Arbe Robotics Ltd. Q1 FY2022 Earnings Call

Thank you everyone for joining us today. Welcome to Arbe's First Quarter of 2022 Financial Results Fireside Chat Imaging Automotive in 2030. My name is Mor Assia, and I will be moderating today’s event. I am a Director on Arbe’s Board and the Founding Partner of iAngels, one of Israel’s most active VC firms. Arbe is one of our largest investments. We’ve been supporters of Arbe since the beginning where we led their seed financing rounds and have invested in each of Arbe’s financing round since. The automotive industry is progressing quickly and ultra high resolution imaging radars are going to be critical for achieving truly safe driver assist systems and hands free driving. Arbe is driving this revolution. Before we begin, I would like to remind you that certain information provided on this call may contain forward-looking statements, and the Safe Harbor statement outlined in today's earnings release also pertains to this call. Please also note that this event is being recorded. Today, we are joined by Kobi Marenko, Arbe’s Co-Founder and CEO, who will begin the call with the business updates. Then we will turn the call over to Karine Pinto-Flomenboim, Arbe’s CFO, who will review the financial statements followed by an insightful fireside chat with industry experts from Arbe’s leadership team and Board of Directors about the promises and challenges of automotive autonomy over the next decade, and will conclude with a question-and-answer session. With that, I would like to turn it over to Kobi Marenko. Kobi, please go ahead.

Thank you, Mor, and hello everyone. It is great to have you with us. Today we are going to discuss the future of autonomy in 2030 and the leading role that Arbe will play in this world. But first, I would like to go over some of our recent business highlights. We made great progress in the first quarter, particularly with our Tier-1 relationships and OEM customers. Hyundai, a leading car manufacturer and one of our early investors, held a PoC testing the safety announcements introduced by our next-generation radar. Just yesterday, they showcased our joint pilot at the EcoMotion event. Working closely with world leading car manufacturers like Hyundai is important for us as it allows us to evaluate how our technology addresses their safety and autonomy needs in real-time. Let’s view some highlights from the pilot. During the first quarter, Arbe engaged with five new customers, including OEMs who are leaders in Level 2+ passenger vehicle design and new mobility players focusing on Level 4 applications. Part of our business progress during the first quarter is attributed to our first Tier-1 relationships who develop radar systems based on our chipset. The success and commitment of our partners is critical to our ability to scale in terms of production, unit sales and market reach. In the first quarter, our Tier-1 relationships submitted 5 RFPs and RFQs with Arbe's chipset to major OEMs, committing to supply the customer with volumes of 400,000 systems to 1 million systems per year. In the first quarter, Arbe secured a wealth of knowledge and experience with the addition of several new members to our leadership team. Joining our Board of Directors is Thilo Koslowski, a renowned thought leader and visionary in automotive and digital technology, who previously served as the Founder and CEO of Porsche Digital. Thilo also founded the automotive and smart mobility practice of Gartner where we advise global automakers, technology companies and governments on harnessing new technologies and innovation. Alex Hitzinger, who also joined our Board of Directors, is the former Volkswagen Group’s Senior Vice President of Autonomous Driving and a member of the management board of Volkswagen Commercial Vehicles. Additionally, Alex held the position of Head of Product Design for Autonomous Transportation at Apple where he led the automotive team. Finally, Gonen Barkan, who joined Arbe’s management as our new Chief Radar Officer, will head Arbe’s technological strategy. Gonen Barkan comes to us from General Motors, where he led a global team and was responsible for all aspects of radar technology, development, radar product development and radar integration into GM vehicles. We are proud that Gonen, Alex and Thilo chose to join Arbe, demonstrating their confidence in our vision. Their knowledge and expertise will strengthen our strategy, tighten our relationships in the auto industry and expedite our progress. Alex and Gonen will join our fireside chat today. On the product front, back in January at CES, we introduced the vision of Free Space Mapping to our Imaging Radar perception stack. This is the first time an automotive radar is able to perform Free Space Mapping, a critical function of autonomous driving that requires great accuracy and redundancy. Last week, we were happy to announce the launch of our latest RF chipset in the final production configuration. A new chipset increases range, allowing radars to detect vehicles at 800 meters or about half a mile. This functionality will make our radar extremely viable across customer verticals including trucks, a key vertical for Arbe, as the truck industry will be one of the first to introduce autonomous driving on a mass scale. Our new chipset offers the industry's first combination of system design flexibility with ultra high resolution providing optimal performance across challenging driving scenarios such as driving on the highway, enabling delivery robots to drive safely on the sidewalk and developing forward and backward free space mapping, particularly for unprotected left turns, T-junctions merging into the highway and more. Now I would like to highlight some of the exciting news that we shared demonstrating the market recognition of Arbe’s innovative technology. We are honored to be recognized for our product innovation, recently winning some of the most prestigious awards in our industry. Back in January, Arbe’s perception imaging radar was recognized for revolutionizing autonomous vehicle and sensing to support advanced perception capabilities at an affordable cost for the mass market by CES 2022. Additionally, we were proud to win first place at the 2022 Tech AD Conference in the category of sensor perception, which highlights the superiority of our advanced perception radar designed to create ultimate safety in the autonomous vehicle industry. This meaningful validation combined with three industry executives choosing to join our management team and our Board are all important signals that we are on the right path. We are extremely pleased to be progressing according to plan. We are confident in our leadership role in the evolution of the industry and we look forward to continuing to achieve major milestones. I would now like to turn it over to our CFO, Karine. Hey, Karine.

Hey, Kobi. Thank you, Kobi, and hello everyone. I would like to review our financial results for Q1 2022 in more detail. Total revenue in the first quarter was $0.9 million, compared to $0.6 million in the first quarter of 2021. Backlog as of March 31, 2022, was $2.8 million, consisting mainly of chipsets and sample orders and services from several leading car manufacturers and Tier-1s. Gross margin for Q1 2022 was 56.1%, compared to 44.3% in the same period in 2021. The gross margin increase was primarily related to a lower cost per unit as we expand towards production. Moving on to expenses. In Q1 2022, we reported total operating expenses of $11.1 million, an increase from $4.5 million in the first quarter of 2021. The increase in operating expenses was primarily driven by a labor cost uptick, non-cash share-based compensation and additional general overhead costs related to our status as a public company. Research and development expenses increased from $3.7 million in Q1 2021 to $7.8 million in Q1 2022, reflecting growing investments in labor and moving towards production. Net loss in the first quarter of 2022 decreased significantly to $7.9 million, which included $2.8 million of financial income, compared to a net loss of $18.4 million in the first quarter of 2021, which included $14.1 million of financial expenses. Both years’ financial expenses and income related to the revaluation of convertible loans and warrants. Looking at adjusted EBITDA in Q1 of 2022, a non-GAAP measurement, which excludes expenses for non-cash share-based compensation and for non-recurring items, was a loss of $8.6 million, compared to a loss of $4.1 million in the first quarter of 2021. Moving to our balance sheet. As of March 31, 2022, Arbe had $87.3 million in cash and cash equivalents. Total debt as of March 31, 2022, was $5.1 million, which we expect to pay by July 1, 2022. With respect to our guidance for 2022, we would like to reiterate what we previously shared, revenue is expected to be in the range of $7 million to $11 million, heavily weighted towards the end of the year. Adjusted EBITDA is expected to be a loss in the range of $34 million to $38 million. Additionally, we believe that we are on track to reach our $312 million revenue goal for 2025. Now I will turn it back over to Mor to open the fireside chat with the rest of our team.

Thanks, Karine. This is a pivotal time in the automotive industry with the changes occurring faster than ever before. At the heart of these changes is technology innovation and at the heart of this technology innovation is Arbe. With that today, we have several industry experts, Alex, Kobi and Gonen. Thank you all for joining us today. Let’s discuss the promises and challenges of automotive autonomy over the next decade. So questions to pose to the group. When we think about books, movies, what we expected for 2030 might be very different from what we anticipate today, whereas we once might have imagined fine cars. Today, I think we can all agree that 2030 will likely look much closer to our daily lives today than what we once might have thought. That being said, there are so many new advances and improvements in the space and I am excited to talk about some of them with you today. Alex, I want you to start us off. What will a day in 2030 look like, in terms of mobility? How will it be the same or different from today?

I hope you can hear me well. I think mobility will be safer. It will be cleaner, and it will be more convenient. I mean, it will be safe because there will be widespread use of radar systems in the cars and in trucks. It will be cleaner because I think electrification will have gone really mainstream and the majority of new vehicles sold will be electric. And it will be also more convenient because the overall spectrum of transportation, I think, will be expanded. So, mobility will play a much bigger role for short distance travel, as we will have vehicles which will have radar systems, making driving more enjoyable even in higher traffic conditions. We will also start to see things like easy toll in the early stage. So, overall, the spectrum of transportation will be much broader and thus make it more convenient to get from A to B.

Kobi, anything to add?

First of all, I agree with Alex that the main change, and the main difference is that everything will be safer. I think the sun was rising like the ambition to reach the moon. So it’s a ten-year plan. It will take time. It will take a lot of effort, but in the middle, there are a lot of byproducts from this ambition that will play a large role in our lives. First of all, safety, above all, and I think that the majority of the car manufacturers today put safety as their first goal—safety anywhere, safety in every life and condition, and I think this is going to be a major change. Additionally, the fact that you can get delivered from a delivery robot to your home easily without a human being is also a great change. It will dramatically reduce delivery times and improve our ability to receive goods at home. Furthermore, the fact that trucks will drive more and more safely and in almost automated ways will also change our lives and enhance our abilities to bring goods to our homes at better prices and with improved timing.

Excellent. Gonen?

Yeah, thanks. So, I agree with you both and I’ll add that a lot of driving functions that we are used to do will start to become much more automatic and autonomous, but step-by-step.

Nice. Well, I believe that by 2030, it’s safe to expect that Level 2+ will become an industry standard at approximately 70% penetration, with an emphasis, as previously mentioned, on safety rather than comfort, driven by both consumer demand and regulation. Gonen, what new technologies will be available in 2030?

Thank you. So, as we said, to get to this safety level, especially for more complex driving tasks, we need to make significant advancements. Level 4 will not be as widespread, and the mass market will require safe and widely available driving features. So, we see radar as a major driving force in achieving this. With high-resolution cameras and possibly some lidars in the front, we will need a new generation and scale of radars to meet these requirements, which I think will be the major change in technology.

Thank you. Alex?

I think it will be a phased approach. There won’t be any big bang moment where we suddenly have full autonomy available. Level 4 will start to appear in premium products on specific routes that will make long-distance travel much more convenient. This technology will penetrate first into premium products where people are less cost-sensitive. As Kobi mentioned, long-haul trucking is a perfect opportunity for rolling out Level 4 functionality. We will see this develop in the next years leading up to 2030. As technology penetrates these areas, the volume of components will increase, leading to lower costs, allowing it to transition into mainstream products over time. This will also help raise public awareness and acceptance of these technologies, driving adoption.

Kobi, anything to add?

I would like to add maybe two points. One, I am confident that as cars become more autonomous, they will also become more entertainment areas. The screens will be bigger, and we may even see commercials in our cars. We will be able to watch videos, play games, or view movies. I think that by 2030, the car will be part of the entertainment and advertising ecosystem. The second thing, which I find questionable, is how much of this industry will become service-oriented. How many people will abandon owning cars and choose to hire one instead? In big cities where parking is scarce and traffic is heavy, this shift toward car-as-a-service will continue to grow.

Thank you. So, we all understand that in order for technology to be car and road-ready, the model specification cutoff is approximately three years prior. Given that timeframe, what technologies will not be available in 2030, either because they will be phased out or because 2030 will still be too early for them? Alex, what do you think?

I think one major issue is the challenge of achieving full autonomy in urban areas. I don't expect widespread adoption of this technology until at least 2030, due to the complexity of handling edge cases. While some believe it’s just around the corner, I don't think that's realistic. The challenges are significant, and while we will see more commercial pilots of the robo-taxi model, it won't be a mainstream commercial business by then.

Anything to add, Kobi?

I agree that the robo-taxi concept currently seems more like a hobby than a viable business. There are significant technological challenges that need to be addressed, and achieving the necessary computing power for full autonomous driving on a large scale at an affordable price remains a major obstacle. We may see some forms of urban mobility, such as delivery robots, that operate at low speeds in cities.

Okay. So, what do you think will be the role of imaging radars at Arbe in achieving your goals for 2030, Gonen?

Thank you. First and foremost, radars will not only be able to provide required redundancy but also bring those safety features to a level that customers can trust. I think radars today are still far from achieving this and need to advance significantly. I believe this leap is where Arbe places itself, aiming to offer a full suite of solutions that can be available anytime and everywhere, with safety as a priority—not merely as an assist system.

Kobi?

The industry began to understand that the focus over the last ten years was merely on passing tests like the Euro NCAP tests and the minimal requirements involved. Now there is a major shift in thinking. The car manufacturers realize that just passing the tests is not sufficient; delivering a fully safe solution to the customer is the true goal. If we are to move towards full safety solutions, having a radar capable of functioning effectively in all weather and lighting conditions over significant distances without false targets is imperative. This has been our mission since we started.

Perfect. In other sectors, 2030 feels like nearly a decade from now. So, why are we, as investors, discussing 2030 now? For me personally, as an investor, we have seen a lot of activity in the automotive space with several companies going public. Arbe has established a unique position within the market, but mass adoption of autonomous driving is still very much ahead of us. It’s exciting to foresee what is yet to come in the latter part of this decade. I believe Arbe becoming a public company is only a stepping stone, and this is really just the beginning. Kobi, why do you feel we are talking about 2030 now? Can you elaborate on what will happen over the next three years, for example?

Yes. First of all, we are discussing 2030 because we believe it will be the year when Level 2+ will be a mass-market product. You won’t want to get into a vehicle lacking real safety features; they will have to incorporate piloting and driving assistance in traffic and similar solutions. What we see today as pilot versions in cars will be mainstream by 2030. However, achieving this will take time because the cycles in the automotive industry are lengthy. They are currently selecting fogdet radars for 2025, and some even for the 2026 models. We are also keenly aware of the dynamics in the Chinese market, which tends to accelerate the timeline. In China, what may take five years in the west might only take three. We’re also highly engaged in delivery robot technology and trucks, which do not require this extended automotive design cycle, allowing us to expect revenue ramp-up sooner. Overall, we are optimistic about significant revenue growth in 2023 and continuing into 2024.

Excellent. So, now we would like to start and kick off the Questions-And-Answer Session. Thank you to all of our panelists for the thought-provoking discussion. We are now ready to take questions from our audience. Welcome to the Q&A session. We will be starting with analysts’ questions, followed by audience-submitted questions. Our first question comes from Josh. Hi Josh.

I think the most common statement you are on mute.

Hi. Sorry. Thank you. Just for future, I need to— the host will unmute for Q&A. Anyway, Kobi, could you say a sharper revenue ramp in 2023? Is there anything you can share on the comparison between some of your announced customers like AutoX and BAIC versus others in different industries or OEMs that we might not be aware of? Thank you.

Josh, can you repeat the question? Sorry. Josh?

Okay. We’ll go to the audience questions and we will get back to Josh once we resolve this adjustment. The first question is: how has the automotive imaging radar market evolved over the past quarter?

I think we've seen the market shift toward imaging radar. Last year, high levels of autonomy were more of a luxury. Now, almost every car manufacturer has a program for adopting imaging radar or front-facing radars. This is why we are receiving numerous RFPs and RFQs from leading Tier-1s and have secured very strong partnerships for radars. Each RFP RFQ is for approximately 400,000 to 1 million units per year. If we look at the overall market potential, we are talking about tens of millions of radar chipsets from Arbe as a potential market over the next three to five years.

Great. Next question is from David Green: Please comment on Innoviz's $4 billion valuation. Doesn’t lidar have disadvantages in comparison to imaging radar? Can it affect Arbe?

First of all, we are really excited to hear about our Israeli friends from Innoviz winning such an amazing valuation. It is a great sign for the Israeli auto tech industry, and we are proud to be in the same space with Innoviz. Basically, every car manufacturer that chooses front-facing lidar also opts for at least front-facing radar and typically four to five more radars for full 360-degree coverage. So you can be assured that any car company that invests in lidar will also have robust imaging radar technology. Lidar does have advantages, especially in azimuth resolution, but it has many disadvantages in terms of weather conditions, lighting conditions, and range, and it's a complementary product that we are comfortable with. Even advocates of vision-based only approaches recognize that imaging radar is essential for achieving optimal performance in Level 2+ and Level 3 systems.

Next question: Will radar and lidar compete against test versions of vision only? Who will capture greater market share?

I can comment on this. Vision-based systems can take you only so far, and I’m not sure they will represent the same market segment. As we noted, the transition toward safer driving functions will necessitate a combination of vision and radar inputs. Therefore, I don’t think there will be a direct competition; they offer different levels of performance and safety.

I agree. I think Tesla will find a way to incorporate imaging radar in the future.

At some point.

At some point; at least they will want to achieve safety along with their drive and comfort features.

Thank you. Another question is: Could you provide some insight on the customer engagement stage timeframe and potential orders?

As I mentioned earlier, the potential order of each one of our OEM clients ranges from 0.5 million to 1 million units per year, representing about $50 million to $100 million in revenue for Arbe. Right now, we are in the pre-production stage with two large Tier-1 OEMs. We recently completed a PoC with Hyundai and Hyundai Mobis, and they are now awaiting a final decision on technology adaptation. Additionally, BAIC, one of our largest shareholders, is also utilizing our radar for Level 2+ and Level 3 systems. We're actively engaged in 20 different stages of engagements, RFP, RFQ, or early volume with other clients, and we also announced that we won AutoX, the largest robo-taxi player in China and a significant player in this sector.

Thank you, Kobi. Now that we've resolved the problems, we can get back to Josh.

Hey, Kobi, how are you? Can you hear me?

Yes.

Yes.

Wonderful, thank you. Kobi, you spoke about a sharper revenue increase projected for 2023. How do you foresee the contributions from customers like AutoX and BAIC compared to pre-production wins in other verticals?

We can’t reveal exact revenue figures from AutoX in 2023 due to the dependency on their market rollout. However, we expect significant contributions from a Chinese OEM in the second half of 2023 that may account for roughly 30% of our revenues, estimated to be around $20 million. The robo-taxi sector will likely contribute about $15 million to $20 million more, and the remainder is anticipated from delivery robots and non-automotive applications. Overall, we are forecasting approximately $70 million in revenue for 2023. Most of this will be originating from chipset sales rather than one-time payments.

That’s incredibly helpful. Thank you. For my follow-up, the press release didn’t mention the three leading OEMs that you are in pre-production with. Will you be able to share more context on that, and is everything still on track in line with your $312 million target for 2025?

We are still aligned with our plan. Adjustments may vary based on the timing of engagement. Overall, we are engaged with the right Tier-1s for these projects, and we have increased our relationships with OEMs over the past quarter. Some of them have already begun testing our radar in their vehicles, ensuring we are well-positioned for our $300 million revenue target. We are adding new partnerships and engagements that contribute to this goal.

Got it. Thank you.

Thank you, Josh. Next, we will have Suji.

Hey, Suji.

Hey guys. Can you hear me?

Yes.

Yes.

Excellent. Kobi, regarding your comments on the 400,000 to 1 million annual units, can you characterize this range in terms of customer-specific or model specific rather than being a platform number? Will there be variations with some smaller and larger wins?

All OEMs, with few exceptions, have a similar strategy of initiating production with high-end models first. This means that they must have enough premium cars to support this strategy, leading to hundreds of thousands of units in their initial production, which can subsequently scale up to millions with the mass production.

Great. That's really helpful insight, Kobi. Perhaps a question for Gonen would be regarding the camera-lidar-radar cost balance that we often mention, roughly around $500 each. How do you see OEMs assessing the overall cost and balancing the use of radar versus cameras and lidar? Would you say these numbers fluctuate?

Thank you. First, I think there has been a major shift in thinking—OEMs see the value across the entire platform instead of merely the sensors used for a specific program. If you can leverage the same technology and architecture across your whole portfolio, it justifies higher costs on individual platforms. The breakdown typically has cameras costs related to processors and other components. Lidar is primarily employed for front-facing applications. Most players target to keep it under $1,000. For radars, costs tend to vary since comprehensive coverage may be required, which also impacts prices.

Okay, thank you everyone.

All radars together generally equate to the cost of one lidar.

All of the radars combined will typically range in price—a rough comparison to the lidar.

Yes, all the radars combined will generally cost similar to lidar.

Understood. Thank you, everyone.

Thank you, Suji. Now next is Gary.

Hey, Gary.

Hey. How are you? Can you hear me okay?

Yes.

Yes.

Okay. I'm trying to figure out the attach rate of your technology to some of your automotive OEM customers’ products. How should we think about the use cases and how they plan to market this technology? Will it be a default safety feature spread across all models, or will it be an OEM add-on, like Tesla’s autopilot that requires a $15,000 upgrade?

I think the first description is more accurate. It will likely be bundled as part of a set of features, such as general driving assistance or more complex automation levels, rather than just a costly optional upgrade.

Yes. It will be packaged into the overall feature set, rather than being simply an aftermarket add-on.

Great. Appreciate the insight. Lastly, I wanted to touch on the volatility in R&D expenses, perhaps due to the tape-out of certain products. How should we think about the trajectory of these expenses going forward?

We expect R&D expenses to increase due to our production transition. The mix will change since our focus is now on production and associated labor costs. We anticipate an annual increase, but the percentage relative to revenue should remain relatively stable.

Thank you. Hi, thanks for taking my questions. Previously, there was a call where someone mentioned the supply chain, and you noted that you were starting to see material revenues. What progress have you made on that front, and how do you feel about your ability to source the components needed to reach production levels?

Our current strategy, combined with strong relationships with global partners, is helping us ensure supply. We have secured sufficient supply for 2022 and 2023 without problems. However, we need to focus on 2024 and 2025, where we acknowledge that semiconductor shortages could linger, potentially affecting larger corporations. We are working closely with our global partners to ensure customer accessibility to chips. For 2022 and 2023, we don’t foresee issues, but we are currently beginning to secure our strategy for 2024.

Thanks. Additionally, could you comment on where the competition stands now? Have you noticed more competitive activity in imaging radar? How far do you believe you currently stand?

The current semiconductor situation works in our favor. It requires large companies five to seven years to develop new chips. For example, NXV, which had been a pioneer in radars, is just about to go into production by the end of this year with a processor that is significantly less powerful than we have. They are just catching up on production timelines and will face higher costs. In the last few quarters, Intel has been notably aggressive in trying to enter the imaging radar market. However, even with this aggressive stance, their product is not projected to reach our performance levels before 2025. In fact, we have already started working on advanced R&D for our 2025 product line, which promises to be even more advanced.

Thank you.

Thank you. Now we will turn the call to Jamie. Jamie Torres.

Good day, everybody. Thanks for taking my questions. Regarding the new executives added to the Board, are you looking to add any more members with market expertise? What is your strategy for expanding the management team?

As you mentioned, we have added two automotive executives to our board. They provide significant help in formulating strategies and directing the company toward opportunities. Gonen recently joined us and brings a wealth of experience in successfully bringing radar into production. Their expertise will aid in guiding our goals for the next decade.

Thank you, Kobi. Now, turning to our last question from Scott. It seems you have enough cash flow to execute your plans. Does this exclude acquisitions? The cash raised during the business combination is expected to take us through our breakeven point, anticipated to be one year after we reach full production at the end of 2023 or early 2024. Regarding acquisitions, we currently have no plans but will evaluate any interesting openings if they arise. Thank you everyone for being here today. We look forward to keeping you updated on Arbe’s progress in the upcoming months. Until then, you are invited to reach out to the team with any questions or comments. Thank you and goodbye for now.