developments since our last call and Amy will go into details on the financial performance of the business.
At a big picture level, we’ve spent 14 years building our technology and products, scaling our operations, and serving an amazing customer base that loves our products. We’ve also been through a difficult period for the last year and a half with a financial restatement, uncertain macro environment and the need to raise capital in difficult markets. This quarter was pivotal for View on several fronts, namely continued revenue growth, financing to capitalize the company and the impact of ITC, the investment tax credit. With all this in place, we’re now taking decisive actions and are 100% focused on getting the business to profitability.
First on the revenue growth, we continue to execute on our strong growth trajectory with contribution from all product lines and particular momentum from our Smart Building Platform. For Q3 2022, we’re reporting revenues of $24 million, which represents 46% sequential growth, and 26% growth compared to Q3 2021. While the real estate industry is going through change and uncertainty, we feel confident about the secular tailwinds in the industry and our customers continuing to adopt our products.
This momentum is occurring across all our key market segments driven by the industry’s need to build and upgrade buildings that are more sustainable, experiential, healthier, and smarter. We remain on track to achieve our full year 2022 guidance in the range of a $100 million to $110 million and expect revenue – record revenues for the company in the fourth quarter of this year.
Second onto financing. We completed a $200 million capital raise through the sale of convertible notes. As you know, we couldn’t access the capital markets over the last year due to a restatement and being locked out of the markets until this summer. While the macro environment continued to get tough, raising capital in this environment is a testament to the value we’ve created in the business. With this financing, we’re well capitalized to continue to execute our growth plans and path to profitability.
Equally importantly, this financing was led by strategic real estate investors. It’s actually exciting that our customers are investing in our business. The lead investor in this financing is RXR, the prominent New York real estate developer with over $20 billion of assets under management and a multifamily portfolio of over 7,000 apartments. We’re excited to strengthen our partnership with RXR and we look forward to working with them to accelerate the transformation of the real estate industry.
USAA Real Estate, Anson Funds were the other strategic real estate investors in this financing, along with the Environmental Strategies Group of BNP Paribas Asset Management. I’m also pleased to announce that Scott Rechler, Chairman and CEO of RXR, has joined View’s Board of Directors. Scott brings deep real estate experience and is a big believer in moving the industry forward by building better, smarter, and more sustainable buildings. His knowledge of the real estate ecosystem and drive for positive change in the industry match our mission perfectly. I’m excited to welcome Scott to the View team and couldn’t think of a better partner for our journey ahead.
Finally, let’s talk about the ITC. The Inflation Reduction Act of 2022 was signed into law in August and is a game changing moment for the adoption of Smart Windows. The legislation includes Smart Windows as a new energy property in the ITC alongside solar, wind, and energy storage. View Smart Windows are now eligible for a 30% to 50% tax credit on the fully installed cost of a smart window. ITC was the massive catalyst to drive widespread adoption of solar and wind, and we expected to do the same for Smart Windows. The importance of this is that for our customers, net of the tax credit, Smart Windows are now expected to be the same cost as conventional windows, and we have recently seen a dramatic increase in the customer interest.
Let me take a minute to go a bit deeper into the impact of ITC on our business as it is fundamentally changing our business in three critical ways. First, on demand. In the two months since ITC, we’ve seen a rapid acceleration in our pipeline, and our contracting team is the busiest they’ve ever been. View has a proven product market leading customers, and the capacity and infrastructure in place to capitalize on this moment. The last remaining friction to mass adoption was the incremental upfront investment to our customers, and now ITC is expected to remove that premium.
Second on unit economics. In order to drive the structural change in the real estate industry and the construction industry, our business has required significant upfront investments in capacity and infrastructure. As you know, we’re shipping our fourth generation product that is very well loved by our customers, and we’ve made massive upfront investments in long lead item production capacity. The field support resources to execute large real estate projects in key geographies are also already in place. These earlier investments in fixed costs now create significant leverage in our business model, resulting in economies of scale. ITC increases the visibility we have on our volume ramp and accelerates our ability to achieve unit cost reductions.
Third, let’s talk about the product mix. And as you know, we have three product categories, Smart Glass, Smart Building Platform and Smart Building Technologies. Early last year we started a shift from Smart Glass where we used to sell components to our customers to Smart Building Platform, which is a complete solution providing a fully installed digital skin for the building. We’re seeing a dramatic acceleration of the ship from Smart Glass to Smart Building Platform following the ITC. This is beneficial to our customers as we deliver a full smart window system at scale and create delight with the users at the time of occupancy and operation. This also allows us to capture more upfront revenue and more gross profit per project.
To summarize ITC not only turbocharges smart window adoption and View’s top-line growth, but it also accelerates our profitability by increasing demand, improving unit economics and expanding gross profit.
Now let me talk about our journey ahead. For full year 2022, we expect revenues in the range of a $100 million to $110 million a significant top-line milestone for the company. Today View has a market leading product, a loyal top tier customer base, a growing pipeline and backlog, and the capacity and infrastructure in place to support profitable growth. With the significant tailwind from ITC, we’re targeting to double our revenues in 2023. Importantly, we’re also targeting to become gross margin positive in 2023.
With that, I’ll hand it over to Amy to cover the financials. Amy, over to you.
Amy Reeves
Thank you, Rao and good afternoon everyone. I will be covering the financial results for the third quarter 2022. As we get started, please note that unless otherwise stated, my comments refer to non-GAAP results of operations, which exclude non-cash stock-based compensation expense. Please refer to the non-GAAP reconciliations in our press release.
For the quarter, we reported revenue of $24 million, which represents a 26% year-over-year increase from Q3 2021 due to growth across all product lines, including Smart Glass, Smart Building Platform, and Smart Building Technologies. Our year-to-date revenue of $57 million represents the 25% year-over-year increase.
Our Q3 2022 non-GAAP cost of revenues decreased 4% year-over-year from Q3 2021, primarily driven by a decreased in new contract loss accruals recently implemented cost savings initiatives in the factory and improved inventory management, partially offset by increased costs associated with the delivery of higher Smart Building Platform revenues and higher production requirements in the factory.
Cost of revenues continue to improve as a percentage of revenues reflecting the benefit of growing revenues over the company’s fixed manufacturing costs and favorable mix shifts to our Smart Building Platform product. As a result, gross margin of the percent of sales significantly improved year-over-year. We expect to see continued leverage in our gross margin as we forecast strong revenue growth through the remainder of 2022 and as we progress towards our profitability milestones in 2023.
Turning to operating expenses, View incurred $13.5 million in non-GAAP research and development expenses in Q3 2022, a decrease of 60% from Q3 2021. This decrease was primarily driven by a reduction in depreciation expense following a one-time charge in Q3 2021 of $14 million. The remaining decrease was attributable to the completion of R&D projects and the realization of cost savings initiatives as we focus on operational efficiencies.
As we discussed in our last earnings call with the launch and ramp of our fourth generation product, as well as the launch of Smart Building Platform, a new product offerings and our Smart Building Technologies behind us. We anticipate a continued moderation of our non-GAAP R&D spend.
We incurred $20.4 million in non-GAAP SG&A expenses, which was a relatively flat with an increase of less than $1 million from Q3 2021. As Rao mentioned, the infrastructure required to grow the business, support our customers and maintain compliance as a public company is largely in place and we expect our non-GAAP SG&A expense to continue to decrease at the percentage of revenues for the remainder of this year, and in 2023. As we leverage the infrastructure we have built and progressed towards our profitability milestones. This accumulates to a Q3 2022 adjusted EBITDA loss, a $52.9 million this quarter compared to $63.8 million in Q3 2021, reflecting the leverage of our expenses over our revenue grips [ph].
During the first half of the year, our cash used in operations total $153 million. On our last earnings call, we said that we anticipated cash burn would improve in the second half of 2022. We are pleased to report that cash used in operations was $51 million in the third quarter, a significant improvement from $82 million in Q2 2022. This increase in cash used –or this decrease in cash used was driven by leverage from higher revenues, improved working capital management, reduced general and administrative spend, followed by the completion of the restatement, and the realization of certain cost savings initiatives. We anticipate that our cash used and operations in the remainder of the year to continue to reflect lower burn as compared to the first half of the year as we leverage revenue growth and focus on operational efficiencies and working capital management.
As Rao stated at the start of the call, we are 100% focused on getting the business to profitability. We have the infrastructure in place to support our targeted revenue growth, and we are committed to the keys to profitability, namely growing our top-line with the right customers and projects, realizing our factory economics with scale and execution, and finally, a dedicated focus on operational efficiencies and working capital management.
With that operator, we’ll open for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We have a first question from the line of Pavel Molchanov with Raymond James. Please go ahead.
Pavel Molchanov
Thanks for taking the question. Let me first ask about, what you recently mentioned as the game plan, which is obviously becoming profitable. You set that gross margin should turn positive by the end of 2023. Assuming that happens as expected, what is the additional amount of time you anticipate for EBITDA to turn positive?
Rao Mulpuri
Yes, hi Pavel. So, we’re not giving precise guidance about the timing of EBITDA positive, but let me give you some context, that’s helpful. So, as we mentioned in our prepared remarks, as Amy pointed out, we significantly reduce cash burn in the quarter Q2 to Q3 from about $80 million to about $50 million, and we expect to continue to march on the revenue path, reducing unit economics or improving unit economics as we ramp revenue, we’re going to manage our OpEx to right size the company based on the R&D needs, based on the sales and marketing needs and of course, G&A to properly run a public company.
And we expect that cash burn to continue to get better. So the sequentially it should get better. Obviously we’ll have bumpiness quarter-to-quarter, but in the bigger picture, we do see continued improvement in not only gross margin, but also the path to profitability. So, and we are well capitalized for this next set of milestones. And remember, our factory when we achieve gross margin positive next year will still be at a fraction of its full capacity. So, we still have all those fixed costs, that we’ll be amortizing over more and more units. So once we hit gross margin positive next year on a quarterly basis, we think we’re one turn of the crank away, if you will, to getting to profitability because at that point that gross profit starts to pay for the OpEx.
And so the way to think about our business is we’ve made significant upfront investments in fixed costs, and those fixed costs can be in the form of OpEx, but they’re also in the form of, kind of investments in factory and every incremental dollar and revenue is accretive to our gross margin. And so we do anticipate that it’s one more crank away after that gross margin positive to be EBITDA positive.
Pavel Molchanov
Okay. Given the Inflation Reduction Act plus the fact that you are selling the full curtain wall and not just the panels, you said your fabs revenue potential has doubled to $2 billion annually up from $1 billion. What’s the updated thinking about the long-term gross margin profile? So, I remember from the stack process you were talking about kind of a 60%, 65% gross margin in the long run as a steady state number. Is that still realistic?
Rao Mulpuri
Yes, I mean our revenue has now, since we’re selling a full system and not just the pure kind of, let’s say coded and technology components. We plan to capture more gross profit, in an absolute dollars per building or per square foot shipped, no question about it, because we still have a lot of efficiencies to be had, but a full window system will inherently have a slightly lower margin than if you just sold the piece parts. But in reality, per unit of buildings being built or window shipped we expect to capture a lot more gross profit. So, and we’re not guiding the percent of that at this moment.
Pavel Molchanov
Right. Okay. Understood. My third question is about the competitive landscape because of the new subsidy that will be offered in the United States starting next year. Do you anticipate that electrochromic glass produced from outside the U.S. will be coming into the U.S. market as a way of, trying to chase that tax credit?
Rao Mulpuri
Well, currently, as we’re a big share of the market. We do have some competitors, they’re U.S. based at the moment, or at least some of them have U.S. manufacturing and components coming from elsewhere. We don’t see anybody commercially viable that’s a foreign manufacturer at the moment. But I think, we’re clearly proving that a smart window is good for people, it’s good for the planet, and we’re on our way to proving that it’s a great business. So, as you can imagine, there should be more interest in this space. I’d be disappointed if more people aren’t interested. So, I think we’re paving the way for the world to move dumb windows into Smart Windows and naturally there’ll be room for more players. But as you know, businesses like this take time to build the technology, to build the operations, to build the field resources.
I mean, this is what we’ve been doing for the last several years and this is why it’s taken this kind of capital and investment and effort. So somebody would have to catch up to that. And I think the Inflation Reduction Act and the investment tax credit, not just for Smart Windows, but for all such energy properties have a base credit component, which would be 30%, but then there’s a 10% additional as written in to law for domestic content. So as a domestic manufacturer, obviously we qualify. So if a foreign manufacturer were to come in, obviously they wouldn’t qualify for that.
And then there’s another 10% for energy properties depending on where they’re located. So, I think, they’d have the disadvantage for the time being of that 10% domestic content. But the much bigger factor to answer your question is, somebody would have to start these technologies from scratch and build it into scale.
Pavel Molchanov
And then lastly on the residential opportunity, we haven’t talked about this for a while. Are you still looking to establish a footprint with residential home builders? And if so, what’s the timetable for getting there?
Rao Mulpuri
Yes, it’s a great question, and believe it or not, it’s probably the single most common incoming we get into our sales desk is can you do my home? As you know, we’ve traditionally started in office, and we’re doing corporate campuses, build-to-suits and of course spec build, including office renovations in major cities. Then we did airports and we’re now well known in airports. We’re in about 15 airports across the United States. And I don’t think, you can build a modern airport today without a smart window. We’ve done hospitals and our fastest growing segment right now is multi-family.
So you can imagine a 10, 20, 30, 50 story building which has, 300 to a 1000 apartment units, they’re kind of glass towers and they have great views theoretically, but have incredible issues of heat and glare. And so what we found is that our product is actually brilliant in a residential environment, the way we deliver our product, the way we contract our product, the way we engage with the customer base today, our business is best suited for a B2B like a sale and support.
And so we’re staying focused on large properties, where we can deliver large quantities of product to one site, and that’s our primary path to profitability. We think going into single-family at the moment from a business point of view, wouldn’t be wise yet, although for the same reason it’s brilliant in a multi-family, it is very brilliant in a single-family home. We’re just not set up and I think our ability to capture profit will be harder, should we jump into single-family at the moment.
So for all those reasons we’re gaining a lot of learning on residential, user behavior, the way humans interact with the app and then, that then interacts with the window. So, we have a ton of learning we’re gaining in a B2C environment in how people engage with the window and engage with the electronics and the app, that’s going to help port that over very easily into single-family residential. But I’d say stay tuned and there I say we should be able to fill this plant and build a profitable business without touching single-family. So for all those reasons, we’re staying focused on multi-family as a residential segment at the moment but it actually helps us someday get ready for single-family.
Pavel Molchanov
Got it. Thank you very much guys.
Operator
Thank you. There are no further questions at this time. And I’d like to turn the floor back over to Dr. Rao Mulpuri for closing comments. Over to you, sir.
Rao Mulpuri
Thank you all for joining the call today. Extremely proud of the View team and what we’ve accomplished so far. We’re at an incredible moment for the industry and for View and we’re poised for tremendous growth in 2023, and we have the capacity and infrastructure in place to efficiently scale the business and support our customer growth. In 2023, we’re targeting the achievement of key profitability milestones as we grow our business and benefit from the leverage that’s inherent in our business model. And we look forward to talking to you all again on our Q4 call. Thank you.
Operator
Thank you. Ladies and gentlemen, this concludes today’s conference call. You may disconnect your lines at this time and thank you for your participation.
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