Arbe Robotics Ltd. Q2 FY2022 Earnings Call

Good day and welcome to Arbe Robotics Second Quarter 2022 Financial Results. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Mary Cegal, CEO of MSIR. Please go ahead.

Thank you everyone for joining us today. Welcome to Arbe’s second quarter 2022 financial results conference call. Before we begin, I would like to remind our listeners that certain information provided on this call may contain forward-looking statements in the Safe Harbor statement outlined in today’s earnings release also pertains to this call. If you have not received a copy of the release, please view it in the investor relations section of the company’s website. 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, CFO, who will review the financials. Finally, we will open the call up for the question and answer session. With that, I would like to turn it over to Kobi Marenko. Kobi, please go ahead.

Thank you, Mary. Good morning everyone and thank you for joining us. I would like to begin by reviewing some of our recent business highlights. In July, we introduced Lynx, the industry's first Surround Imaging Radar, fulfilling a significant market demand for 360 long-range, high-resolution sensing at an affordable price. With 24 by 12 channels, Lynx outperformed the most advanced industry radars on the market today, even the highly priced front radar, making it the first surround radar able to announce perception and sense the future. The Lynx imaging radar was designed to complement Arbe’s flagship product, Phoenix Perception Radar, which processes 48x48 channels. Both radars will work in sync to deliver unified perception and interference avoidance and to provide full sensor coverage around the vehicle, enabling unparalleled safety for vehicles. Lynx is designed to be a corner and a back radar for L2+ and higher autonomous vehicles. We anticipate that four to six surround imaging radars will be integrated per vehicle in addition to one or two protection radars. Further, Lynx can be utilized as a front radar for ADAS, and we believe it is the only product on the market that can fulfill the endcap safety requirements. We believe that this now represents an enormous business opportunity for Arbe and for the Tier 1s that build and sell radar based on Arbe’s chipsets. I'm also happy to share with you that we reached a major milestone with our strategic partner GlobalFoundries in the second quarter. As many of you know, GlobalFoundries is a major semiconductor supplier for the automotive and other industries, and it has established a designated area dedicated to the production and sampling of Arbe’s chipset within their fab. GlobalFoundries has delivered the first significant customer samples shipment of our chips in the second quarter. In addition, both companies have signed a long term manufacturing agreement that covers quality assurance, assembly and testing and marks tremendous progress going into mass production. We believe this will provide us with the quality and the capacity necessary to meet our customer requirements. China is the largest vehicle market in the world. During the second quarter, a leading Chinese ADAS Tier 1 supplier, HiRain Technology, announced that it is undertaking major OEM and autonomous driving projects with imaging radar based on the Arbe chipset. HiRain announced that it expects to reach full mass production of the radar system by 2023. The HiRain radar system utilizes Arbe’s chipset with 48 meters channels, and 48 receiving channels and a dedicated processor to map the environment and sense the surrounding of the vehicle in high resolution. In parallel to this announcement, HiRain has been shortlisted for leading Chinese OEMs RFQ which is a major business milestone. As the pipeline continues to grow during the second quarter, Arbe added two new customer engagements, including a truck OEM that is the leading in level 2+ truck design and a new mobility company that is focusing on level 4 vehicles. Additionally, Tier 1s submitted 5 RFPs and RFQs with Arbe’s chipset to major OEMs, committing to supply the customer with volumes ranging from 400,000 to 1 million systems per year. Arbe is now shortlisted for 8 RFPs and RFQs. This includes top OEMs from North America, Europe, and Japan. Winning all these contracts would generate $7.5 billion in revenues for us by the end of the decade. On the corporate front, we have made some key organizational changes at Arbe that we believe will help boost our company to the next level of growth. We have consolidated highly focused R&D groups to scale our business, allowing us to deliver the revolution in radar solutions to our customers. With these changes in place, we will accelerate product execution while maintaining technological excellence as we focus on the next generation of solutions. Finally, just last month, Arbe’s early shareholders initiated an extension to the lockup period. This gives us great confidence that our shareholders believe in the long-term potential of Arbe’s business and in our ability to seize the opportunities ahead. Full details about the extended period can be found on our investor website and in our filings with the SEC. As we enter the second half of 2022, we are shifting our focus to production and execution. We believe that our expanded offering, Phoenix Perception Radar and Lynx surround imaging radar can open new and vast industry verticals, and further expand Arbe’s business potential. This is our time to win new businesses and monetize our engagement by building on our innovative technology and strong execution capabilities. In addition, the production timeline, enhanced by higher-end technologies, coupled with the progress achieved by all Arbe’s Tier 1s is positioning us ahead of the rest in the industry. Now I'd like to turn it over to our CFO Karine to go over our financials.

Thank you, Kobi, and hello, everyone. First, let me apologize for my voice today. I woke up this morning and lost my voice, so I hope you'll bear with me when I'll do my best in reviewing our financial results for the second quarter in more detail. Total revenue in the second quarter was $1.2 million, compared to $0.5 million in the second quarter of 2021. Backlog as of June 30, 2022, was $1.5 million, consisting mainly of chipset services and sample orders from Tier 1s. Gross margin in Q2 2022 was 72.8%, compared to 31.9% in the same period in 2021. The gross margin increase was primarily related to economies of scale and lower cost per unit as we expand towards production. Moving on to expenses. In Q2 2022, we reported total operating expenses of $13 million, an increase from $6.9 million in the second quarter of 2021. The increasing operating expenses were primarily driven by non-cash share-based compensation expenses, labor costs, increased research and development material and subcontractor costs, and additional general overhead costs related to our status as a public company. Operating loss for the second quarter of 2022 was $12.1 million, compared to a $6.7 million loss in the second quarter of 2021. Operating loss reflected our growing investment mainly in research and development. Looking at adjusted EBITDA in Q2 of 2022, and non-GAAP measurements, which exclude expenses for non-cash share-based compensation and for non-recurring items, was a loss of $9.5 million, compared to a loss of $6.4 million in the second quarter of Q2 of 2021. Net loss in the second quarter of 2022 increased and was $11.6 million, which included half a million dollars of financial income, compared to a net loss of $10.6 million in the second quarter of 2021, which included $3.9 million of financial expenses. Q2 2022 financial income resulted from the revaluation of warrants partially offset by exchange rate revaluations and financial interest. Moving on to our balance sheet: As of June 30, 2022, Arbe had $71.3 million in cash and cash equivalents. We repaid our last loan on June 30, 2022, and we have no debt on our balance sheet. 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 toward 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 meet our $312 million revenue goal for 2025. Now we will be happy to take your questions. Operator, please start the Q&A session.

Operator Instructions. The first question comes from Joshua Buchalter with Cowen and Company. Please go ahead.

Hey, guys, thanks for taking my question and congrats on all the progress. It's starting to clear in the tone that you're focused on operations. And it sounds like things at GlobalFoundries are pretty much ready to go for volume production. Are you able to give a timeline of when you expect to fully enter volume production, and should we still expect AutoX to sort of lead as the first customer as you ramp up volume, followed by Asian OEMs in 2023? Thank you.

Yes. So, first of all, it's actually two questions there. One is regarding our production and the second question is about production of AutoX. So, regarding our production, we believe that early 2023, we're going to be in full production of the chipset, as we are assuming. Likewise, original projection, we don't see any change in the production timeline. On the contrary, we see here today, in our two chips that are production ready, in the final stages of testing, and I can say working quite well. Like we are quite happy with the design. And from here, we believe this is just where the process or the things that need to be taken in order to take it to production. But we don’t see anything that should stop us from achieving our goal. We have weekly meetings with GF on this project and the project is on schedule, which is quite amazing considering that it's almost a two-year project to take those chips into production. The second question is about the AutoX production. So AutoX designed their own antenna for their radar, and this antenna is already working with our chips. And from here, the next stage is going to be to make it production ready. We believe that early next year, we will be able to start again shipping production-ready radar for AutoX. Regarding that, AutoX, as opposed to our usual model of selling chips to Tier 1, here on the AutoX project. There is a contractor that is doing custom designs for AutoX and we are already working with them to support them. So in terms of the revenues, we are not just counting the chipset, but we will count the entire radar. So to summarize the answer is yes. But of course, this is on the side of the customer. They must get into production the system with a B sample. As of now it looks like it's on schedule, and they will be able to start ramping up B samples next year.

Kobi, thank you for all the color. Then I wanted to ask you about Lynx. Was it developed due to customer demand, or is it more that it's something that you're now taking to customers and waiting to see the response to a 24 by 12 product? And how incremental is Lynx to the total addressable market and what's a realistic timeline for revenue contribution? Thanks, guys.

Lynx was created based on the requirements outlined by car manufacturers, and we have developed a reference design for it, which we have announced as a performance product. I can confirm that two European Tier 1 companies collaborating with us have already created their own 24 by 12 Lynx-like product, and this has already been submitted as part of our RFP and RFQ processes. This work has taken place over the last nine months in partnership with the OEMs to ensure that our product meets specifications. Concurrently, the Tier 1 companies have developed their own reference designs, and both of these European Tier 1s have functioning 24 by 12 products currently being tested in vehicles. Looking ahead, we anticipate that HiRain and another company in China will also develop their own 24 by 12 products in the near future.

Got it. Thank you. Appreciate all the color and feel better.

Thanks, Josh.

The next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Hello, everyone. Thanks for taking my question. I apologize. Gonen Barkan, I will start with a question for you. A 73% gross margin for the quarter is notable, although it's also a small revenue base. And if I'm not mistaken, the long term view by the company is offering your long term guidance is maybe something in the high 60% range. So my question is, is this low 70% gross margin a permanent fixture or are you still standing by that high 60% long term gross margin view?

Thank you, Gary, good question. So we’re still standing behind the high 60% for the long run. This specific quarter's margin consisted mainly of some services without any cost. Also, as we already get ready for production, specific costs also reduced. But I think we have economies of scale here for some fixed costs, but in the long run, also some of the fixed costs will increase as well. So to your question, we're still standing behind the higher 60% margin for the long run.

Okay, thanks for that clarification. One for Kobi. How many customers have had seen samples or received sample shipments from GlobalFoundries and normally automotive grade customer qualifications can be quite lengthy. So maybe if you can talk about the different lengths of the qualification period for the different types of customers that you have in the queue.

Yes, so first of all, one customer got a direct shipment from GlobalFoundries, and we did it in June actually. So we just started. So this was the first and successful one, and it made all of us happy, including GF. But the next customer will get the chips from them during this quarter. But, more and more we begin to have this walking mechanism that we can support more and more clients from this site. Regarding tests, the chips are getting out of the fab after all of the testing on the automatic testers, so the customers don't need to test them. GlobalFoundries basically provides them approval that the chips were tested. Qualification, of course, just to be clear, they are not yet automotive qualified and the full automatic qualification process is what basically separates us from being in the situation that we are today and for in full commercialization of the chips. So, basically looking at the process, GlobalFoundries has a test sales for these chips as effort as possible. The difference is metering the receiver and they are testing the chips automatically with tests that we designed together with them after those tests and after the chips pass the test. And of course, sometimes there are some chips that don't pass, which is basically what is influencing our yield. I can say that our numbers now on the yield side, even before we made the improvements, are better than we expected in the past. This is again influencing margins and influencing everything. So after the chips are tested, and in the testers making sure that they are 100% functioning, those that are 100% functioning are shipped to the customer, so the customers don't need to check anything in parallel. The same lot that went out of the fab has gone through the qualification process to make sure that it's automotive-grade. And then when we finish automotive grade, the chips get a different part number, which means that they are not samples anymore, and they're in full production perfection.

Thank you both. Appreciate it.

The next question comes from Suji Desilva with Roth Capital. Please go ahead.

Hi, Kobi. Hi, Karine, congrats on the progress here. The full year guidance I know it's early, but the $7 to $11 million of revenue, what would roughly separate you guys from the low end versus the high end? Is that production volume or is that more prototype shipments to more customers?

No, it's production volume completely. Regarding our guidance, as we see it today, we're currently in line for the first two quarters. We achieved our plan, and we expect frankly, to continue achieving it. Again, the fact there will be no other delays in the industry, which we do not see currently.

Okay, that's very helpful. Thanks. And as we look ahead to the $300 million that you reiterated today, in the out years, Kobi, how would you think about the number of customers you'd need in production to help get to that number, if that's something because you have an RFQ shortlist and so forth? I know they each vary in size, but maybe some idea of when you'd have visibility to that, based on wins like what would it take?

So, first of all the visibility we will have, I believe in the next two to three quarters. So we are now shortlisted as we mentioned in around 10 different RFPs awaiting decisions. We expect this from September through March next year. Each one of these contracts represents for us something like I would say, on the low volume about $30 million, and on the high volume around $100 million per year. So if you think of it like this, the $300 million is more or less the two or three big wins, along with some small projects that we already have like AutoX, like a delivery robot, like other projects.

That's I think for the entire business case here is then this forecast is based on already identified customers. It's not something that if we have more, I think this number will even go higher.

That's very helpful. Thanks, guys. And then one last quick question. With the Lynx product, how should we think about the attach rate of Lynx to when you win a Phoenix project for a customer? Kobi, is that the right way to think about it?

In a nutshell, I think that the majority of the clients will buy one Phoenix and four Lynx. We believe that the fact that the Lynx price and performance are superior and we might find them also in Tier level 2 ADAS end cap related applications, which is something that was not on our radar until now. I think we have the ability to be very competitive with the current long-range radars in terms of price and in performance of course we are different.

Okay, thanks, Kobi, thanks, Karine.

Thanks, Suji.

The next question comes from Jaime Perez with RF Lafferty. Please go ahead.

Good day, everybody. And thanks for my question. It's a more hypothetical one, as we go into production in 2023 what changes with the customer base? I mean, I know customers are right now looking to integrate your chipset into their product. But are we going to see any contracts with customers once you've entered production? How does that dynamic change in the market?

I think that right now, all of our customers, especially the Tier 1s, already have the confidence that we will get into production early 2023. They have this confidence, as well, because they sell the chips, and they understand that they are really mature. But second, because they spoke to GlobalFoundries, which gave them the comfort that they are behind the company. They have behind the aggressive plan of taking three chips into production. What happened in the last quarter is that the OEMs themselves that were in our RFPs and RFQs received this confidence directly from GlobalFoundries. As you probably know, the automotive companies today are aware of supply chain issues and how the market works. So they asked us to get this guarantee directly from GlobalFoundries. We have very strong statements from their VP of Automotive that they're standing behind the production timeline; they're standing behind our capacity. This is something that they are offering to all of the OEMs customers. So I think right now, the customers are looking into selection of the radar based on our chips and have the confidence that the third largest foundry in the world is behind our chipset.

Awesome. Seems like everything's ready to go. Thanks for my question. See you next quarter.

Thank you.

The next question comes from Matthew Galinko with Maxim. Please go ahead.

Hey, thanks for taking my questions. Just a couple of clarifications: you talked about the $7.5 billion of total potential revenue in RFPs and RFQs by the end of the decade, I just want to make sure I understand that to mean by the end of 2030, or did I understand that incorrectly?

Yes, when we're talking about all of the RFPs and RFQs that we're in, and the anticipated volume and revenues for us from 2023 until 2029, this sums up to $7.5 billion. Of course, we don't expect to win all of the RFPs and RFQs that we raised, but about 95% of them. This is the aggregated amount we wish to reach, totaling $7.5 billion in revenue.

Thank you, appreciate that. And good luck with that win rate. I think you mentioned restructuring your R&D team a little bit or something along those lines in your prepared remarks. Could you go back to that for a moment and maybe talk about why the timing and what that means for your R&D spend and efficiency going forward?

Thank you, it's a good question. I think early this year when the year started, and we saw that the market is heading towards a kind of storm, and the economic situation is not as it used to be, we decided to take a close look at our yearly budget and try to reduce costs wherever we could. This is one side of the story. The other side of the story is, when we're going to production, we see that it's a good idea to separate between the R&D that is developing the chips from the ID to production, and the team that is doing the radar reference design like the Lynx and the Phoenix. Those are two different sides of the business. So the size of the chipset can run separately and take the chips to full production. Without those chips we won’t be relating to an actual radar. From the other end, the radar team takes the chipset to build a full reference design. They can support the Tier 1 easier in a much more efficient way than it used to be distracted. By doing this separation, it offers us inside the company to mimic the client and to solve for the client many problems before the client will even be able to see them. Overall, this restructuring allowed us to save costs and to provide a much better end product to our customers.

Thank you.

Now I will turn the conference back over to Kobi Marenko, Arbe’s CEO for any closing remarks.

Thank you. We were so pleased to have you join us today, to our employees and partners. Your continued dedication is deeply appreciated. We look forward to updating you further on Arbe’s progress in the coming months. Until then, you are invited to reach out to the team with any questions or comments. Thank you all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.