Arbe Robotics Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 9 speakers on the call.

Operator

and welcome to the Arbei Robotics Second Quarter 2023 Earnings Results Conference Call. All participants will be in a listen only mode. After today's presentation, Please note this event is being recorded. I would now like to turn the conference over to Mary Sagal of MSIR. Please go ahead.

Speaker 1

Thank you, operator, and everyone for joining us today. Welcome to Arbe's Q2 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.

Speaker 1

Then we will turn the call over to Karim 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 Morenko. Kobi, please go ahead.

Speaker 2

Thank you, Mary. Good morning, everyone, and thank you for joining us. I will begin by reviewing some of our recent business highlights. Then Karine Pinto Flumenboim, 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.

Speaker 2

We are pleased with the progress we have made in the Q2. 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. Wefu High Technology Group, a key Tier 1 we've been working with since 2019 placed an 11,600,000 preliminary order for radar chipset which will enable Arben to meet Weifu's projected sales demand for 2024 for customers across China.

Speaker 2

As many of you are aware, China is one of the fastest growing automotive industries in the world and 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 and we are committed to providing key players such as WIFU with the most advanced perception radar solutions that can provide comprehensive free space mapping of a vehicle's surroundings. Additionally, WIFU placed a $1,000,000 order for professional services including engineering services, set up of a testing lab and advanced support from RBAC. As we mentioned in Q1, WIFU has already successfully established a production line and has a functional B sample in operation, which represents the production configuration. Other T1s are actively constructing their production lines and are in the final stages of B Sample development as well.

Speaker 2

This achievement represents one more milestone for our expansion strategy, starting revenues from China in 2024. In parallel, radars based on RBES 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 2+ and level 3 applications in both of those markets and we have confidence that we will meet our targets for 4 selections this year. In Q2, we were very happy to successfully raised $23,000,000 with special situations funds as well as with some of our current investors who are related to our directors. In case you are not familiar with special situation 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.

Speaker 2

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 profits to further announce our penetration Chinese automotive market, expedite our R and 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. ROVED's advanced AI algorithms enable real time fusion of radar and camera data, empowering vehicles with enhanced object detection and tracking capabilities at high speed 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.

Speaker 2

As we look to the second half of the year, we are confident in our position and we remain committed to adding 4 customers wins by the end of 2023. Now, I'd like now to turn it over to our CFO, Corinne to go over the financials.

Speaker 3

Thank you, Kobi, and hello, everyone. I'd like to review our financial results for the Q2 of 2023 in more detail. Total revenue in the Q2 was $300,000 a decrease from $1,200,000 in Q2 2022 and slightly below our expectations. Backlog as of August 9 is $1,500,000 now including both announced Hyren and Weifu preliminary orders. Gross margin for Q2 2023 was negative 1% compared to a positive seventy 2.7% gross margin in Q2 2022, as a result of our reduced quarterly revenue as we transition and focus on mass production.

Speaker 3

Moving on to expenses. In Q2 2023, we reported total operating expenses of $12,600,000 compared to $13,000,000 in Q2 2022. The decrease in operating expenses was primarily driven by a decrease in research and development from $9,500,000 in Q2 2022 to $9,100,000 in Q2 2023 and a decrease in general and administration expenses from $2,300,000 in Q2 2022 to $2,000,000 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 and O insurance costs, partially offset by an increase in our share based compensation costs related to recent employee grants and to a lesser extent an increase in fundraising costs. Sales and marketing expenses increased from $1,200,000 in Q2 2022 to $1,500,000 in Q2 2023.

Speaker 3

Excluding share based compensation expenses, sales and marketing level remains unchanged. Operating loss in the Q2 of 2023 was $12,600,000 compared to an operating loss of $12,100,000 in the Q2 of 2022. Adjusted EBITDA, a non GAAP measurement, which excludes expenses for share based compensation and for non reoccurring items such as fundraising costs, was a loss of $8,400,000 in Q2 of 2023. Overperformed company's expectations and compared to a loss of $9,500,000 in the Q2 of 2022. Net loss in the Q2 of 2020 3 was $12,600,000 compared to a net loss of $11,600,000 in the Q2 of 2022.

Speaker 3

Net loss in Q2 2023 includes $300,000 of financial expenses, mainly related to exchange rate revaluation, offset by income of interest from deposits and to warrants revaluations. Net loss in Q2 2022 included financial income of $500,000 mainly related to warrants revaluations. Moving to our balance sheet. As of June 30, 2023, Arbe had $31,600,000 in cash and cash equivalent and $25,600,000 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.

Speaker 3

Our goal for 2023 to achieve 4 design ins with automakers. Revenue is expected to be in the range of $5,000,000 to $7,000,000 which will be heavily weighted towards the back end of the year. Adjusted EBITDA is expected to be a loss in the range of $32,000,000 to $35,000,000 Now, we will be happy to take your questions. Operator?

Operator

The first question today comes from Gary Mobley with Wells Fargo. Please go ahead.

Speaker 4

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

Speaker 2

Hi, Gary. Thank you for the question. Basically, yes, this is what it means. So we have around $30 something million value of orders from our partners in China and this means that a GlobalFoundries has for us at least this capacity for next year, for 2020 4. Regarding the progress in production, we are more or less in line with our plan.

Speaker 2

Production of chips in automotive is around 18 to 24 months plan and right now we are basically meeting our milestones in the resolutions of weeks and basically the 3 chips are in the final stages of qualification for automotive ACQ1000 and for the safety and 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. So when we are saying that there is a bit sample of a Tier 1, the bit sample includes the chips from the final production version. It just and then we will just need to finish the time that those chips need to work in order to get the final step that they are qualified.

Speaker 4

That's helpful, Koby. And I was hoping that you can give us an update on the competitive environment. I think you've been publicly company for about 2 years and the 4 d radar market has evolved over that time. I don't know if you can say at a slower than expected pace, but nevertheless, maybe it's given an opportunity for some competitors to catch up. Maybe you can give us an update there on how you see the competitive environment?

Speaker 2

No. So, first of all, I think that the main thing is that the competitive landscape didn't change. So right now, we see in all of the RF feeds that we're in and mainly with the premium German OEMs that we see Continental as a Tier 1 based on the TI chipset on the RF side and NXP on the as a processor or FPGA. So this is the same chip that we know, the same performance that we know and this is a radar that has order of magnitude lower amount of channels than our solution. Then 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.

Speaker 2

We still believe that we have the 2 or 3 years ahead of Mobileye in terms of maturity of the solution and we have an advantage in price that is based on our patents and in the system architect direction that we took as opposed to mobilize. So 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 $100,000,000 $200,000,000 of dollars in order to reach to a solution. So we're right now, I believe, till the end of the decade, this is the picture that we see 2 main 2 horse rates, Mobileye and our solution and of course the Tier 1 that's behind us, especially the fact that Veoneer that was our main Tier 1 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.

Speaker 5

Thank you, Colby.

Operator

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

Speaker 6

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 China. I was just hoping if you could elaborate on your confidence in terms of the wins, are they kind of low cost region? And the magnitude of these engagements, if they're waiting to see production ready to ship as a catalyst?

Speaker 2

Can you please repeat the question?

Speaker 6

Sure. So you've called out that you're in the final stages of selection your confidence that 4 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? And I have a follow-up.

Speaker 2

Yes. So, 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. So China, we are now in a final selection of car that cars that should go to production in the second half of twenty twenty five, which means that they need to get a radar from the Tier 1s in early 2025 and this means that they need to get chips from us by Q1, Q2, 20 4. So we believe that those selections will definitely provide us with the ability to fulfill our projection for 2024 and 2025.

Speaker 2

Also in China, I cannot elaborate, but there is 2 major OEMs that wants to produce also the radars by themselves and those deals will definitely include some major NRE for us. So it 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 26 and even 27. So it's a year after China terms of revenues, but the volume in Europe is much higher and of course the fact that the premium German OEM or another big car manufacturer in Europe will select our technology, it's of course means a lot for our technology.

Speaker 6

Great. Thank you for that color. For my follow-up, I was hoping that you could talk about your $11,600,000 order with layer in and layer into the model for that course of time?

Speaker 2

This is basically the 11.6 is the expectation of WIFU for 2024. I remind you that we also have a preliminary order from Hi Rain from last quarter of another $30,000,000 for 2024. So this is basically altogether this is what is giving us our focus for 2024.

Speaker 6

Understood. Thank you.

Operator

The next question comes from Jamie Perez with R. S. Laverty. Please go ahead.

Speaker 7

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 and meet the annual expectations for revenues?

Speaker 2

I think that the gross margins sorry, take it.

Speaker 3

Just to say, this is first as expected. The revenue levels meet only the fixed costs of our cost of revenue for a portion for the COGS and that's why it's driving on a 0 margin profitability for this quarter. But 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 percentage of and of course positive ones.

Speaker 7

All right. So reading into it, I mean, so right now we're looking at, let's say, this fixed cost and then as you ramp up, we just saw the 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? And do you book revenues when they receive them or when the cars are sold to the client?

Speaker 7

So my question is, when is the revenue recognition?

Speaker 4

Basically,

Speaker 2

We will begin to ship the ships 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 going to be in early 'twenty four. Basically, the revenue recognition and Karen can elaborate is upon delivery, to the Tier 1.

Speaker 3

Shipments, yes.

Speaker 8

All right.

Speaker 7

I'll leave it for now. Thanks for my question. Thanks.

Speaker 3

Thank you,

Operator

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

Speaker 5

Hey, thanks for taking my questions. So we see the progression in the backlog number. I guess I'm just curious if that's excluding the 2 major Tier 1s that we've talked about, where is the backlog growth coming from?

Speaker 3

So, yes, as I stated, it excludes the recent WIFU and higher end preliminary orders, but it does include, we mentioned in our PR as well, the $1,000,000 of order from WIFU 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.

Speaker 5

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

Speaker 2

The first two quarters revenues this year were not really meaningful. So when we say it's below expectation, it's below in $50,000 or something. So it's a matter of shifting of a few chipsets or few radar models that shifted between Q2 and Q3. So basically, I think this year's revenues are not the ones that are really important. The real revenues is 24% and up.

Speaker 2

This year, we're still selling chipset for evaluation, radars for evaluation, some NREs and so on. So 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. So our ability to be laser focused on the selections and supporting our Tier 1 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 radars or 100 chipsets, it's not relevant. We are laser focused on the big clients, on the big take.

Speaker 5

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

Speaker 2

Basically, we're trying as much as we can to build software stack that will help our final customers, the car manufacturers adapt the technology as fast as they can. So 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 Fusion. So 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.

Speaker 5

Okay. Thank you.

Operator

The next question comes from Suji Desilva with ROTH Capital. Please go ahead.

Speaker 8

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

Speaker 2

I think there is 2 things here that the Tier 1s need 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 a full B sample from the Tier 1, especially from Magna, also from HiRein. The fact that we have a big sample with WIFU is very good, but we need to have also big sample with the last version of the chips going to production from Hyren and from Magna. This is expected to be around, I believe, during September.

Speaker 2

So they all both of them already have the other and it's in the final stages of bring up. So this is a major milestone for the selection. And then we will be left with the last but not least, the final negotiation on the price. And we believe that by September, October, we will be able to be selected in some of those projects.

Speaker 8

Okay. Thanks, Colby. And then one other question, I apologize if you already covered this. The way through announcement, does that cover a single automotive OEM? Or is that multiple auto OEMs that they're working with?

Speaker 8

If it isn't autos, I just want to clarify that or if it's non auto? Thanks.

Speaker 2

It's a part of it is the OEM and part of it is the project that we want together for with Didi for the level 4 trucks that we announced last quarter.

Operator

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

Speaker 2

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 JPMorgan Auto Conference that happens today, the Jefferies Chicago Semi's Conference on August 29 and the Jefferies Israel Tech Track September 12.

Speaker 2

Please contact us at investorsarberobotics.com or visit our site to schedule a meeting. Thank you and goodbye for now.

Operator

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

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Earnings Conference Call
Arbe Robotics Q2 2023
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