Xos, Inc. (NASDAQ:XOS) Q4 2023 Earnings Call Transcript

Xos, Inc. (NASDAQ:XOS) Q4 2023 Earnings Call Transcript March 21, 2024

Xos, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to Xos Inc. Fourth Quarter and Full Year 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. At this time, I would like to turn the conference over to the General Counsel of Xos, Christen Romero. Thank you. You may begin.

Christen Romero: 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 Acting Chief Financial Officer, Liana Pogosyan. Ahead of this call, Xos issued its fourth quarter 2023 earnings press release, which we will reference during the call. This can be found on the Investor Relations section of our website at investors.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 fourth 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 now turn it over to our CEO, Dakota.

Dakota Semler: Thanks, Christen, and thank you, everyone, for joining us to review Xos’ best year-to-date. On today’s call, I will cover highlights from 2023 during which we generated revenues of $44.5 million, delivered 283 units and achieved positive gross margins in both the third and fourth quarters. Before handing it off to Gio and Liana for operational and financial updates, I will discuss our anticipated acquisition of ElectraMeccanica and the outlook for 2024. Last year, we delivered quarter-over-quarter growth and set new delivery records in each of the third and fourth quarters following the release of the redesigned Stepvan platform. As is common practice in our industry, most of our customers build confidence in Xos vehicles by starting with an initial order of 10 or fewer trucks and putting these vehicles through their paces in the real world.

Customers then return with larger order sizes that make Xos part of their ongoing vehicle replacement schedule. The initial orders all involve important decisions about the vehicles use case, total cost of ownership, charging infrastructure and driver training that differ from the traditional commercial vehicle sales process, making a robust sales program, a strategic focus of Xos. Our strong customer pipeline built on the past 6 years of direct sales propelled us to success with significant delivery volumes to establish customers like Loomis and UniFirst as well as new customers, including UPS and Canada Post. Direct sales comprised over 90% of our 2023 sales and remain a critical tool in growing our market share. Following the sale, we rely heavily on our dealer partners to service and support Xos vehicles delivering a high-quality customer experience that directly translates into larger follow-on orders.

In 2023, we saw order sizes grow with many of our customers including Loomis’ purchase of 150 vehicles announced in the first quarter, and we expect that our established relationships with globally recognized fleets will continue to differentiate Xos. Our new Stepvan platform also contributed directly to our improved financial results, showcasing that Xos’ commercial EVs can deliver attractive gross margins without the massive scale and capital requirements cited by many. The new Xos Stepvan exhibit unit gross margins in the range of 6% to 23% in line or exceeding the gross margins of many legacy OEMs. We expect these results will continue to improve the concerted efforts of our engineering and supply chain teams which Gio will describe momentarily.

The new Stepvan was also a step forward for our customers, combining longer range with improved payloads and reliability. Over the second half of the year, we delivered over 170 units of the new Stepvan, the customers alongside a small population of prior generation inventory. It is a vehicle platform that we plan to leverage for many years, both in the Stepvan market and our powertrain and hub products. Operationally, we pursued a series of difficult and aggressive cost-cutting efforts in 2023 that instilled financial discipline and rigor across the company. By the fourth quarter, we reduced operating expenses by 43% from their peak in the fourth quarter of 2021. Those changes, together with improvements to our gross margins, propell Xos towards our next company goal, positive free cash flow.

Our steady march towards positive free cash flow is bolstered by our expected acquisition of ElectraMeccanica. In 2023, we explored multiple options to address excess need for growth in working capital. We found a unique opportunity with ElectraMeccanica following the discontinuation of their Solo EV, ElectraMeccanica conducted an extensive review of all options to deploy their capital and determine Xos offered the best long-term opportunity. Our anticipated acquisition of ElectraMeccanica further underscores Xos’ unique position as a leader in fleet electrification. Yesterday, the transaction was approved by shareholders of both Xos and ElectraMeccanica and we currently anticipate to close this upcoming Monday, March 25. The deal is expected to provide Xos with over $45 million in additional capital that will provide a secure financial base for many quarters.

For reference, Xos quarterly cash consumption range between $2.2 million and $8.5 million in the second half of 2023, excluding our now completed repayments to Yorkville. The positive impact of the acquisition is hard to overstate. And I thank all of the ElectraMeccanica shareholders for their support in ensuring that Xos remains a leader in commercial EVs for years to come. Following the anticipated close of the transaction next week and the resultant influx of capital to Xos, Xos will continue to make judicious capital allocations in those areas where we anticipate short and midterm gains in our bottom line. We will remain open to outside funding opportunities where it unlocks significant value for both customers and shareholders. However, we do not foresee a need for additional capital to deliver growing volumes of our core products.

Turning now to our commercial prospects for 2024. I firmly believe that Xos has selected the ideal entry point to the commercial EV market with our Stepvan and further believe the Xos will parlay Stepvan’s success into other sectors as customer demand and infrastructure readiness grows. For now, we remain wholly committed to the Stepvan market and our related powertrain products. That continued focus is reflected in our CapEx and R&D budgets, which remain unchanged following the acquisition. We believe concentrated attention on increased Stepvan deliveries is the key to reaching our financial goals. In 2024, our delivery volumes will be bolstered by three major factors: First, we anticipate our established customers will continue to increase their order sizes and make Xos a part of their routine vehicle procurement cycles.

We continue to believe that deliveries will be weighted to the second half of the year as customers race to install charging infrastructure supported by our sales team, who’ve gotten a strong start to the year. Relative to 2023, we expect to see substantially stronger first and second quarters. Second, regulatory pressure, combined with customer incentives available in at least 10 states will continue to motivate new and existing customers to adopt EVs. Lastly, the revised Stepvan platform is translating into stronger powertrain sales. We have powertrain deliveries planned for Winnebago and a nationally recognized school bus manufacturer in 2024. In addition to bolstered vehicle sales, we have high expectations for the updated Xos Hub. The hub serves as both a sales enablement tool for Stepvan and as a high-margin product in its own right.

We are seeing surging interest and purchase orders from a range of customers, including Xos Energy and Duke Energy, who signed sales orders and are beginning to take delivery. Our hub leverages existing power infrastructure at customer sites to provide stopgap EV charging, remote and rescue charging and low-cost DC charging infrastructure. Each unit can charge up to 4 vehicles at one time from a single power connection, which many locations already have on site. The hub can also be mounted to a trailer to provide mobile power storage and charging capabilities. By allowing users to forego expensive and time-consuming electrical upgrades, our fleet customers can put newly purchased Stepvans into service before permanent charging infrastructure is complete.

In many cases, fleets can entirely avoid the uncertain infrastructure installation timelines that have impacted excess vehicle delivery schedules. And additional support for hub sales are the recent incentives from the California Air Resources Board core incentive project, which provide up to $160,000 per unit for certain hub purchases. In all, while the hub won’t eliminate charging-related delays for our customers, we believe it will meaningfully improve the predictability of our Stepvan deliveries. I’ll now hand it over to our COO, Gio, for an operational update.

Giordano Sordoni: Thanks, Dakota. 2023 was a banner year for the Xos engineering, supply chain and manufacturing teams. We launched a new higher-performance Stepvan platform, delivered positive gross margins and sustained higher vehicle build rates than ever before. Our updated Stepvan platform delivers higher payload and range performance to our customers, while simultaneously enabling us to achieve our gross margin targets. The long-range variants of our platform is a particular highlight and comprised approximately 53% of 2023 deliveries. The platform redesign was coupled with significant revamp of our factory operations. By bringing our manufacturing team in-house, integrating our ERP system into our product development and manufacturing systems and fabricating more components on site, we were able to scale up factory output to match customer demand without significant capital investments.

In both the third and fourth quarters, we were able to demonstrate for periods of time, build rates in excess of 700 chassis per year. Xos sustained build rates underscore the Tennessee factory’s future production capabilities and reflects the agility with which our team can quickly pivot and satisfy production demands without risking unhealthy inventory build-up. The team accomplished all of this while significantly reducing operating expenses over the year, which is a testament to our ability to deliver results in the capital constrained environment. Beyond Stepvan, our team fully revamped the hub. By leveraging our existing battery and charger technology, the hub now offers sub 10,000-pound curb weight, 280-kilowatt hour capacity and 4 charge heads with up to 150-kilowatt charge speed, all at a 40% lower price than our prior version.

Thanks to our engineers’ efforts and the highly overlapping supply chains, we have the manufacturing capacity to build up to 100 hubs per year at our Byrdstown, Tennessee factory in addition to our projected Stepvan volumes. Turning to 2024. Our supply chain and engineering teams will continue to focus on cost reductions and improved vehicle performance. Our growing scale and reputation as a leader in the industry is starting to pay dividends and supplier relationships. As a result, we have more opportunities to enter into long-term supply agreements with better terms that have eluded new OEMs. Our engineers are working closely alongside our supply chain team to further improve performance and margin of our vehicles. In 2024, we expect to expand our addressable market by introducing new Stepvan variants and powertrain systems where customer demand is sufficient to justify the R&D resources.

The Xos Hub empowered by Xos will continue to expand and support revenue growth. But for 2024, our top priority will remain scaled Stepvan production and deliveries. With that, I’ll pass it to Liana.

Liana Pogosyan: Thank you, Gio, and good afternoon, everyone. 2023 presented a year full of challenges that Xos was able to navigate, all while making significant progress financially. Launching our gross margin positive Stepvan, growing unit deliveries and securing meaningful capital via our expected acquisition of ElectraMeccanica have prepared Xos to deliver strong results in the coming years. Compared with 2022, we grew revenue by 22%, improved our annual gross margins to near breakeven at negative 2.9% from negative 83% and reduced our quarterly operating expenses by 27%. These accomplishments required immense dedication from our entire team and provide me confidence that we will continue to deliver on our aggressive targets in 2024 and beyond.

With that in mind, I’ll now review our financial performance for the fourth quarter of 2023. Our revenue for the fourth quarter increased to $18.4 million compared to $16.7 million in the third quarter. Our cost of goods sold during the quarter increased to $17 million compared to $14.7 million in the prior quarter. GAAP gross margin during the quarter was a profit of $1.3 million compared to a profit of $2 million in the prior quarter. The change in revenues was primarily due to the increase in quarter-over-quarter unit deliveries as well as an increase in current quarter deliveries of energy products, including the Xos Hub. Cost of goods sold increased in line with revenue during the quarter. Gross margin was impacted in the current quarter by changes in our inventory reserves, updates to the absorption of overhead costs related to sold units and the results of our physical inventory count.

This activity resulted in slightly lower margins compared to the prior quarter, but highlights our focus on continuous improvement of our inventory management processes. As noted last quarter, GAAP gross margin for our vehicle OEM is impacted by a range of reserves that combined with changes in the sales mix between dealer, direct and prior model inventory sales introduced higher levels of volatility in quarterly results. For this reason, we continue to share a consistent non-GAAP gross margin that you can find in today’s earnings release. Our fourth quarter operating expenses decreased to $13.2 million from $14.6 million in the prior quarter, primarily driven by the October 2023 reduction in workforce and overall lower expenses across all categories, partially offset by ElectraMeccanica transactional-related expenses.

Full year non-GAAP operating loss was $58.1 million and for the fourth quarter, $10.9 million. Operating expenses are expected to increase moderately following the acquisition as we wind down the remaining ElectraMeccanica operations through the second quarter. We ended the year with cash and cash equivalents of $11.6 million compared with $22.6 million at the end of the third quarter. In addition to cash used in operating activities, we used $10.9 million during the fourth quarter in financing activities. This was primarily related to our convertible debentures with Yorkville, which have now been repaid in full. As mentioned last quarter, these payments concluded in the fourth quarter and will not impact future results. Inventory contracted to $37.8 million from $48.9 million in the third quarter as we continue to draw down the pandemic inventory and prior generation Stepvan.

Raw materials balance decreased as a result of the Expedia’s production of [indiscernible] units during the quarter, offset by fewer receipts given our focus on strategic purchasing and inventory management. Finished goods inventory decreased due to the sale of our prior generation Stepvan as well as the sale of energy products. We expect inventory balances to stabilize moving forward with sudden and deliberate purchasing. Operating cash flow less CapEx or free cash flow improved to negative $0.9 million for the fourth quarter from negative $8.4 million last quarter. This reflects both Xos’ improved cost structure from reductions made in 2023 and as well as increased deliveries of gross margin positive units. Wrapping up with outlook for 2024, we expect to generate $66.7 million to $100.4 million in revenue, achieve a non-GAAP operating loss of $48.7 million to $43.7 million and deliver 400 to 600 units.

As a result of redesigned Stepvan and updated Xos Hub, we expect Xos to deliver positive gross margin in each quarter of 2024. This growth will be supported by improved liquidity in the form of over $45 million in cash and cash equivalents that we expect to receive from the acquisition of the ElectraMeccanica in the coming weeks. This capital will be used to fund Xos’ ongoing operation and working capital needs to support our growing Stepvan deliveries. Our expected acquisition of ElectraMeccanica includes the assumption of term liabilities, mainly in the form of two real estate leases that we expect to sublease. We do not anticipate the acquisition to meaningfully change the trajectory of Xos’ operating expenses or delay our achievement of positive cash flows.

I’ll now turn the call back over to Dakota.

Dakota Semler: Thanks, Liana. To wrap up, 2023 was a critical year for Xos that set the stage for an exciting 2024. Our customers clearly demonstrated their growing demand for electrification, leading to our back-to-back record quarters in the second half of 2023. Our vehicles are now in use by the majority of North America’s large Stepvan fleets and remain the sole source option for zero-emission Class 5 and 6 Stepvan delivered at scale. We also demonstrated that commercial EVs can be built profitably with the release of our gross margin positive Stepvan, making Xos a leader in positive EV economics. Now with the upcoming acquisition of ElectraMeccanica, we have secured the funding needed to build a sustainable cash flow positive business.

These milestones remain rare accomplishments in the commercial EV industry. Xos continues to be an outlier in the industry and a critical part of the electrification of commercial vehicles. With that, let’s open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Donovan Schafer with Northland Capital Markets. Please go ahead.

Donovan Schafer: Hey guys, congratulations on getting the votes for the fellow acquisition. That’s great to hear. So for my first question, I want to ask about gross margins. So they came down a little bit this quarter. And based on what Liana said, I realize there are some — there’s some inherent lumpiness, it seems it has to do with the way reserves are treated in different channels, whether it’s direct sales or through a dealer, but it sounds like on a non-GAAP — with the non-GAAP gross profit you report, it adjusts for a lot of that. So I’m curious if we can kind of just isolate if there was something — my impression is that kind of on an apples-to-apples basis, gross margins may have come down a little bit Q3 to Q4. Correct me if I’m wrong on that. And if so, just what — if you can talk through what kind of was the impact there in the fourth quarter?

Dakota Semler: Can you hear us now, Donovan?

Donovan Schafer: Yes.

Dakota Semler: Great. So there’s really a couple of things that drive that. When you look at the GAAP figures, it’s obviously the reserves that Liana touched on to drive a little bit of that change. But when we adjust for non-GAAP considerations, the single largest factor is going to be model mix. And some of the shorter-range battery vehicles or slightly different configured vehicles are going to represent or demonstrate different margin profiles and so as we make different deliveries to various customers that have longer range or liftgates or other components that might be added on to the vehicle, that’s ultimately going to drive our margin performance quarter-to-quarter that changes. But as we get through some of the older inventory, which should end in Q2 and as we make more deliveries of our 2023 and 2024 Stepvan, the margin profile across all of those vehicles will continue to increase.

And as we’ve said in the previous calls, we believe margin profile of all of our products should be north of 20%. So it should continue to improve in quarters to come.

Donovan Schafer: Okay. Great. And then turning to 2024…

Liana Pogosyan: Just to add one more point on the margins. I think for this quarter is — in our script, we mentioned that there was absorption of overhead related costs. And part of the evaluation of the methodology, we recorded a change in estimate this quarter that was onetime in nature that we don’t expect to reoccur. And that was primarily driven the lower margins this quarter as well.

Donovan Schafer: Okay, okay. And then turning to 2024, there’s a very crude kind of approach to things. But if I take the midpoint of the revenue guidance, and I take the midpoint of the non-GAAP operating loss guidance. And if I just sort of hold OpEx and other expenses constant and I just sort of make that the same in 2024 as it was in 2023, which I know is very crude, but the implication there is something like — is a gross margin for 2024 somewhere in the ballpark of 11%. I’m just curious if you can give any color around like is that — is that like — is that going to grossly mislead us to think in that framework? Are there going to be different sort of puts and takes or things that would cause a deviation from that? And then also if it will start lower and scale through the year, how you would expect that kind of gross margin to behave over the year?

Dakota Semler: Yes. So it’s a great question. And while we don’t guide to gross margins and free cash flow or, I guess, operating cash flow at a granular level, we can provide some context that I think informs your assumption, which if you look at 2023 OpEx, we talked about making significant improvements since our full year OpEx reductions were close to 25% by the end of Q4 and so if you look at the annualized OpEx number, it’s probably not the stabilized OpEx number that we saw in Q4. That will drive a little bit of improvement and then as we represented that model mix will continue to improve, and we anticipate selling a substantial portion of those higher-margin kind of vehicle configurations within the year that will ultimately lead to that improved gross margin performance in the year ahead.

Obviously, a lot of it comes down to what gets delivered quarter-to-quarter. So there is still a little bit of variability. But I think, generally speaking, OpEx performance should be better, excluding some of the impacts of the inclusion of the EMV financials for Q1. And the profitability of all the vehicles we’ll deliver in this year will continue to improve as well.

Donovan Schafer: Okay. And if I can squeeze one more in, just if we can get an update on the state of — the current state of things for your customers getting the EV charging infrastructure in place? Kind of what visibility you have, what kind of conversations or engagement you’re doing with customers to make sure that they will be able to take delivery sort of a scheduled where — compared to, I know, in the past, a year ago or so, so that was limiting the ability of customers to take delivery. So if we can just get kind of an update there, that would be great.

Dakota Semler: Yes. Absolutely. We’re happy to provide a general update. Infrastructure continues to be the biggest issue that we and other OEMs experience in terms of delivering vehicles, growing deliveries period-over-period. But we’re taking that into our own hands and really working with customers to improve the rate with which we deliver infrastructure. We also recently announced the launch of our second-generation hub subsequent to Q4 close in the beginning of Q1. And this second-generation hub was released to much fanfare, we’ve been building a significant order backlog of those units, which will help enable delivery of more of our own trucks as well as other EVs for customers that don’t currently acquire Xos trucks. So we believe that’s solving a significant portion of the problem that we’re dealing with today.