Arbe Robotics - Q3 2023

Transcript

Operator (participant)

Good morning, and welcome to the Arbe Robotics third quarter 2023 financial results conference call. All participants will be in 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 your touchtone phone. To withdraw from the question queue, please press star then two. 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 (Head of Investor Relations)

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 (Co-Founder and 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 1s made significant progress towards commercial production, 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, our Tier 1s 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 Arbe's 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, reaffirming 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 chipset 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 will likely 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 2024 and 2025. Weifu High Technology Group, a key Tier 1 we've been working with since 2019, has placed an $11.6 million preliminary order for Arbe radar chipsets, meeting their projected sales demand for customers in China. In addition, HiRain Technologies, a leading Chinese ADAS Tier 1 supplier, has placed a preliminary order for 340,000 radar chipsets to serve their 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. On the corporate front, 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 role in sub-Nyquist sampling. Her addition to our board 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 the 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 previously announced preliminary orders. Gross margin for Q3 2023 was 24%, compared to a 72.5% gross margin in Q3 2022, as 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 a 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, as well as reduction in our D&O insurance cost, partially offset by an increase in our share-based compensation cost. 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.

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 non-recurring items, was a loss of $7.5 million in Q3 of 2023, overperformed company's expectations, and compared to a loss of $8.4 million in the third quarter of 2022. 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. 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.

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. With respect to 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-$7 million. Adjusted EBITDA is expected to be a loss in the range of $32 million-$35 million. Now, we will be happy to take your questions.

Operator (participant)

We will, excuse me. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone, touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Gary Mobley (Equity Analyst)

Hi, Kobi. Hi, Karine. I hope you're, you and your families are safe and remain safe. 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 your workforce getting called to the military. Maybe you could 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 (Co-Founder and CEO)

Yep. Thank you for this question, and thank you for the kind words. First of all, it's not easy, but I think it came to us after the Corona, so the company knows how to operate in a remote way. Part of the team is working from home, part of the team is working from the office. From the beginning, we prioritized the tasks. First of all, everything that is related to our next generation of chipsets will be delayed, and this team will be what was moved to work mainly on the current activities with the customers. I don't think it's really you know makes a difference or where anyway our next generation should be in the market in 2025 or 2026, 2026.

So a month here and there is not really influencing. We have the team outside of Israel, especially support and sales, and this helps us support our customers in China and in Germany and in U.S., even at that time. And we are trying to do the best with the team we have right now. We are able to support majority of our plans, and especially all of the tasks that are needed for our Tier 1 partners to go to production. And all of the tasks that are related to OEM evaluation and to OEM integration are prioritized, and I can ensure that no such task is hurt due to the situation.

We hope that the peace will come back to the Middle East soon.

Gary Mobley (Equity Analyst)

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

Kobi Marenko (Co-Founder and CEO)

It's actually what we need to do right now is to close the last phases of winning, the Tier 1s need to close the last phases of winning contracts with the OEM. The preliminary orders are based on their forecast for next year and the year after. We believe that in till the end of the year or early, very early next year, they will be able to finalize the deals with the OEMs based on their pre-samples, and we'll turn those preliminary orders into actual orders.

Gary Mobley (Equity Analyst)

All right. Thank you both.

Kobi Marenko (Co-Founder and CEO)

Thank you, Gary.

Operator (participant)

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

Speaker 8

Hi, this is Lanny on for Joshua Buchalter. Can you hear me okay? Yes. Great. I'd like to echo Gary's comment and wish the best safety for you, your family, and as well as your staff. Moving on to my question, my first question is, reading your guidance for 2023 implies quite a steep ramp in Q4 with your Tier 1s, and being in the final talk 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 (Co-Founder and CEO)

Yeah. So, we are in the final stages, as we mentioned in the call with 11 OEMs. We believe that at least 5 or 6 of them will take decisions before year-end or early next year. Part of them in China, part of them in Europe and the Western countries. With all of them, I think that the process is almost done, and we're in, at least with all of them, we are in, the Tier 1s are in final stages, and negotiating prices and negotiating year of production with SOP of the car.

We see in China, SOP for our radar, for the car in 2025, and outside of China, we are now in a process of projects for SOP 2026, SOP 2027, for the car, which means that we will gonna see the revenues ramping from the second half of 2024, mainly in 2025 and 2026 and 2027.

Speaker 8

That's really helpful color. Thank you. For my education standpoint, who are you seeing in the final process as your competitors? Like, how many competitors are you seeing narrowed down into these final decisions?

Kobi Marenko (Co-Founder and CEO)

I think that the competitive landscape in the radar has not really changed. So, there is, on imaging radar bucket, there is the low-end imaging radar that is based on the full cascaded chips coming from TI or NXP, and then FPGA or a processor of NXP. This gives something like 200 virtual channels compared to our 2,304 virtual channels. And so basically those products go to the market by two Tier 1, Continental and ZF. We see in the last few months aggressively that Mobileye trying to get aggressively also into the imaging radar business.

They have a product that is more or less close to the performance that we are bringing to the market, but we are a year and a half or 2 years ahead of them in terms of production and readiness for getting into a car.

Speaker 8

Thank you very much.

Operator (participant)

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

Suji Desilva (Managing Director and Senior Research Analyst)

Hi, Kobi. Hi, Karine. I also echo my hopes that you and your folks there are staying safe. So you talked about the customers looking at the B-sample and integrating the data sets from the 4D imaging. Kobi, how long does that process typically take in terms of how long do you think it'll take for them to have that, you know, the 4D imaging data set integrated with their perception software and data?

Kobi Marenko (Co-Founder and CEO)

Oh, so, basically what we see is the, as the, going all over, the OEMs is that the, the need is, for, something like, the 100,000 hours of driving, of data in order to train, the basic algorithms is between 2-3 months. The data collection, which we are in the middle of this phase, and then, you know, improving the, the stack for that, it can be, from 6-12 months. Depends on, on, you know, the abilities, of the software team. I think that, even in the, in, in the data collection, in parallel, they're beginning, to train, the stack.

They already see the value in an imaging radar and the ability to, to use an imaging radar like we are bringing to the market for a full Free Space Mapping based just on the radar, and we are the only company today that brings such value.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay, that's very helpful. And then, my other question is on the high range, the 340K units, I think you talked about. It seems like they'll start shipping in 4Q. I want to understand if the rest of it is still expected to ship in calendar 2024, or if any factors are shifting the shipment plan for that HiRain PO.

Kobi Marenko (Co-Founder and CEO)

Oh, we are not yet sure when we exactly will begin to ship the chips, but it's mainly gonna—the main volume would be in 2024. We are, we not sure if we will be able to start shipping in by the end of 2023 or only in the beginning of 2024. But anyway, as we assumed, majority of the shipping of the chips will be in 2024.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay, great. Thanks.

Operator (participant)

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

Jamie Perez (Senior Research Analyst)

Yeah, thank you for taking my question. I want to really, really be thoughts and prayers to everybody in the firm and the people of Israel. My first question, I noted, you noted on the press release that you have 2 projects for trucks, commercial side. Can you talk a little bit about that? Because, you know, we're seeing there's a big difference between, especially in the EV, between the passenger and the commercial fleet market, you know, as far as dynamics. So could you give a little bit more color on that? Thanks.

Kobi Marenko (Co-Founder and CEO)

Yeah. So I think the truck market today is becoming a bit complicated. So there is the trucks manufacturers themselves, which this is what we refer to, they working on adding ADAS level two plus, level three functionalities to the trucks and also to heavy machinery. And this is the two projects that we are engaged with. And there is the fleet owners that by the end of the day needs to buy those trucks with this service. And there is the, I would say, operations or operating companies, like we announced in China, the subsidiary of DiDi, they're doing the service of trucks.

This is also on our agenda to support those companies. To refer to those two projects, it's a big brands of truck company.

Jamie Perez (Senior Research Analyst)

All right. And my follow-up question on the market you're developing with the passenger side, are you gonna maybe apologize if you touched upon this before. Are you gonna be part of a suite or a standalone radar component? And also concerning you know, especially here in the U.S. where cars are becoming more expensive, there's a question of affordability. I mean, what's your price comparison between Arbe's chipset and let's say the LiDAR? 'Cause I know there's a significant difference, especially with you know, consumers being strapped for cash.

Kobi Marenko (Co-Founder and CEO)

So, first of all, the radar is part of the stack. The stack consists of, of course, at least 8-10 cameras, and sometimes also with the LiDAR. Comparing to the price of a LiDAR, imaging radar is much cheaper. Actually, the imaging radar is quite close to the price of the current front-facing radar. And we see that we are on the path to achieve with our Tier 1 partners a price that is around $150-$160 for a front-facing radar, imaging radar, 48 by 48, 2,304 hannels.

Jamie Perez (Senior Research Analyst)

All right. All right, thanks for my question. Thanks.

Kobi Marenko (Co-Founder and CEO)

Thank you.

Operator (participant)

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

Matthew Galinko (SVP and Senior Equity Research Analyst)

Oh, thank you for taking my question. I think you mentioned you're potentially touching 31% of the global passenger market with the OEMs you're in the final selection process for. So I think we've visited this question in the past in various forms, but for the rest of the global passenger market, is there reticence to imaging radar among the other OEMs? Is it geographically, you're just not touching those areas yet? Just, you know, 31% is a great number, but where is the rest of the market? Thank you.

Kobi Marenko (Co-Founder and CEO)

I think so, there is few things here that related to adoption of an imaging radar. So first of all, there is early adopters, and as the early adopters are the premium car manufacturers, and this is our first target. And also there is the premium adopters in China that again are not the old school car companies, but more of the private ones and not the government controlled. So we are approaching those companies first.

And of course, as I mentioned, we believe that by the end of the day, every car will have an imaging radar, but the first adoption would be on premium cars, on high-end cars and on early adopters of new technologies.

Matthew Galinko (SVP and Senior Equity Research Analyst)

Thank you. I think you just mentioned this, but did you say towards the end of the decade, you expect imaging radar to be standard on all cars?

Kobi Marenko (Co-Founder and CEO)

Yes. Like a camera.

Matthew Galinko (SVP and Senior Equity Research Analyst)

Got it. Okay. Thank you.

Operator (participant)

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

Kobi Marenko (Co-Founder and 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 we continue to execute our business priorities as planned. Israeli babies, children, women, and men are currently held in Hamas captivity. Our lives will not be whole before each of them is returned 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 (participant)

The conference has now concluded. Thank you for your participation.