Arbe Robotics - Q4 2023

Transcript

Operator (participant)

Hello, and welcome to the Arbe Robotics fourth quarter and full year 2023 earnings results conference call and webcast. 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 telephone keypad, and to withdraw from the question queue, please press star then two. I would now like to hand the call over to Miri Segal of MS-IR. Please go ahead.

Miri Segal (Head of Investor Relations)

Thank you everyone for joining us today. Welcome to Arbe's fourth quarter and full year 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, our 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 the call 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)

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 CFO, will review the financials in more detail and share our outlook. Finally, we will open the call for the question and answer session. Throughout the year, we focused on driving a radar revolution with our industry-leading solutions. We are pleased with the progress we have made as we continued to innovate and develop our offerings in 2023. Although some OEMs pushed their decision timelines into later this year, the anticipation surrounding our offerings is high, and we expect to announce significant customer wins in 2024. Industry timelines have been extended as the auto industry realigns its autonomous driving ambitions with a focus on enabling meaningful Level 2+ and Level 3 applications to differentiate their offering and meet customers' needs.

As a result, OEMs have redirected their engineering resources and adjusted product roadmaps. The dream of safe hands-free driving is within reach. According to Evercore analyst, in 2028, around 30% of all new vehicles will offer hands-free driving. The industry is currently selecting the next generation sensor solution to fuel this revolution. We see that the core sensor needed to solve the problem is a high channel count imaging radar like Arbe's. This demand is well reflected in all RFPs we encounter in the market. One of the most exciting developments of Q4 was our announcement of the production version of our radar processor. It supports the processing of a rich point cloud that is 10 times more detailed than any other radar on the market, offering the first radar-based solution that is detailed enough to support OEM's ambition to launch Level 3 and higher autonomy applications.

Our sophisticated perception radar supports the needs of hands-free driving at an affordable price, providing unmatched safety that we believe can scale the industry to full autonomy. Also, on the product front, we recently announced the availability of our production intent chips, which include the transmitter, receiver, and processor for the manufacturing of perception radar. This is an important step leading to the production and the revenue phase. Now our chipset is in the automotive qualification phase, which is the final step before mass production this year. The production intent chips is already in use by our Tier 1s in their pre-sample systems and has been delivered to OEMs for data collection and algorithm development. In January, we were proud to announce an important milestone.

HiRain, one of our longtime Chinese Tier 1s, announced that it will begin the mass production of state-of-the-art 4D imaging radars, powered by our chipset by the end of this year. In addition, HiRain announced it will start a data collection phase using a vehicle fleet equipped with Arbe-powered imaging radars, with plans to cover 1 million kilometers. The goal of the data collection project is to optimize the fusion and perception systems to enable key safety and comfort features. On top of HiRain, five other leading OEMs selected Arbe's chipset for perception projects. Additionally, Arbe received a second order for evaluation systems from a leading Western Truck Company. This level of commitment from Tier 1s and OEMs marks an important final step before moving into the commercial phase.

Shifting gears, as part of our growth strategy, we are also targeting the non-automotive market, which is moving faster than the traditional auto market. One of our Tier 1 Sensrad recently announced that it has significant customer orders for its Hugin imaging radar, which is based on our chipset. These orders include an American autonomous transportation global manufacturer, a robotized professional outdoor power equipment manufacturer, as well as a key player in the transportation sector. We view this achievement as a strong validation of our technology. Collaborating with Sensrad in the non-automotive market increases our total addressable market and accelerates our time to market. Finally, we are initiating a dual listing on the Tel Aviv Stock Exchange to enhance our trading volume. At the same time, we plan to issue bonds to the public to secure working capital to support the predicted production ramp-ups in 2025.

This proactive and strategic approach underscores our commitment to optimizing investor value and for fortifying our financial position in a dynamic market landscape. In summary, we are encouraged by our progress during the past year, as well as the progress of our Tier 1. Despite selection process and OEM program delays that are out of our control, we see that customers are excited about our solutions and the possibilities we can achieve together. We believe that Arbe remains strongly positioned as the long-leading radar supplier in those OEMs, and we expect to announce four customer wins in 2025, in 2024. Additionally, our approach in targeting new areas around the non-automotive industry is proving to be successful, and we see faster go-to-market opportunities in these markets. Arbe continues to innovate, and we believe we can lead a safe and smooth evolution.

Now, I'd like to turn the call over to our CFO, Karine, to go over the financials.

Karine Pinto-Flomenboim (CFO)

Thank you, Kobi, and hello, everyone. Let me review our financial results for the fourth quarter and the full year of 2023 in more detail. Total revenue in the fourth quarter was $0.35 million, compared to $0.15 million in the fourth quarter of 2022. For the full year of 2023, total revenue was $1.5 million, compared to $3.5 million in 2022. Backlog as of December 31, 2023, is $1 million and is expected to be recognized as revenue during 2024. Negative gross margin for Q4 2023 was 54.5%, compared to a negative gross margin of 45.6% in Q4 2022.

Gross margin for the full year of 2023 decreased to -2.6%, compared to a positive 63.5% in 2022. The margin decrease was primarily related to low annual revenue as we shifted our focus onto chip for production. Moving on to expenses. In Q4 2023, we reported total operating expenses of $11.9 million compared to $14 million in Q4 2022. The decrease in Q4 2023 was primarily driven by a reduction in research and development expenses, favorable exchange rate, offset with an increase in share-based compensation. Operating expenses for the full year totaled to $46.8 million, compared to $50 million in 2022.

The decrease reflected our advanced production stage and the finalization of costs related to this production maturity stage, and to a lesser extent, favorable exchange rate and the reduction in D&O insurance rates, partially offset by an increase in share-based compensation. Operating loss for the fourth quarter of 2023 was $12.1 million, compared to $14.1 million in the fourth quarter of 2022. Operating loss for the full year of 2023 was $46.9 million, improvement of $0.8 million compared to 2022. Looking at adjusted EBITDA in Q4 of 2023, a non-GAAP measurement, which excludes expenses for non-cash share-based compensation and for non-recurring items, was a loss of $8.2 million, compared to a loss of $11.5 million in the fourth quarter of 2022.

Adjusted EBITDA for the full year of 2023 amounted to a loss of $32.5 million, a $5.5 million improvement from 2022, and within our projected guidance. Net loss in the fourth quarter of 2023 decreased to $9.3 million, compared to a net loss of $11.1 million in the fourth quarter of 2022. Net loss for the full year of 2023 was $43.5 million, compared to $40.5 million in 2022. 2023 net loss includes financial income of $3.4 million, resulted mainly from deposit interest and foreign exchange revaluations. Moving to our balance sheet. As of December 31st, 2023, Arbe had $44 million in cash, cash equivalent, and short-term bank deposits, with no debt.

With respect to our 2024 guidance, our goal of achieving four design-ins with automakers remain unchanged, as we observe continued strong interest in our market-leading offering. We have strengthened our positioning in all our RFQ engagements, even though the OEMs have shifted their decision timelines from late 2023 to 2024. The 2024 annual revenue are expected to be in line with those of 2023, followed by revenue growth in 2025. These revenue projections are based on the intention to be in full production in the second half of 2024, as well as our decision to exclusively focus on getting our chipset into production. We are committed to maintaining a strong and well-managed balance sheet, focusing on cost effectiveness and the ability to fund our revenue growth.

Adjusted EBITDA for 2024 is projected to be in the range of $30 million-$36 million loss. Now, we will be happy to take your questions. Operator?

Operator (participant)

Thank you very much. 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. To withdraw your question, please press star then two. We will pause momentarily to assemble our roster. Today's first question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Gary Mobley (Executive Director and Senior Analyst)

Hi, everyone. Thanks for taking my question. I think last quarter you highlighted how perhaps as much as 20% of your workforce was called to military duty because of the war. Maybe you can give us an update on where that stands today and how that's affecting your R&D activity.

Kobi Marenko (CEO)

Yeah. So during Q4, we had around 20% of our team in military reserve. In January, most of them came back home and came back to work, and right now, we have less than 5% of our employees on reserve duty. Definitely, Q4, I would say was our less productive quarter ever. But people tried to compensate in the hard work. Overall, we were able to achieve all of our milestones with the customers, and right now we're back to almost normal, at least to the new normal.

Gary Mobley (Executive Director and Senior Analyst)

Okay. I go back to the last earnings call. I believe you highlighted 11 major OEMs that were in the final stages of selection, and you expected about 5 or 6 of these to conclude, you know, with final decisions. It sounds like now you're counting on 4 of those to go to final decision in calendar year 2024. So maybe you can give us sort of an update there in terms of, like, the total pool of OEMs that are still in various stages of selection.

Kobi Marenko (CEO)

The pool didn't change. So where we talk about 11 OEMs on Q4, actually it's now 12. Another RFP was open with an OEM that last year did not start this process yet. We haven't got any RFP since we started participating in RFP or since our Q1 began submitting proposals with our chipset. And the other way around, I think we are very, very close to major win during end of this quarter, early next quarter. As time goes by, the decisions are in the final stages, and we hope to be able to announce major news before end of Q1, at least before we will report our Q1.

Gary Mobley (Executive Director and Senior Analyst)

Okay. Last question for me, if I can. It sounds like more of the same with respect to China, that is, China will be the first geography to really adopt and embrace L2+ autonomous driving. Maybe you can just speak to some of the impediments that you're seeing in terms of, you know, direct customer or consumer adoption for L2+ autonomous driving, you know, outside of China.

Kobi Marenko (CEO)

Yeah. So China, I think, right now, looking on this market in two segments. There is the luxury car segment that, of course, would be launched first in 2025, but this is very, very narrow volume, and most of those OEMs are focusing on launching radar together with LiDAR, sometimes even two LiDARs for L2+ plus L3. But the main segment, I would say, is the mainstream in China, and they're trying to launch this kind of services only with radar. We spoke about HiRain fusion project. We can say that at least two major OEMs are doing this kind of projects as well.

Fusion of radar, imaging radar, our imaging radar, with cameras in order to support Level 2+ plus Level 3 application without a LiDAR. Because on the mainstream of China, the LiDAR price is too expensive. Even the Chinese LiDAR are too expensive, and we believe that imaging radar will have a significant role in those launches.

Gary Mobley (Executive Director and Senior Analyst)

Thanks, Kobi.

Operator (participant)

Thank you very much. The next question comes from Joshua Buchalter with TD Cowen. Please go ahead.

Speaker 7

Hi, everyone. This is Winnie on for Josh today. Just a few questions from me. To start, can you walk through the main drivers of slower adoption and pushouts? Is it slower for Arbe or the imaging radar space in general? And then are there any implications to the slower 2024 ramp on your expectations for 2025 and 2026, or are those separate deficiencies?

Kobi Marenko (CEO)

Can you repeat? You're too close to the microphone, so can you repeat your question, please? Thank you.

Speaker 7

Yeah, sure. Is this better? Can you hear me better now?

Kobi Marenko (CEO)

Yeah, now it's much better.

Speaker 7

Okay. Sorry about that. Just to start, I says, can you walk through the main drivers of slower adoption and pushouts at the OEM level? We've seen this across other sensors, like LiDAR, but is it slower for Arbe or imaging radar in general? And then can you talk about the implications of a slower 2024 ramp and 2023 on your 2025 and 2026 expectations?

Kobi Marenko (CEO)

Okay. So, I think that we are suffering from the same main problem of the industry. So the full stack of Level 2+, Level 3 or sort of defines vehicles that can run this kind of software and do over-the-air updates and improve the ADAS over the air over time. This stack is pushed because it's too complicated than the OEMs basically thought at the beginning. But what we see clearly is that majority of the OEMs putting a lot of R&D efforts on this area, maybe more than before. They are shifting part of their investments in EVs into those R&D projects.

All of them wants to control this stack and to compete on this stack and offer their customers a better and safer experience for a highway autopilot and then for urban autopilot. So we see that this push in the industry is across the board, even it's influencing the ramp up of the central compute and other sensors. As of our revenues, our 2025 revenues are built mainly from China, which we believe that will ramp up earlier, and we know it will ramp up earlier, and from non-automotive applications, so we don't see a real influence on our 2025 revenues. It's mainly on the shift in 2024. And also we believe that in 2026 we will see major.

The wins that we will have this quarter and next quarter will be in our revenues in 2026. So overall, I think that the main delay is in 2024 revenues, which are shifted a bit to 2025. We have enough cash to pass this hiccup, and we believe that on the long run, Arbe will be a leader player and a very strong company.

Speaker 7

Great. Thank you for that color. I guess on that, you've previously mentioned a preliminary order for about $11.6 million from Weifu and the 304,000 chipsets from HiRain, I think, worth $10s of millions. Are these expected to—like, when can we expect these to layer into the model, and are they waiting final OEM decisions before revenue recognition?

Kobi Marenko (CEO)

Yeah, we are waiting for final OEM approval for before recognition. Also, you know, in chipsets, you need to deliver, to actually deliver the chipset in order to be able to recognize it. We expect that we, as HiRain stated, by the end of this year, last quarter of 2024, they will be in full production with our radar. So which means that they will start, we will start shipping them chips, and the majority of the revenues from those preliminary orders, we believe, gonna be recognized in 2025.

Speaker 7

Great. Thank you. That's all for me.

Operator (participant)

Thank you. 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. In the press release, you talk about a production intent chipset, and there's an auto qual being conducted. Is that being conducted by you or a Tier 1 or a potential customer?

Kobi Marenko (CEO)

No, no. Basically, as you know, our fab is GlobalFoundries, and GlobalFoundries are doing for us also a full turnkey solution of taking the chips to production. So the chips are in final stage of automotive qualification. They are running the automotive qual. In the pre-qual, we saw that they are fine, and we finished all of the preliminary tests, and we are now running on the formal stage of last stage of the automotive qualification. And we hope to start shipping full qualified production chips by end of Q2.

Of course, in the beginning, in the first two, three months, the volume will be low because it takes time for ramp up in automotive, but in 2025, we will be in full capacity and be able to supply any volume that is needed in the market.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. All right. Thanks, Kobi. And then my other question is on the competitive landscape, if you could update us on the traditional radar competitors and maybe some of the more software-centric models and what you're seeing in various geographies and OEMs in terms of the competition?

Kobi Marenko (CEO)

We are not seeing those kinds of companies in the competition. The other way around, what we see more and more is OEMs that stating that in the RFP the minimum requirement is a minimum high channel count, that as much as we know there is the other than us, maybe one or two players that are able to meet this qualification. And all of those software-centric or software radars are not qualified to those RFPs and RFQs that wants to support Level 2++, Level 3. Those solutions are very good for low-end ADAS to meet the challenges of NCAP, but not for real solving the problems of radar.

So, if we are looking on the competitive landscape, I think that in the last quarter, our situation improved dramatically. So from one end, there's no new competitor. From the other end, there is clear understanding, almost in every OEM that we are meeting, that high channel count above 16 by 16 is a must for year model 2027 and up. So, right now, as it was announced, there is a radar of us, but that is based on our chipset and a radar that is based on the chipset of Mobileye. Those are the only solutions that we know that are available in the market. It might be that someone is working on something too that we don't know.

But all of the solutions with software or with less channels are not qualified for next generation solutions.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. Thanks, Kobi.

Operator (participant)

Thank you. The next question comes from Jaime Perez with RF Lafferty. Please go ahead.

Jaime Perez (Senior Research Analyst)

Hey, everybody. Good day. Thanks for taking my question. The order that you received from the Western Truck Company, can you give us a little bit color? Is it a pre-production order, test order? We appreciate it if you give a little bit color on that.

Kobi Marenko (CEO)

The preliminary order that we got from HiRain is mainly focused on the OEM that HiRain already won, their central ECU, and they assume that the best radar to connect to this central processing unit is our radar, and they're in the final stages of the nomination with the OEM for this project.

Jaime Perez (Senior Research Analyst)

Now, is this gonna be a main radar or back or redundant, part of the redundant system?

Kobi Marenko (CEO)

No, it would be the main radar.

Jaime Perez (Senior Research Analyst)

The main radar. Okay, thanks. Now, I mean, also, focusing on the automotive market, since the automotive market has been a little bit choppy lately due to weak demand, and on your press release, you mentioned you're gonna look for other markets that maybe have a shorter lead time and less choppiness. Could you give a little color on that, on your non-automotive strategy?

Kobi Marenko (CEO)

Yeah, there is. So first of all, our non-automotive strategy was there from the beginning, but what we see is that Sensrad are gaining lots of traction with their product, mainly in robotics, in transportation, and even in homeland security. And we believe that we will see major revenues from this non-automotive market already in 2024 and, and of course, in 2025.

Jaime Perez (Senior Research Analyst)

All right. Okay, that's all the questions I have. Thanks, thanks for taking my question.

Operator (participant)

Thank you very much. This concludes our question and answer session. I'd like to turn the call back over to Mr. Kobi Marenko for any closing remarks.

Kobi Marenko (CEO)

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 on all this progress in the coming months. Look out for updates as we prepare for several investor events. We'd love to meet you in person for additional discussion. Please contact us at [email protected], or visit our site to schedule a meeting. Thank you, all.

Operator (participant)

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