Arbe Robotics Ltd. (ARBE) Q2 2022 Earnings Report, Transcript and Summary

Good day and welcome to Arbe Robotics Second Quarter 2022 Financial Results. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mary Cegal [Ph], CEO of MSIR. Please go ahead.

Thank you everyone for joining us today. Welcome to Arbe’s second quarter 2022 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 in 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 the business updates. Then we will turn the call over to Karine Pinto-Flomenboim, CFO, who will review the financial. Finally we will open the call up for the question and answer session. With that, I would like to turn it over to Kobi Marenko. Kobi, Please go ahead.

Thank you Mary. Good morning everyone and thank you for joining us. I would like to begin by reviewing some of our recent business highlights. In July, we introduced Lynx, the industries’ first Surround Imaging Radar, fulfilling a significant market demand for 360 long-range, high-resolution sensing at an affordable price. With 24 by 12 channels Lynx outperformed the most advanced industry radars on the market today, even the highly priced front radar, making it the first surround radar, able to announce perception and sense of future. The Lynx imaging radar was designed to complement Arbe’s flagship product Phoenix Perception Radar, which processes 48x48 channels. Both radars will work in sync to deliver unified perception and interference avoidance and to provide full sensor coverage around the vehicle, enabling unparalleled safety for vehicles. Lynx is designed to be a corner and a back radar for L2+ and higher autonomous vehicles. We anticipate that four to six surround imaging radars will be integrated per vehicle in addition to one or two protection radars. Further, Lynx can be utilized as a front radar for ADAS, and we believe it is the only product from the market that can fulfill the endcap safety requirements. We believe that this now represents enormous business opportunity for Arbe and for the Tier 1s that build and sell radar based on Arbe’s chipsets. I'm also happy to share with you that we reached a major milestone with our strategic partner GlobalFoundries in the second quarter. As many of you know, GlobalFoundries is a major semiconductor supplier for the automotive and other industries, and it has established a designated area dedicated to the production and sampling of Arbe’s chipset within their fab. GlobalFoundries has delivered the first significant customer samples shipment of our chips in the second quarter. In addition, both companies have signed a long term manufacturing agreement that covers quality assurance, assembly and testing and marks tremendous progress going into mass production. We believe this will provide us with the quality and the capacity necessary to meet our customer requirements. China is the largest vehicle market in the world. During the second quarter, a leading Chinese ADAS Tier 1 supplier HiRain technology announced that it is undertaking major OEM and autonomous driving projects with imaging radar based on the Arbe Chipset. HiRain announced that it expects to reach full mass production of radar system by 2023. HiRain radar system utilizes Arbe’s chipset with 48 meters channels, and 48 receiving channels and a dedicated processor to map the environment and sense the surrounding of the vehicle in high resolution. In parallel to this announcement, HiRain has been shortlisted for leading Chinese OEMs RFQ which is a major business milestone. As the pipeline continues to grow during the second quarter, Arbe added two new customers engagement including a truck OEM that is the leading in level 2+ truck design and the new mobility company that is focussing on level 4 vehicles. Additionally Tier 1s submitted 5 RFP RFPs and RFQs with Arbe’s chipset to major OEMs committing to supply the customer with volume ranging from 400,000 to 1 million systems per year. Arbe is now shortlisted for 8 RFPs RFQs. This includes top OEMs from North America, Europe and Japan, winning all these contracts would generate $7.5 billion in revenues for us by the end of the decade. On the corporate front, we have made some key organizational changes at Arbe that we believe will help boost our company to the next level of growth. We found consolidated highly focused R&D groups to scale our business allowing us to deliver the revolution in radar solutions to our customers. With these changes in place, we will accelerate product execution while maintaining technological excellence as we focus on the next generation of solutions. Finally, just last month, Arbe’s early shareholder initiated an extension to the lockup period. This gives us great confidence that our shareholders believe in the long term potential of Arbe’s business and in our ability to seize the opportunities ahead. Full details about the extended period can be found on our investor website and in our filings with the SEC. As we enter the second half of 2022, we are shifting our focus to production and execution. We believe that our expanded offering Phoenix Perception Radar and Lynx surround imaging radar can open new and vast industry verticals, and further expand Arbe’s business potential. This is our time to win new businesses, and monetize our engagement by building on our innovative technology and strong execution capabilities. In addition, the production timeline enhanced by higher end technologies, coupled with the progress achieved by all Arbe’s Tier 1 is positioning us ahead of the rest in the industry. Now I'd like to turn it over to our CFO Kareem to go over our financials.

Thank you, Kobi and hello, everyone. First, first, let me apologize for my voice today. I woke up this morning and lost my voice. So I hope you'll bear with me when I'll do my best in reviewing our financial results for the second quarter in more details. Total revenue in the second quarter was $1.2 million, compared to $0.5 million in the second quarter of 2021. Backlog as of June 30 2022 was $1.5 million, consisting mainly of chipset services and samples orders from Tier 1s. Gross margin in Q2 2022 was 72.8% compared to 31.9% in the same period in 2021. The gross margin increase was primarily related to economy of scale, and lower cost per unit as we expand towards production. Moving on to expenses. In Q2 2022, we reported total operating expenses of $13 million an increased from $6.9 million in the second quarter of 2021. The increasing operating expenses were primarily driven by non-cash share based compensation expenses, labor costs, increased research and development material and subcontractor cost and additional general overhead costs related to our status as a public company. Operating loss for the second quarter of 2022 was $12.1 million, compared to a $6.7 million lost in the second quarter of 2021. Operating loss reflected our growing investment mainly in research and development. Looking at adjusted EBITDA in Q2 of 2022, and non-GAAP measurements, which excludes expenses for non-cash share based compensation, and for non-reoccurring items, was a loss of $9.5 million, compared to loss of $6.4 million in second quarter of Q2 of 2021. Net loss in the second quarter of 2022 increased and was $11.6 million, which included half a million dollars of financial income, compared to a net loss of $10.6 million in the second quarter of 2021, which included $3.9 million of financial expenses. Q2 2022 financial income resulted from the revaluation of warrants partially offset by exchange rate revaluations and financial interest. Moving on to our balance sheet. As of June 30 2022, Arbe had $71.3 million in cash and cash equivalents. We repaid our last loan on June 30, 2022 and we have no debt on our balance sheet. With respect to our guidance for 2022, we would like to reiterate what we previously shared. Revenue is expected to be in the range of $7 million to $11 million heavily weighted toward the end of the year. Adjusted EBITDA is expected to be a loss in the range of $34 million to $38 million. Additionally, we believe that we are on track to reach our $312 million revenue goal for 2025. Now we will be happy to take your questions. Operator, please start the Q&A session.

[Operator Instructions] The first question comes from Joshua Buchalter with Cowen and Company. Please go ahead.

Hey, guys, thanks for taking my question and congrats on all the progress. It's starting to clear in the tone that you're focused on operations. And it sounds like things are GlobalFoundries are pretty much ready to go for volume production. Are you able to give a timeline of when you expect to fully enter volume production, and should be still expect autoX to sort of lead as the first customer has you ramped a volume and then followed by Asian OEMs in 2023? Thank you.

Yes. So first of all, it's actually two questions there. One is regarding our production and second question is about a production of automatic. So first of all, regarding our production, we are we believe that early 23, we're going to be in full production of the chipset, like we assuming. And likewise, original projection, we don't see any change in the production timeline. The other way around, we see here today, in our tweet chips that are production ready, in the final stages of testing, I can say working, quite good. Like a word design. And from here, we believe this is just where the process or the things that needs to be taken in order to take it to production. But we don't see any anything that should stop us from achieving our goal. And we have weekly meetings with GF on this project. And the project is on schedule, which is quite amazing. Taking into consideration that it's almost a two years project to take those chips into production. The second question is about the autoX production. So autoX design their own antenna for their radar, and this antenna is already working with our chips. And from here, the next stage is going to be to make it a production ready. And we believe that early next year, we will be able to stop again shipping production ready radar for autoX. Regarding that, autoX as opposed to our let's say usual model that we are a selling chips to tier one here on the autoX project. There is a contractor that is doing for autoX custom designs and we are already working with them to support them. So in terms of the revenues, we are not just counting the chipset, but we will come the entire radar. So to summarize the answer is yes. But of course, this is on the side of the customer. So they must get into production the system with a with the B sample. As of now it looks like it's on schedule. And they will be able to start ramping up B samples next year.

Kobi, thank you for all the color. Then I wanted to ask you about Lynx. Was it developed due to customer demand poll? Or is it more, it's something that you're now taking to customers and waiting to see the response to a 24 by 12 product and how incremental is to the TAM is Lynx and what's a realistic timeline for revenue contribution? Thanks, guys.

Now Lynx we saw the need from the specs of the car companies and we designed the reference [Ph] of the Lynx and we announced that we have a reference design product in the performance. I can say that two Tier 1s, two European Tier 1s that are walking with us closely already had their own 24 by 12 like Lynx product, and it's already in our RFP, RFQ part of them already submitted. So this work has been done in the last nine months, together with the OEMs on to make sure that the product is according to the specs, and from the other end with the Tier 1s that in parallel to our reference design, build your own reference design and our two European Tier 1 has their own 24 by 12 walking product already in the test vehicle as we speak. We believe that the next stage would be that in China, HiRain and [Indiscernible] will do their own net 24 by 12 as well in the coming future.

Got it. Thank you. Appreciate all the color and feel better green.

Thanks, Josh.

The next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Hello, everyone. Thanks for taking my question. I apologize. Gonen Barkan start with a question for you. 73% gross margin for the quarter is notable, although it's also a small revenue base. And if I'm not mistaken, the long term view by the company is offering your long term guidance is maybe something in the high 60% range. So my question is, is this low 70% gross margin a permanent fixture? Or are you still standing by that high 60% long term gross margin view?

Thank you Gary, good question. So we’re still standing behind the 60 higher 60% for the long run. This specific quarter margin consisted mainly of some services without any cost. Also, as we already as we get ready for production or a specific cost also reduced. But I think and also we have economies of scale here for at some fixed cost, but in the long run, also, some of the fixed costs will increase as well. So, to your question, we're still standing behind the higher 60% margin for the long run.

Okay, thanks for that clarification, one for Kobi. How many customers have had seen samples or received sample shipments from GlobalFoundries and normally automotive grade customer qualifications can be quite lengthy. So, maybe if you can talk about the different lengths of the qualification period, for the different types of customers that you have in the queue.

Yes, so first of all, one customer got a direct shipment from GlobalFoundries and we did it in June actually. So, we just started. So, this was the first and successful one and it made all of us happy and including GF. But next customer will get the chips from them during this quarter. But, more and more we begin to have this walking mechanism that we can support more and more clients from this site. Regarding tests, the chips are getting out of the fab after all of the testing on the automatic testers, so the customer don't need to test them GlobalFoundries basically provide them approval that the chips were tested qualification of course, just to be clear, they are not yet automotive qualified and the full automatic qualification process this is what basically separating us from being in in the situation that we are today and for in a full pack full a commercialization of the chips. So, basically looking at the process, a GlobalFoundries have a test sales for the three chips the effort as possible. So the difference metering the receiver they are testing the chips automatically with tests that we designed together with them after those tests and after the chips pass the test. And of course, sometimes there is some chips that don't pass, which is basically what is influencing our what I'll say, yield, sorry. So those are counted from the yield, I can say that our numbers now in the yield side, even before we made, the improvements are better than we expected in the past. And this is, again influencing margins, and influencing everything. So after the chips are tested, and in the testers making sure that they are 100% functioning, those that are 100% functioning are shipped to the customer, so the customers don't need to check anything in parallel. The same lot that went out of the frog is gone through the qualification process to make sure that it's the automatic grade. And then when we finish automotive grade, the chips getting a different path number, which means that there are not samples anymore, and they'll full production perfection.

Thank you, both. Appreciate it.

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

Hi, Kobi. Hi, Karine, congrats on the progress here. The full year guidance I know it's early, but the 7 to -- 11 million of revenue, what would roughly separate you guys from the low end versus the high end? Is that production volume? Or is that more prototype shipments to more customers?

No, it's production volume completely. Regarding their guidance, that as we see it today, we're currently in line for the first two quarters. We achieved our plan. And we expect frankly, to continue achieving it. Again, the -- the fact there will be nowhere other delays in the industry, which we do not see them currently.

Okay, that's very helpful. Thanks. And as we look ahead to the 300 million that you reiterated today, in the out years, Kobi how would you think about the number of customers you'd need in production to help get to that number, if that's something because you have a RFQ shortlist and so forth. I know they each vary in size, but maybe some idea of when you'd have visibility to that, based on wins like what would it take.

So, first of all the visibility we will have, I believe in the next two three quarters. So we are now were shortlisted as we mentioned in around the 10 different RFPs are fewer decisions. It should be expected from September through March next year. And you each one of those contracts represents for us something like I would say, on the low volume $30 million on the high volume around $100 million per year. So where if you think of it like this, the $300 million is more or less the two or three big wins. And some small projects that we already have like autoX like a delivery robot, like other projects.

That's I think for the entire business case here is then this forecast is based on already identified customers. It's not something that if we'll have more, I think this number will even go higher.

That's very helpful. Thanks, guys. And then one last quick question. With the Lynx product, how should we think about the attach rate of Lynx to when you win a Phoenix project for a customer? Kobi, is that the right way to think about it?

In a nutshell, I think that majority of the clients will buy one Phoenix and four Lynx. But we believe that the fact that the Lynx price and performance are superior and we might find them also in Tier level 2 ADAS end cap related applications, which is something that we were not was not on our radar till now. And I think we have the ability to be very competitive with the current, let's say the current long range radars in terms of price and in performance of course we are differently.

Okay, thanks, Kobi, thanks Karine.

Thanks, Suji.

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

Good day, everybody. And thanks for my question. It's a more hypothetical. One, as we go into production in 23 I mean, what changes with the customer base? I mean, I mean, I know customers are right now looking to integrate your chipset into their product. But this, we're going to see any turn contracts with customers say now that you've entered production, we're going to take a look at it today. How does that dynamic, dynamic change in the market?

I think that right now, all of our customers, especially the Tier 1 already have the confidence that we will get into production, early 2023. They have this confidence, as well, because they sell the chips, and they understand that they're really mature. But second, because they spoke to GlobalFoundries that gave them the comfort that they are behind the company. And they have behind the aggressive plan of taking three chips into production. What's happened in the last quarter is that the OEMs themselves that we're [Indiscernible] on their RFPs RFQs got this confidence directly from a GlobalFoundries. As you probably know, the automotive companies today are aware of supply chain issues and aware of how this market works. So they asked for to get this guaranteed directly from GlobalFoundries. And we have very strong statements from their VP of Automotive that they're standing behind the production timeline; they're standing behind our capacity. And this is the something that they're offering to all of the OEMs customers. So I think right now, the customers looking into selection of the radar based on our fifth have the confidence that the third largest part in the world is behind our chipset.

Awesome. Seems like everything's ready to go. Thanks for my question. See you next quarter.

Thank you.

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

Hey, thanks for taking my questions. Just a couple of clarifications, on you talked about the seven and a half billion of total potential revenue in RFPs and RFQs. By the end of the decade, I just want to make sure I understand that to me. And by the end of by 2030, or did I understand that incorrectly?

Yes, this is the when we're talking and when we're taking notes, all of the RFPs, RFQs that we're in, and the anticipated volume and revenues for us from 2023 till 2029. This sums up in $7.5 billion. Of course, we don't expect to win all of the RFPs RFQs that were raised, just 95% of them. But this is the -- if you take this aggregated amount you wish to $7.5 billion in revenue.

Thank you appreciate that. And good luck with that win rate. And maybe secondly, I think you mentioned restructuring your R&D team a little bit or something along those lines in your prepared remarks. So can you just go back to that for a moment and maybe talk about why the timing and kind of what that means for your R&D spend and efficiency going forward.

So thank you, it's a good question. And so where I think early this year when this year started, and we still think the market is getting to a kind of a storm. And the economic situation as well is not as it used to be, we decided to take a close look on our yearly budget and try to reduce costs, whatever we can. And this is one side of the story. The other side of the story, when we're going to production, we sell that it's, it's a good idea to separate between the R&D that is developing the chips from ID to production. And the team that is doing the radar reference design like the Lynx like the Phoenix those are two different size of this business. So the size of the chipset can run separately and take the chips to put to full production. Without those chips we’ll be related to an actual radar. From the other end the radar team takes the chipset build a full reference design. And so they can support the Tier 1 easier in the in a much more efficient way than it used to be distracted where we did this separation, offering us inside the company to mimic the client and to solve for the client many problems before the clients will even be able to see them. Overall, this restructuring allowed us to save costs overall and to give a much better end product to our customers.

Thank you.

Now I will turn the conference back over to Kobi Marenko Arbe’s CEO for any closing remarks.

Thank you. We were so 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 Arbe’s progress in the coming months. Until then, you are invited to reach out to the team with any questions or comments. Thank you all.

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