Earnings Call Transcript - AUR Q2 2022

Operator, Operator

Greetings. Welcome to the Aurora Second Quarter 2022 Business Review Conference Call. At this time all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Richard Tame, Chief Financial Officer. Thank you, you may begin.

Richard Tame, Chief Financial Officer

Thank you, Alex. Good afternoon, everyone. And welcome to our second quarter 2022 business review call. I'm introducing the call today as Stacy is under the weather. We announced our results earlier this afternoon. Our shareholder letter and a presentation to accompany this call are available on our Investor Relations website at ir.aurora.tech. The shareholder letter was also furnished with a Form 8-K filed today with the SEC. On the call with me today is Chris Urmson, Co-founder and CEO. Chris will provide an update on the progress we have made across the key pillars of our business. And I will recap our second quarter financial results. We will then open the call to Q&A. The recording of this conference call will be available on our Investor Relations website at ir.aurora.tech shortly after this call has ended. I'd like to take this opportunity to remind you that during the call, we will be making forward looking statements. This includes statements relating to the achievements of certain milestones around the development and commercialization of the Aurora driver on our anticipated timeframe, the timing of availability of autonomy enabled platforms, the expected performance of our business, and potential opportunities with partners and pilot customers expected cash runway and overall future prospects. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, as described in our risk factors included in a quarterly report on Form 10-Q for the quarter ended March 31, 2022, filed with the SEC on May 12, 2022, as well as the current uncertainty and unpredictability in our business, the markets and economy. You should not rely on our forward-looking statements as predictions of future events. All forward looking statements that we make on this call are based on assumptions and beliefs as of the date here, and Aurora distinctly disclaims any obligation to update any forward-looking statements except as required by law. Our discussion today may include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Information regarding our non-GAAP financial results, including a reconciliation of our historical GAAP to non-GAAP results may be found in our shareholder letter, which was furnished with our Form 8-K filed today with the SEC, and may also be found on our Investor Relations website. With that, I will now turn the call over to Chris Urmson.

Chris Urmson, Co-founder and CEO

Thank you, Richard. We're pleased to report a strong second quarter; we made critical technological progress toward commercial deployments across multiple fronts. We achieved a significant milestone with the launch and successful demonstration of our fault management system. And we introduced a suite of new driving capabilities in our beta 3.0 release that improves the Aurora driver's performance on surface streets, ramps, highways, and construction zones. We also expanded our commercial operations with FedEx, launched new pilots with Werner and Schneider, and made significant progress with our OEM partners on their respective driverless platforms. It is through this progress that we see a clear path to a driverless future. As we move closer to the launch of our first commercial product, we recognize the value in providing a more tangible way to measure our progress. In our shareholder letter that we published this afternoon, and also on page three in the slide deck, we introduced our roadmap for the commercial launch of our autonomous trucking product, Aurora horizon. Our roadmap outlines the progress we have made this year and the work that remains between now and our planned commercial launch. It encompasses the key components and dependencies of our business, the Aurora driver operations, and the vehicle platforms. Let me walk through some of the significant milestones highlighted on the roadmap. For the balance of 2022 and the first quarter of 2023, our technical development work will focus on releasing the remaining capabilities that we expect the Aurora driver will require to drive commercial loads on our launch lanes. We expect the Aurora driver to be feature complete by the end of the first quarter of 2023. Feature complete means we will have implemented all of the capabilities necessary for launch and will have removed all policy interventions. As a reminder, we define a policy intervention as an action an operator takes to preemptively disengage the Aurora driver when we know it is not yet capable of confidently navigating a particular scenario. Throughout development, and once the Aurora driver is feature complete, we expect to continue validation and compiling the evidence for the safety case for our commercial launch. When the Aurora driver is feature complete, and as we work towards commercial readiness for the Aurora driver by the end of 2023, we expect to begin sharing a quantified measure of the Aurora driver's autonomy performance quarterly, to show our progress towards this critical milestone. We look forward to outlining this autonomy performance framework at our upcoming Analyst and Investor Day in September. Earlier this year, we committed to demonstrating our Fault Management System during the third quarter. Our FMS is designed to actively monitor the health of the vehicle, including the self-driving software, sensors, and onboard computer. When it detects an issue, the FMS will intervene navigating the vehicle to a safe stopping location where the issue can be addressed. We achieved this milestone earlier than expected and demonstrated it on Aurora driver powered trucks operating at highway speeds. This speaks to the incredible work of our team who defined, implemented, and validated over 1000 requirements to achieve this milestone while also making rapid advances across a range of other technological areas critical for commercial deployment. We've included a video of the demonstration on page 4 in the slide deck; engineers injected artificial faults representing sensor damage. This system detected these faults, assessed their severity, and responded by activating the autonomous vehicle’s hazard lights, reducing its speed, and safely pulling over to the side of the road. As with other elements of the Aurora driver, the fault management system was developed and extensively tested first in simulation, enabling safer and more rapid implementation in the real world. As we move towards commercial launch, our fault management architecture will advance to recognize and respond to additional safety issues while on the road. I experienced this system in action firsthand in June when I joined our vehicle operators during testing just outside of Fort Worth. It was a thrilling moment that demonstrated the maturity of the Aurora driver. This is a foundational capability for removing vehicle operators and a meaningful step toward satisfying the failsafe core claim of our safety case and ultimately delivering a safe, commercially ready driver. During the second quarter, we also released Aurora driver beta 3.0, continuing our commitment to deliver quarterly technical updates that advance the Aurora driver. This update debuted capabilities to enable end-to-end autonomous operation between Aurora's terminals and shows how the Aurora driver can safely navigate increasingly complex and critical situations that are necessary for the deployment of our commercial trucking product. We've included a few videos in the slide deck to bring some of these capabilities to life. On Page 6, after exiting our El Paso terminal, you can watch the Aurora driver making an unprotected right turn onto the westbound frontage road and proceeding to execute a Texas U-turn to merge onto I-10 eastbound to Fort Worth. Additionally, the Aurora driver can now handle long downhill grades using engine braking to avoid excessive wear and the danger that comes from overheating brake pads. In the video on page 7 of the slide deck, you can see the Aurora driver on the Fort Worth will pass a route to ascending Ranger Hill on I-20 for three miles with a 3.5% downgrade without engine braking. This hill cooks brake pads, reducing their life dramatically. Now the Aurora driver autonomously applies engine brakes, increasing safety for all drivers on the road. And on page 8 of the slide deck, the Aurora driver is on the highway and plans to change lanes as indicated by the green path, but another vehicle has aggressively cut into the lane. I'm sure we've all had similar experiences where we've had to make split-second decisions about how to adjust our driving. Here the Aurora driver recognizes that another vehicle is now occupying the space and safely returns to its lane, ultimately executing the lane change once it can safely do so. The National Highway Traffic Safety Administration data shows that 9% of all accidents occur during lane changing and merging on highways. Given this relative frequency, we've continued to refine the logic by which the Aurora driver reasons about and negotiates lane changes with other actors. During the third quarter, we plan to launch capabilities that include identity and responding to debris and navigating even more complex construction zones, including the detection of lane markings that have shifted. These advancements put us on the path for the Aurora driver to be feature complete by the end of the first quarter of 2023 and commercially ready by the end of 2023. While we are bringing new capabilities online, we are simultaneously improving our performance on existing capabilities. As you can see in the chart on our shareholder letter, over the course of the second quarter, we drove a significant improvement in required vehicle operator interventions for localization issues on the Fort Worth to El Paso Lane, with no intervention seen in the final weeks of the quarter. This improvement stemmed from advancements in our HD mapping system, the Aurora Atlas, and the Aurora driver that enabled our vehicles to better adapt between using lane markings and geometric data to precisely position themselves. These developments make the Aurora driver's performance more robust in construction zones and highway segments, with few distinct road features, such as signs and off ramps, as well as long stretches of rapidly growing vegetation. All of these conditions are common on rural routes like Fort Worth to El Paso. Turning to our pilots during the second quarter, we doubled our commercial miles driven across our pilots and lanes and also saw improved autonomy performance when compared to the first quarter, further demonstrating our progress towards the commercial launch of the Aurora driver. One of the most tangible ways to measure our performance and progress is the feedback we receive from our customers themselves. Given our strong performance since the launch of our pilot with FedEx, we further expanded our collaboration with them earlier this year, growing our pilot to include the 600-mile Fort Worth to El Paso Lane. We're currently autonomously hauling FedEx loads under the supervision of vehicle operators daily between Dallas and Houston and weekly between Fort Worth and El Paso. Demonstrating our autonomous technology through this pilot is one key aspect. Equally as important is that we are operating this pilot in a commercially representative manner. This means FedEx expects these vehicles to perform to its exacting requirements for scheduling, dropping hook trailer operations, and on-time delivery. We're pleased to report that across each dimension, our pilot fleet has delivered. To date, this pilot has allowed both Aurora and FedEx to refine our operations and prepare for future growth. We are proud of our performance since the launch of the pilot. Through the second quarter, we have delivered over 335 loads driving over 80,000 cumulative miles with 100% on-time performance and with no cancellations. With each trip, the Aurora drivers are providing thousands of FedEx customers with packages that were autonomously transported. We're excited to have been invited by FedEx to their Investor Day earlier this summer to share how we are integrating Aurora driver with their network. And you get a flavor for the operational elements of this partnership in a video that FedEx developed, which we've included on page 10 in the slide deck. We continue to see broad demand to apply our technology. This week, we're launching our fourth pilot; Aurora powered trucks will autonomously haul freight under the supervision of vehicle operators for Schneider National, one of the industry's largest multimodal transportation providers. We’ll begin with weekly hauls on our Dallas to Houston Lane, and we expect to increase that frequency as our relationship expands. We look forward to working with Schneider to understand how best to incorporate autonomous trucks into its fleet with the goal to improve efficiencies and address the growing demand to move goods. We believe the sheer breadth and diversity of our customer pilot programs including FedEx, the largest less than truckload freight carrier in the United States, Mercer, a top five full truckload carrier, Schneider, one of the largest multimodal carriers, and Uber Freight, a significant freight broker is a testament to both our industry-leading technology and operational excellence. These programs set us apart in the autonomous freight space. Through strong execution on our pilot programs, we are continuing to build trust and credibility in the industry. We believe the strength of these relationships positions us for an effective driverless commercial launch when our technology is sufficiently mature to meet our rigorous safety standards and the requisite truck platforms are ready. On that front, we continue to make significant progress with both Paccar and Volvo trucks in the preparation of scalable, autonomy-enabled truck platforms. Working in close partnership, our teams have defined product requirements, aligned on detailed technical requirements, selected and awarded key component suppliers, designed key interfaces between the Aurora driver and the vehicle platform, and built initial prototypes. As strong as the collaboration progress has been, these programs are not immune to the industry challenges we continue to see. Taking into account current supply chain constraints, we now expect the delivery of scalable autonomous truck platforms in the first half of 2024. While this program timing is later than we had initially expected, we see the recent awarding of key supplier contracts as a major point of schedule risk reduction in these programs. With the delivery of the truck platforms, we expect to be able to complete final validation of the integration of the Aurora driver with the truck platform in preparation for releasing a scalable trucking product by the end of 2024. Turning to the regulatory landscape, as we work closely with our vehicle partners toward delivering our product, we also continue to engage with policymakers on their support for safe deployment and development of self-driving technology, and ultimately, how together we can make our roads safer and transportation systems more efficient. This past quarter, we continue to build legislative and regulatory support in California and Pennsylvania. We work with others in our industry to encourage regulation to permit deployment of autonomous trucks in California. And we joined others in the industry in advancing legislation in Pennsylvania that would facilitate fully autonomous operation in the state. Additionally, as we set the foundation for our future expansion, I'm pleased to share that the state of Arizona has granted Aurora’s request to test and operate in their state. And we have submitted notification of our intent to operate in New Mexico. From a regulatory perspective, this now allows Aurora to commercially deploy our self-driving technology in Texas, New Mexico, and Arizona. When we're ready to do so, it brings us one step closer to deploying on one of the busiest freight corridors in the country, from Dallas to San Diego. Finally, I'm immensely proud of our safety culture at Aurora. We finished the second quarter celebrating National Safety Month, an opportunity to reinforce, recognize, and reflect on our safety practices while also giving the team an opportunity to hear from safety experts outside of Aurora. At Aurora, we put an emphasis on developing and implementing safety best practices to ensure our employees are empowered and have multiple outlets to raise safety concerns without fear of retaliation. We review and address this feedback to continuously improve our technology, policies, and internal practices. I'm proud to share that during the second quarter, we reviewed and closed 100% of safety concerns raised within the quarter. Everyone at Aurora, from our vehicle operators to myself, plays a role in safety by speaking up if something doesn't meet Aurora standards. In closing, remaining laser focused on our plan and executing on what we can control is imperative in the current environment. Our first priority and where we are focusing our capital is the commercialization of Aurora horizon. We expect discipline, focus, and prioritization to help extend our cash runway to mid-2024. We can't wait to show the world what the Aurora driver can do as we advance our mission to deliver the benefits of self-driving technology safely, quickly, and properly. I will now pass it over to Richard, who will review our financial results.

Richard Tame, Chief Financial Officer

Thank you, Chris. We recognized approximately $21 million in collaboration revenue during the second quarter of 2022 and $145 million cumulative to date for development work associated with our agreement with Toyota. We have now recognized substantially all of the revenue under the agreement and received substantially all of the cash as well. While our first priority is the commercialization of Aurora horizon, we believe this work and other long lead efforts will spring load us for the eventual launch of Aurora Connect. During the second quarter of 2022, our market capitalization declined below a carrying value of net assets, triggering a $1 billion non-cash reduction in the carrying value of goodwill. There is no change to our outlook for the businesses we have acquired nor how we expect them to contribute to our commercialization. Including the reduction in the carrying value of goodwill, and $46 million in stock-based compensation, operating expenses totaled $1.2 billion. Excluding these non-cash expenses, operating expenses were $171 million. Within operating expenses, R&D expenses, excluding $41 million in stock-based compensation, totaled $142 million primarily comprised of personnel costs as we continue to invest in our industry leading autonomy work. SG&A expenses excluding $5 million in stock-based compensation, were just under $29 million. Turning to cash flow. We used approximately $90 million in operating cash, which reflects the inflow of $48 million during the quarter related to the Toyota agreement. Capital expenditures totaled $4 million. We ended the second quarter with a very strong balance sheet including $1.4 billion in cash and short-term investments, enabling us to continue to develop the Aurora driver for commercial deployment at scale. With that, we'll now open the call to Q&A.

Operator, Operator

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Tom White with D.A. Davidson. Please proceed with your question.

Tom White, Analyst

Good evening, guys. Thanks for taking my question. I guess first off, Chris, I just wanted to make sure I understood your latest expectations around the timetable for commercializing the trucking product. It seems like you guys are tracking ahead of schedule on some of the technical milestones like fault management and the FedEx collaborations. But the letter touched on the delay as it relates to the trucking platforms. So maybe just kind of net our year expectations around commercializing trucking slipping a bit; if you could just elaborate there a little bit? And then I had a follow-up?

Chris Urmson, Co-founder and CEO

Yes. So as you point out, we feel like we're making very good progress on both fronts. On the internal development of the Aurora driver, the team is making great advances. And in the roadmap we've shared, we've outlined some of the concrete capabilities we expect to deliver in the coming quarters to get to feature complete. From there, we're in the fun part where everything is working, refining things, and getting to the quality of performance we need to be confident in a fully operational autonomous driver. To ultimately deliver a commercial product, we need vehicle platforms that have redundancy and interfaces that enable the Aurora driver to operate them safely. Our partners are making great progress. We're working closely with them. We think that the largest risk part of those programs has now been retired; and that's the selection of some key tier one suppliers. That will ultimately lead to us being a little bit later than we had intended or expected with the commercialization of the truck. Importantly, today we are actually operating commercial loads for folks like FedEx, as we pointed out, where we're hauling goods on routes. We expect to continue doing that through the coming years.

Tom White, Analyst

Okay, that's helpful. Thanks. And then maybe just a high-level question on how this industry and ecosystem evolves. I noticed during the quarter that one of your key partners and shareholders, Uber, announced a long-term strategic partnership with Waymo. I feel like this industry is ripe with examples of competitors who are partners and vice versa. I was hoping you could just talk a little bit about how you see this space evolving over the next several years, particularly as it relates to these overlapping partner and competitor dynamics.

Chris Urmson, Co-founder and CEO

So maybe I'll talk just directly about the Uber relationship and then I can talk more broadly about how we see the industry evolving. With Uber, as you're probably aware, we acquired their self-driving business at the beginning of last year. Part of the logic behind that for Aurora was about bringing amazing people and great technology on board, along with a partnership with the world's leading ride-hailing platform and an important freight platform as well. It was understood from day one that we would focus on the driver while they focused on the network, and we understood this was not going to be exclusive in either direction. This made sense, and we expect to compete with others building automated vehicle technology. More broadly, we see the industry evolving so that the current financial climate will help separate the wheat from the chaff. Teams that can deliver products will be able to raise capital when needed; those who can't may struggle. We expect consolidation to continue as this new industry matures.

Tom White, Analyst

That's very helpful. Thank you. Maybe I'll just slip in one last question. In the letter, you indicated that by the end of this year, you plan to begin sharing initial allocations of your launch capacity with customers. Can you talk about how you prioritize who gets the allocations and how you distribute them? It's not purely about revenue maximization, I suspect, so I'd just like to understand your thought process.

Chris Urmson, Co-founder and CEO

Yes, we really put a lot of effort into building alignment with our partners. We want to ensure what we're doing is helping create value for them in their businesses. So as we get into those allocations, it'll be alignment around the routes that we’re operating on and where those partners see the most value. I don't think I can share more than that with you today.

Operator, Operator

Our next question comes from a line of Steven Fox with Fox Advisors, please proceed with your question.

Steven Fox, Analyst

Hi, good afternoon. A couple for me if I could please. First of all, with the delay in the supply chains on the trucking side, and you're still advancing steadily on your own technology, are there any implications for the rideshare goals that you've set out previously? And then I had a couple of follow-ups.

Chris Urmson, Co-founder and CEO

So we think focus matters, and particularly in this economic climate. We're going to be putting more emphasis on trucking and making sure that that product makes it to market. We still see the value in the ride-hailing market; we have a deep partnership with Uber and an amazing partnership with Toyota. But we expect to be shifting resources more to trucks to ensure we get that product out the door and delivered first.

Steven Fox, Analyst

Okay, that's helpful. And then from a safety aspect, Chris, you've emphasized how the company has a safety-first approach to the strategy. I haven’t heard of any incidents with your vehicles as you’ve ramped up these pilots, but one of your peers has had an incident and operational issues. Can you talk about safety issues the company has had to date and how you're handling them?

Chris Urmson, Co-founder and CEO

Absolutely. We put safety first. It's part of our mission to deliver the benefits of self-driving technology safely, quickly, and broadly. From early on, we implemented techniques for employees at all levels to flag safety concerns, which allows us to address them promptly. Our safety management system enables broad reporting of safety concerns and we pride ourselves on closing all scored concerns—100% in Q2, for instance. Our technology includes a checklist system that reviews around 1900 individual elements to ensure everything operates within range before the vehicle even attempts autonomy. We work to minimize the overall risk of what happens out on the road, recognizing that human operators can be fallible.

Steven Fox, Analyst

That's really helpful. Lastly, in the context of the change in the timeline, how does that affect the number of pilot runs you can do before going to commercial stages?

Chris Urmson, Co-founder and CEO

Yes, as we ramp up the number of trips for our partners on the road, we anticipate the Aurora driver being ready around the same timeframe we previously noted. We will have more real-world experience with the technology operating out there before we move on to removing the operator from the vehicle. That can only be a good thing.

Operator, Operator

Our next question comes from a line of Mark Delaney with Goldman Sachs. Please proceed with your question.

Mark Delaney, Analyst

Yes, good afternoon. Thank you for taking the questions. First, I was trying to better understand the revenue recognition implications from the change in the commercial launch. My understanding had been that you need the commercial truck in order to start recognizing revenue with the horizon. You may now be accounting for revenue; will that still be the case, or could you start recognizing revenue late ‘23?

Richard Tame, Chief Financial Officer

Sure, as Chris mentioned before, every day that we're pulling loads, we are getting paid for those. It's a very small amount of revenue relative to the size of the P&L. We're currently booking that as contra R&D expenses, and that will continue for the foreseeable future. Our product is to pull loads for people with human drivers; the goal is to have an autonomous platform without vehicle operators. That is when we will start recognizing revenue around 2023 and into 2024.

Mark Delaney, Analyst

Okay, it's hard to inject deliveries that would coincide with receiving these trucks in mid-2024, when it would launch commercially.

Richard Tame, Chief Financial Officer

Yes.

Mark Delaney, Analyst

You gave an update on the cash runway and having cash on hand through mid-2024. That's just around the time, or even a little bit before, that the commercial launch could occur. Do you have too much cash relative to what you need to support a commercial launch?

Richard Tame, Chief Financial Officer

I think we ended Q2 with a very strong cash position, with $1.4 billion in cash and short-term investments on the balance sheet. We believe that's sufficient to take us into mid-2024. Progress along the roadmap will support us in being able to access capital markets when the time is right. We can wait for the macro environment to improve, and our roadmap progress should help us to raise capital at an appealing price.

Mark Delaney, Analyst

It’s too hard to say if there’s a minimum figure needed to support a commercial launch in ‘24.

Richard Tame, Chief Financial Officer

Yes, that's not something we're going to say.

Mark Delaney, Analyst

Okay, thank you.

Richard Tame, Chief Financial Officer

Thank you.

Operator, Operator

Our next question comes from a line of David Vernon with Bernstein. Please proceed with your question.

David Vernon, Analyst

Hey, good afternoon, guys. Thanks for walking us through the quarter. I also wanted to thank you for including the timeline on page 4 of the shareholder letter. I have a question around the notion of 'feature complete.' Are we thinking of being feature complete for any operational design domain or just around initial rollout areas within Texas?

Chris Urmson, Co-founder and CEO

Yes, we expect that to be feature complete for the initial launch lane. We expect that as we expand into different areas, there will be some features added. But the bulk of the development work to enable the Texas triangle and southwestern U.S. should be ready, refined, and validated by that point.

David Vernon, Analyst

That makes sense. When can you help us think about how many trucks would be available during that initial launch?

Chris Urmson, Co-founder and CEO

Part of what's happening between us and our truck partners is ensuring that the platform developed is truly scalable. When those trucks are ready, we expect to see meaningful scalability. We think that getting 20-ish vehicles out on the road without operators initially will facilitate our commercial launch, and we will build from there.

David Vernon, Analyst

Okay, so there's an estimate of around 20 vehicles at the initial launch date?

Chris Urmson, Co-founder and CEO

Yes, that’s kind of what I'm indicating. The important work with vehicle platforms aims to enable us to build on that initial number.

Operator, Operator

Thank you, ladies and gentlemen. We have reached the end of the question-and-answer session. This does conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation and have a wonderful day.