Arbe Robotics Ltd. Q4 FY2022 Earnings Call

Thank you everyone for joining us today. Welcome to Arbe’s Fourth Quarter and Full Year 2022 Financial Results Webcast. My name is Kobi Marenko and I am the Co-Founder and CEO of Arbe. I am very excited to share the developments made by Arbe in 2022, especially in Q4, where we moved from the proof-of-concept phase to the production and commercial deployment stage. After my presentation, Karine Pinto-Flomenboim, Arbe’s CFO, will share a view of our financials and outlook. Next, Ram Machness, our Chief Business Officer, will discuss the market forecast and the business opportunities that we are pursuing. Finally, Noam Arkind, our CTO and my Co-Founder, will conclude the presentations and speak about Arbe’s latest innovations and our vision for the future. We value your input and questions, so we will reserve time for a question-and-answer session. Please take a minute to review the Safe Harbor statement. Throughout the year, Arbe was dedicated to maturing cutting-edge perception technology that significantly improves vehicle safety and accelerates the realization of Level 2+ advanced driver assistance vehicles. Our company’s progress has paralleled the advancement of the vehicle market to Level 2+, which we anticipate will become the industry standard in automotive by 2025. In 2022, we actively collaborated with leading automakers' perception teams to ensure that our best innovations are designed into their groundbreaking technologies. We received clear indications that our Perception Radar technology will be a crucial enabler and an integral component of Level 2+ as the mass market increasingly adopts autonomous systems. As we look ahead, we remain on track to achieve full production by the fourth quarter of 2023. Thanks to the hard work and dedication of our team and our business partners, we are optimistic about the year ahead. In 2022, we collaborated with multiple global Tier 1 suppliers who will position Arbe for success in 2023 and beyond. Veoneer, a world leader in automotive safety, selected Arbe’s chipset for their next-generation radars. Veoneer is an attractive partner for Arbe as it currently produces more than 50 million radars per year, forecasting to grow to roughly $250 million per year by the end of the decade. In addition, Arbe received its first mass production preliminary order for 340,000 chipsets from HiRain Technologies, a leading Chinese ADAS Tier 1 supplier. This announcement validates Arbe’s leadership as trucks require the highest safety standards and have the biggest need for advanced sensing. The HiRain business partnership will allow us to quickly scale revenue, deploying Arbe products in China, the largest and fastest-growing EV market in the world. Part of our success today is a direct result of the strong relationships we have built with industry leaders such as Valeo, Veoneer, HiRain, and Weifu suppliers to leading global automakers. This quarter marks a significant milestone for our Tier 1 business partners as these companies have made considerable financial investments and deployed sizable teams to develop radar systems utilizing our cutting-edge radar chipset. We are confident that these advancements will make a significant impact for Arbe and the entire industry. We want to thank our Tier 1 partners for choosing and trusting Arbe and for working hard to secure customer wins. We look forward to updating you on specific wins. In addition to our Tier 1 partners, we are pleased with our collaborations with passenger and commercial vehicle makers and robotaxi companies. We can report that we are actively engaged with 12 out of the top 15 automakers worldwide, conducting field trials and participating in RFI and RFQ bids. Our goal for 2023 is to achieve two design-ins in the rapidly expanding Chinese market and two design-ins with OEMs from Europe and the United States. These design-ins will allow multiyear revenue contracts. As mentioned, our focus in 2022 and 2023 is on the transition from proof-of-concept to mass production. We have completed our dedicated chipset production line with Global Foundries in Vermont, USA. Our chips are now undergoing the AEC-Q100 qualification process, representing the highest safety standards required for the automotive industry. At the end of 2022, we launched our groundbreaking 360 degrees Radar-Based Perception Solution, providing a comprehensive analysis of vehicle surroundings over a long range. We take pride in being the first company to offer an integrated 360-degree Radar-Based Perception Solution. Our suite of Perception Radars captures data using advanced AI technology to identify, classify, and track objects within the entire field of view. The data is processed in real time to create a full free space map around the vehicle, providing an analysis of evolving hazards detected by the radars. We are excited to offer this innovative and cost-effective solution to the market and believe it will set a new industry standard for vehicle perception systems. Arbe experienced great success at the CES Trade Show in Las Vegas, one of the industry’s most important events. We had the pleasure of meeting with most of our automakers, who have secured the necessary budgets to work on products based on our cutting-edge chipset throughout 2023. These projects focus on driving significant advancements in vehicle safety, and we are proud to partner with our customers to bring these innovations to the market. In addition, CES was a fantastic opportunity to meet with potential new customers, and we were pleased to learn that Arbe’s leading innovations and value proposition resonate with the needs of these customers. We are also proud to announce that Arbe has once again been awarded the prestigious CES Innovation Award for the 360 degrees Radar-Based Perception. We are thrilled to be recognized for our pioneering work in advancing automotive safety. Looking forward to 2023, our goal is clear. We expect to enter full production with our cutting-edge chips in the fourth quarter. We have already received orders that meet our 2023 production capacity. In addition to our production goals, we continue to focus on ambitious sales and business development objectives of OEM design-ins for the year ahead. Our disruptive solutions have quickly gained recognition and endorsements from industry leaders, and we believe that our strong offerings will enable us to gain market share and drive innovation forward. At this point, I would like to hand over to our CFO, Karine, who will provide a detailed overview of our financial performance.

Thank you, Kobi, and hello, everyone. Let me review our financial results for the fourth quarter and the full year of 2022 in more detail. As Kobi said earlier, Arbe is a company in transition from development to production, and our financial results in Q4 reflect this. As we progress with our strategy, we are shifting our focus to chips for production. As a result, we have decreased engineering sample sales during Q4. This transition will streamline our operations and provide cost savings as we work to adjust our processes and ramp up production accordingly. We believe that these decisions will enable us to better serve our customers and drive innovation forward. Total revenue for the first quarter was $0.15 million, compared to $0.5 million in the fourth quarter of 2021. For the full year of 2022, total revenue was $3.5 million within our guidance, representing an increase of 56%, compared to $2.2 million in 2021. Gross margin held a negative margin of 45.8% in Q4, compared to a positive gross margin of 37.7% in Q4 2021. This negative margin is another response to our reduced quarterly revenue as we transition to mass production. Gross margin for the full year of 2022 increased to 63.5%, compared to 36% in 2021. This improvement was driven mainly by economy of scale, revenue mix, and lower cost per unit as we progress toward production. Moving on to expenses, in Q4 2022, we reported total operating expenses of $14 million, compared to $14.2 million in Q4 2021. The decrease in our pre-production-related costs and the favorable impact of foreign currency exchange rates were offset by an increase in labor costs and non-cash share-based compensation expenses. Operating expenses for the full year totaled $50 million, compared to $34.1 million in 2021. The increase was in line with our expectations as we continue to grow the company and add to our employee base to support our future growth. We also continue to strengthen our research and development investment, with R&D expenses totaling $10.8 million in Q4 2022, compared to $11.6 million in Q4 2021, related to a decrease in pre-production costs. R&D expenses for the full year were $36.7 million, compared to $28.6 million in 2021. Operating loss for the full year of 2022 was $47.7 million, compared to a loss of $33.3 million in 2021. This reflects our growing investment mainly in research and development and in our human assets as well as costs associated with being a publicly traded corporation, all towards our progress for production. Looking at adjusted EBITDA in Q4 of 2022, non-GAAP measurement excluding expenses for non-cash share-based compensation and for non-recurring items, was a loss of $11.5 million, within our guidance, compared to a loss of $11.9 million in Q4 of 2021. Adjusted EBITDA for the full year 2022 amounted to a loss of $38 million, compared to a loss of $30.4 million in 2021. The net loss in the fourth quarter of 2022 decreased to $11.1 million with $3 million in financial income, compared to a net loss of $15.8 million in the fourth quarter of 2021. Net loss for the full year of 2022 was $40.5 million, compared to $58.1 million in 2021. Moving to our balance sheet, as of December 31, 2022, Arbe had $54.2 million in cash and cash equivalents with no debt. With respect to our guidance for 2023, we would like to provide an outlook for the full year ending December 31, 2023. Our goal for 2023 is to achieve four design-ins with OEMs. Revenues are expected to be in the range of $5 million to $7 million, representing our expectations of full production in Q4 2023, together with our decision to focus exclusively on production-intent chips. Adjusted EBITDA is expected to be in the range of $32 million to $35 million loss, primarily related to revenue year-over-year growth, as well as decreases in initial production costs and cost efficiency efforts. I am now pleased to hand over the floor to our Chief Business Officer, Ram Machness, who will share insights into our market forecast and the business opportunities that lie ahead.

Thank you, Karine. I am Ram Machness, and I am the Chief Business Officer at Arbe. We would like to provide an outlook for 2023 and summarize 2022. We will talk a bit about the market trends we have seen in 2022. We will talk about our business model and what’s next, where we see the main trends emerging, and where we see our product winning in the market. When we look at the market and the trends for 2022, we see many changes in the autonomous driving arena. There was a lot of buzz around autonomous driving, but we see the whole solution providing complete autonomous driving is a trend that is diminishing. Now, we are looking at the development of smaller features and capabilities specific to certain scenarios that work under specific conditions and sometimes require driver supervision. So instead of providing a full solution that works in any scenario, in any road condition, and any weather conditions fully unsupervised, we are seeing a trend of developing specific features that evolve the overall automation in stages. For example, in the past, we may have wanted the car to drive fully autonomously all the time. Now, we are focusing on scenarios with very clear entry and exit criteria. We are seeing many OEMs looking at providing the building blocks for these solutions. Additionally, we observed a strong trend toward software-defined vehicles, meaning that the software can evolve throughout the ownership of the vehicle. OEMs want to ensure that the hardware they place in the car can support advanced features in the future. Across all OEMs, there is an understanding that Imaging Radar adds independent information relevant to autonomous features and capabilities, which car manufacturers are eager to integrate into their vehicles. We see not only ourselves, but also competitors like Mobileye declaring that Imaging Radar is critical for providing those advanced features. We are in contact with 12 out of the top 15 global OEMs looking to integrate Arbe radars into their next platforms. We have also announced our penetration into the Japanese market and we have passed their regulatory certification for radars based on our chipset to commence operations there. When we look at the radars Arbe is bringing to market, we talk about Perception Radar, which differs significantly from traditional radar systems. For example, with traditional radar, if a bus and a pedestrian are next to each other, the radar may only detect there is something there, but it can’t separate the two objects. Basic Imaging Radars might identify the presence of larger objects or stationary objects, but they fail at distinguishing between them. Our Perception Radar allows us to give clear images of the outside world, improving the capabilities of perception algorithms that require an independent information source. Current generation radars can manage basic functions such as adaptive cruise control and emergency braking, but they often cannot accurately determine the size of objects or identify stationary ones. Our high-end Perception Radar addresses these limitations by providing a detailed image of the environment and identifying distinct objects. This represents a fundamental evolution in the sensing capabilities needed for advanced perception systems. Therefore, as we move forward, we are confident that the next steps in our development will include enhancements in both technology and customer engagement, enabling us to stay at the forefront of the industry.

Thank you, Ram. Hello, everybody, I am Noam, the Co-Founder and CTO at Arbe. Today, I am going to show you our technology. Radar is the perfect automotive sensor, known for its great features like effectiveness during the day and night, resilience against weather conditions, and the ability to detect targets at long distances with high refresh rates. Arbe has harnessed this mature technology to push performance boundaries using Massive MIMO concepts that allow us many channels to process. Our primary radar uses 48 transmitters and 48 receivers for optimal detection. We also have a downsized version utilizing 24 transmitters and 12 receivers. Channel count is crucial in radar technology, comparable to camera resolution. We are achieving ten times better performance than the existing radars on the market due to our innovative design. Over the years, we have developed our radar chipset, which is composed of our own receiver chip, transmitter chip, and digital chip, integrating cutting-edge radar processing capabilities. Our Radar Dissensor is meant for crucial driving scenarios, from basic obstacle avoidance to mapping the environment for various applications. We are tackling the challenge of detecting vulnerable road users with the required high resolution. Additionally, we are innovating in creating simultaneous localization and mapping capabilities for our radar that will enable advanced ADAS functions. We are dedicated to expanding our strong patent portfolio, which protects our core technologies, and we continuously seek to enhance our competitive edge. We anticipate unveiling a super-resolution point cloud based on our current data, which will allow us to approach LIDAR-like resolutions at a fraction of the cost. These enhancements are key for mass adoption of our autonomous driving technologies in the future.

Now we will be happy to take your questions. The first question will come from the analyst, Gary Mobley of Wells Fargo. Hi, Gary?

Hey, guys. Thank you for taking my question. I want to pick up where you just left off in your prepared remarks and talk about the future architecture in the competitive environment. Do you see a situation where automotive OEMs like Tesla, for example, may have the capability to develop high-definition radar solutions? Do you see a path towards some of what your competition is implementing using camera imaging, sensing, and centralizing control, or is edge processing still secure in terms of radar specifically?

Thank you for these questions. We believe that the amount of data generated from a 4D high-resolution Imaging Radar cannot be processed exclusively on the edge. The theoretical data of 1 terabyte is unrealistic to send to a central computer. Similarly, OEMs developing their own chipset does not make sense economically. We have our own processor, and we believe our core IP and next-generation processor will provide OEMs better capabilities to develop their stacks on top of it. As of now, we have not heard of any OEM desiring to develop their chipset, although they may try to engage directly with Tier 2 suppliers.

Now we will take questions from Josh from Cowen.

Sorry, and thank you for taking my question. I appreciate all the facts you made there, but I want to ask about the financial outlook. 2023 seems to be coming in materially softer than your original forecast, which was driven by ramps from Chinese customers and also robotaxi. Can you speak to what’s driving the softer growth outlook versus original expectations?

As we see it, we are experiencing a shift of around three quarters from our original plan two years ago. This shift is primarily due to supply chain problems that have slowed down our production timeline and, on the other hand, delayed decisions on the OEM side. Full autonomous driving has also progressed more slowly than expected, reflecting feedback from our customers. However, the good news is that the supply chain issues are behind us, and China is working to close the gap rapidly. We are optimistic for 2024, as we expect to be closer to our initial forecasts, including a preliminary order valued at around $30 million.

To add to Kobi, the strategy was adjusted to focus on serial production and revenue potential for future recurring revenue streams, which allows us to solidify our customer base while ensuring they endorse our technology.

Hi, can you just touch on the OEM repositioning? You mentioned in your presentation slide that the OEMs are evolving their customer stacks. Are they becoming more comfortable over time with your technology?

Yes, indeed! The OEMs have a strong desire to make their hardware ready for the features associated with autonomous driving Level 2+ and Level 3. They must ensure that their system can process and sense the environment effectively, making high-definition Imaging Radar an essential sensor alongside cameras.

If I could ask a quick follow-up. You mentioned you are engaged with 12 of the top 15 automakers. Are the other three engaged with advanced radar competitors, or are they radar skeptics at this point?

The other three are certainly working with lower-end Imaging Radars, while we, with our high-channel count solutions, are providing distinct advantages in performance, providing a level of detail and reliability that sets us apart.

I have a technical question. In your presentation, you mentioned that you have multiple frequencies. Are these against other radar systems or are they from other components?

The multiple frequencies are designed to keep us from being interfered with by other radars and maintain compatibility since there may be more than one radar per vehicle.

Okay. Just a follow-up on the revenues this year. Is it going to be primarily evaluation sales or testing sales?

We are focusing on our chipset production, which will be back-loaded towards the end of the year. Throughout the year, we expect to have small amounts of chipset sales for non-automotive customers, along with additional small volumes for our known customers.

The major part is our production of our chips and the preliminary order we have in place.

Thank you, Jaime.

We will have some more questions from the audience.

Both Arbe and Mobileye announced a direction towards high channel count radars based on what the technology is called FMCW. In that sense, we align with them in aiming to solve the sensing needs for perception. However, Arbe is bringing our chipset into production this year, a step ahead of the competition.

Next question from Billy. How close is the next best competitor to your product performance levels?

If we look at the regular competitors, they are focused on lower-end Imaging Radars that operate at lower channel counts, while we are delivering significantly better performance with our high channel count technologies.

To add to what Ram said, we are providing ten times more performance at the same pricing as the next best radar.

Several investors had questions about the Tesla buzz.

We can only refer to OEMs that have allowed us to share their names, but we are hearing a strong trend across the industry regarding the widespread shift toward Imaging Radar.

Last question. Kobi, what keeps you up at night?

Aside from the production pressures we are facing, I am primarily concerned with maintaining motivation for innovation. It is vital that, parallel to our shifts to mass production and customer support, we preserve our drive as an early-stage startup to develop our next-generation product. We appreciate your participation today and your ongoing support as we strive to push the boundaries of innovation in the industry and lead in Level 2+ and Level 3 advanced perception. To our valued employees and partners, we extend our sincerest thanks for your commitment to Arbe. Your hard work and dedication propel us forward to achieve our goals. We are excited about the opportunities that lie ahead and committed to keeping you updated on our progress. Please reach out to us at investors@arbe.com or visit our website to schedule a meeting. We look forward to hearing from you.

Thank you.