Arbe Robotics Ltd. Q2 FY2023 Earnings Call

Good day, and welcome to the Arbe Robotics Second Quarter 2023 Earnings Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Miri Segal of MS-IR. Please go ahead.

Thank you, operator and everyone, for joining us today. Welcome to Arbe's Second Quarter 2023 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, 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, our Co-Founder and CEO, who will begin the call with a business update. 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'd like to turn the call 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, our CFO, will review the financials in more detail and share our outlook. We are pleased with the progress we have made in the second quarter. Our product development is on track, and we are poised to achieve a production-ready chipset by the end of this year. Our collaboration with Tier 1 is rapidly evolving, reinforcing our position in the global auto market. Notably, our cutting-edge technology plays an increasingly important role in enhancing our customers' next-generation product offerings. Weifu High-Technology Group, a key Tier 1 we've been working with since 2019, placed an $11.6 million preliminary order for our radar chipset, which will enable us to meet Weifu's project and sales demand for 2024 for customers across China. As many of you are aware, China is one of the fastest-growing automotive industries in the world, and this preliminary order represents a large opportunity for us going forward. We know there is a strong demand for perception radar coming from the region, and we are committed to providing key players such as Weifu with the most advanced perception radar solutions that can provide comprehensive free space mapping of the vehicles surrounding. Additionally, Weifu placed a $1 million order for professional services, including engineering services, the setup of a testing lab, and advanced support from Arbe. As we mentioned in Q1, Weifu has already successfully established a production line and has a functional base operating, which represents the production configuration. Other customers are actively constructing their production lines and are in the final stages of B sample development as well. This achievement represents one more milestone for our expansion strategy, starting revenues from China in 2024. In parallel, radars based on our advanced chipsets are in the final stages of selection with 11 major premium OEMs in Europe and China. We see momentum for our radar, mainly for Level 2++ and Level 3 applications in both of those markets, and we are confident that we will meet our targets for full selections this year. In Q2, we successfully raised $23 million with special situation funds as well as from some of our current investors who are related to our directors. In case you are not familiar with Special Situation funds, they are a collection of value-driven funds that invest in growth-oriented small and micro-cap public equities primarily in the United States, Israel, and Canada. The fund's mission is to identify complex technology trends likely to materialize in the not too distant future and then invest in small companies with state-of-the-art solutions that critically enable those trends. We expect to use the proceeds to further enhance our penetration in the Chinese automotive market, expedite our R&D efforts, increase our chipset line capacity, capitalize on recently proposed safety regulations, and strengthen our balance sheet. Just recently, during Q2, we participated at the International Wireless Industry Consortium Automotive Sensor Architecture Conference hosted by BMW, where we showcased our latest breakthrough in radar camera fusion. Arbe's advanced AI algorithms enable real-time fusion of radar and camera data, empowering vehicles with enhanced object detection and tracking capabilities at high speeds and long ranges. This innovative solution is designed to excel in detecting multiple objects to provide clear pathways on highways and complex environments, ultimately making it truly safe for drivers and pedestrians alike. As we look to the second half of the year, we are confident in our position, and we remain committed to adding four customer wins by the end of 2023. Now I'd like to turn it over to our CFO, Karine, to go over the financials.

Thank you, Kobi, and hello, everyone. I'd like to review our financial results for the second quarter of 2023 in more detail. Total revenue in the second quarter was $0.3 million, a decrease from $1.2 million in Q2 2022 and slightly below our expectations. Backlog as of August 9 is $1.5 million, not including the previously announced higher-end preliminary orders from Weifu. Gross margin for Q2 2023 was negative 1% compared to a positive 72.7% gross margin in Q2 2022 as a result of our reduced quarterly revenue while we transition and focus on mass production. Moving on to expenses, in Q2 2023, we reported total operating expenses of $12.6 million compared to $30 million in Q2 2022. The decrease in operating expenses was primarily driven by a decrease in research and development from $9.5 million in Q2 2022 to $9.1 million in Q2 2023, and a decrease in general and administration expenses from $2.3 million in Q2 2022 to $2 million in Q2 2023. The decrease in both was primarily related to a reduction in subcontractor expenses, favorable exchange rates, and a reduction in D&O insurance costs, partially offset by an increase in our share-based compensation costs related to recent employee grants and, to a lesser extent, an increase in fundraising costs. Sales and marketing expenses increased from $1.2 million in Q2 2022 to $1.5 million in Q2 2023. Excluding share-based compensation expenses, the sales and marketing level remains unchanged. Operating loss in the second quarter of 2023 was $12.6 million compared to an operating loss of $12.1 million in the second quarter of 2022. Adjusted EBITDA, a non-GAAP measurement, which excludes expenses for share-based compensation and for nonrecurring items such as fundraising costs, was a loss of $8.4 million in Q2 of 2023. This overperformed the company's expectations when compared to a loss of $9.5 million in the second quarter of 2022. Net loss in the second quarter of 2023 was $12.6 million compared to a net loss of $11.6 million in the second quarter of 2022. The net loss in Q2 2023 includes $0.03 million of financial expenses mainly related to exchange rate revaluation, offset by income from interest on deposits and warrant revaluations. The net loss in Q2 2022 included financial income of $0.5 million, mainly related to warrant revaluation. Moving to our balance sheet, as of June 30, 2023, Arbe had $31.6 million in cash and cash equivalents and $25.6 million in short-term bank deposits with no debt. Regarding our guidance for the year, we would like to reiterate what we 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. Now we will be happy to take your questions.

The first question today comes from Gary Mobley with Wells Fargo.

As we think about the fruition of the preliminary order from Weifu and the backlog from both Weifu and HiRain, is the conversion of that primarily a function of having production bubble quantities available from GLOBALFOUNDRIES? And maybe if you can give us some update on where you stand in having some production-ready silicon out of your foundry partner?

Hi Gary, thank you for the question. Basically, yes, this is what it means. So we have around $30-something million worth of orders from our partners in China, and this means that GLOBALFOUNDRIES has for us at least the capacity for next year, for 2024. Regarding the progress in production, we are more or less in line with our plan. The production of chips in automotive is around an 18 to 24-month plan. And right now, we are meeting our milestones in the resolution of weeks. The three chips are in the final stages of qualification for automotive AEC-Q100, and for safety, we don't expect any issues with production right now. We have the chips, the production chips already in our office. They are all functioning on radar samples. So when we say that there is a big sample of Tier 1, the base sample includes the chips from the final production version. It just needs to finish at the time that those chips need to work in order to get the final stance that they are qualified.

That's helpful, Kobi. And I was hoping that you can give us an update on the competitive environment. You have been a public company for about two years, and the 4D radar market has evolved over that time. I don't know if we can say it is at a slower-than-expected pace, but nevertheless, maybe it's given an opportunity for some competitors to catch up. Could you give us an update there on how you see the competitive environment?

Yes. So first of all, I think that the main thing is that the competitive landscape didn't change. Right now, we see in all of the RFPs that we are in and mainly with the premium German OEMs, we see Continental as a Tier 1 based on TI chipset on the RF side and as a processor or FPGA. This is the same chip that we know, the same performance that we know, and this is a radar that has an order of magnitude lower number of channels than our solution. On the other side, we see Mobileye trying to take into production radar with a similar, more or less similar number of channels as us, a bit less, but I think 10% less challenged than what we have. We still believe that we are two to three years ahead of Mobileye in terms of maturity of the solution, and we have an advantage in price based on our patents and the system architecture direction that we took as opposed to Mobileye. So basically, there are no new players in this market. I believe that the environment now, both on the public markets and in the private high-tech sector, will not allow a new competitor to get in. It's $100 million to $200 million to reach a solution. So we see that till the end of the decade, this is the picture that we see: a two-horse race between Mobileye and our solution, and of course, we have the Tier 1s behind us. Especially the fact that Veoneer, which was our main Tier 1, was purchased by Magna, which is a much bigger company, gives us comfort that there is a big player in the market pushing our solution into production.

The next question comes from Joshua Buchalter with TD Cowen.

This is Lanny on for Josh. You called out that you're in the final stages of selection for 11 premium OEMs in Europe and China. I was just hoping you could elaborate on your confidence in terms of the conversion. Are they in kind of the final cost region, and what is the magnitude of these engagements? Is this leading to production chips? And I have a follow-up.

Sorry, I couldn't hear the question. Your line was too bad. Can you please repeat the question?

Sure. So you called out that you're in the final stages of selection for 11 premium OEMs in Europe and China. I was hoping that you could elaborate on your confidence that four of these will convert to meet your 2023 goal? And any color that you can provide on the magnitude of engagement or the different progress levels across the regions? And I have a follow-up.

Yes. So first of all, I think that in general, the selections in China are for a much earlier year model, which means that the revenues that we will see are much earlier than in Europe and the U.S. In China, we are now in a final selection of cars that should go into production in the second half of '25, which means that they need to get radars from the Tier 1s in early '25. This means they need to get chips from us by Q1, Q2 '24. We believe that those selections will provide us with the ability to fulfill our projection for '24 and '25. Also, in China, I cannot elaborate, but there are two major OEMs that want to produce the radar by themselves. Those deals will definitely include some major NRE for us. So it will also help us to meet our second half guidance as well as the revenues there. In Europe, we are targeting model years '26 and even '27, so it's a year after China in terms of revenues. However, the volume in Europe is much higher. The fact that the premium German OEMs and another big manufacturer in Europe will select our technology means a lot for our technology.

Great. For my follow-up, I was hoping that you could talk about your $11.6 million order with Weifu Technology a bit more. If this is unique, what are their estimated requirements for 2024? How can we expect this to kind of layer into the model for that course of time?

This is basically, the $11.6 million is the expectation of Weifu for '24. I remind you that we also have a preliminary order from HiRain from last quarter of another $30 million for '24. So this is essentially together what is giving us our focus for '24.

The next question comes from Jaime Perez with RF Lafferty.

Good day, everybody. I mean gross margins took a hit this quarter. Could you give us some color on the progression as you ramp up and meet the annual expectations for revenue?

I think that the gross margins... Sorry, just take it.

Just to say, this is, first, as expected. The revenue levels meet only the fixed cost of our cost of revenue for that portion of the COGS. That's why it's driving a 0-margin profitability for this quarter. But of course, as we progress toward the second half of the year with our expectations of revenues, the fixed portion will still remain, and our contributed margin is a profitable margin, which is above 60%. So taking it all into a mixture, it will drive us to a higher percentage, and of course, positive ones.

All right. So reading into it, I mean, right now, we're looking at, let's say, this fixed cost, and then as you ramp up, which you're sort of leveraging the variable costs. All right. Next, to meet the annual revenue guidance, when do you need to ship those chips to the client? And do you book revenues when they receive them or when the cars are sold to the client? What sort of – my question is, One is the revenue recognition?

Basically, we will begin to ship the chips early next year. We believe maybe we will be able to ship some of it by the end of this year, but the majority will go in early '24. Basically, the revenue recognition, and Karine can elaborate upon delivery to the Tier 1.

Shipments, yes. Thank you, Jaime.

The next question comes from Matthew Galinko with Maxim Group.

So we see the progression in the backlog number. I guess I'm just curious if that's excluding the two major Tier 1s that we've talked about, where is the backlog growth coming from?

So yes, as I stated, it excludes the recent Weifu and HiRain preliminary orders, but it does include, as mentioned in our PR, the $1 million in order from Weifu for services, which we received, and that's included in our orders. We'll also be able to recognize it towards the end of the second half of the year.

Okay. I think you might have mentioned in your prepared remarks that revenue was below internal expectations for the quarter. So I guess, can you just touch on maybe why and does that influence your view on where we land for the full year range? Or is that just a timing issue that doesn't really change the full year expectation?

The first two quarters' revenues this year were not really meaningful. So when we say it's below expectation, it's below $50,000 or something. So it's a matter of shifting of a few chipsets of a few radar models that shifted between Q2 and Q3. Basically, I think this year's revenues are not the ones that are really important. The real revenues are 24% and up. This year, we're still selling chipsets for evaluation, radars for evaluation, and so on. Before we will start shipping full production, the revenues and the level of the revenues are basically meaningless. They don't show anything about our traction. Maybe the other way around. Our ability to be laser-focused on the selections and to support our Tier 1 on the selections they are going through with their customers is important. We can always sell another 10 or 20 systems to clients that, by the end of the day, will buy from us 100 radars or 100 chips, which is not relevant. We are focused on the big paths and the big selections, not on small projects that we can always take.

Got it. And then just the final one for me. I think you touched on a radar camera sensor fusion demonstration. Just curious, is that the direction that you think OEMs are starting to pull as far as their sensor stack looking out into the '27 model years? Or how are you thinking about it? And how does that impact your go-to-market, if at all?

So basically, we're acquiring as much as we can to build a software stack that will help our final customers, the car manufacturers, to adapt the technology as quickly as possible. We are working to help them with the Free Space Mapping, and the classification of objects based on the radar, as well as with the fusion. We are not going to take this code and this software stack into production; we will just provide it as reference code to our customers in order to reduce their effort in taking those technologies to production.

The next question comes from Suji Desilva with ROTH Capital.

So congrats on the progress here. The customers that are in the final stage of selection, Kobi, what are the remaining steps in their process that they are evaluating and that are between here and sort of final decisions, just so we understand the remaining process?

I think there are two things here that the Tier 1 needs to meet in order to get into selection. First of all, in all of the evaluations that we are in, it's clear that the technology and the product are better than the competition and the price is attractive. What they are waiting to see is a full sample from the Tier 1, especially from Magna and also from HiRain. The fact that we have a big sample with Weifu is very good, but we also need to have a big sample with the last version of the chips going into production from HiRain and from Magna. This is expected to be around, I believe, during September. So both of them already have the harbor, and it's in the final stages to bring up. This is a major milestone for the selection. We will then be left with last but not least, the final negotiation on price. We believe that by September and October, we will be able to be selected for some of those projects.

And then one other question, I apologize if you already covered this. The Weifu announcement, does that cover a single automotive OEM? Or is that multiple automotive OEMs that they're working with? If it is in auto, I just wanted to clarify that or if it's not?

It's part of it is OEM, and part of it is the project that we won together with DiDi for the Level 4 trucks that we announced last quarter.

This concludes our question-and-answer session. I would like to turn the conference back over to Kobi Marenko, Arbe's CEO, for any closing remarks.

Thank you. We were so pleased that you joined 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 several investor events, including the JPMorgan Auto Conference that happens today, the Jefferies Chicago Semis Conference on August 29, and the Jefferies Israel Tech Track on September 12. Please contact us at investors@arberobotics.com or visit our sites 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.