Earnings Call Transcript - ARBE Q3 2023

Operator, Operator

Good morning, and welcome to the Arbe Robotics Third Quarter 2023 Financial Results 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 Alexis Pascal of MS-IR. Please go ahead.

Alexis Pascal, Unidentified Company Representative

Thank you, and thank you, everyone for joining us today. Welcome to Arbe's third 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 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 a business update. Then we will turn the call over to Karine Pinto-Flomenboim, CFO, who will review the financials. Finally, we will open up the call for the Q&A 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, Alexis. Good morning, everyone and thank you for joining us. I will begin by reviewing some of our recent business highlights. In the third quarter, Arbe and our Tier 1 made significant progress on several commercial productions, supporting our goal to become a leader in perception radar solutions for the automotive industry. The selection process by vehicle manufacturers involves multiple steps. During the quarter, Arbitrum One delivered B samples of radar systems based on our chipset to leading OEMs. These samples facilitate the evaluation of production functionality and mark a crucial milestone in the OEM selection process. Additionally, they enable OEM perception teams to gather data for their L2+ and L3 applications within ongoing development projects using our cutting-edge technology. Our advanced technology plays an increasingly pivotal role in enhancing the next-generation product offerings of our Tier 1 partners. Tests performed on radar systems using the Arbe chipset have consistently demonstrated performance that meets or exceeds target benchmarks, affirming the superior quality of our technology. Arbe is currently engaged with four top Tier 1 companies: Magna, HiRain, Weifu, and Sensrad. In Q3, all four advanced to the production of radar systems based on our chipsets and are now in the final stages of selection with prominent European, American, and Asian OEMs. Additionally, we are awaiting the final confirmation of success in securing two prominent truck projects. Collectively, the OEMs that are in the final selection stages for our technology represent 31% of the global passenger vehicle market. The fact that they are currently opting for imaging radar shows a strong preference for imaging radar technology, and it is likely to become the standard technology of choice for most passenger vehicles by the end of the decade. We are sizing this opportunity and are fully committed to realizing it. As previously announced, we have received preliminary chipset orders from China for '24 and '25. Weifu, a key Tier 1 we've been working with since 2019, has placed an $11.6 million preliminary order for Arbe radar chipset, meeting their projected sales demand for customers in China. In addition, HiRain Technology, a leading Chinese ADAS Tier 1 supplier, has placed a preliminary order for 340,000 radar chipsets to serve customers throughout China. Arbe's current cash balance ensures sufficient funds until the second half of 2025. The current funds and the preliminary orders from China will allow the company to reach breakeven with its existing cash. We are delighted to welcome Professor Yonina Eldar to our Board of Directors. Professor Eldar is a known expert in electrical engineering and radar theory at the Weizmann Institute of Science. She is known for her groundbreaking work in sub-Nyquist sampling. In addition to her expertise, being part of our goals is of great significance, and we are proud she chose to join Arbe. Regarding the current situation in Israel, we want to emphasize that our operations and ability to conduct business activities are not affected. We continue to monitor the situation and will adjust as needed to ensure the continuity of our business while prioritizing the safety and well-being of our employees. I would also like to highlight that Arbe is a public company. The manufacturing and production of our chipsets are carried out in Germany by GlobalFoundries, a multinational semiconductor manufacturing and design company. As a result, we do not anticipate any changes in product availability. While around 20% of our team were called for military duty, this primarily affects long-term projects that we are involved with, with no impact on our immediate client support capabilities. Arbe has successfully continued to operate as planned, thanks to the commitment and dedication of our employees. Now I'd like to turn it over to our CFO, Karine, to review the financial results in more detail.

Karine Pinto-Flomenboim, CFO

Thank you, Kobi, and hello, everyone. Total revenue in the third quarter was $0.5 million, a decrease from $1.3 million in Q3 2022, in line with longer OEM implementation timelines. Backlog as of September 30 is $1.1 million, not including HiRain and Weifu’s previously announced preliminary orders. Gross margin for Q3 2023 was 24% compared to a 72.5% gross margin in Q3 2022. This was a result of our reduced quarterly revenue with a fixed cost portion in our cost of goods sold. Moving on to expenses. In Q3 2023, we reported total operating expenses of $11.7 million compared to $11.8 million in Q3 2022. The decrease in operating expenses was primarily driven by a decrease in research and development from $8.6 million in Q3 2022 to $8.4 million in Q3 2023, and the decrease in general and administrative expenses from $2.2 million in Q3 2022 to $2 million in Q3 2023. The decrease in both was primarily due to lower subcontractor expenses, favorable exchange rates, and a reduction in our D&O insurance costs, partially offset by an increase in our share-based compensation costs. Sales and marketing expenses increased from $1.1 million in Q3 2022 to $1.3 million in Q3 2023. Share-based compensation increased from $2.3 million in Q3 2022 to $3.9 million in Q3 of 2023, related to equity grants from Q2 2023 under our stock option plan. Our operating loss in the third quarter of 2023 was $11.6 million compared to an operating loss of $10.9 million in the third quarter of 2022. Adjusted EBITDA, a non-GAAP measurement which excludes expenses for share-based compensation and for nonrecurring items, was a loss of $7.5 million in Q3 of 2023, which overperformed the company's expectations compared to a loss of $8.4 million in the third quarter of 2022. The net loss in the third quarter of 2023 was $11.7 million compared to a net loss of $9.9 million in the third quarter of 2022. The net loss in Q3 2023 includes $0.1 million of financial expenses, mainly related to exchange rate revaluation expenses, partially offset by interest from deposits and warrants revaluation. The net loss in Q3 2022 included financial income of $1 million, mainly related to exchange rate revaluation income. Moving to our balance sheet. As of September 30, 2023, Arbe had $23.5 million in cash and cash equivalents, and $25.6 million in short-term bank deposits with no debt. Regarding our guidance for the year, Arbe is in the final selection stages with leading OEMs in Europe, the U.S., and Asia Pacific. These OEMs account for 31% of the global passenger vehicle market. Revenue is expected to be in the lower range of $5 million to $7 million. 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.

Operator, Operator

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

Gary Mobley, Analyst

Hi, Kobi. Hi, Karine, I hope you and your families are safe and remain safe. And relating to the conflict, I wanted to ask about the day-to-day operational challenges that the conflict brings? I know you mentioned 20% of the workforce getting called to the military. Maybe you can speak to how that affects your long-term R&D roadmap? And as well, what has been the feedback and support that you've received from your prospective customers since this began a month ago?

Kobi Marenko, CEO

Yeah. So thank you for this question, and thank you for the kind words. So first of all, it's not easy, but I think we have learned to operate in a remote way. Part of the team is working from home while part of the team is working from the office. From the beginning, we prioritized the tasks. Everything related to our next generation of chipsets will be delayed, and this team will be moved to work mainly on the current activities with the customers. I don't think it significantly changes our timeline. Our next generation should still be in the market in '25 or '26. We have a team outside of Israel, which is especially focused on supporting sales, and this helps us support our customers in China, Germany, and the U.S. even at this time. We are trying to do the best with the team we have. Right now, we are able to support the majority of our plans, especially all of the tasks that are needed for our Tier 1 partners to go to production and all of the tasks related to OEM evaluation and OEM integration are prioritized. I can ensure that no crucial task is hindered due to the situation. We hope that peace will return to the Middle East soon.

Gary Mobley, Analyst

Thank you for that, Kobi. As my follow-up, I want to ask about some of the preliminary orders you have from some of your Chinese Tier 1s, I think between Weifu and HiRain. It sounds like you have multiple tens of millions of dollars in potential sales there. What needs to happen for those preliminary orders to actually turn into shipments?

Kobi Marenko, CEO

What we need to do right now is to close the last phases of winning contracts with the OEMs. The preliminary orders are based on their forecast for next year and the year after. We believe that until the end of the year or very early next year, they will be able to finalize the deals with the OEMs based on their resample, and convert those preliminary orders into actual orders.

Gary Mobley, Analyst

All right. Thank you both.

Karine Pinto-Flomenboim, CFO

Thank you, Gary.

Operator, Operator

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

Unidentified Participant, Analyst

Hi. This is Lanny on for Joshua Buchalter. Can you hear me okay?

Karine Pinto-Flomenboim, CFO

Yes.

Unidentified Participant, Analyst

Great. I'd like to echo Gary's comment and wish safety for you, your family, as well as your staff. Moving on to my question, my first question is meeting your guidance for 2023 implies quite a steep ramp in Q4 with your Tier 1s being in the final talks with OEMs now. Can you tell us a little bit more about the volumes, where you expect it to be driven by and where they're going?

Kobi Marenko, CEO

Yeah. So we are in the final stages, as we mentioned in the call, with 11 OEMs. We believe that at least five or six of them will make decisions before year-end or early next year. Some of them are in China, and others in Europe and Western countries. The process is almost done, and with all of them, we are negotiating prices and production timelines. We see China opening up for our radar in the upcoming years. Outside of China, we are working on projects for top 2026 and 2027 vehicles, which means that we will see revenue ramping from the second half of '24, mainly in '25, '26, and '27.

Unidentified Participant, Analyst

That's really helpful color. Thank you. And from an educational standpoint, how many competitors are you seeing narrowed down in these final decisions?

Kobi Marenko, CEO

I believe that the competitive landscape in the radar space has not really changed. There are low-end imaging radar systems based on four cascaded chips from TI or NXP and an FPGA, which give some 200 virtual channels compared to our 2,304 virtual channels. We see aggressive competition from some players like Mobilize, which is trying to enter the imaging radar business. However, we are approximately 1.5 to 2 years ahead of them in terms of production readiness.

Unidentified Participant, Analyst

Thank you very much.

Operator, Operator

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

Suji Desilva, Analyst

Hi, Kobi. Hi, Karine. I also like to echo my hopes that you and your folks are staying safe. You talked about customers looking at the B samples and integrating the data sets from the 4G imaging. Kobi, how long does that process typically take for them to have the 4G imaging data set integrated with their perception software and data?

Kobi Marenko, CEO

Basically, what we observe across the OEMs is that the need is for approximately 100,000 hours of driving data in order to train the basic algorithms, which can take about two to three months. After that, improving the stack can take anywhere from six to twelve months, depending on their software team's ability. I believe that even during the data collection phase, they can begin training the stack. They already see the value in imaging radar and its capability for full free space mapping based on radar, and we are currently the only company offering such value.

Suji Desilva, Analyst

Okay. That's very helpful. And then my other question is on the HiRain, the 340,000 units. It seems like they'll start shipping in Q4. I want to understand if the rest of it is still expected to ship in calendar '24 or if any factors are shifting the shipment plan for that HiRain order?

Kobi Marenko, CEO

We are not yet sure when we will exactly begin shipping the chip. The main volume is expected to be in '24. However, we are uncertain if we will be able to start shipping by the end of '23 or only in early '24. Most likely, the majority of the shipping will occur in '24.

Suji Desilva, Analyst

Okay. Great. Thanks.

Operator, Operator

The next question is from Jaime Perez with R.F. Lafferty. Please go ahead.

Jaime Perez, Analyst

Yeah. Thank you for taking my question. My thoughts and prayers are with everybody in the firm and the people of Israel. My first question: I know you noted in the press release that you have two projects for trucks in the commercial side. Can you talk a little bit about that? We are seeing a significant difference between the dynamics of the EV passenger and commercial fleet markets. Could you give a bit more color on that?

Kobi Marenko, CEO

I think the truck market today is becoming a bit complicated. There are truck manufacturers themselves, which is what we refer to. They are working on adding ADAS, Level 2+, and Level 3 functionalities to the trucks, and also to Machineries, which are the two projects we are engaged with. There are also fleet owners who ultimately need to buy those trucks with these services. We are working to support those companies. But to reference those two projects, they involve significant truck brands.

Jaime Perez, Analyst

All right. And my follow-up question on the market you're developing on the passenger side: Are you going to be part of a suite or a standalone radar component? Additionally, especially in the U.S. where cars are becoming more expensive, what's your comparison of pricing between your chipset and LiDAR, given the affordability question?

Kobi Marenko, CEO

Firstly, the radar is part of the tech stack. This stack consists of at least eight to ten cameras, and sometimes also includes LiDAR. In terms of pricing, the imaging radar is much cheaper than LiDAR. In fact, the imaging radar is quite close in price to the current non-imaging radar. We are on a path to achieving a price of around $150 to $160 for a front-facing imaging radar with 2,304 virtual channels.

Jaime Perez, Analyst

All right. Thanks so much.

Karine Pinto-Flomenboim, CFO

Thank you.

Operator, Operator

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

Matthew Galinko, Analyst

Thank you for taking my question. I think you mentioned you're potentially touching 31% of the global passenger market with the OEMs during the final selection process for. For the rest of the global passenger market, is there reluctance to imaging radar among the other OEMs? Geographically, are you just not covering those areas yet? 31% is a great number, but where is the rest of the market?

Kobi Marenko, CEO

There are several factors related to the adoption of imaging radar. Firstly, we have early adopters, primarily premium car manufacturers, which is our initial target. There are also premium adopters in China that are not traditional car companies, but rather private ones. We are targeting those companies first. By the end of the day, we believe that every car will incorporate imaging radar technology, but the first wave of adoption will focus on premium vehicles and early adopters of new technologies.

Matthew Galinko, Analyst

Thank you. Did you state that you expect imaging radar to be standard on all cars by the end of the decade?

Kobi Marenko, CEO

Yes, similar to cameras.

Operator, Operator

This concludes Arbe's third-quarter conference call. I would like to turn the conference back over to Kobi Marenko for any closing remarks.

Kobi Marenko, CEO

Thank you all for joining us today. I'd like to extend my gratitude to our team for their contribution. Whether they are currently serving in Israel's Armed Forces or fully dedicated to ensuring that we continue to execute our business priorities as planned. Israeli families, children, women, and men are currently held hostage. Our lives will not be whole until each of them returns home safely. Throughout this period, we have experienced outstanding support from our customers, partners, and investors. We thank you for standing with us. Thank you, and goodbye for now.

Operator, Operator

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