As We Expected, Lofty Symbotic Revenue and Profit Expectations Should Come Down Following Poor FQ4 Guidance; Shares Down 20% - HOLD
Symbotic SYM 0.00%↑ reported mixed FQ2 results with revenues coming in above the Company’s previous guidance and consensus expectations, but higher than expected implementation costs drove lower gross margins and in-turn adjusted EBITDA to come in below Management and Street estimates. Furthermore, Management acknowledged that the Company is focused on improving their deployment process, which will temporarily slow growth. As a result, Symbiotic provided FQ4 revenue guidance, which was 10% below consensus estimates at the midpoint. In addition, driven largely by the FQ4 revenue shortfall, adjusted EBITDA guidance also fell below Street expectations.
As we have been highlighting since our original initiation report, Symbotic is still scaling up deployments, and we believe revenues and profitability may be lumpy given the size of these deployments. Management’s FQ4 revenue guidance has now validated this assumption, and we expect what we believed to be aggressive analyst expectations to come down post FQ3 results. Driven by the lower than expected guidance, shares traded down ~20% in after market trading. Given Symbotic was trading at ~50x EV/EBITDA based on 2025 estimates we believe the bar was set very high and this miss likely causes shares to trade down further in the near term. That said, we continue to view Symbotic as a clear leader in the warehouse automation space that has a massive $20B+ backlog driven by Walmart. Management was confident that this was a near term speed bump and revenue growth will accelerate in FY25, coupled with a gross margin recovery. Driven largely by valuation we remain on the sidelines, but could view a further pullback as a compelling buying opportunity given Symbotic’s massive opportunity.
View detailed historical results in our full financial model here.
Source: Company Filings, FactSet; Data In Millions
Key 3FQ24 Earnings Takeaways
Symbotic reported 3FQ24 (Jun-24 quarter end) revenues growing 57.7% Y/Y to $491.9M, which came in above Management's previous guidance ($450 - 470M) and above consensus expectations ($464.3M). The Company started 5 new deployments and finished 3 deployments in the quarter, bringing the total number of deployments to 39 and fully operational systems to 21. System sales were $472.1M, software revenues were $3.5M and operational services sales were $16.2M in the quarter. The company did not provide an updated backlog number, but we estimate it remains ~$23B.
Gross margins in the quarter were 13.7%, but adjusting for stock based comp, depreciation and a one-time restructuring charge, non-GAAP gross margins were 15.6%. This was lower from 18.3% during the same period a year ago. Lower gross margin was one of the biggest disappointments in the quarter, and was driven by higher implementation costs. Specifically, delayed permits caused a pushout in deployment timing, and the Company was required to absorb higher labor costs. Driven by lower gross margins, Symbotic generated adjusted EBITDA of $22.5M, which was lower than Management's previous guidance ($27 - 29M) and consensus expectations ($28.1M). Symbotic generated $50.4M in cash from operations and $33.2M in free cash flow in the quarter.
Looking ahead, Symbotic expects 4FQ24 revenues in the range of $455 - 475M, which implies 18.7% Y/Y growth at the midpoint but came in well below analyst estimates ($516.9M). The meaningful slowdown is related to the Company wanting to improve their deployment process, which they acknowledged could impact near term growth. Furthermore, adjusted EBITDA guidance of $28 - 32M also missed consensus expectations ($38.9M). That said, Management was adamant that FQ4 will be the trough in growth, and expect revenue growth to reaccelerate in FY25.
5-Year Financial Outlook
Given Symbotic’s ~$23B backlog, we believe the company has incredible visibility for the next several years, and it is now in the hands of Symbotic’s ability to ramp up deployments. However, given the revenue slowdown in FQ4, we have lowered our FQ4 estimates, but continue to anticipate the Company can sustain 25%+ growth through 2028. However, heading into earnings, analysts were extremely bullish on Symbiotic future growth continuing with consensus estimates calling for revenes to grow 40%+ annually over the next 3 years. Our lower growth rate was due to our anticipation deployments this size may take a little bit longer to ramp, but their long term opportunity remains lucrative. We would not be surprised to see analyst forecasts trend closer to our estimates post FQ3 results.
Excluding the last couple of quarters, Symbotic has seen solid gross margin expansion as revenues ramped. However, given the near term turbulence we have decided to take a conservative approach and bring down our long term 30% gross margin estimates until we have further evidence they can expand beyond 20%. That said, we expect gross margins to continue to expand on an annual basis, and can approach 25% by FY28. We believe the Company can sustain adjusted EBITDA profitability going forward, and expect the Company to report adjusted EBITDA of $132M in FY25 and $256M in FY26 which is well below consensus estimates coming into earnings. Long term, we think Symbotic can exceed 15%+ adjusted EBITDA margins at scale, which is slightly lower due to our lower gross margin assumption. We also expect the company to continue to generate strong free cash flow to help fund the business and future R&D efforts.
Below is an overview of our 5 year outlook with a full downloadable financial model here.
Source: Industrial Tech Analyst, Data In Millions
Investment Thesis
We view Symbotic has a clear leader in the warehouse automation space, as their end-to-end solution has seen strong adoption across several distribution centers in the US. We are very upbeat on the company’s opportunity with Walmart, and their plan to automate 42 Walmart distribution centers in the US, which accounts for ~$10B of the company’s massive ~$23B backlog. Furthermore, we believe the company’s Greenbox venture to offer Warehouse-as-a-Service, as well as expansion into the fulfillment automation market with Break Pack positions the company for long-term success. So why are we not buyers today? Although excited about the Company’s future prospects, Symbotic heading into earning was trading at ~50x EV/EBITDA based on 2025 estimates, which is a significant premium to their industrial tech peers of ~25x. While the Company’s robust backlog can support a premium valuation, Symbotic is just becoming profitable. As the company scales up, we believe revenues and profitability may be lumpy, and as we will see post FQ3 results a slight miss likely causes shares to trade down significantly. That said, we remain on the sidelines largely due to valuation, but could view a further pullback as a compelling buying opportunity.
As shown below, we use a 5 year DCF model to value Symbotic shares. Based on our current forecast we value Symbotic at $25.22, which is lower than our prior estimate of $31.59 as a result of lower revenue and profitability expectations.
Source: Industrial Tech Analyst, Data In Millions Except Price Target
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