```htmlQuality of Earnings Report: Ouster, Inc.

Quality of Earnings Report

Company: Ouster, Inc.

Report Date: June 17, 2025

Prepared for: M&A, Investment, and Due Diligence Stakeholders

Executive Summary

This Quality of Earnings (QoE) report provides an analysis of Ouster, Inc. ("Ouster" or "the Company"), a leading provider of high-resolution digital lidar sensors for industrial automation, robotics, smart infrastructure, and automotive. This report focuses on Ouster's financial performance, business model sustainability, and growth trajectory, particularly in light of recent positive developments, including the Department of Defense (DoD) granting its first 3D LiDAR approval for drones using Ouster's technology, which reportedly caused a significant stock price increase.

Key Findings: Ouster has demonstrated significant revenue growth over the past three years, driven by increasing adoption of its digital lidar technology across various industries. The merger with Velodyne Lidar in early 2023 has substantially increased the company's scale, market share, and product portfolio, though it also introduced complexities in year-over-year financial comparisons and significant one-time integration costs.

Normalized EBITDA, after adjusting for non-recurring items such as merger-related expenses and stock-based compensation, remains negative, reflecting the company's investment in growth and R&D. However, gross margins have shown improvement potential. The recent DoD approval represents a significant catalyst for future growth in the defense and aerospace sectors.

Key Risks: Include ongoing net losses, cash burn rate, intense competition in the lidar market, reliance on key customers/sectors, and the successful integration of Velodyne and realization of synergies. Margin sustainability amid pricing pressures is also a concern.

Further due diligence is recommended on customer concentration, long-term contract viability, and the specific financial impact and scalability of the DoD drone approval.

Company Overview

Ouster, Inc. designs and manufactures high-resolution digital lidar sensors and enabling software. Its products are used in a wide variety of applications, including industrial automation, robotics, smart infrastructure, and automotive (ADAS and autonomous driving). Ouster's digital lidar technology is differentiated by its simplicity, scalability, and reliability.

In February 2023, Ouster completed its merger with Velodyne Lidar, another prominent player in the lidar market. This strategic combination aimed to create a lidar powerhouse with a broader product portfolio, increased operational scale, and enhanced R&D capabilities.

A recent significant development is the Department of Defense (DoD) granting its first approval for 3D LiDAR on drones utilizing Ouster's sensors. This milestone is expected to open new revenue streams and validate Ouster's technology for demanding applications, potentially leading to accelerated adoption in defense and other government sectors.

Financial Performance Analysis

The financial analysis covers the fiscal years 2021, 2022, and 2023. Financials for 2023 reflect the partial-year impact of the Velodyne merger, significantly affecting comparability with prior periods. All figures are illustrative and based on publicly available information understanding for a company of this nature and its recent merger.

Income Statement Highlights (Illustrative)

Note: FY2023 figures are significantly impacted by the Velodyne merger from February 2023 onwards, including increased revenue, costs, and substantial one-time merger/restructuring charges. Gross margin in 2023 was also impacted by purchase accounting adjustments and integration activities.

Normalized EBITDA Calculation (Illustrative)

Normalized EBITDA remained negative, indicating the company is still investing heavily in growth and R&D, and absorbing merger integration costs. The increase in normalized losses in 2023 is primarily due to the inclusion of Velodyne's operational losses and ongoing integration efforts. Achieving positive Normalized EBITDA will be a key milestone.

Margin Analysis

Gross margins showed some fluctuation, impacted by product mix, production volumes, and, in 2023, merger-related inventory accounting. The standalone Ouster gross margin was improving prior to the merger. Post-merger, stabilizing and improving gross margins will be critical. Operating and net margins are deeply negative due to high R&D and SG&A spend relative to current revenues, typical of a growth-stage technology company in a nascent market. The focus is on scaling revenue to leverage the fixed cost base.

Cash Flow Analysis

Ouster has historically exhibited negative cash flow from operations due to its net losses and investments in working capital to support growth. Investing activities have been significant, driven by R&D capital expenditures and, notably, the merger with Velodyne. Financing activities have included equity raises and debt to fund operations and strategic initiatives. Maintaining adequate liquidity is crucial. The DoD approval could potentially lead to more predictable, larger-scale orders improving cash flow visibility in that segment.

Balance Sheet Analysis

As of the latest reported period (post-merger), Ouster's balance sheet would reflect a larger asset base, including acquired intangibles and goodwill from the Velodyne merger. Key areas to monitor include cash position, accounts receivable (days sales outstanding), and inventory levels (days inventory outstanding). Working capital management will be essential, especially as the company scales and integrates operations. The debt level and structure post-merger also require careful observation.

Business Model Assessment

Core Revenue Streams: Ouster generates revenue primarily from the sale of its digital lidar sensors. Additional revenue comes from related software and perceived solutions. The merger with Velodyne broadened the product portfolio, offering a range of sensors for different applications and price points.

Cost Drivers:

• Cost of Goods Sold (COGS): Includes raw materials, manufacturing labor, and overhead. Scaling production is key to reducing per-unit costs.
• Research & Development (R&D): Significant investment in developing next-generation lidar technology, improving performance, and reducing costs.
• Sales, General & Administrative (SG&A): Investments in global sales and marketing efforts, customer support, and corporate overhead. Merger integration also adds to G&A in the short term.

Scalability and Sustainability: The business model is designed for scalability, leveraging a fabless semiconductor manufacturing approach for its digital lidar chips. The recent DoD approval for drone applications enhances scalability into the defense sector. Sustainability depends on achieving widespread adoption of lidar, maintaining technological leadership, driving down costs, and achieving profitability. The merger aimed to accelerate this by combining complementary strengths and customer bases.

Operational Risks and Dependencies:

• Supply chain disruptions for critical components.
• Intense competition from numerous lidar companies, leading to pricing pressure.
• Dependence on the growth of end markets (automotive, robotics, industrial).
• Successful integration of Velodyne's operations, technology, and culture.
• Protection of intellectual property.
• Cyclical nature of some end-markets.

Growth Trajectory Evaluation

Historical Growth: Ouster has shown strong historical revenue growth, albeit from a relatively small base. Growth has been organic, driven by increasing sensor shipments and new customer wins. The 2023 revenue jump is largely attributed to the Velodyne merger, making organic growth assessment for that year complex.

Future Growth Potential:

• DoD Drone Approval: This is a major catalyst. It opens a potentially large and previously untapped market in defense and government applications for drones and other autonomous systems. This can lead to substantial, multi-year contracts.
• Expanding Industrial & Robotics Market: Continued automation across industries drives demand for lidar.
• Smart Infrastructure: Applications in traffic management, security, and public safety are growing.
• Automotive: While the fully autonomous vehicle market timeline is extended, ADAS applications continue to grow, and Ouster (with Velodyne's portfolio) is positioned to serve this.
• Synergies from Velodyne Merger: Cross-selling opportunities, expanded product portfolio, and potential cost efficiencies are expected to drive future growth.

Benchmarking: Compared to other publicly traded lidar companies, Ouster (post-merger) is one of the largest in terms of revenue and product breadth. Key performance indicators to benchmark include revenue growth rate, gross margin improvement, path to profitability (Normalized EBITDA), and customer adoption rates in key verticals.

Key Risks and Considerations

• Path to Profitability: Sustained net losses and negative Normalized EBITDA require a clear path to profitability through revenue scaling and cost management.
• Cash Burn: The company's current cash burn rate needs careful monitoring; further financing may be required if profitability is not achieved in a timely manner.
• Merger Integration Risk: Successfully integrating Velodyne and realizing anticipated synergies is critical and complex. Failure to do so could impede growth and profitability.
• Competitive Landscape: The lidar market is highly competitive with many players, potentially leading to pricing pressures and market share battles.
• Market Adoption Speed: The pace of adoption in key markets like automotive and robotics can be unpredictable.
• Customer Concentration: Dependence on a few large customers in specific sectors could pose a risk if not diversified.
• Technological Obsolescence: Rapid technological advancements in the sensor industry require continuous R&D investment.

Conclusion and Recommendation

Ouster, Inc., especially post-merger with Velodyne, is a significant player in the evolving lidar market with a broad technology portfolio and growing revenue. The recent DoD approval for its 3D LiDAR for drones is a strong positive development that significantly enhances its growth outlook in the defense sector and provides crucial technological validation.

The quality of earnings is impacted by substantial investments in R&D and SG&A, as well as significant one-time costs related to the Velodyne merger, resulting in negative Normalized EBITDA. Gross margin improvement and achieving operational leverage are key focus areas moving forward.

While risks related to competition, cash burn, and merger integration persist, Ouster's technological capabilities, expanding market opportunities (particularly with the new DoD approval), and increased scale position it for potential long-term growth.

Recommendation: Further due diligence should focus on the projected financial impact and scalability of the DoD contracts, detailed customer pipeline and concentration, progress on merger synergies, and the company's updated roadmap to achieve positive cash flow and profitability. The Velodyne merger's full impact on financials and operations needs continued scrutiny in upcoming quarterly reports.

Citations (Illustrative Sources)

• Ouster, Inc. Investor Relations Website (hypothetical link: investor.ouster.com)
• Ouster, Inc. SEC Filings (10-K, 10-Q) (searchable via SEC EDGAR database)
• Press Release: "Ouster Soars as DoD Grants First 3D LiDAR Approval for Drones" (hypothetical news source)
• Industry Analyst Reports on LiDAR Market (e.g., from Yole Développement, IHS Markit - illustrative)
• Velodyne Lidar SEC Filings (for historical pre-merger data)

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