Arbe Robotics Ltd. Q1 FY2023 Earnings Call

Good day, and welcome to the Arbe Robotics First Quarter 2023 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Miri Segal, CEO of MS-IR. Please go ahead.

Thank you, everyone, for joining us today. Before we begin, I would like to remind our listeners that certain information provided on this call may contain forward-looking statements, and the Safe Harbor statement outlined in today's press 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 Chief Executive Officer; and Karine Pinto-Flomenboim, CFO. Kobi will begin the call with a business update, then we will turn the call over to Karine, who will review the financials. Finally, we will open the call up to our listeners for the question-and-answer session. With that, I'd like to turn it over to Kobi Marenko. Kobi, please go ahead.

Thank you, Miri. Good morning everyone, and thank you for joining us. I will begin by reviewing some of our recent business highlights, then Karine Pinto-Flomenboim, Arbe's CFO, will review the financials in more detail, and share our outlook. This quarter, we have taken significant steps for production and increasing revenue through our collaboration with Tier 1s and leading car manufacturers who look to adapt our technology for enhancing safety and autonomy in their next-generation platforms. Weifu has successfully established a production line and has a functional B sampling operation, which represents the production configuration. Four other Tier 1s are actively constructing their production lines and are in the final stages of B sample development as well. The Weifu production line is currently capable of producing tens of thousands of units per year. Weifu is in the final stages of upgrading their production line to allow them to manufacture hundreds of thousands of radars annually. I recently returned from China, which was my first time visiting since COVID, and I was very encouraged by the commitment and progress achieved with car manufacturers. While there, I participated in the Shanghai Auto Show where Arbe and Weifu signed a strategic cooperation agreement with Didi Global's autonomous freight company, KargoBot. Didi Global is the leader in innovative mobility technology in China, providing safe and sustainable transportation worldwide. KargoBot will be integrating Weifu's radar system, which utilizes the Arbe chipset, into their Level 4 trucks. As we have stated many times, safety is at the heart of Arbe's focus and commitment. Together with Weifu and KargoBot, we intend to develop advanced technological products and accelerate the commercialization of autonomous driving solutions in the field of logistics and freight. Additionally, we are collaborating with the perception teams of leading European and Asian premium car manufacturers who are implementing our radar technology in their next-generation solutions. This collaboration aims to bridge the gap between current driver assist systems and the desired next generation of safety and autonomy. By working closely with these teams, we demonstrate the advantages of our radar technology and illustrate its role in driving forward advancements in the automotive industry. After meeting with Weifu, HiRain, and our customers in China and observing the progress made by our Tier 1 Valeo and Veoneer in engaging potential customers across Europe and America, we are confident that we will achieve our target of securing four OEM selections by the end of this year that will generate significant revenue. With our cutting-edge technology, we are well-positioned to meet the growing demand for safe driver-assist systems, providing unparalleled performance, and paving the way for a future where road safety is significantly enhanced. Finally, we are delighted to announce the exciting news about Sensrad, a spin-out venture from our longstanding partner Qamcom. Sensrad is dedicated to developing radar systems based on the advanced Arbe chipset. In a significant development, Sensrad has received a strategic investment from Gapwaves, a leading provider of high-performing radar antenna technology. This strategic partnership enables Sensrad to deliver cutting-edge radar systems to various industry verticals including infrastructure, heavy machinery, surveillance, and autonomous mobility. By leveraging the power of Gapwaves' antenna technology along with the exceptional capabilities of the Arbe chipset, we believe that Sensrad radar systems will provide unparalleled safety and enhanced autonomy across a wide range of industries. The potential for radar application in non-automotive verticals is enormous, and we are thrilled to join this journey. As we look ahead, we are confident in our strong position for sustained growth in 2023. With the support of our partners in China, Europe, and the U.S., we are fully prepared to achieve our commercial objectives and mass production this year. Now, I would like to turn it over to our CFO, Karine, to go over the financials.

Thank you, Kobi, and hello, everyone. I would like to review our financial results for the first quarter of 2023 in more detail. Total revenue in the first quarter was $0.4 million, a decrease from $0.9 million in Q1 2022 and in line with our expectations given our decision to shift focus to production of chips. Backlog as of March 31, 2023, was $0.4 million, not including the previously announced HiRain preliminary order. Gross margin for Q1 2023 was 11% compared to 56.1% in Q1 2022, mainly related to economy of scale and, to a lesser extent, revenue mix. Moving on to expenses, in Q1 2023, we reported total operating expenses of $10.7 million compared to $11.1 million in Q1 2022. The decrease in operating expenses was primarily driven by exchange rate favorability and, to a lesser extent, savings in expenses and labor costs, partially offset by an increase in our research and development. As a result, our operating loss remained unchanged from the third quarter of 2022 at a loss of $10.6 million. The company continues strengthening its research and development investments with R&D totaling $8.1 million for Q1 2023 compared to $7.8 million in Q1 2022. Looking at adjusted EBITDA, a non-GAAP measurement which excludes expenses for non-cash share-based compensation and for non-recurrent items, was a loss of $8.4 million in Q1 of 2023 which exceeds the company's expectations and compared to a loss of $8.5 million in the first quarter of 2022. Net loss in the first quarter of 2023 increased to $9.9 million compared to a net loss of $7.9 million in the first quarter of 2022. Net loss in Q1 2023 included $7.7 million of financial income compared to $2.8 million of financial income in the first quarter of 2022. Moving to our balance sheet, as of March 31, 2023, Arbe had $44.9 million in cash and cash equivalents, with no debt. With respect to our guidance for the year, we would like to reiterate what we've previously shared. Our goal for 2023 is to achieve four design-ins with automakers. Revenue is expected to be in the range of $5 million to $7 million, which will be heavily weighted towards the back-end of the year. Adjusted EBITDA is expected to be a loss in the range of $32 million to $35 million. As Kobi said, we believe that we are well-positioned for sustained growth in 2023 as we plan to go into mass production, and we look forward to updating you on our progress in the coming quarters. Now, we will be happy to take your questions.

We will now begin the question-and-answer session. The first question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Hey, everyone. Thanks for taking my question. Regarding the goal for the four OEM design wins with automakers for the year, can you give us a sense of what model years that would be focused on?

Sure. There is, of course, a difference between China and the U.S. and Europe. So, China is today working faster in terms of bringing new hardware into their cars. We are focusing on model year '25 in China, which means that their radar systems are expected to start production by the end of '24, which means that our revenues from the chipset will start ramping up in '24. In Europe and the U.S., we are focusing now on model years after '26, sometimes even '27. The radar will start production in mid-'25, and revenues will ramp up in early '25.

Thanks, Kobi. As my follow-up, I wanted to probe a little bit deeper on HiRain with a multi-part question. What would it take to translate preliminary orders into shipments? And what sort of impact would those preliminary orders have on your backlog?

I think that HiRain is waiting for their final announcement from their OEM about receiving the design-ins, as well as the exact date of the start of production of the car. In contrast to Europe, in China, new models can start production almost every month of the year due to the volume of models being launched. When I was at the Shanghai Auto Show, there were 14 new EV models coming out of China this year. Therefore, HiRain is awaiting the exact date for the start of production of the car, which is what will convert their preliminary order into a formal booking.

Regarding your backlog question, Gary, we currently do not include the preliminary orders in our backlog, but when they become formal orders, they will be part of our backlog.

Thanks, Karine.

The next question comes from Joshua Buchalter with TD Cowen. Please go ahead.

Thank you. And thank you for taking my question. I wanted to ask a follow-up to Gary's question on the four potential design-ins for this year. Anything you can give us on the scope, magnitude, or use case on those? Where are you working? Is it for front-facing perception radar? Just any clarity on the magnitude of those engagements? Is it across vehicle models? Is it for different OEMs? We would just love more clarity there. Thank you.

Yes, almost every OEM today is evaluating imaging radar for their next-generation platforms. We are engaging in these opportunities through our Tier 1 partners, but the ultimate selection is held by Veoneer, Valeo, Hirain, or Weifu, not Arbe directly. I would categorize our engagements into three models: first, engagement via RFP and RFQ, where we are not directly involved but Tier 1s update us on their progress; second, those companies involving us in their evaluation stage, providing detailed use cases where they see challenges with their existing sensor suite; and third, deep engagement with companies already installed with our technology in their development vehicles, collecting data for their perception stack.

Thank you for all that, Kobi. As my follow-up, I wanted to ask about the competitive environment. We've seen some announcements from large incumbents in the auto radar market that are defining imaging radar functionality. Can you compare and contrast what you're bringing with your single-chip solution versus what some of the larger peers who have been selling products to the radar market for a while are calling their products imaging radar? I'd love to hear you walk through what's changed in the competitive environment recently. Thank you.

I think that the competitive landscape hasn't changed much since we started. Initially, we saw NXP's processor and existing RF chipsets from NXP and TI as our competition. There was also a midterm solution that was based on a four-chip cascaded TI chip and a single FPGA. NXP finally announced a processor attempting to compete, but when it comes to real-world results, all those competing solutions fail to solve the complex challenges faced by automotive manufacturers. Mobileye's recent decision to develop a radar similar to our specifications underscores the unique capabilities of our single-chip solution, providing unparalleled performance and results in real vehicles testing.

Thanks, Kobi.

The next question comes from Suji Desilva with ROTH MKM. Please go ahead.

Hi, Kobi. Hi, Karine. You target four OEMs by the end of the year. I'm curious how many you are currently engaging with? And what proportion of those are within the three categories you just discussed, type 1 versus 2 versus 3?

First of all, we categorize those companies in group 3 as having a low probability of winning. The companies in category 1, where we are very engaged with the perception teams, are those where we believe we have over a 50% probability to win. When we multiply the number of OEMs in that category by the probability, we project that four is a reasonable target. There is another batch in category 2 where we have a very high chance of winning, though some selections may slip into 2024. When we mention four, we consider all car companies where we are confident we can achieve a design win this year.

Okay, very helpful. And then just to understand how backlog reports for the next few quarters, is that, Karine, a three-month backlog of all the shipments you expect in the coming quarter or a 12-month backlog, and will that grow when you have more design wins? How should we think about that number?

Backlog usually represents a 12-month forecast, sometimes even further ahead. It can take between 18-24 months for revenue recognition from traditional western OEMs, while for the Chinese market, it may take 12-18 months from agreement to revenue recognition. Therefore, we expect that bookings would reflect in our backlog and will increase with new design wins.

Okay, thanks.

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

Good day, everybody. My question, I think I want to focus on the non-automotive segment. I mean how far are we in that segment? Are we looking to understand the timeframe of shipment product, maybe the size you expect to win in that segment in the next year or two?

In this segment, I think that the fact that Qamcom started a fully dedicated arm called Sensrad for that focus will accelerate our progress. We expect revenues from the non-automotive segment to start as early as '24, with higher volumes expected in '25.

All right, okay, higher volume, this helps. Are you going to be shipping product in 2023? I mean how much lead time do they need just in time? Maybe give some color on that.

They will first need us to start production. So, they cannot ship products until we start production. We expect to start production by the end of this year, and they should start providing systems around Q2 next year.

All right. And my follow-up, I mean in the next couple of years, let's look forward in the next four years. I mean how big is non-auto when we compare it to the auto? Is it going to be more or less, auto is going to be the bulk of your revenue?

Four years from now, non-auto would be single digits in percentage, up to 10% of our entire revenue. The gross margins there are a bit better than auto, but still I think nothing compares to auto when we talk about full design wins. The minimum yearly revenues for auto is around $25 million to $30 million a year. Therefore, if the non-auto segment reaches $25 million by '26, that would be considered a significant win for us.

All right. That's all the questions I have. Thank you.

Thank you.

Thank you.

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

Hey, good morning, and thanks for taking my questions. I wanted to sort of, if we think about your models and engagement answer, the OEMs that haven't decided yet to add imaging radar and contrast that with your position that your imaging radar is the only way to resolve some corner cases between other sensors. Can you help us understand if those reluctant OEMs are just not as advanced in their ADAS ambitions, or is it something that you expect they will get to it at some point in the future? Just where is the divide there?

In the automotive space generally, there are leaders and innovators and followers. This was evident in the history of airbags and camera solutions. It typically starts with premium OEMs focused on safety like Volvo and Mercedes, followed by others. In ADAS, some manufacturers are innovating on their own while others might wait until this technology is mainstream, seeing customer demand before transitioning to new technologies. Companies focused on evolving their solutions to fully autonomous vehicles have recognized the necessity of imaging radar to support higher safety and performance goals.

This concludes our call. I will turn the call to Kobi Marenko, Arbe's CEO for closing remarks.

Thank you. We are very 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. Look out for updates as we prepare for further investor events including the Evercore Virtual Autotech & AI Forum on May 24; TD Cowen's virtual ESG Week on June 5; and the Needham Virtual Automotive Tech Conference on June 7. Please contact us at investor@arberobotics.com or visit our website to schedule a meeting. Thank you and goodbye for now.

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