View Inc

NASDAQ:VIEW

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to View Inc.'s Third Quarter 2023 Earnings Call. [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, executive]

Good afternoon, everyone, and welcome to View's Third Quarter 2023 Earnings Call. I am 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 2023 financial results, which you may access 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 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 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. Unless otherwise stated, our comments during the call refer to non-GAAP results of operations.

Now I will turn the call over to our CEO, Dr. Rao Mulpuri. Rao, over to you.

[Rao Mulpuri, executive]

Thank you, Samuel, and thank you all for joining us this afternoon. During the call, we will address the results in the quarter but also up-level the conversation to provide context around where we are and where we're going.

Over the past year, with the dual realities of challenges in the real estate industry and the capital markets, we've continuously evolved our product, our operations and our market approach to sustain our business, serve our customers and importantly, continue to build long-term value at View. I'm grateful for the support and belief from our customers and capital partners, and I'm proud of the View team for focusing on the mission, being learning oriented, being nimble and resilient and delivering key outcomes for our customers and the company. The Q3 results are a testament to that.

Now let me provide a quick recap of the key announcements and results we reported today. First, in the third quarter, we showed continued progress on our path to profitability and significantly improved gross margin. We grew revenues 61% year-over-year in the quarter. Gross margin was positive without the impact of the future production outlook adjustments that Amy will describe in detail.

Second, we are executing on our plan to reduce structural fixed costs and to lower the required revenue breakeven points in the business. The third quarter results show a steep decline year-over-year in both our factory fixed costs as well as our operating expenses. Combining the improved gross margins and lower structural fixed costs, we're making significant progress in reducing our quarterly cash burn. Going forward, we remain laser focused on cash management and growing the business to achieve profitability.

Third, in October, we were pleased to announce a senior secured credit facility from an investor consortium comprised of strategic real estate investors, Canto Fitzgerald, RXR, Anson and Affinius. These strategic investors are leaders in the real estate industry, and we're excited to partner with them to unlock the next stage of View's growth.

Let's discuss our journey to gross margin in a little more detail. We made significant improvement to our gross margins year-over-year. This was a result of View team's focus, hard work and continuous improvements made in several key aspects of our business. Anyone who knows a manufacturing-oriented hardware business with a new product category knows that this is a major inflection point in the business and proves out the unit economics, which in turn, forms a basis for profitable growth in the future. For this milestone to materialize, several things needed to be delivered.

First, continuous improvements in product architecture and material selection. Our fourth generation product has all the key characteristics needed to scale to a high-volume mainstream product. Second, delivering on the key factory metrics while optimizing production and delivery costs and meticulously managing the supply chain.

Third, continuing to scale the business with high-quality profitable projects; and fourth, unlocking value for both our customers and View with our fully integrated smart building platform and the investment tax credit. This journey is never a straight line to success given all the inputs and moving parts, but the trend line is clear.

Our financial performance continues to improve with scale, and this provides confidence towards the path to profitability. As we zoom out and look at the cost structure of the entire business, we're committed to reducing quarterly cash burn and getting the business to cash flow positive. We took additional actions in October to further lower our structural fixed costs, including reductions in factory fixed costs and operating expenses. These actions are expected to reduce our cost structure below the already realized year-over-year savings that we reported in our Q3 2023 results.

We're able to make these costs improvements because we have made great progress to date on the product, our market approach and the factory operations. On the product, as I've mentioned before, we completed the release of our mainstream Gen 4 product. We recently completed the upgrade of unit and the software, and we fully released our multifamily offering. The maturity of the product means we're able to reduce R&D spend substantially.

On the factory side, we're performing well across key operating metrics, which allow us to reduce overhead and production costs. We are delivering exceptional products to our customers with on-time shipments to large flagship projects across the country. As part of our focus on reducing quarterly cash burn, we made the strategic decision to rationalize our capacity ramp until we are cash flow positive.

Consistent with this rationalized capacity plan and greater focus on our strategic accounts and given the current demand dynamics, we're updating our full year revenue outlook to be in the range of $110 million to $120 million, representing 13% year-over-year growth for 2023.

Now turning to our customers and the market. While the real estate industry continues to deal with the headwinds of office segment challenges and high interest rates, we see multifamily residential development being a bit more resilient at the macro level. Our dual value proposition of sustainability and delighted users, combined with the affordability of smart windows with the investment in tax credit, plays well to the needs of the real estate developers in this segment.

With these benefits, we continue to make progress in product evolution, awareness and growth in the multifamily market. Yesterday, we announced that View has been selected for 89 Dekalb Avenue in Brooklyn, New York, developed by RXR. Likewise, developers nationwide are showing interest in View to differentiate their portfolios in a crowded market.

As we continue growing this market, we expect that the multifamily residential segment will be a key driver of demand, enabling you to reach profitability.

With that, I'll hand it over to Amy to cover the financials. Amy, over to you.

[Amy Reeves, executive]

Thank you, Rao, and good afternoon, everyone. I will be covering the financial results for the third 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 $38 million, which represents a 61% year-over-year increase from Q3 2022, primarily due to growth in our smart building platform revenues driven by a continued and strategic shift to this line of business. Smart building form is our fully integrated smart window platform. And given the customer reception and inherent advantages to this product offering, we expect this to be our primary product offering on a go-forward basis. Our revenues are benefit benefiting from repeat purchases from existing customers and traction in the multifamily residential market.

Additionally, the growth that we saw in our Smart Glass revenues was driven by a favorable product mix shift to our higher priced and higher-margin products that are typically shipped towards the end of these projects. And we have fewer -- as we have fewer early-stage Spark glass projects with ITUs and production following the shift to Smart Building platform. Moving forward, we anticipate Smart Glass revenues to decrease and be a much smaller part of our total revenues.

While we grew revenues year-over-year, our Q3 2023 non-GAAP cost of revenues decreased 13% from Q3 2022, reflecting the benefit of our lower fixed costs in the factory and the field and favorable product mix was in and across the three major product offerings, partially offset by $6 million of charges for our changes in estimates in future per unit IGU costs. As we have been discussing throughout this year, our lower fixed cost of revenues in the factory in the field were driven by our cost savings initiatives put in place during the second half of 2022 and earlier this year.

Revenue growth, coupled with our lower cost of revenues, resulted in continued significant improvement in gross margin. This quarter, our gross margin increased by $21 million as compared to Q3 2022. And increased sequentially from Q2 2023 by $9 million.

Turning to operating expenses. We've incurred $8 million in non-GAAP research and development expense in Q3 2023, a decrease of 42% or $6 million from Q3 2022. This decrease was primarily driven by the completion of certain R&D projects as well as the realization of cost savings initiatives we have put in place. We anticipate that R&D expense will continue to reflect lower spending as compared to prior periods for the remainder of this year and into 2024 as we focus on cash profitability.

We incurred $60 million in non-GAAP SG&A expenses in Q3 2023, which decreased 20% or $4 million compared to Q3 2022, reflecting lower spend on legal fees following the completion of a restatement as well as lower sales and marketing expenses following our cost savings initiatives. During the quarter, we noted a continued decline in economic and market conditions, including a continued and sustained decline in our market capitalization, rising interest rates and a prolonged outlook for a continued slowdown in the real estate market.

This, combined with the limited amount of additional financing we secured and our revised projections for our future operating results, culminated in a $170 million impairment charge to write down the value of our property and equipment. Additionally, following the revisions to our outlook for future prediction, we determined that our estimated future costs of IDU production would be higher on a per unit basis and recorded $6 million of charges this quarter, $4 million to increase our warranty liability and $2 million to increase our content loss accrual.

We have further reduced our factory fixed costs as we focus on strategic volume growth with higher quality projects with favorable economics, and we are running the factory with this rationalized capacity model. It is important to note that these charges do not result in higher cash outflows for factory costs. For the third quarter of 2023, we reported a $30 million improvement in adjusted EBITDA with a loss of $23 million compared to $53 million in Q3 2022, reflecting the impact of higher revenues, improving gross margins and lower operating expenses.

Now turning to cash. We ended the quarter with $51 million of cash and cash equivalents compared to $80 million as of June 30, 2023. Cash used in operations for the third quarter of 2023 was $32 million, a $19 million improvement compared to the third quarter of 2022 and a sequential improvement of $15 million from the second quarter of 2023. On our last earnings call, we said that we anticipated cash burn would improve in the second half of 2023 driven by leverage from higher revenues with the lower fixed cost structure following our recent cost savings initiatives, and we are seeing these results in the third quarter.

On October 16, we announced the closing of a $50 million senior secured credit facility from an investor consortium comprised of real estate investors. Initial net proceeds from this facility were $10 million and we anticipate additional draws of $37.5 million over the next 2 quarters, subject to meeting certain covenants within the agreement. We believe cash on hand, in combination with the projected draw from the credit facility, should be sufficient to fund our currently anticipated operating and capital requirements into but not through the first quarter of 2024. This time frame gives us runway to continue to execute our business and demonstrate a reduction in cash burn as we look to finance the business to cash flow positive.

With that, operator, we will turn it over for questions.

[Operator]

[Operator Instructions]. Our first questions come from the line of Graham Price with Raymond James.

[Graham Price, analyst]

First of all, well done on gross margin turning positive, excluding the $6 million charge. Though did want to get some clarification on, I guess, why that would impact the current quarter if it's tied to future per unit costs? And then maybe more broadly, realizing that you have yet to give guidance for 2024. But just directionally, how do you see margins progressing from here? And then maybe talk a little bit about where you see the longer-term margin profile kind of shaking out.

[Rao Mulpuri, executive]

Yes. So Graham, this is Rao. Let me take the second question, and I'll hand it to Amy to explain the $6 million charge. Second part of the question, so gross margins going forward. As you know, our margin line hasn't been a perfect straight line, but the trend line is clear. We have the product architecture, the materials, which is foundational to margins, as you know, in any hardware company. And then as a manufacturer, we also have the right production metrics and the supply chain all worked out. So basically, the invention and engineering are complete. And what's in front of us is scale. And to achieve scale, obviously, we need a certain number of minimum projects to get there. We have the unit economics worked out, we have the business model proven, and we're going to focus pretty heavily on the multifamily sector, although we still have a really good healthy airports business. We have a healthy institutional business and growing, but importantly, there's still office builds, life science and renovations going on.

But as a growth area, we worked very hard at it and lucky that we've been able to get the product completed and be ready for multifamily specifically. Within that, the relationships we've built over the last 3, 4 years, with installations in key markets. And obviously, our backers being active in this market is really helpful to us going forward. So the best way I would address kind of how this coming quarter looks and going forward is we have all of the right cost structures in place, including the lower breakeven points. And now it's about growing in that segment. and it will be on a quarter-to-quarter basis, potentially bumpy, but the long term trend is to use the positive contribution to get to profitability. And as far as 2024, as I said, we're pretty heavily focused on the multifamily sector, and we're not yet guiding for revenues next year, but I think we'll do that in the next call.

With that, Amy, do you want to address the $6 million question?

[Amy Reeves, executive]

Yes, Graham. So we have 2 liabilities on our balance sheet that require us to project future cost of manufacturing on a per unit basis. First, on the warranty liability, we took $4 million charge. As we've explained in the past, with the fixed nature of our manufacturing costs, our unit economics can vary significantly with volumes. And so given the reduced outlook that we have for future production requirements, those unit economics for our future warranty replacements are now expected to be higher than we previously estimated.

Now on the contract loss accrual, we're estimate -- we have to record a liability for the total amount of costs that would be in excess of a contract revenue price, and that total cost includes the cost of manufacturing. So essentially, what we have is a higher percentage of our factory fixed costs that are being allocated to the smart building platform projects that are currently being manufactured.

[Graham Price, analyst]

Okay. Understood. Thank you both for the color on those items. I think, Rao, you touched quite a bit on my second question, but obviously, we're still seeing a lot of pressure in the commercial office market. I was wondering if you could talk about some of the other end markets, which you did a little bit, airports, health care, obviously, multifamily housing and maybe specifically, the impact from interest rates that your customers are experiencing in each of those markets?

[Rao Mulpuri, executive]

Yes. I think our business can be broadly broken into, let's say, infrastructure and government spending and, let's say, private sector. My comments, obviously, the interest rates and the dynamics apply to the private sector, so let's focus on that for a moment about what's going on with our customers' businesses.

One lens is how are their economics looking and this is a generic cancer. Obviously, every project is different. But they have a trifecta of issues that our customers are facing. Number one, construction costs are still somewhere around 10% to 20% higher than they were before the pandemic, let's say, if you take the baseline of about 3 years ago. And that's driven by a variety of factors, probably labor cost is the biggest one. But clearly, the cost to build is higher than it was.

The second is cost of debt in which a lot of our commercial customers take on debt, at least during the construction phase, and then they either refinance or sell the property after they stabilize it. So cost of debt is a very important metric for them in total cost and their own returns. And as you know, interest rates are about double where they were. So their cost of debt is twice.

On the revenue side. For a while, the leases and rents were going up, especially in the multifamily segment, and now the rents are a little bit more in threat. And it's either an unknown or a potential stabilization of rents. So when you take the 3 factors together, it's a less competitive time or it's a less lucrative time to be building.

Having said that, there's still a very heavy housing shortage. And there are haves and have not. There are customers that are able to finance in this segment, in this timing. And there are customers that are able to still build. And some of our development customers, instead of building 4 or 5 projects a year, they may be building 2 or 3.

And then geographically, there are submarkets that are very hot and people are continuing to build. So with all those, while the macro is depressed, there's still enough business for us to go after in the multifamily segment. Specifically, if you look at our value proposition, we help our customers to differentiate their properties, right? So in a tighter market environment and a flight to quality where they're trying to one up each other to gain that tenant or get a little more rent, we provide an important amenity.

We are long-term sustainable for them with their goals for building more efficiently, providing the path to net 0, saving a little bit of energy. But importantly, this is an amenity users love. That actually the main reason we're being successful in this segment. We have very strong user affinity. Now the Inflation Reduction Act on the tax credit of -- on the smart windows makes smart windows now affordable. They're either same cost net of the tax credit. And in a few cases, we're actually saving them a little bit of money. So that's why we're bullish and focused on the multifamily segment.

To your question on other segments. Airports, as you know, primarily, they're owned by cities or local counties. There's a lot of investment going on in airports across the United States perhaps partly because for decades, there have been an underinvestment in infrastructure in general and specifically airport facilities. But secondly, as you know, passengers have gone back up to pre-pandemic levels. Airlines are demanding that the facilities be built to a better standard because a better on-the-ground experience provides a better in-the-air experience. And airports are building and renovating pretty much across the board. We are in about 15 U.S. airports and growing, and we have significant repeat business where they're building another terminal or renovating in that space.

Health care also is facing some of the same financial challenges. But there are hospitals and medical office buildings being built. And then finally, in the office sector, while everyone talks about work from home, I think you're seeing major employees -- employers are bringing people back to work, maybe at least 3 days a week, in some cases, 5 days a week. And obviously, they're filling up their existing footprints.

But importantly, the key subtrend note, which really makes a big difference for View is the flight to quality is most evident in this sector. For example, in New York City, there are $150 per foot offices that are full and there are $50 per foot offices not too many blocks away that are empty. And what it does show is every employer is obviously not only having a strong desire or a requirement to bring employees back, but they're using their facilities, their buildings as amenities to create a type environment and culture that they want to bring their employees back to.

So in that sense, even though on a per square foot basis, it's a higher cost to build a better spec building, to get into a lease with a better spec. Those are getting more traction, which means you should see, even if there isn't a new build, renovation of these old tired properties in order to reposition them for a more modern and a more leasable environment. And we already have done renovations over the years. We continue to have renovation business in the right markets with the right locations. And that will continue to be a segment. But make no mistake, we're heavily focused on multifamily as a segment for us to get to profitability.

[Graham Price, analyst]

Okay. Understood. And maybe last one for me. I wanted to ask about the Mississippi factory. I think you're still running it at less than 10% utilization. So just as a way to get some extra revenue in the door in light of, I guess, the revised growth outlook. Would there potentially be a possibility of, for example, leasing out some of that space or maybe partnering with another manufacturer?

[Rao Mulpuri, executive]

Yes. Good question. Obviously, Graham, we're always looking at how can we cut our structural costs and while we're ramping thoughtfully to get to profitability. I mean, this is a purpose-built facility. We have about $400 million of hardware. If you go inside and look at the facility, it's a large infrastructure, industrial tech, combined with semiconductor technology. So it's purpose-built to make smart windows. It's not really capable of being broken up and used for other purposes.

Our goal is to fully fill this facility as we ramp up. And as you've noted, at a fraction of the full capacity, we will be cash flow positive. So we've cut our cost structure quite a bit and we continue to look for ways to be more and more efficient. I think breaking it up and using it for other uses is not one of them. But using the facility we have thoughtfully and ramping our business appropriately is what we're focused on.

[Operator]

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Rao Mulpuri for any closing comments.

[Rao Mulpuri, executive]

Thank you all for joining the call today. View continues to make progress on our path to profitability and our third quarter results demonstrate our steadfast focus on cash management and reducing cash burn. We've taken the right actions to lower our structural fixed costs and lower the required revenue breakeven points for the business. Importantly, we continue to make progress on delivering high-quality products at scale, keeping our promises to our customers, and moving the industry forward. We look forward to speaking with you again when we report the full year 2023 results. Thank you.

[Operator]

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.