Arbe Robotics - Q2 2023

Transcript

Operator (participant)

Welcome to the Arbe Robotics Second Quarter 2023 earnings results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. 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 of MS-IR. Please go ahead.

Miri Segal (Founder and CEO)

Thank you, operator, everyone for joining us today. Welcome to Arbe's second quarter 2023 financial results conference call. Before we begin, I would like to remind our listeners that certain information provided on this call may contain forward-looking statements, and the safe harbor statement outlined in today's press release also pertains to this call. If you have not received a copy of the release, please view it in the investor relations section of the company's website. Today, we are joined by Kobi Marenko, Arbe's co-founder and CEO, who will begin the call with a business update. We will turn the call over to Karine Pinto-Flomenboim, CFO, who will review the financials. Finally, we will open the call up for the question and answer session. With that, I'd like to turn the call over to Kobi Marenko. Kobi, please go ahead.

Kobi Marenko (Co-Founder and CEO)

Thank you, Miri. Good morning, everyone, and thank you for joining us. I will begin by reviewing some of our recent business highlights, then Karine Pinto-Flomenboim, our best CFO, will review the financials in more detail and share our outlook. Finally, we will open the call for the question and answer session. We are pleased with the progress we have made in the second quarter. Our product development is on track, and we are poised to achieve a production-ready chipset by the end of this year. Our collaboration with Tier 1 is rapidly evolving, reinforcing our position in the global auto market. Notably, our cutting-edge technology plays an increasingly important role in enhancing our customers' next generation product offering.

Weifu High-Technology Group, a key tier 1 we've been working with since 2019, placed an $11.6 million preliminary order for radar chipset, which will enable Arbe to meet Weifu's projected sales demand for 2024 for customers across China. As many of you are aware, China is one of the fastest growing automotive industries in the world, this preliminary order represents a large opportunity for us going forward. We know there is a strong demand for perception radar coming from the region, we are committed to providing key players, such as Weifu, with the most advanced perception radar solutions that can provide comprehensive free space mapping of a vehicle's surrounding. Additionally, Weifu placed a $1 million order for professional services, including engineering services, setup of a testing lab, and advanced support from Arbe.

As we mentioned in Q1, Weifu has already successfully established a production line and has a functional B sample operation, which represents the production configuration. Other tier 1s are actively constructing their production lines and are in the final stages of B sample development as well. This achievement represents one more milestone for our expansion strategy, starting revenues from China in 2024. In parallel, radars based on Arbe's chipset are in final stages of selection with 11 major premium OEMs in Europe and in China. We see momentum for our radar, mainly for level two plus plus and level three applications in both of those markets, and we have confidence that we will meet our targets for full selections this year.

In Q2, we were very happy to have successfully raised $23 million with Special Situations Funds, as well, as well as, with some of our current investors who are related to our directors. In case you are not familiar with Special Situations Funds, they are a collection of value-driven funds that invest in growth-oriented, small and micro-cap public equities, preliminary in the United States, Israel, and Canada. The fund states that its mission is to identify complex technology trends likely to materialize in the not-too-distant future, and then invest in small companies with state-of-the-art solutions that critically enable those trends. We expect to use the proceeds to further enhance our penetration in the Chinese automotive market, expedite our R&D efforts, increase our chipset line capacity, capitalize on recently proposed safety regulations, and strengthen our balance sheet.

Just recently, during Q2, we participated at the International Wireless Industry Consortium Automotive Sensor Architecture Conference, hosted by BMW, where we showcased our latest breakthrough in radar camera fusion. Arbe's advanced AI algorithms enable real time fusion of radar and camera data, empowering vehicles with enhanced object detection and tracking capabilities at high speeds and long ranges. This innovative solution is designed to excel in detecting multiple objects to provide clear pathways on highways and in urban environments, ultimately making it truly safe for drivers and pedestrians alike. As we look to the second half of the year, we are confident in our position, and we remain committed to adding four customers wins by the end of 2023. 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 second quarter of 2023 in more detail. Total revenue in the second quarter was $0.3 million, a decrease from $1.2 million in Q2 2022, and slightly below our expectations. Backlog as of August 9th is $1.5 million, now including both announced HiRain and Weifu preliminary orders. Gross margin for Q2 2023 was -1%, compared to a positive 72.7% gross margin in Q2 2022, as a result of our reduced quarterly revenue as we transition and focus on mass production. Moving on to expenses. In Q2 2023, we reported total operating expenses of $12.6 million compared to $13 million in Q2 2022.

The decrease in operating expenses was primarily driven by a decrease in research and development from $9.5 million in Q2 2022 to $9.1 million in Q2 2023, and a decrease in general and administration expenses from $2.3 million in Q2 2022 to $2 million in Q2 2023. The decrease in both was primarily related to a reduction in subcontractor expenses, favorable exchange rates, as well as reduction in D&O insurance costs, partially offset by an increase in our share-based compensation costs related to recent employees grants, and to a lesser extent, an increase in fundraising costs. Sales and marketing expenses increased from $1.2 million in Q2 2022 to $1.5 million in Q2 2023. Excluding share-based compensation expenses, sales and marketing level remains unchanged.

Operating loss in the second quarter of 2023 was $12.6 million, compared to an operating loss of $12.1 million in the second quarter of 2022. Adjusted EBITDA, a non-GAAP measurement, which excludes expenses for shared-based compensation and for non-recurring items, such as fundraising costs, was a loss of $8.4 million in Q2 of 2023, overperformed company's expectations, compared to a loss of $9.5 million in the second quarter of 2022. Net loss in the second quarter of 2023 was $12.6 million, compared to a net loss of $11.6 million in the second quarter of 2022.

Net loss in Q2 2023 includes $0.03 million of financial expenses, mainly related to exchange rate revaluation, offset by income of interests from deposits and to warrants revaluations. Net loss in Q2 2022 included financial income of $0.5 million, mainly related to warrants revaluations. Moving to our balance sheet. As of June 30, 2023, Arbe had $31.6 million in cash and cash equivalent and $25.6 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 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 toward the back end of the year. Adjusted EBITDA is expected to be a loss in the range of $32 million-$35 million. 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 on on your touch tone phone. If you are 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 today comes from Gary Mobley with Wells Fargo. Please go ahead.

Gary Mobley (Executive Director of Senior Analyst)

Hi, everyone. Thanks for taking my question. As we think about the fruition of the preliminary order from Weifu and the backlog from both Weifu and HiRain, is the conversion of that primarily a function of having production level quantities available from GlobalFoundries, and maybe if you can give us some update of where you stand in having some production-ready silicon out of your foundry partner?

Kobi Marenko (Co-Founder and CEO)

Hi, Gary, thank you for the question. Basically, yes, this is what, this, this is what it means. We have around $30 something million value of orders from our partners in China, and this means that GlobalFoundries has, for us, at least, this capacity for next year, for 2024. Regarding the progress in production, we are more or less in line with our plan. Production of chips in automotive is around 18-24 months plan. Right now, we are basically meeting our milestones in, you know, in the resolutions of weeks.

Basically, the three chips are in the final stages of qualification for automotive AEC-Q1000 and for the safety. We don't expect any issues with production right now. We have the chips, the production chips already in our office. They are all functioning on radar samples. When we are saying that there is a B sample of the tier 1, the B sample includes the chips from the final production version. It just. Then we will just need to finish the time that those chips needs to work in order to get the final stamp that they are qualified.

Gary Mobley (Executive Director of Senior Analyst)

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

Kobi Marenko (Co-Founder and CEO)

Yeah. First of all, I think that the main thing is that the competitive landscape didn't change. Right now, where we see in all of the RFPs that we're in, and mainly with the premium German OEMs, that we see Continental as a tier one, based on a TI chipset on the RF side, and NXP on the as a processor or FPGA. This is the same chip that we know, the same performance that we know. And this is a radar that has an order of magnitude lower amount of channels than our solution. From the other side, we see Mobileye trying to take into production a radar with a similar, more or less similar amount of channels as we. A bit less, but I think 10% less channels than what we have.

We still believe that we have the two or three years ahead of Mobileye in terms of maturity of the solution. We have an advantage in price that is based on our patents and in the system architect direction that we took as opposed to Mobileye. Basically, there's no new players in this market. I believe that the environment now, both on the public markets as well as in the private high tech sector, will basically not allow a new competitor to get in. It's $100 million, $200 million in order to reach to a solution. Where right now, I believe till the end of the decade, this is the picture that we see. Two main two horse race, Mobileye and our solution, and of course, the tier one that's behind us.

Especially the fact that Veoneer, that was our main tier one, was purchased by Magna, that has a big. That is a much bigger company, I think gives us comfort that there is a big player in the market that's pushing our solution into production.

Gary Mobley (Executive Director of Senior Analyst)

Thank you, Kobi.

Operator (participant)

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

Speaker 8

Hi, this is Lanny on for Josh. Thank you for taking my question. You called out that you're in the final for 11 premium OEMs in Europe and China. I was just hoping if you could elaborate on your confidence in terms of the wins. Are they kind of full across region and the magnitude of these engagements, if they're waiting to see a production-ready chip as a catalyst? I have a follow-up.

Kobi Marenko (Co-Founder and CEO)

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

Speaker 8

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

Kobi Marenko (Co-Founder and CEO)

Yeah. Well, first of all, I think that in general, the selections in China are for a much earlier year model, which means that the revenues that we will see are much earlier than in Europe and U.S.. China, we are now in a final selection of cars that should go to production in the second half of 2025. This means that they need to get radars from the tier ones in early 2025, and this means that they need to get chips from us by Q1, Q2, 2024.

We believe that those select selections will definitely provide us with the ability to fulfill our projection for 2024 and 2025. Also, in China, I cannot elaborate, but there is two major OEMs that wants to produce also the radars by themselves, and those deals will definitely include some major NRE for us. Which will help us also to meet our second half guidance, as well as the revenues out there. In Europe, we are basically right now targeting year model 2026 and even 2027. It's a year after China in terms of revenues. But the volume in Europe is much higher.

Of course, the fact that the premium German OEM, or another big car manufacturer in Europe will select our technology, it, it, of course, means a lot for our technology.

Speaker 8

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

Kobi Marenko (Co-Founder and CEO)

This is basically, the $11.6 million is the expectation of Weifu for 2024. I remind you that we also have a preliminary order from HiRain from last quarter, of another $30 million for 2024. This is basically altogether, this is what is giving us our focus for 2024.

Speaker 8

Understood. Thank you.

Operator (participant)

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

Jaime Perez (Senior Research Analyst)

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

Kobi Marenko (Co-Founder and CEO)

I think.

Karine Pinto-Flomenboim (CFO)

Hey, Jaime.

Kobi Marenko (Co-Founder and CEO)

that the gross margins. Sorry. Take it.

Karine Pinto-Flomenboim (CFO)

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

Jaime Perez (Senior Research Analyst)

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

Kobi Marenko (Co-Founder and CEO)

Basically.

Karine Pinto-Flomenboim (CFO)

Revenue

Kobi Marenko (Co-Founder and CEO)

We will begin. Sorry.

Karine Pinto-Flomenboim (CFO)

Sorry.

Kobi Marenko (Co-Founder and CEO)

We will begin to ship the chips early next year, we believe, maybe we will be able to ship some of it in by the end of this year, but the majority of it is gonna be in early 2024. Basically, the revenue recognition, and Karine can elaborate, is upon delivery to, to the tier one.

Jaime Perez (Senior Research Analyst)

Okay.

Karine Pinto-Flomenboim (CFO)

Shipment. Yeah.

Jaime Perez (Senior Research Analyst)

All right. I'll get there. All right, okay, then I'll leave it there for now. Thanks for my question. Thanks.

Karine Pinto-Flomenboim (CFO)

Thank you, Jaime.

Operator (participant)

As a reminder, if you have a question, please press star then one to be joined into the question queue. The next question comes from Matthew Galinko with Maxim Group. Please go ahead.

Matthew Galinko (Senior Vice President and Senior Equity Research Analyst)

Hey, thanks for taking my questions. We see the progression in the backlog number. I guess I'm just curious if that's excluding the two major tier ones that we've talked about, where is the backlog growth coming from?

Karine Pinto-Flomenboim (CFO)

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

Matthew Galinko (Senior Vice President and Senior Equity Research Analyst)

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

Kobi Marenko (Co-Founder and CEO)

The first two quarters revenues this year were not really meaningful. When we say it's below expectation, it's below in $50,000 or something. It's a matter of shifting of a few chipsets, or few radar models that shifted between Q2 and Q3. Basically, I think this year's revenues are not the ones that are really important. The real revenues is 2024 and up. This year, we're still selling chipset for evaluation, radars for evaluation, some NREs, and so on. Before, we will start shipping full production, I think that the revenues and the level of the revenues is basically meaningless.

It's not really showing anything about our traction, maybe the other way around. Our ability to be laser focused on the selections and those, and supporting our Tier 1s on the selections that they are going through with their customers, is of course coming. We can always sell another 10 or 20 systems to clients that, by the end of the day, will buy from us 100 radar or 100 chipsets. It's not relevant. We are laser focused on the big clients, on the big selections, and not on small projects that we can always take.

Matthew Galinko (Senior Vice President and Senior Equity Research Analyst)

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

Kobi Marenko (Co-Founder and CEO)

Basically, we're trying as much as we can to build software stack that will help our final customers, the, the car manufacturers, adapt the technology as fast as they can. Where we are working to help them with the free space mapping, with the classification of the objects based on the radar, and also with the with the fusion. This is we are not going to take this code and this software stack into production. We will just provide it as a reference code to our customers in order to reduce, for them, the effort for taking those technologies to production.

Matthew Galinko (Senior Vice President and Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

The next, the next question comes from Suji Desilva with Roth Capital. Please go ahead.

Suji Desilva (Managing Director and Senior Research Analyst)

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

Kobi Marenko (Co-Founder and CEO)

I think there is two things here that the Tier 1s needs to meet in order to get into selection. First of all, I think in all of the evaluations that we are in, it's clear that the technology and the product is better than the competition, and the price is attractive. What they're waiting to see is the full B sample from the tier 1, especially from Magna, also from HiRain. The fact that we have a B sample with Weifu is very good, but we need to have also B sample with the last version of the chips going to production from HiRain and from Magna. This expected to be around, I believe, during September.

They both of them already have the hardware, and it's in the final stages of bring up. This is a major milestone for the selection. Then we will be left with the last but not least, the final negotiation on the price. We believe that by September, October, we will be able to be selected in, in, in some of those projects.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. Thanks, Kobi. One other question, I apologize if you already covered this. The Weifu announcement, does that cover a single automotive OEM, or is that multiple auto OEMs that they're working with? If it is in autos, I just wanted to clarify that, or if it's non-auto. Thanks.

Kobi Marenko (Co-Founder and CEO)

It's a, it's a, part of it is OEM, and part of it is the project that we won together for with DiDi for the level 4 trucks.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay.

Kobi Marenko (Co-Founder and CEO)

That we announced, last quarter.

Suji Desilva (Managing Director and Senior Research Analyst)

I see. Okay, great. All right, thank you.

Operator (participant)

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

Kobi Marenko (Co-Founder and CEO)

Thank you. We were so pleased that you joined us today. To our employees and partners, your continued dedication is deeply appreciated. We look forward to updating you further on Arbe's progress in the coming months. Look out for updates as we prepare for several investor events, including the J.P. Morgan Auto Conference that happens today, the Jefferies Chicago Semis Conference on August 29th, and the Jefferies Israel Tech Trek, September 12th. Please contact us at [email protected] or visit our site to schedule a meeting. Thank you and goodbye for now.

Operator (participant)

The conference is now concluded. Thank you for attending today's call.