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Good day, and thank you for standing by. Welcome to the Views First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to Samuel Meehan, Head of Investor Relations. Have a great day.
Good afternoon, everyone, and welcome to Views' First Quarter 2023 Earnings Call. I'm Samuel Mean, 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, you issued a press release announcing its first quarter 2023 financial results. You may access this press release in the Investor Relations section of 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 filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings, including quarterly reports on Form 10-Q. I'd like to remind you that during the call, we will discuss certain non-GAAP measures related to Views performance. You can find the reconciliation of these measures to the nearest comparable GAAP measures in the press release.
Now I will turn the call over to our CEO, Dr. Rao Mulpuri, over to you.
Thank you, Samuel, and thank you all for joining us this afternoon. 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. I'll cover the macro environment and the real estate industry dynamics as they relate to view in terms of challenges and our opportunities. Then I'll cover how we're navigating this environment, specifically our strategy to reach profitability, including our go-forward cost structure and enhanced go-to-market approach.
First, on the macro. The real estate industry is going through significant changes and our customers are contending with two main issues: One, the office sector has been under stress in every market; and two, higher interest rates and the lack of availability of credit. But given View is leading a secular trend, and we're at a very low market share at the moment, Views journey is less about the macro, but more about the underlying dynamics that drive the adoption of smart windows. Despite these challenges, there's plenty of opportunity in the market for view, and we expect to continue to gain market share through the cycle.
Now turning to the office segment. While the overall demand for office is bad, tenants that are renewing leases are moving to new spaces are demanding that the offices be top back and highly amenitized [ph] in order to make it attractive for their employees to come into the office and do their best work. Class A office is doing better and Class B and C offices are suffering the worst. This flight to quality drives adoption of ViewSmart windows since they provide a superior occupant experience. Building owners are also under pressure to comply with regulations around climate change and view provides the perfect combination of a better building for the occupants and a better building for the planet.
Now regarding other real estate verticals. As we have noted in the prior calls, it's a well-known fact that there continues to be a shortage of housing across the U.S., and we have a significant pipeline of projects in the multifamily sector now. As you know, we are in a number of notable U.S. airports and continue to grow with repeat business in both renovations and terminal expansions in existing airports as well as additional new airports. We also have significant installations in hospitals and medical office buildings across North America. Both of these institutional segments are much more resilient in the cycle compared to commercial real estate.
Now let me describe our go-forward strategy and path to profitability. As we announced on our last earnings call, we took actions that we expect will reduce our annual structural fixed costs by approximately $50 million. We completed these actions in the first quarter of 2023. It's important to note that these savings start to become effective in Q2 2023 and are above and beyond the year-over-year improvements to be realized in our first quarter 2023 financial results. I'd like to provide more details into the realigned cost structure of the business and our go-forward strategy. First, regarding our factory fixed cost.
As you know, we've had to create a very unique supply chain moving from an ordinary vendor to a high-tech connected smart skin for the building. That required us to make substantial investments in capacity and years of iterative process improvement. Through the hard work and dedication of our team, our manufacturing process has now matured when our factory is performing well with high quality and on-time delivery for our customers. In the first quarter of 2023, we adjusted our supply chain, process capacity and overhead costs and rationalize them to reflect our improved operational performance, resulting in higher efficiency and lower fixed costs. Also in Q1, we made significant strides in transitioning from our Smartclass product to being more vertically integrated with the smart building platform, which allows us to optimize for the overall system performance rather than just the components.
This change is significant in that it removes inefficiencies across manufacturing and supply chains and allows us to deliver more efficiently for our customers while also reducing our cost of delivery per project. Putting it all together, we believe the current factory and delivery infrastructure we have already built will allow the company to scale to profitability. Second, on to R&D. As we have mentioned on prior calls, we are now in our fourth generation product. That transition was completed last year and has been met with terrific feedback from customers on neutral color, aesthetics and visual quality. We also recently completed R&D of our next-generation network that is more secure, lower cost and easier to install. This is an area that effectively tracks Moore's Law in taking advantage of the benefits of continued cost reductions in semiconductors and circuit design.
The completion of both of these initiatives allowed us to reduce R&D expenses substantially. Gen 4 is now our mainstream product, and we intend to get to profitability of this product. Now let me talk about sales and marketing. First, regarding marketing. Our customers are the best promoters of our product. With major installations in each of the key U.S. markets, awareness of our product has gone up significantly in the last year. This allows us to be more efficient with our marketing spend going forward.
Next, on to the sales effort. While we spent the last few years getting reference installations and building awareness in key markets, we're now focused on what we call platform accounts. These are customers who have large portfolios of buildings and are constantly building and renovating. Instead of treating each building as a separate decision, our customers are increasingly choosing view as a design standard across their portfolios. These market-leading customers also tend to be more sustainability focused and equally importantly, have the ability to invest in upmarkets and down markets.
Once we penetrate these accounts, we also enjoy significant repeat business. This makes the selling effort a lot more efficient, effectively reducing our customer acquisition costs. So putting it all together, the maturation of our manufacturing processes and ramp-up, combined with a product that is fully developed and ready for the mainstream and a sales effort that's focused on platform customers gives us a more efficient cost structure. We've also been very thoughtful about the go-forward structure of the business. And today, we believe we have the infrastructure in place to achieve profitable scale. Specifically, we plan on holding our fixed costs at this level until we achieve profitability.
In total, these reductions represent a significantly lower fixed cost structure to the business and set up lower breakeven points for both gross margin positive and EBITDA positive. Turning to the revenue side of the business. Last year, we did $100 million in revenue, which was a significant milestone for the company. It's worth pointing out that this was achieved prior to the investment tax credit being enacted. Historically, our customers paid a significant premium for smart windows. Going forward, the tax credit removes that premium, making the smart window about the same cost as a traditional window.
As a result, the smart window can now be incorporated cost effectively across a bigger spectrum of our customers' portfolios. We're seeing a significant uptick in customer interest, and we anticipate this momentum will drive our demand growth going forward. As we mentioned on our last call, we have a committed backlog for 2023 that already exceeds 2022 revenues. Today, we are guiding our 2023 revenue outlook to be in the range of $125 million to $150 million or a growth of 36% at the midpoint of the range.
Now on to some details about the investment tax credit. ITC for Smart Windows was enacted on January 1. And today, customers are able to get a vastly superior window for around the same cost as a traditional window. At the same time, Vu is able to capture higher value and better profit margins per project. This quarter, we made substantial progress educating the industry on ITC and putting key operational building blocks in place for our customers. View established an insurance program to support our customers and enable the guarantee of the tax credit for qualifying projects. We believe with these building blocks in place for the investment tax credit, we will see a rapid acceleration of customers benefiting from the smart window ITC.
Finally, today, we announced that we're pursuing $150 million financing. As you know, we closed the $200 million financing last year that was led by RXR and other strategic real estate investors. We're currently in discussions with our existing noteholders and shareholders regarding today's announced financing. Given the progress we made this quarter in lowering our structural fixed costs and lower breakeven point, our strategy is that with this financing, we give the company to profitability. With that, I'll hand it over to Amy to cover the financials. Amy, over to you.
Thank you, Raul, and good afternoon, everyone. I will be covering the financial results for the first quarter of 2023. As we get started, please note that unless otherwise stated, my comments refer to non-GAAP results of operations as described by Samuel at the beginning of the call. Please refer to the non-GAAP reconciliations in our press release.
For the quarter, we reported revenue of $18 million, which represents an 8% year-over-year increase from Q1 2022, primarily due to growth in our smart building platform products as we continue our momentum to strategically shift to this line of business. We expect to continue to see this shift throughout 2023 as we focus on the development of relationships with high-quality customers and our differentiated approach to supporting their projects.
Our Q1 2023 non-GAAP cost of revenues decreased 1% year-over-year, reflecting the benefit of cost savings initiatives put in place in our factory during 2022 and lower levels of inventory impairment, which more than offset the increased cost of delivery of our smart building platform product associated with the higher revenues.
Cost of revenues continue to improve as a percentage of revenue, reflecting the benefit of growing revenues over the company's fixed manufacturing costs and the favorable mix shift to our smart building platform products. We expect to see continued leverage in our gross margin as we grow our revenues, improve our operational efficiencies and realize the impact of our lower structural fixed costs through the additional measures that Ron discussed earlier. As a result, we expect that gross margin as a percentage of revenues will continue to improve during 2023, both as compared to 2022 and sequentially each quarter this year.
Turning to operating expenses. We incurred $12 million in non-GAAP research and development expense in Q1 2023, a year-over-year decrease of 40%. This decrease was primarily driven by the completion of certain R&D projects as well as the realization of cost savings initiatives that we put in place in late 2022.
We incurred $6 million in non-GAAP SG&A expenses in Q1 2023, which decreased 39% year-over-year, reflecting lower spend on accounting and legal fees following the completion of our restatement in the second half of 2022 as well as lower -- as well as lower sales and marketing expenses following our cost savings initiatives that we put in place in late 2022. We expect to see even lower quarterly R&D and SG&A expense beginning in the second quarter of 2023 as we further realize the cost savings that we put in place in March, which Ray discussed earlier. For the first quarter of 2023, we reported an adjusted EBITDA loss of $43 million compared to $63 million in Q1 2022, reflecting the impact of our lower expenses. We expect to see continued improvement of our adjusted EBITDA loss this year.
Now turning to cash. Cash used in operations for the first quarter of 2023 was $60 million, an $11 million improvement compared to $71 million in the first quarter of last year. We anticipate that our cash burn will continue to improve over the course of 2023, driven by leverage from higher revenues with our lower fixed cost structure following our recent cost savings initiatives that were put in place.
As we previously mentioned, we expect that these actions will result in annualized savings of approximately $50 million. We anticipate sequential improvement to our cash burn each quarter this year. Due to the cash impact of the restructuring in the second quarter, we will fully realize the impact to our cash burn beginning in the third quarter. We ended the quarter with $130 million of cash, cash equivalents and short-term investments compared to $198 million as of the end of -- as of December 31, 2022. We believe our cash and short-term investments on hand should be sufficient to fund our currently anticipated operating and capital requirements into but not through the third quarter of 2023. In light of this cash need, and as Ron mentioned earlier on the call, we are actively pursuing a $150 million financing to strengthen our balance sheet and support us as we progress on our path to profitability. With that, operator, we'll open for questions.
Thank you. [Operator Instructions] Our first question comes from the line of .
Thanks. Let me start with the tax credit and the insurance protocol that you have created. Can you be a little more precise what is being insured and what is Viu's role in providing the service?
Yes. So Pavel, thank you for that. So as you know, the tax credit is a 30% to 50% credit. And we -- most of our projects qualify for 40% credit because we are a domestic manufacturer as well. So there's a 10% kicker for domestic manufacturing. And then in certain brownfield or energy community properties, you can get up to 50%. There's a way you estimate the percent of the project that covers for the tax credit, -- and that estimate is based on our interpretation of how the law is written. The regs are still coming out. The regulations for broadly the entire 48 -- Section 48 tax credit is still coming out from the IRS.
As you know, you saw some clarifications around EVs and so on. So they're getting around to different aspects of the energy tax codes, and we expect those to come out later this year. But in the meantime, our customers are making investment decisions and they're looking for further clarity. And as you know, there's an industry of legal firms, accounting firms, insurance firms that are well versed in this subject given the subject of tax credits itself is not new. And so what we have in place is a program that we can guarantee the credit for our customers, and we have third-party insurance that backs our guarantee. So imagine a project where a customer may be making a $30 million investment in smart windows and they expect to get a $12 million tax credit, that credit and the availability of that credit at the time the project is put in service, which will be sometime in the future, but they're making the investment decision today is being guaranteed by our program.
Right. And given that you're essentially taking this kind of potential liability on your balance sheet? Have you estimated the company could be on the hook for dollars, for example, based on 2023 sales that you're guiding to?
Yes. So we're actually not taking it on our balance sheet. We have an insurance policy that covers the guarantee. And there's a small fee paid for that. That's pretty common in these types of situations. So we would still get the full revenue and the benefit of it, and it's backed by a third-party insurer.
Okay. Let me turn to the guidance. Good to see you reinstating revenue guidance for the year. I remember 6 months ago, when you gave initial 2023 guidance, you indicated that some kind of expectation for gross margin turning positive before the end of 2023. What's the latest in terms of when you think gross margin can get above 0?
Yes. So Pavel, traditionally, we have focused on growth as an antidote to burn. And that meant higher volumes mean faster path to profitability. That would be true for any business that has a very high amount of fixed cost. And as you know, volume gives us the accretive benefit of getting to profitability. The new strategy we have is one where we're focused on the higher-quality business by way of better margins, and we're expanding the margins with all of the things we talked about, which is putting the tax credit into operation, taking the fully vertical system of smart building platform that allows us to deliver more value and capture more value and running our infrastructure a lot more efficiently. All of that means we're able to capture better margin per square foot shipped, for example.
On the cost side, as you know, not only in our delivery cost, which is manufacturing, supply chain and our support in the field of fulfilling our commitments to our customers, but also in R&D, sales and marketing and G&A, having reduced our breakeven points. you will see that we're able to get to gross margin positive and EBITDA positive at lower volume levels and also lower revenue levels than we had planned in the past. So this is a realigned strategy that's focused on the right kind of customers and projects while delivering in a more efficient way than we thought we could a year ago.
The net impact of that is we will get very, very close, if not right around gross margin positive by the end of this year. So we're keeping the time line to get there, but we're -- we've created a strategy where we're able to capture better value in getting there. Now whether we get slightly positive, slightly negative write around gross margin depends on the mix of projects we'll have in a given quarter. But our time line to achieve profitability remains about the same as we thought we did 6 months ago.
Okay. And then maybe finally, I'll ask about the proposed convertible offering, $150 million that you announced today. Your last convert -- or I should say, your first and only convert thus far, of course, was with the strategic partner, RXR. Do you envision a similar kind of arrangement for this convert? Or are you aiming more for traditional financial investors or too early to say?
I think it's a bit early to be specific. But let me tell you, as you know, the real estate industry largest asset class in the world, is going through changes, and we'll continue to go through massive changes. And that industry will be the benefactor of our product, our company and companies like us being successful in the medium to long term. Now within the industry, there are entities that manage not only portfolios of real estate, but have pockets of capital available to invest in emerging technologies and growth companies. And RXR is one of them. As we had announced in the last financing, we've had many others that have very similar thoughts in terms of change in the industry and the change they're looking for and the ability for them to fund and help develop companies like ours.
The beauty of that investor group is that they're operators, they get due diligence as a user of the product, and they get to support us as a user of the product in our iterative learning and enhancement. And having that investor base in the last round has been hugely beneficial to view compared to our prior class of investors in that we're able to get insights into the industry dynamics, be it how interest rates are impacting their ability to invest, what subsegment is being more successful than not, how we should evolve our product and evolve the collective collaboration and designs. And for example, in one of the projects we worked on, we had 50 different sizes. We were able to bring it down to 6 sizes by working closely with them.
That has enormous benefits in our manufacturing supply chain in on-time delivery as well as in costs. and running our operation. So to answer your question, I think we should expect that same group and class of investors to be heavily involved in this next financing because they have the ability to diligence view story and be confident about it and frankly, help us succeed in the medium to long term.
Let me actually squeeze one more in. If we zoom out versus 6 months ago, again, when you gave original 2023 guidance, you talked, I guess, it was in March about the headwinds in commercial real estate more broadly. So now that you've had a little more time to kind of observe the macro landscape in real estate, -- how much different do you expect the sales mix or customer mix to be this year compared to '22 or '21 in terms of multifamily versus airport versus commercial high-rise?
Yes. Great question. I'll have two points of view on that. Number one, from a macro and how it impacts real estate. Our planning is not that this will turn around anytime soon. So we are fully planning for an environment in which all sectors of real estate will be challenged for the next couple of years. Now that may not be true, but as a tech company serving the industry at a very low market share, we believe that that's a safe assumption for us because if it grows from here and does better as upside. In terms of segments, as you know, traditionally, we've been very strong in office and life science and office-oriented projects.
We've made that pivot -- started to make that pivot last year. And today, our largest pipeline of projects is in multifamily. And so I would say that's a major shift from office to multifamily and our timing of being ready with our product is impactable in that 2, 3 years ago, we weren't really, today, we are fully ready with our panels with all the multifamily buildings tend to have more operable, sliding doors, swinging windows, et cetera. And then also the way you interact with the product, there's a B2C component where the consumer, someone in the apartment is now using the app to control the environment.
So we've completed all of that work to be ready for multifamily. We also have had a number of major multifamily installations with great feedback and data coming back. And those same portfolios are now repeat buying from us and now expanding to other portfolios. Some of our developer customers actually have the ability themselves to pivot from heavily office to heavily multifamily in multiple geographies in the U.S.
So that's also kind of creating the symmetry where they're moving to more multifamily and views able to deliver more multifamily. So that's the office to multifamily transition. Having said that, let me tell you, we're still doing a number of offices as well as life science and renovations in office sector because of the flight to quality that we discussed. Throughout this time, as you know, we've been growing in airports.
We're in a number of a dozen or so U.S. airports, many of them with multiple projects. I mean, they build or renovate every single year in some of these airports and we're now on to our third or fourth project in some of these airports as well as new ones. And then health care is also a segment in U.S. and Canada where we've been in a number of large hospitals as well as medical office buildings. Airports and hospitals are investing relatively speaking, better in this cycle, and we're well positioned there as well.
So yes, to your question, we have transitioned our verticals to where there is money and there is build-out. The macro to the first order is worse than it used to be, but we're factoring a significantly worse macro in how we think about pipeline and our customers going forward anyway.
Very good.
Thank you.
Great. And this concludes the Q&A section of the call. Rob, I'll hand it back to you.
Thank you all for joining the call today. Vu has made a lot of progress to start the year. We took actions to reduce our cost structure and lowered our breakeven point for profitability. We expect to continue to grow our revenue using our focused sales approach. We intend to raise $150 million of financing, and our strategy is that with this financing, we get the company to profitability. With that, I look forward to speaking with you all again on our Q2 2023 earnings call. Thank you.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.