Merger Overview

Before market open, Ouster and Velodyne announced that the two companies would merge in an all-stock transaction. Under the agreement, each Velodyne share will be exchanged for 0.8204 shares of Ouster. Ouster and Velodyne shareholders will each own 50% of the combined company. The merger is expected to close in 1H23, subject to customary closing conditions, and is expected to see ~$75 million in synergies across engineering, manufacturing, and general administration within 9 months of close. In addition, the combined company will have an IP portfolio of 173 granted and 504 pending patents and a cash position of $355 million.

Our Take

We think the merger makes sense for both parties and think this combination could: 1) create a powerhouse in the non-automotive LiDAR market, with a strong portfolio of technologies and significant revenue synergies, 2) create an opportunity to lower price points for LiDAR systems through manufacturing processes and architectural efficiencies, and 3) create a strong Software platform. We estimate the all-stock transaction will be dilutive to EPS in 2023, however, this is based on our estimate that the combined company will realize 50% of synergies in 2023 ($37.5 million total).

Ouster reports 3Q22 Results

In conjunction with this announcement, Ouster announced 3Q22 revenue of $11.2 million (+8.5% q/q, +44% y/y) and GAAP gross margin of 33.2%. Management is hosting a conference call at 5:00 pm ET today to discuss the 3Q22 results and its business outlook. Our estimates, rating, and price target for Ouster are under review.

Upgrading Velodyne to Hold from Sell

We are upgrading Velodyne to Hold from Sell after Ouster & Velodyne announced earlier this morning that the companies are merging in an all-stock transaction (0.8204 shares of Ouster for each share of Velodyne). Recall our Sell thesis had been predicated on business setbacks for Velodyne that took place over the last few years that allowed competitors to take market share. In addition, we thought it would take the new Velodyne management team time to restore the company to its former glory. We believe Ouster has a strong management team that will help Velodyne get back to what it once was with little to no business setbacks, help generate a strong pipeline for revenue generation, and create a competitive LiDAR portfolio.

VLDR

Velodyne Lidar

Semiconductors & Emerging Technologies

Discontinuing Coverage of Velodyne Lidar

VLDR - Continued Progress on the 4 Pillars; Reiterate Hold

OUST, VLDR - Ouster and Velodyne to Merge in All-Stock Transaction

Initiating Coverage of the LiDAR Industry