Arbe Robotics - Q1 2023

Transcript

Operator (participant)

Good day and welcome to the Arbe Robotics Q1 2023 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Miri Segal-Scharia, CEO of MS-IR. Please go ahead.

Miri Segal-Scharia (Founder and CEO)

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 CEO, 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.

Kobi Marenko (CEO, Co-Founder and Director)

Thank you Miri. Good morning everyone and thank you for joining us. I will begin by reviewing some of our recent business highlights. Karine Pinto-Flomenboim, our business CFO, will review the financials in more detail and share our outlook. Finally, we will open the call for the question and answer session. 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 platform. Weifu has successfully established a production line and has a functional B sample 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 a leader in innovative mobility technology in China, providing safe and sustainable transportation worldwide. KargoBot will be integrating Weifu's radar system, which utilize 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 product and accelerate the commercialization of autonomous driving solution 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 solution. 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 selection 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 long-standing 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 system will provide unparalleled safety and enhanced autonomy across a wide range of industries. The potential for radar application in non-automotive verticals is enormous. 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'd like now 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 Q1 of 2023 in more detail. Total revenue in the Q1 was $0.4 million a decrease from $0.9 million in Q1 2022. In line with our expectations, given our decision to shift focus to chip for production. 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 saving 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 Q1 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 shared-based compensation and for non-reoccurring items was a loss of $8.4 million in Q1 2023 which exceeds company's expectations and compared to a loss of $8.5 million in the Q1 of 2022.

Net loss in the Q1 of 2023 increased to $9.9 million compared to a net loss of $7.9 million in the Q1 of 2022. Net loss in Q1 2023 included $0.7 million of financial income compared to a $2.8 million of financial income in the Q1 of 2022. Moving to our balance sheet. As of March 31st, 2023, Arbe had $44.9 million in cash and cash equivalent with no debt. With respect to 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-$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-$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 updating you on our progress in the coming quarters. Now, we will be happy to take your questions. Operator?

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Gary Mobley (Executive Director, Senior Analyst of Semiconductors)

Hi 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?

Kobi Marenko (CEO, Co-Founder and Director)

Sure. It's, there is, of course, a difference between China and U.S. and Europe. China is today working faster in terms of bringing new hardware into the car. We are today focusing on new model 2025 in China. Which means that their radar sort is end of 2024, which means that our revenues from the chipset will start ramping up in 2024. In Europe and U.S. we are focusing now on year model, a year after 2026 sometimes even 2027. The radar will start production early 2025. Sorry, middle of 2025 and ramp up of revenues in early 2025.

Gary Mobley (Executive Director, Senior Analyst of Semiconductors)

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? What sort of impact would those preliminary orders have on your backlog?

Kobi Marenko (CEO, Co-Founder and Director)

Well, I think that HiRain are waiting for the final announcement of the OEM about them receiving the design-in and also on the exact date of the start of production of the car. Opposed to Europe, in China, models can be in start of production in almost every month of the year because of the amount of models that they are launching. Just in when I was in Shanghai Auto Show this year, there were 40 new EV models coming out of China. Opposed to Europe and Germany, Europe and U.S. that new model is announced somewhere around the end of the summer. In China, it might be every quarter.

What HiRain are waiting is to get the exact date of the start of production of the car, and based on that, they will place the order to the exact date. This is what will turn it from a preliminary order to a booking.

Karine Pinto-Flomenboim (CFO)

Regarding your backlog question, Gary. It's currently, as we said, it's not included in our backlog. Of course, when it will be an order it will be part of our backlog.

Gary Mobley (Executive Director, Senior Analyst of Semiconductors)

Thanks Karine.

Operator (participant)

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

Joshua Buchalter (Managing Director, Equity Research of Semiconductors)

Hi team. Thank you for taking my question. I wanted to ask as, I guess, as a follow-up to Gary's question on the Ford potential design-ins for this year. Anything you can give us on the scope or magnitude or use case on those? You know, where are you working? Is it for front-facing perception radar? Just any scope on the magnitude of those engagements. Is it across vehicle models? Is it for different OEMs? Would just love more clarity there. Thank you.

Kobi Marenko (CEO, Co-Founder and Director)

Yeah. Basically, I think almost every OEM today is evaluating imaging radar for their next generation platform. And we are presented today in those opportunities with our Tier 1 partners, of course. By the end of the day, the selection is the Veoneer or Valeo or HiRain or Weifu and not Arbe. We are not a direct Tier 1 for that. What we see, I would say, is maybe I will divide it into 3 models of engagement. There is engagement that is basically RFP, RFQ, and that's it. That we are not involved. The Tier 1s, of course, updating us about submitting this RFPs, RFQ.

They're competing there sometimes against just imaging radar, other imaging radar, lower in performance of course, but sometimes also against the legacy radar, which basically means that there's not yet a real decision to add imaging radar to the stack. On the second group, I would say, those are companies that involving us in the evaluation stage. They gave Veoneer and Valeo and also us a very detailed use cases, 10, 15, sometimes even 20 use cases, where they see today a problem with their existing sensor suite, from their existing radar cameras and also from the LiDAR that they are testing for those platforms. They are involving us and our radar, making sure that our radar closes all of those use cases.

As we see it today, and we have, those use cases from, I would say, around 10 different car manufacturers. 90% of it, of course, is similar. Everyone is dealing with the same problems and our radar solves them, all. I would say this is the second part. On those, OEMs, we of course, today the only sensor that can bridge the gap between today's, let's say, ends of cars to next generation ends of and to next generations, eyes of. Last is, even deeper engagement. Those are companies that already installed our cars in their development vehicle. They are already collecting data to their perception stock from our radar and making sure that their next generation of perception would be using imaging radar. Of course, those companies, we believe that we have the most chances to win.

Joshua Buchalter (Managing Director, Equity Research of Semiconductors)

Thank you for all that, Kobi. As my follow-up, I wanted to ask about, I guess, the competitive environment. We've seen some announcements from large incumbents in the auto radar market that say they're doing imaging radar functionality. Can you compare and contrast, I guess, 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, but are calling their products imaging radar? Like, I'd love to hear you walk through, like, what's changed in the competitive environment recently. Thank you.

Kobi Marenko (CEO, Co-Founder and Director)

I think that the competitive landscape didn't change at all actually since we started. From the beginning we saw NXP's processor and the existing RF chipset from NXP and TI as our competition. And there was a midterm solution that is based on both cascaded TI chip and a single FPGA. NXP announced that finally on their processor that is trying to compete with it. When I just detailed the situation that we are in with all of those car manufacturers, they tried this four-chips cascade and those four-chips cascade don't solve the problem.

We saw that all of those use cases that we are using that I spoke about, our radar solves the problem where the four chip cascade whether it's based on the TI RF or NXP RF, whether it's an FPGA inside or an NXP processor inside, they are not solving the problem. This is the reason why Mobileye I believe decided to develop a radar more or less on the spec that we are doing and bringing it to the market in 2025, 2026. I think that even that everyone that will analyze the performance of our radar against NXP radar based on our chipset and based on NXP chipset will see the difference in all of those scenarios.

I would say in the easy scenarios, we are equal, but for the easy scenarios, you don't need an imaging radar. You can use a legacy radar. On the problematic scenarios today, as far as we know, we have the only available solution that we can really solve the problem, not on paper, not on spec, not, you know, in demos in conferences, in real vehicles, in real testing with the leading premium European car manufacturer.

Joshua Buchalter (Managing Director, Equity Research of Semiconductors)

Thanks Kobi.

Operator (participant)

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

Suji Desilva (Managing Director and Senior Research Analyst)

Hi Kobi. Hi Karine. You target four OEMs by the end of the year. I'm curious, how many are you talking to now, roughly, engaged with? What proportion are those you're engaged with in the three categories you just discussed, like one versus two versus three?

Kobi Marenko (CEO, Co-Founder and Director)

First of all, the ones that are in category three, we by definition taking them in low probability to win. On the first category where we are engaged with the perception team, this is what we be, those are companies that, we believe that we have more than 50% probability to win. If you take the amount that we have there and multiply by the probability, I think that four is a good number that we feel very comfortable with. On the second category, there is another bunch of companies that we feel from them and from the Tier 1s that we have a very high chance to win.

Some of those selections might slip to 2024. When we are talking about four, we take it, we take the entire car companies that we are confident that we have a very good chance to win. Also that the decision would be taken this year and not slip to early 2024.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. Very helpful. Just to understand how backlog is gonna be reported in the next few quarters. Is that Karine, a three-month backlog of all the shipments you expect in the coming quarter, or is that a 12-month backlog, and will that grow when you have more design wins out? How should we think about that number?

Karine Pinto-Flomenboim (CFO)

Okay. Backlog is 12 months ahead, even further, but usually it's 12 months. When we have an agreement, again, it depends if it's the Western OEM or Chinese OEM, because it differs. It takes either between 18-24 months in the Western more traditional OEM side and quicker for 12-18 in the Chinese market from agreement to revenue recognition. We assume in that space that in assumably at least 12-18 months that we get the booking ahead and it will be considered in our backlog and included.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay thanks.

Operator (participant)

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

Jaime Perez (Senior Research Analyst)

Good day everybody. My question, I think I wanna focus on the non-automotive segment. I mean, how far are we in that segment? Sort of what's the timeframe of shipping product, maybe the size and do you expect any wins in that segment in the next year or two?

Kobi Marenko (CEO, Co-Founder and Director)

In this segment, I think that the, the fact that Qamcom started a full dedicated arm that is called Sensrad, dedicated for that will of course accelerate it. We expect revenues from non-auto to start in as early as 2024. Of course, it's not yet a high volume and higher volume in 2025.

Jaime Perez (Senior Research Analyst)

All right. Okay, higher volume. Are you gonna be shipping product in 2023 or I mean, how much lead time do they need? Is it just in time? Let me give some color on that.

Kobi Marenko (CEO, Co-Founder and Director)

I think what they need now, first of all, is the, for us to start production, they cannot ship products of course without us starting production. We will start production by the end of this year. We should expect that they will start providing systems around Q2 next year.

Jaime Perez (Senior Research Analyst)

All right. My follow-up, given, I mean, in the next couple, let's look forward the next four years. What size is it non-auto gonna be compared to the auto? Is it gonna more or less is auto gonna be the bulk of your revenues?

Kobi Marenko (CEO, Co-Founder and Director)

Four years from now, the non-auto would be single-digit in percentage up to 10% from our entire revenue. The growth margins there are a bit better than auto, but it's still I think nothing compares to auto where when we are talking about each one of those 4 design wins that I mentioned, I think it's the minimum yearly revenues for us is something like $25 million-$30 million a year. All of the segment of the non-auto together, I think if in 2026 we'll reach $25 million it would be amazing for us.

Jaime Perez (Senior Research Analyst)

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

Kobi Marenko (CEO, Co-Founder and Director)

Thank you.

Operator (participant)

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

Matthew Galinko (SVP and Senior Equity Research Analyst)

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

Kobi Marenko (CEO, Co-Founder and Director)

I would say that in the automotive space as general, there is the leaders, the innovators, and there is the followers. Same with ADAS and new sensors. It was back then with the airbag, it was with and with also with a single camera solution. All of those started with a premium OEMs that were focused on safety like Volvo, like Mercedes, and then it moved to other followers. I think also in ADAS there is the leaders that trying to develop it by themselves, trying to improve it by themselves.

There is the followers that might wait to see that this technology is in the mainstream and the demand of the customers is already there in order to start it. They also might choose a different direction of not developing it and buying a full system from other suppliers. As long as car OEM don't try to go beyond the adaptive cruise control maybe lane maintain and very basic functionalities, emergency braking, the current radars are I would say good enough. They sometimes fail but still since there is a man in the loop that holds the wheel, this is not really critical. The companies are trying to get off to get to ends of solution. Once this ends of solution to be fully safe I think needs an imaging radar and the companies are trying to go to eyes off is even critical.

Matthew Galinko (SVP and Senior Equity Research Analyst)

Got it. Thank you.

Operator (participant)

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

Kobi Marenko (CEO, Co-Founder and Director)

Thank you. We were 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 our best progress in the coming months. Look out for updates as we prepare for several investor events including the Evercore Virtual AutoTech and AI Forum on May 24th, the TD Cowen Virtual ESG Week on June 6th, and the Needham Virtual Automotive Tech Conference on June 7th. Please contact us at [email protected] or visit our website to schedule a meeting. Thank you and goodbye for now.

Operator (participant)

The conference has now concluded. Thank you.