Xos, Inc. (NASDAQ:XOS) Q1 2023 Earnings Call Transcript

Xos, Inc. (NASDAQ:XOS) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Greetings, and welcome to Xos Inc.’s First Quarter 2023 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I would like to turn the conference over to General Counsel of Xos, Christen Romero. Thank you. You may please go ahead.

Christen Romero: Thank you, operator, and thank you, everyone, for joining us today. Hosting the call with me today are Chief Executive Officer, Dakota Semler; Chief Operating Officer, Giordano Sordoni; and Chief Financial Officer, Kingsley Afemikhe. Ahead of this call, Xos issued its first quarter 2023 earnings press release, which we will reference during this call. This can be found on the Investor Relations section of our website at investor.xostrucks.com. On this call, management will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect because of factors discussed in today’s earnings news release, during this conference call or in our latest reports and filings with the Securities and Exchange Commission.

These documents can be found on our website at investors.xostrucks.com. We do not undertake any duty to update any forward-looking statements. Today’s presentation also includes references to non-GAAP financial measures and performance metrics. Please refer to the information contained in the company’s first quarter 2023 earnings press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. Participants should be cautioned not to put undue reliance on forward-looking statements. With that, I’ll turn it over to Dakota.

Dakota Semler: Thanks, Christen, and thank you, everyone, for joining us today for our first quarter 2023 earnings call. On today’s call, I will cover the quarterly business highlights and provide an update on our charging infrastructure deployments. Then our COO, Giordano Sordoni, will provide an update on our path to begin delivering gross margin positive units at the end of the second quarter. To wrap up, our CFO, Kingsley Afemikhe, will share the company’s first quarter financial performance. To begin, our focus remains on the three core tenets we outlined on our fourth quarter call. These tenets are growing demand and deliveries of our products, achieving positive gross margins at the unit level by midyear, and maintaining ample liquidity and access to capital.

Regarding the first tenet, we continue to experience strong demand for our vehicles evidenced by additional orders and customer engagement. During the first quarter, we delivered a total of 31 units to customers such as Alsco and multiple FedEx Ground ISPs. Deliveries were impacted by customer infrastructure installation delays that resulted in request to postpone some scheduled deliveries. While infrastructure-related disruptions will likely remain a factor as utilities and permitting municipalities catch up with customer demand, we are taking actions to mitigate the impact on our deliveries. These include reprioritizing customers based on their infrastructure readiness, stricter enforcement of delivery terms, quoting excess charging services alongside every Stepvan and launching new solutions like the Xos Hub to fill the gap between vehicle delivery and permanent charger installation.

Though our first quarter deliveries fell short of expectations, we continue to maintain our forward-looking guidance for the year, as Kingsley will cover. In addition to being a critical enabler for Stepvan deliveries, charging infrastructure is also an important revenue driver for Xos. We continue to see growing demand for Xos Energy Solutions or XES, our suite of comprehensive charging infrastructure and services. We are seeing more customers realize the importance of investing in charging infrastructure alongside vehicle purchases. As we noted last quarter, our Energy Solutions team has multiple installation projects in the works, and we just delivered new chargers to customers such as Loomis, UniFirst and multiple FedEx ground ISPs. In addition to our permanent charging infrastructure projects, we formally revealed our second-generation Xos Hub ahead of the Advanced Clean Transportation or ACT Expo last week.

Customer interest in the hub was high at ACT Expo. Our team held dozens of meetings with current and potential customers that solidified our belief that flexible methods of charging like the hub will play a key role in accelerating fleet electrification. The hub is capable of charging five vehicles at the same time from a single power connection, enabling fleet operators to transition to EVs ahead of installing permanent infrastructure. We expect the hub to begin scaling production in the third quarter of this year. Relatedly, as you may recall from the fourth quarter call, our first Xos Hub prototype was delivered to one of our Fortune 100 customers where it has been actively charging vehicles for a parcel delivery fleet and collecting real-world usage and reliability data.

Turning to our second tenet, getting to positive gross margins at the unit level by midyear. We made good progress, evidenced by significant gross margin improvement in the first quarter. Our gross margins improved to negative 19% in the first quarter 2023 from negative 93% in the fourth quarter of 2022. This improvement was driven by better inventory management and continued growth in average selling prices that Kingsley will cover later in the call. In addition, we are excited by the launch of the 2023 Stepvan as the next step in continuing that encouraging trend and progressing towards achieving consistent positive gross margins on a unit level. The new design is expected to reduce the direct material and labor costs by more than $15,000 per Stepvan with further savings anticipated and on our product road map for 2023 and 2024, which Gio will provide more detail on.

As we transition away from the previous generation Stepvans and begin to deliver our 2023 model Stepvan in the second quarter, those cost reductions are expected to become evident in our financials. Finally, before I wrap up, I would like to turn our attention to a management transition. Our CFO, Kingsley Afemikhe, came to us and noted some professional and personal opportunities he’d like to pursue and will be leaving the team later this month. Kingsley has helped us build a deep finance organization over the last few years and onboarded several strong leaders for each of his critical finance functions. Kingsley has been a great partner for our management team, and we would like to thank him for his service over these past three years. He will remain in his role to help ensure a smooth transition over the next few weeks, and we expect the Board to appoint our Corporate Controller, Liana Pogosyan, as acting CFO while we complete our evaluation of internal and external candidates.

Liana has made major contributions to the strengthening of the finance function during her time at Xos, and had a successful career prior to joining Xos in various finance and audit functions over the last 18 years. She has built a robust accounting team and will lead our finance organization as it grows and evolves to meet the needs of the organization. With that, I would now like to turn the call over to our COO, Gio Sordoni, who will share an operational update.

Giordano Sordoni: Thanks, Dakota. Xos’ operational focus remains on beginning to deliver gross margin positive units during the second quarter. In order to achieve this goal, the team is taking steps to reduce costs and better leverage our manufacturing capacity. To that end, we’ve streamlined our manufacturing operations and focused production at our Tennessee facility. The Tennessee facility provides us with manufacturing capacity to meet our customers’ expected needs for the foreseeable future, allowing us to focus on efficiency improvements. These efforts include improvements to the warehouse management systems and investing in our quality and supply chain teams with on-site senior leadership. Paul Sivaswamy, VP of Supply Chain; and Eric Purcell, VP of Quality are on the ground in Tennessee and put into work their immense experience built over many years at Caterpillar and Tesla, respectively.

We are pleased with the early results from these actions, which include reduced freight charges and more accurate inventory counts. In addition to manufacturing process improvements, design changes included in the 2023 Stepvans are expected to further reduce the cost of manufacturing. Compared with the previous generation Stepvans, we’ve made changes, designed to reduce costs and improve performance for fleet operators. These include centralized power electronics that shorten high-voltage cable runs, saving on copper costs as well as switching to lithium iron phosphate or LFP battery chemistry, which reduces our need for expensive nickel and cobalt. These are just a couple of examples of the extensive updates made to the 2023 Stepvan. Looking forward, we’ve identified additional improvements that will integrate into the Stepvan in over 2023 and 2024 as we look to move beyond gross margin goals and towards generating positive cash flow.

In summary, we believe we are well positioned to scale our business and expand margins. We’re very proud of what the engineering, supply chain and manufacturing teams have been able to accomplish during the quarter and their dedication to reducing costs without sacrificing what makes our vehicles leaders in this sector. We’re all motivated by the immense opportunity for clean fleet and logistics solutions, and we expect to benefit from a secular shift to a net zero carbon economy. I’ll now turn the call over to our CFO, Kingsley Afemikhe, who will cover our financial results for the quarter.

Kingsley Afemikhe: Thank you, Gio, and good afternoon, everyone. As previously noted, we continue to remain on track to deliver gross margin positive units by mid-2023, while also ensuring we meet the strong demand for our products and solutions. I’ll now turn and review our financial performance for the first quarter of the year. For the first quarter, our revenue was $4.7 million compared to $7 million in the first quarter of 2022. This decrease in revenue was driven by the sequential decline in deliveries that Dakota covered earlier in the call. While revenues came in lower than desired, we were pleased to see a continued quarter-over-quarter growth in average selling prices. Relative to the fourth quarter of 2022, our first quarter average selling prices were up by 4%.

Our cost of goods sold during the quarter decreased to $5.6 million compared to $13 million for the first quarter of 2022. Gross margin during the quarter was a loss of $0.9 million compared to a net loss of $6 million in Q1 2022. This represents significant improvement from negative 85% to negative 19%. In addition to pricing, this improvement came primarily from the investments in our inventory management processes, as Gio mentioned earlier, that improved count accuracy and drastically reduced write-downs. These improvements give the team confidence in our ability to deliver gross margin positive units by the end of the second quarter. Turning now to expenses. Our first quarter operating expenses decreased to $19.2 million from $20.3 million in the first quarter of 2022, and this is driven by lower research and development expenses of $5.7 million during the quarter compared to $6.9 million in the first quarter of 2022 and the decrease in sales and marketing expenses, which were $1.8 million compared to $2 million in the first quarter of 2022.

These lower expenses were partially offset by an increase in general and administrative expenses to $11.6 million versus $11.3 million in the first quarter of 2022. Non-GAAP operating loss for the quarter was $18.9 million. Looking forward, as we prepare to move beyond gross margin targets and aim to position Xos as a positive cash flow business, we have put in place a plan to drive efficiency in all our operating expenses, and we’ll share more details on these efforts next quarter. We closed the quarter with cash, cash equivalents and marketable debt securities available for sale of $64 million. In addition to cash used in operating activities, we used $9.7 million in financing activities, primarily related to payments on our convertible debentures with Yorkville Advisors.

On a quarter-over-quarter basis, inventories declined from $57.5 million at the end of the fourth quarter of 2022 to $57 million in the first quarter. We expect inventory to remain roughly at the same level also over the second quarter despite growing sales. Operating cash flow less CapEx or free cash flow, cash used improved to $15.6 million for the quarter from $24.6 million last quarter. We believe that as we grow delivery volumes, build working capital and progress towards positive gross margins, we’ll have options to raise additional capital, and we’ll continue to maintain ample liquidity. To wrap up, we reiterate our 2023 outlook and continue to expect to deliver 450 to 600 units, generate between $58.5 million to $84 million in revenue and a non-GAAP operating loss of between 52.8 and $80 million .

As mentioned last quarter, we expect deliveries to be weighted towards the second half of 2023. In closing, as this will be my last quarterly call as CFO of Xos, I would like to say it has been the privilege of my career to work with such a committed and talented team at Xos. I’m proud to have assembled and developed a team of capable leaders within our finance organization. As I depart, I wish the entire Xos team, all our customers and our investors, nothing but very best in the continued journey. I’ll now turn the call back to Dakota.

Dakota Semler: Thanks, Kingsley. Though the commercial EV sector remains impacted by the rollout of charging infrastructure, we remain confident that Xos is on track for long-term success. We are actively taking steps to sustain our growth, unblock the charging difficulties of our customers and deliver gross margin positive units. Our superior products, strong customer relationships and the supportive regulatory tailwinds position us well to achieve our goal of electrifying commercial fleets. Finally, I want to thank our extremely talented and committed team here at Xos for their ongoing efforts in pursuit of our vision for the company as well as our valued customers and stakeholders for their continued support. With that, we’d now like to open the line for questions.

Q&A Session

Operator: [Operator Instructions] The first question comes from Mike Shlisky with D.A. Davidson. Please go ahead. I’m sorry. The first question comes from Donovan Schafer with Northland Capital Markets. Please go ahead.

Operator: The next question is from Mike Shlisky with D.A. Davidson. Please go ahead.

Operator: [Operator Instructions] The next question comes from Sherif El-Sabbahy with Bank of America. Please go ahead.

Operator: At this time, there are no other questions in the queue. Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines. Have a wonderful day.