Earnings Call Transcript - ARBE Q1 2024

Operator, Operator

Good morning, everyone, and welcome to the Arbe Robotics First Quarter 2024 Earnings Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that today's event is being recorded. At this time, I'd like to turn the floor over to Miri Segal, CEO of MS-IR. Please go ahead.

Miri Segal-Scharia, CEO of MS-IR

Thank you, everyone, for joining us today. Welcome to Arbe's First Quarter 2024 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 release also applies to today's call. If you have not received a copy of the PR, please view it in the Investor Relations section of the company's website. Kobi Marenko, Arbe's Co-Founder and CEO, will begin the call with a business update. Then we will turn the call over to Karine Pinto-Flomenboim, Arbe's CFO, who will review the financials in more detail. Finally, we will open the call for the question-and-answer session. With that, I'd like to turn it over to Kobi Marenko, Arbe's CEO. Kobi, please go ahead.

Kobi Marenko, CEO

Thank you, Miri. Good morning, everyone, and thank you for joining us. I'd like to start by sharing some exciting updates with you. We congratulate hiring one of our Tier 1s in China on being selected to supply radar systems powered by the Arbe chipset to a global leader in autonomous driving with net production scheduled in 2025. We look forward to providing more details about this announcement soon. Arbe also reached a significant milestone in Q1, the successful development of post-point cloud algorithms, including tracking classification and free space mapping. These algorithms have been integrated into HiRain's imaging radar for serial production. This advanced technology was tested by OEMs, demonstrating its potential to improve automotive safety. Importantly, HiRain announced it will begin net production of these imaging radars by the end of this year. During the first quarter, Arbe and our Tier 1 made significant progress in reaching our goal of serial production by the end of this year. We work with major OEMs on data collection for their Level 2++ and Level 3 solutions as well as on improving the radar specification. As part of our progress in Japan, we'd like to update that a large Japanese automotive client is working to complete a massive data collection initiative with other radar solutions this year as part of the development of an advanced ADAS and AD architecture. There's a wide demand for next-generation radar systems with a high-channel count now considered essential for road safety. In March, the ADAS radar and radar perception at Mercedes emphasized publicly that ADAS radars require an array of at least 32x32 channels. Few companies meet these requirements, and Arbe exceeded with the largest channel array on the market. We see similar requirements in RFPs from other major OEMs. We are pleased with the outstanding progress we are making with top OEMs worldwide. Despite industry delays, we are confident in our opportunity pipeline and our goal to secure full design wins this year, especially with promise and signs coming from the leading top 10 OEMs. We look forward to sharing more updates very soon. Collaborations are key for Arbe. At the NVIDIA GTC Conference, NVIDIA shared that it has brought together a select group of advanced sensors from industry leaders, including Arbe Perception Radar, to create a rich ecosystem of simulation tools and applications as part of the Omniverse cloud APIs, giving us design to accelerate the path to autonomy. Additionally, at the 2024 Beijing International Automotive Exhibition, Horizon Robotics, a leading provider of computing solutions for ADAS and autonomous driving in China, showcased the integration of Weifu's 4D Imaging Radar, powered by the Arbe chipset, with Horizon's Journey six automotive AI processors as part of their partner ecosystem. As many of you know, there have been important developments within our industry and a shift towards new safety standards and regulations. These are needed to drive the future of road safety. We certainly believe that Arbe has the best solution to effectively address these changes, and we are well-positioned to help meet the revolution. The NHTSA federal safety standards of the US mandate automatic emergency braking (AEB), including pedestrian AEB, for all passenger cars and light trucks by September 2029. This safety measure is set to reduce collisions and accidents with pedestrians. At the same time, the Euro NCAP 2030 roadmap aims for zero road fatalities, requiring proactive measures in all scenarios. A key to successful implementation will be in the sensors used to power the advanced safety standards and requirements. This creates a growing opportunity for the adoption of our technology, which is the leading solution for tracking pedestrians and vehicles in challenging weather and lighting conditions, even at high speed and over long distances. We expect that by the end of the decade, over 15% of new cars will feature high-end imaging radars like ours, providing real safety and Level 3 autonomy. Lastly, we are in the final stages of dual listing with an additional listing on the Tel Aviv Stock Exchange. At the same time, we are advancing through the convertible bond issuance on the Tel Aviv Stock Exchange to secure working capital and support the expected production ramp-up in 2025. We are excited about the potential opportunities for Arbe and we believe that 2024 will prove to be a turning point for our company. Now I'd like to turn it over to our CFO, Karine, to go over the financials.

Karine Pinto-Flomenboim, CFO

Thank you, Kobi, and hello, everyone. I'd like to review our financial results for the first quarter of 2024 in more detail. Total revenue in the first quarter was $0.1 million, a decrease from $0.4 million in Q1 2023. Backlog as of March 31st was $1 million and is expected to be recognized as revenue during 2024. Negative gross margin for Q1 '24 was 194% compared to a positive gross margin of 11% in Q1 2023. The margin decrease was mainly related to a reduction in revenue and an increase in our workforce. Moving on to expenses. In Q1 2024, we reported total operating expenses of $12.5 million compared to $10.7 million in Q1 2023. The increase in operating expenses was primarily driven by an increase in noncash share-based compensation expenses totaling $1.9 million. To a lesser extent, labor cost increase was offset by bonus accrual release, favorable exchange rate, and reduction in D&O insurance rates. Operating loss in the first quarter of 2024 was $12.8 million compared to an operating loss of $10.6 million in the first quarter of 2023. Adjusted EBITDA, a non-GAAP measurement, which excludes expenses for share-based compensation and for nonrecurring items, was a loss of $8.5 million in Q1 of 2024 in accordance with our plan. This is compared to a loss of $8.4 million in the first quarter of 2023. Net loss in the first quarter of 2024 increased to $12.8 million compared to a net loss of $9.9 million in the first quarter of 2023. Net loss in Q1 '24 included $45,000 of financial expenses, resulting mainly from exchange rate revaluation partially offset by interest from deposits and warrants revaluation. This is compared to a $0.7 million in financial income in the first quarter of 2023. Moving to our balance sheet. As of March 31st, 2024, Arbe had $5.4 million in cash and cash equivalents and $30.3 million in short-term bank deposits with no debt. With respect to our guidance for the year, we would like to reiterate what we previously shared. Our goal of achieving four design wins with automakers remains unchanged as we observed continued strong interest in our market-leading offerings. We have strengthened our positioning in all our RFQ engagements even though the OEMs have shifted their decision timelines from late 2023 to 2024. The 2024 annual revenue is expected to be in line with those of 2023, followed by revenue growth in 2025. These revenue projections are based on the intention to be in full production in the second half of 2024 as well as our decision to focus exclusively on getting our chipset into production. We are committed to maintaining a strong and well-managed balance sheet, focusing on cost-effectiveness and the ability to fund our revenue growth. Adjusted EBITDA for 2024 is projected to be in the range of $30 million loss to $36 million loss. Now we will be happy to take your questions.

Operator, Operator

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. Our first question comes from Joshua Buchalter from TD Cowen. Please go ahead with your question.

Joshua Buchalter, Analyst

Hi, Team. Good afternoon. Thanks for taking my question. I wanted to ask about the confidence in achieving the four design wins this year. Any incremental data points or what you can give us and what gives you confidence that those are going to convert in the second half of the year? And maybe what led to the, we've litigated in the past, but maybe an update on the timeline given it got pushed from 2023 into 2024. Any clues by geography or type of application that these wins are going to be for? Thank you.

Kobi Marenko, CEO

Yes. So basically, as we said, out of those opportunities that were pushed from last quarter, are now coming to a decision point. What we see as a main change between last year and this year is that even in RFQs that were in the market, the conditions changed, and the threshold for the radar has gotten much higher, leaving mainly two or three players who can provide the solution. This gives us a lot of comfort that the majority of the market, particularly the top 10 OEMs, understand that multi-channel high-channel count radar is key for Level 2++ and Level 3. The fact that the regulation changes add the need for automatic braking, especially in all use cases, gives our radar a significant tailwind because any OEM will need to have this kind of solution. The only way to solve it is with high channel count imaging radar and camera. A single camera alone cannot solve those scenarios. Even camera and LiDAR combined cannot adequately address them. But anyway, LiDAR is much too expensive for a feature that is not something OEMs can really charge customers for. To provide some context to your questions, we are currently engaged with 11 car companies located in Germany, Sweden, and several other countries in Europe, as well as Japan and China. In all those RFPs and RFQs, we have already made significant progress with our Tier 1 partners in the evaluation of the radar, testing it under corner cases, and demonstrating the advantages of our radar based on our chipset and the high-end channel count imaging radar solutions we offer as opposed to those in the market based on TI or NXP chipsets. This is not truly imaging radar. I believe all of the OEMs understand the difference between radars like ours and the existing legacy solutions based on older chips that were not designed to meet the specifications of tomorrow. Taking all this into account, we are confident that we will secure at least four of the shortlisted opportunities in the coming months and will be able to announce them to the market. This is the reason for our loan. The loan in Tel Aviv is conditional on winning a contract. Our confidence in being very close to winning this contract has allowed us to secure this funding, as well as instilling confidence in investors who are willing to provide us with a loan at a conversion price that is more than 30% higher than our current share price. I believe that we will have a very good year, as we indicated, a turning point for the company, transitioning from development to business very soon.

Joshua Buchalter, Analyst

Thanks for the extensive color, Kobi. For my follow-up, I think in the press release you mentioned you're getting close to receiving full auto-grade qualification. It feels like that process has been going on for a while. Can you maybe talk about what are the last few things you need to complete to get the auto-grade sign-off? And then is that a hurdle and something that needs to be completed before you sign one of these OEM wins? Or is that not the case? Thank you.

Kobi Marenko, CEO

I think the process of getting the chipset to automotive qualification is structured. GlobalFoundries is leading and managing it for us alongside our engineers. We are more or less on track to finish it by the end of this quarter or early next quarter. As we mentioned last quarter, before starting full qualification, we conduct a series of mini-qualifications to ensure no major issues. We have passed these pre-qualifications and are currently finishing the technical process, which involves thousands of hours of chip testing in high and low temperatures to ensure they will meet all conditions desired by the automotive market. It does not appear that this will be a showstopper for us in discussions with our OEM partners. GlobalFoundries have provided their objective assessment that the chips will be in production in a few months. I believe all the OEMs that will select our chipset with Magna, HiRain, or other Tier 1 partners view this positively.

Joshua Buchalter, Analyst

Thank you.

Operator, Operator

Our next question comes from Suji Desilva from ROTH Capital. Please go ahead with your question.

Suji Desilva, Analyst

Hi, Kobi. Hi, Karine. Kobi, you talked about some of the progress with HiRain and Weifu in China. Can you just elaborate on the ramps, the times of revenue? And how many programs do those involve?

Kobi Marenko, CEO

So we already stated that HiRain and Weifu have given us preliminary orders for 2025. HiRain is for $30 million, Weifu for $10 million. We are currently engaged with a few programs to ensure that the customers receive radars based on our chipset in this volume in 2025.

Suji Desilva, Analyst

Okay. And those are for automotive, Kobi, automotive?

Kobi Marenko, CEO

Yes. Some of them involve trucks and robotaxis. HiRain has won a project in one of the ports of China for trucks. I would say that around 25% of it is non-OEMs, non-passenger vehicles, and the rest is for passenger vehicles.

Suji Desilva, Analyst

Okay. Great. Very helpful color, Kobi. Thank you. And then secondly, you mentioned the NVIDIA Omniverse element. Is Arbe's radar the kind of exclusive radar element there? Or are there multiple radar elements involved? Are they looking for imaging radar? What's the color there on that partnership and inclusion?

Kobi Marenko, CEO

The only imaging radar is Arbe's imaging radar. Of course, there is also low-end radar for lower-end applications, but the high-end imaging radar is exclusively Arbe's.

Suji Desilva, Analyst

Okay. Great. All right. I think lastly, maybe in China, can you talk about the significance of working with Horizon and Weifu in terms of further penetrating the China market versus working with the Tier 1s like Weifu?

Kobi Marenko, CEO

We are not allowed to elaborate much about our cooperation there. But what I can say is that Horizon is like NVIDIA, as they are the ECU provider. They are not a Tier 1. In the end, there is a Tier 1 that takes their chips and builds the central compute to integrate our radar into this processor. Similarly, we have integration with NVIDIA. This kind of integration with Horizon gives us a significant advantage in the Chinese market.

Suji Desilva, Analyst

Okay. Again, very helpful color, Kobi. Thanks.

Operator, Operator

Our next question comes from Jaime Perez from Lafferty. Please go ahead with your question.

Jaime Perez, Analyst

Hi. Thank you. Good day everybody. Thanks for taking my question. Over the last couple of quarters, we've seen a sentiment change for the EV early adapters towards ICE and I think hybrid is also gaining share. I mean, could you give us a little color on whether you have any exposure to hybrids and ICE vehicles? My follow-up question for that is that a lot of EVs are focusing on affordability, especially with the Chinese threatening to ship a low-price cost. So could you tell me what that means for your margins and pricing power? All right. Thanks.

Kobi Marenko, CEO

Those are two great questions. First of all, regarding the EV shift, this is partly the reason for the delays. Last year, the majority of OEMs were focusing on moving almost entirely to EV by 2030. As a result, they decided that all new features, like Level 3 and Level 2++, would be launched solely on EVs. In the last quarter of 2023, the market strategically recognized that the shift to EV currently seems longer than anticipated due to pricing issues, customer adoption, and charging problems, which caused all those Level 3 programs to be put on hold while they reevaluate and adjust their schedules. As we see it by the end of Q1, the majority of OEMs made the decision to launch those services on both EV and traditional engines, including hybrids. So from this perspective, there's no change right now. It caused the delay, but now we are moving forward. Your second question was very interesting. The pricing pressure for EVs is pushing towards sensors that are cheaper and imaging radars are significantly more affordable than LiDAR. This puts us in a favorable position for NHTSA AEB compliance and for Level 3 implementations as our radar is more competitive in pricing compared to other sensors.

Jaime Perez, Analyst

So basically you have a price advantage versus radar now. Most of it, like I said, the focus has been on passenger. I think the electric vehicle to commercial market has been doing a little better. Could you maybe talk about the initiative in the commercial or transit market, if you have any? Thanks.

Kobi Marenko, CEO

Most of our Tier 1s are not focusing on the commercial or transit market. While our Tier 1 Weifu won a project with DiDi's truck company, HiRain also has some truck-related projects, outside of China, however, Magna is not pursuing any truck bids at this time. The volume in trucks is lower, and the cost of integration is higher, making it less economical for these types of solutions currently.

Jaime Perez, Analyst

All right. Okay. I'll pass it back. Thanks for the questions.

Operator, Operator

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

Matthew Galinko, Analyst

Hi. Thanks for taking my question. I was hoping you could provide a little more detail around the investments you expect to make or need to make as you move into production in the back half of this year. And I think to your point is you plan to support through the node issue? Thanks.

Kobi Marenko, CEO

The majority, or essentially all of our expenses, related to production were already incurred. This quarter, Q1, included the last item related to increasing the capacity of our equipment. Therefore, we will be able to supply much higher volumes next year. But the expenses linked to production, which primarily involve capital expenditure, have already been completed and are now behind us. I believe we are ready for revenue generation.

Matthew Galinko, Analyst

Great. Thank you.

Operator, Operator

Ladies and gentlemen, with that being our final question for today, we'll be ending today's conference call as well as today's presentation. We thank everyone for joining. You may now disconnect your lines.