Arbe Robotics Ltd. (ARBE) Q3 2023 Earnings Report, Transcript and Summary

Good morning, and welcome to the Arbe Robotics Third Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

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.

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 1 made significant progress, several 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, Arbitrum One (ph) 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 team to gather data for their L2+ and L3 applications within ongoing development projects using our cutting-edge technology. Our advanced technology plays an increasingly pivotal role in enhancing the next-generation product offering of our Tier 1 partners. Tests performed on radar systems using the Arbe chipset have consistently demonstrated performance that meets or exceeds target benchmarks where affirming the superior quality of our technology. Arbe's 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 chipsets 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 pages for our technology represents 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 '24 and '25. 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 chipset, meeting their projected sales demand for customers in China. In addition, HiRain technology is a leading Chinese ADAS Tier 1 supplier has placed a preliminary order for 340,000 radar chipset to serve the customers throughout China. Arbe's current cash balance ensures sufficient fund 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 [indiscernible], 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 in the Weizmann Institute of Science. She is known for a groundbreaking work in sub-Nyquist sampling. In addition to our goal 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 chipset are carried out in Germany by GlobalFoundries and 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 preliminary -- this primary 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 details.

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 time lines. Backlog as of September 30 is $1.1 million, not including HiRain and Weifu’s 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 the 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 a 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 costs. Sales and marketing expenses increased from $1.1 million in Q3 2022 to $1.3 million in Q3 2023. Shared-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 nonrecurring items, was a loss of $7.5 million in Q3 of 2023, over-performed 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 to $7 million. Adjusted EBITDA is expected to be a loss in the range of $32 million to $35 million. Now we will be happy to take your questions.

We will now begin the question-and-answer session. [Operator Instructions] Our First question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Hi, Kobi. Hi, Karine, I hope your -- you and your families are safe and remain safe. And relating to the conflict I wanted to ask about the day-to-day operational challenges that the conflict brings? I know you mentioned 20% workforce getting called to the military. Maybe you can speak to how that affects your long-term R&D road map? And as well, what has been the feedback and support that you've received from your prospective customers since this began a month ago?

Yeah. So thank you for this question, and thank you for the kind words. So 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. So first of all, everything that is related to our next generation of chipsets will be delayed, and this team will be moved to work mainly on the current activities with the customers. I don't think it's really makes the difference. So anyway, our next generation should be in the market in '25 or '26, months given there and there is not really influencing. We have the team outside of Israel, especially support in 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 plan 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, our prioritized and I can ensure that no touch task is hurt due to the situation. And we hope that the pit will come back to the Middle East soon.

Thank you for that, Kobi. As my follow-up, I want 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 when it has to go right for those preliminary orders to actually turn into shipments?

It’s actually – what we need to do right now is to close the last phases of winning – or sorry, the Tier 1 needs to close the last phases of winning contracts with the OEMs. The preliminary orders are based on their focus flow next year and the year after. And we believe that until 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 resample. And we’ll turn those preliminary orders into actual orders.

All right. Thank you both.

Thank you, Gary.

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

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 best safety for you, your family as well as your staff. Moving on to my question, my first question is meeting your guidance for 2023 implies quite a steep ramp in 4Q 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?

Yeah. So we are in the final stages, as we mentioned in the call with 11 OEMs. We believe that at least five or six 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 a fleet in the -- with all of them, we are in -- the Tier 1s are in final stages and negotiating prices and negotiating a year of production, we're top of the car. We see China stop for our radar -- for the current 25. And outside of China, we are now in the process of projects for top 26, top 27 for the car, which means that we will going to see the revenue ramping from the second half of '24, mainly in '25, '26 and '27.

That's really helpful color. Thank you. And for my education standpoint, where are you seeing in the final processes of your competitors, like how many competitors are you seeing narrowed down into these final decisions?

I think that the competitive landscape in the radar has not really changed. So there is an imaging rate of bucket, there is the low-end imaging radar that is based on four cascaded chips coming from TI or NXP and an FPGA or process or FedEx (ph). This gives something like 200 virtual channels compared to our 2,304 virtual channels. And so basically, those products grow to the market by two Tier 1 continental and net debt. We see in the last few months aggressive that mobilized is 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 1.5 years or two years ahead of them in terms of production and readiness for getting into a call.

Thank you very much.

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

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

So basically, what we see is going all over the OEMs is that the need is for something like the 100,000 hours of driving of data in order to train the basic algorithms between two to three months. The data collection, which we are in the middle of this phase. And then improving the stock for that. It can be from six months to 12 months. It depends on the ability of the software team. I think that even in the data collection in parallel at beginning to train the stack. They already see the value in an imaging radar and the ability to use an imaging radar like we are bringing to the market for a full free space mapping based up on the radar, and we are the only company today that brings such value.

Okay. That's very helpful. And then my other question is on the HiRain, the 340,000 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 '24 or if any factors are shifting the shipment plan for that HiRain [indiscernible]?

We are not yet sure when we exactly will begin to ship the chip. But it’s mainly going to – the main volume would be in ‘24. We’re not sure if we will be able to start shipping in by the end of ‘23 or only in the beginning of ‘24. But anyway, as we assume the majority of the shifting of the ships will be in ‘24.

Okay. Great. Thanks.

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

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

Yeah. So I think the truck market today is a bit -- is becoming a bit complicated. So there is truck manufacturers themselves, which this is what we refer to, they working on adding ADAS, Level 2+, Level 3 functionalities to the truck and also to have a machinery, and this is the two projects that we are engaged with. And there is the fleet owner by the end of the day, needs to buy those trucks with this service. And there is, I would say, operations or operating companies like, we announced in China, the subsidiary of TD, the doing -- the service of truck. And this is also on our agenda to support those companies. But to refer to those two projects, it's a big brands of trucks company.

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

So first of all, the radar is part of the stack, the stack consists of, of course, at least eight to 10 cameras and sometimes also with the LiDAR, comparing to the price of a LiDAR imaging radar is much cheaper. Actually, the imaging data is quite close to the price of the current phone based 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 of 48/48 2,300 in four channels.

All right. Thanks so much. Thanks.

Thank you.

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

Thank you for taking my question. I think you mentioned you're potentially touching 31% of the global passenger market with the OEMs during the final selection process for. So I think we 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 -- 31% is a great number, but where is the rest of the market? Thanks.

I think so there is a few things here that related to adoption of an imaging radar. So first of all, there is early adopters. And we all -- and as the early adopters of the premium car manufacturers, and this is our first target. And also there is premium adapters in China that again are not the old-school car companies, but more of the private ones, not the government control. 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 reduction would be on a premium card on a high-end cars and early adopters of new technologies.

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

Yes. Like the camera.

Got it. Okay. Thank you.

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

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 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 [indiscernible]. Our lives will not be [indiscernible] -- our lives will not be all before each of them is returning home safety. Throughout this period, we have experienced outstanding support from our customers, partners and investors. We thank you for standing with us. Thank you, and good-bye for now.

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