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Palladyne AI Corp. (STRC)·Q3 2023 Earnings Summary

Executive Summary

  • Q3 revenue was $1.83M, down 60.8% year over year (vs. $4.67M), but up 43.1% sequentially (vs. $1.28M), while gross margin improved to 33% from 23% YoY and 26% in Q2 .
  • GAAP net loss widened to $29.0M (–$1.13 per share) vs. –$22.5M (–$0.89) YoY; non-GAAP net loss was $17.1M (–$0.66), reflecting significant restructuring and asset write-down charges .
  • Management pivoted the business to focus on AI/ML software, suspended hardware commercialization, and announced a ~70% workforce reduction (~150 employees), citing better risk-adjusted near-term revenue and cash preservation, supported by a $13.8M U.S. Air Force contract .
  • Guidance removed for Q4 revenue; year-end cash expected at ~$39M, with 2024 net cash usage targeted at ~$1.6M/month; additional restructuring expenses of $22–$24M expected in Q4’23–Q1’24 .
  • Potential stock reaction catalysts: major strategic pivot to AI software, deep cost actions, and reduced forward cash burn; however, consensus estimate comparisons from S&P Global were unavailable for STRC, limiting beat/miss analysis (S&P Global data unavailable).

What Went Well and What Went Wrong

What Went Well

  • Gross margin expanded to 33% (vs. 23% YoY and 26% in Q2), driven by lower cost of revenue and mix; cost of revenue fell to $1.2M vs. $3.6M YoY .
  • Secured a $13.8M, four-year U.S. Air Force contract to advance AI/ML software, validating the pivot toward software-led revenue opportunities .
  • CEO on strategic shift: “We made the decisions to suspend our hardware commercialization efforts, implement a significant reduction in force and focus our resources on our AI/ML platform… de-coupling our advanced AI/ML software from our own robotic systems… reach a much broader market more quickly” .

What Went Wrong

  • Revenue declined 60.8% YoY to $1.83M (fewer product development contracts), and GAAP net loss widened to $29.0M amid restructuring charges .
  • Significant asset write-down and restructuring expenses in Q3 ($11.22M, including $5.2M inventory write-down and $0.5M asset impairment), and further expected $22–$24M in Q4’23–Q1’24 .
  • Hardware programs (subsea, aviation, solar) suspended “for the foreseeable future,” signaling a reset of commercialization timelines and revenue ramp expectations .

Financial Results

Headline Metrics vs. Prior Periods and Year

MetricQ3 2022Q2 2023Q3 2023
Revenue ($USD Millions)$4.67 $1.28 $1.83
Gross Margin (%)23% 26% 33%
Operating Loss ($USD Millions)$(27.25) $(29.96) $(30.75)
Net Loss ($USD Millions)$(22.50) $(28.66) $(28.98)
GAAP EPS ($USD)$(0.89) $(1.12) $(1.13)
Non-GAAP Net Loss ($USD Millions)$(18.57) $(21.92) $(17.05)
Non-GAAP EPS ($USD)$(0.74) $(0.86) $(0.66)
Cash, Cash Equivalents, and Marketable Securities (EoP) ($USD Millions)N/A$75.1 $55.1

Operating Expense Detail

Metric ($USD Millions)Q3 2022Q2 2023Q3 2023
Total Operating Expenses$31.92 $31.24 $32.58
Cost of Revenue$3.58 $0.94 $1.22
Research & Development$10.50 $11.71 $10.01
General & Administrative$14.65 $8.25 $7.56
Sales & Marketing$2.41 $4.41 $1.75
Intangible Amortization$0.79 $0.82 $0.82
Asset Write-Down & Restructuring$0.00 $5.11 $11.22

Revenue Mix (Product Development vs. Product)

Revenue Type ($USD Thousands)Q3 2022Q1 2023Q2 2023Q3 2023
Product Development Contract Revenue$4,488 $2,296 $1,274 $1,044
Product Revenue$179 $0 $3 $783
Total Revenue$4,667 $2,296 $1,277 $1,827

Other KPIs

KPIQ1 2023Q2 2023Q3 2023
Cash, Cash Equivalents, and Marketable Securities (EoP) ($USD Millions)$94.7 $75.1 $55.1
Weighted Avg Shares (Basic & Diluted)152.83M 25.51M (post reverse split) 25.71M
Gross Margin (%)N/A26% 33%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Q3 RevenueQ3 2023$1.1–$1.4M (provided Aug 9, 2023) Actual delivered $1.83M Outcome above prior guide
Q4 RevenueQ4 2023N/ANo revenue guidance provided Maintained “no guide” stance
Full-Year RevenueFY 2023$23–$25M (May 10, 2023) Withdrawn (July 12, 2023) Withdrawn
Year-End CashFY 2023N/A~$39M cash/cash equivalents/marketable securities New disclosure
Avg Monthly Cash UsageFY 2024~$3.0M/month (Q2 guide) ~$1.6M/month Lowered
Restructuring ExpensesQ4’23–Q1’24~$6.0M net in Q3 (prior) $22–$24M in Q4’23–Q1’24 Increased (timing shifted, scope expanded)

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3 2023)Trend
AI/Technology InitiativesFormed Advanced Technologies division to drive AI SaaS; extended AFRL AI agreement (Q2) ; Early AI platform progress noted Pivot to AI/ML software as core; $13.8M USAF contract; software platform targeted for H1 2024 launch Accelerating pivot from hardware to software
Hardware CommercializationQ1: nearing commercialization, Jabil mfg partner, VideoRay subsea integration ; Q2: focus on subsea, aviation, solar despite longer timelines Suspended hardware commercialization for subsea/aviation/solar “for the foreseeable future” Deprioritized
Cost Structure & Cash UsageQ2: RIF ~24% (~71 roles); target ~$3.0M/month cash usage in 2024 RIF ~70% (~150 roles); target ~$1.6M/month in 2024; year-end cash ~$39M Much lower opex & cash burn
Government/DefenseQ2/Q3: contracts with AFRL/USAF advancing AI software $13.8M USAF AI/ML development contract highlighted Reinforced funding source
Manufacturing/FootprintQ2: consolidate Pittsburgh into SLC Close Pittsburgh office; consolidate operations in SLC Consolidation completed/advanced
Revenue MixQ1/Q2 skewed to Product Development contracts Product revenue increased to $0.78M; development contracts fell Mix shifting as hardware pauses

Management Commentary

  • “We made the decisions to suspend our hardware commercialization efforts, implement a significant reduction in force and focus our resources on our AI/ML platform… By de-coupling our advanced AI/ML software from our own robotic systems, we believe we have the opportunity to reach a much broader market more quickly” — Laura Peterson, President & CEO .
  • “Our AI software platform will enable… a dramatic reduction in robotic training times… making industrial robots far more agile… In our lab environment… we have trained commercially available robotic arms to do simple tasks in minutes” — Laura Peterson .
  • “We can run a leaner business that is more efficient, reduce our cash usage and put ourselves in a stronger position to reach profitability without the need to raise additional financing” — Laura Peterson .

Q&A Highlights

  • The Q3 2023 earnings call transcript document exists in the catalog but was not retrievable due to a database inconsistency; Q&A highlights and any clarifications provided during live Q&A are therefore unavailable for inclusion .
  • Conference call details and webcast availability were provided, but content access was not possible within the toolset .

Estimates Context

  • S&P Global consensus estimates for Q3 2023 (EPS, Revenue, EBITDA) were unavailable for STRC due to missing mapping in SPGI/Capital IQ systems. Values retrieved from S&P Global were unavailable.
  • Implications: With the removal of Q4 revenue guidance and a strategic pivot to software, sell-side models likely need to reset revenue trajectories, opex profiles, and margin assumptions toward a leaner, software-first framework; non-GAAP adjustments and restructuring timing materially impact near-term EPS visibility .

Key Takeaways for Investors

  • The strategic pivot to AI/ML software and suspension of hardware commercialization materially changes the revenue model, opex trajectory, and timeline to potential profitability, supported by U.S. government contracts .
  • Q3 showed sequential revenue improvement and margin expansion, but YoY declines and significant restructuring charges; investors should watch for sustained margin improvement as the mix shifts and cost cuts flow through .
  • Cash runway is managed via deep cost actions: year-end 2023 cash targeted at ~$39M; 2024 net cash usage targeted at ~$1.6M/month—both lower than prior expectations, reducing financing risk in the near term .
  • Revenue visibility is constrained near term (no Q4 guidance); monitor software platform commercialization milestones (H1 2024 initial release) and contract conversions to gauge trajectory .
  • The larger RIF (~70%) and site consolidation should simplify operations and lower fixed costs; execution risk shifts to software delivery and customer adoption .
  • Mix is evolving: product revenue rose in Q3 while development contracts fell; with hardware suspended, expect a transition toward software/services and defense-funded development .
  • Without S&P consensus, set expectations around management’s cash burn guide and restructuring cadence; additional restructuring charges ($22–$24M) will impact reported results in Q4’23–Q1’24 .