Arbe Robotics (NASDAQ:ARBE) Q4 2021 Earnings Call

0:00 Good morning and good day and welcome to ARBE's fourth quarter and full year 2021 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your touchtone phone. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Miri Sehgal, CEO of MSIR. Please go ahead.

0:45 Thank you, Andrew, and everyone for joining us today. Welcome to RBAE's fourth quarter and full year 2021 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 the business update. Then we will turn the call over to Karine Pinto-Flomenboim, CFO, who will review the financials.

1:34 We will then open the call for the question and answer session. With that, I'd like to turn it over to Koby Marenko. Koby, please go ahead.

1:45 Thank you, Marie. Good morning, everyone, and thank you for joining us today for our first earning call as a publicly traded company. It's an important time for us at Arbe, and I want to begin by expressing our deep appreciation to our investors, our customers, and our partners who have collaborated with us till now. I'm also incredibly proud of the Arbe team who drove our 2021 achievements by their commitment and hard work. The recent completion of our SPAC merger and becoming a public company was a major milestone. In fact, Arbe is the first automotive imaging radar company to go public in the US. Since this is our first earning call, I'd like to take a few moments to share our story, explain the core value proposition, and why we believe that we will lead the automotive sensors market.

2:47 Arbe is the leading 4D imaging radar company in the market and the only pure-play radar public company traded on Nasdaq. We are driving the radar revolution, paving the way towards fully autonomous driving. We are a semiconductor company and our imaging radar chipset offers the best performance in the industry, enabling free space mapping for safe level 2 plus and level 3 autonomy that relies solely on radar. are there maintain significant product leadership and we believe that our technology today is superior to the performance competitors projected that they will have even in three years from now. Our mission starts with safety. The first goal of our radar is to improve the safety of the entire vehicle system, to allow automatic braking in any condition to enable safe adaptive cruise control, lane change assist, and many other advanced features, scaling up with the industry's evolution towards full autonomous driving.

3:56 Radars in cars need a change, and the entire industry understands that performance needs to improve dramatically. In 2025, the total market of radar will be 11 billion, and a major part of it will belong to imaging radar. When we founded Aave in 2015, the general industry consensus was that radar had already achieved as much as it could. It was widely believed that LiDAR was more promising for advanced applications. However, as time went by, it became clear that achieving high-performance LiDAR at reasonable price was really unrealistic. Also, LiDAR is unable to reach performance targets at necessary ranges and does not function well in bad weather or when the sun shines directly on the sensor.

4:51 In the past few years, the market has shifted back to radar. The majority of OEMs, car companies are beginning to understand that imaging radar is the key for any kind of level 2 plus and level 3 applications and is mandatory for higher autonomy. We believe that in the next few quarters we will start to see announcements from the largest companies choosing to base majority of their stock on imaging radars. This is where we specialize in imaging radar, which is a completely new sensor that drives all the advantages of traditional radar while enhancing them with real physical high resolution in 4D. on the azimuth, on the elevation, on the Doppler, and on the range. This allows our technology to support the development of perception algorithms and to deliver much higher value to the industry.

5:49 Currently, and for some time now, we have the only ultra-high resolution solution in the market. In fact, we believe that our radar has the best performance in terms of resolution, dynamic range, and sensitivity even when it comes to future radials that are still in an early development stage announced by competitors. Our assumption is based on the specification of those radials which were released by the competitors. Today, we can proudly say that we added 30 customers from companies that have purchased a low volume of units to pre-production projects and full designing. Based on a subset of those clients, we expect more than $300 million in revenues in 2025. As we look back at 2021, I'd like to summarize our main achievements. Auto-X selected imaging radar to enable their fully autonomous robot taxi fleet.

6:50 Our pre-production project with the top five global OEM is on schedule, progressing third selection in 2022. We were selected by a top 10 global OEM for an imaging radar-based perception project. Bike Group announced that our best technology will be installed on its mass-produced level 2 plus level 3 model. We are shortlisted with 17 opportunities, 8 OEMs, 5 robotaxis and new mobility players, and 4 tracks manufacturers. Five tier ones, including a leading radar player that recently started working with us are building production radars based on our chipset.

7:35 And we made low volume sales to more than 30 customers during the year. Our 2021 development and commercial objectives were fully achieved and we're ahead of schedule for full production of our chipset by the end of this year. At this year's CES conference, are then well selected as 2022 Innovation Award Ownery in a Vehicle Intelligence and Transportation Product category. Our Perception Imaging Radar was recognized for driving a revolution in autonomous vehicle sensing at an affordable cost of the mass market. The highlight of our innovation was the introduction of free space mapping. This is the first time an automotive radar can contribute to free space mapping A critical function of autonomous driving that requires great accuracy and redundancy.

8:30 The imaging radar complements camera sensors at long range and wide field of view, sensing the environment in all weather, lighting, and visibility conditions. We believe that the ability to generate a free space map and enhance perception algorithms is truly game-changing for the future of autonomous driving and we are enabling greater safety than even before for drivers, pedestrians, bicycles and anyone sharing the road with autonomous vehicles. I'd like to highlight some of our recent announced collaborations with major car manufacturers who plan to adopt 4D radar. Recently, Bike, one of the largest players in China and one of our best investors, announced that our sensor will be brought to the market by Hi-Rank, a Chinese Tier 1, and will eventually be in every one of Bike's Level 2 Plus and Level 3 cars.

9:29 Also, X, the leading robot taxi in China and one of the first movers in the United States, announced that all of their cars will use our base radar and anticipated 400,000 units in the next five years. A few months ago, one of the top five car manufacturers selected Arbe and Valeo as Tier 1 for a pre-production project that will lead to design selection next year. In November, Wifu High Technology Group, a major Tier 1 in the Chinese market, announced that it begins the road pilot phase of its Arbe-based radar system and is scheduled to be in full production by the end of 2022. We believe that it could become one of our flagship projects.

10:17 Hyundai Mobis recently announced that it's conducting a large-scale pilot with Arbe's technology for Level 2 Plus and Level 3. Hyundai is also an investor in Arbe. This pilot was successfully completed and the final radar selection will take place in the coming months. Additionally, Camcom, Arvest T1 for the non-automotive vertical is making an impressive progress, holding pilots with robot taxis, autonomous trucks and delivery robots. As we look at 2022 and beyond, we are optimistic about the long-term future and market need to improve safety by using Arvest's superior solution. While experts assume that the chip shortage and supply chain challenges will continue to impact global markets in 2022, It's important to understand that one of our major advantages is our relationship with Global Foundries. As one of their strategic customers, we are the first company to go to production with chips that are automotive grade based on their 22nm process. Global Foundries has taken full responsibility for chip production and supply chain management.

11:31 They are guaranteeing the supply we promise to our customers for the coming years. Despite the current silicon shortage, we will have the capacity necessary to meet our commitments. In terms of our goals for 2022, we aim to close eight design wins with OEMs, autonomous trucks, delivery robots, and non-automotive companies this year, and we are laser-focused to achieve this target. Based on current market trends, we estimate that steel ones will show increased demand for harvest chipsets. Our goal was to establish a relationship with two leading Tier 1s this year and one of them is already working with us and we are only in the beginning of 2022.

12:18 A major strategic goal for 2022 is to go to production with our chips. This is an ambitious plan and is supported by global funders. We believe we can reach that milestone. Our Tier 1 partners are following closely and they are in the advanced stages of a plan that will take a full radar model to production in parallel. In China, we will be in production by the end of this year, as our Tier 1s have announced, and in Europe and US, we believe it will be in the second half of 2023. To summarize, we are confident in our vision for this market. Everything we see leads to the following conclusion. High Definition Imaging Radar is about to change the auto market and then it is going to walk its way into many other markets and change them as well.

13:11 We believe that our current solution is miles ahead of competition. We intend to gain a significant market share as the leader and innovators of this space. I'd like now to turn the call over to our CFO, Karine.

13:28 Thank you, Kobi. and thanks to everyone for joining us today. I would like to review our financial results in more detail. Total revenue in the fourth quarter was 0.5 million compared to 0.2 million in the fourth quarter of 2020. For the full year of 2021, total revenue was $2.2 million, an increase of 577% compared to 0.3 million in 2020. The backlog as of 31st of December 2021 was 2.3 million, consisting mainly of services, chipset orders, and NRE from several leading car manufacturers and Tier 1s. Gross margin for Q4 2021 was 37.7%, compared to 41.8% in the same period in 2020.

14:17 For the full year of 2021, Growth margin was 36% compared to a negative 2.4% in 2020. The growth margin increase was primarily related to economy of scale. Moving on to expenses. In Q4 2021, we reported total operating expenses of $14.2 million, an increase from $3.9 million in the fourth quarter of 2020. The increase was primarily related to additional investment in R&D towards production, labor costs, share-based compensation, and costs resulting from the additional legal, accounting, and general overhead resulting from our status as a public company.

15:10 Operating expenses for the full year totalled to $34.1 million, compared to $15 million in 2020. The increase was in line with our expectations as we continue to grow the company and add to our employee base to support our future growth. The company continues strengthening its research and development investments with R&D expenses totaling at $11.6 million for Q4 2021, compared to $3.3 million in Q4 2020. R&D expenses for the full year were $28.6 million compared to $12.8 million in 2020.

15:55 Looking at adjusted EBITDA in Q4 of 2021, a non-GAAP measurement, which excludes expenses for non-cash shared base compensation and for non-reoccurring items, was a loss of $11.9 million compared to a loss of $3.7 million in the fourth quarter of 2020. EBITDA for the full year of 2021 was a loss of $30.4 million compared to a loss of $14.2 million in 2020. Net loss in the fourth quarter of 2021 was $15.8 million compared to a net loss of $4.5 million in the same period of 2020. Net loss for the full year of 2021 was $58.1 million compared to $15.6 million in 2020, which included $24.8 million of financial expenses, mostly related to the revaluation of convertible loans and warrants.

16:59 Moving to our balance sheet, as of December 31st, 2021, ARBE had $100.8 million in cash and cash equivalents. Most of the cash is as a result of the $118 million in gross proceeds following the business combination with ITAC, which was completed on October 2021. With respect to our guidance for 2022, revenue is expected to be in the range of $7 million to $11 million. Adjusted EBITDA is expected to be a loss in the range of $34 million to $38 million. We anticipate rapid growth following 2022 as Tier 1s move to mass production and OEMs scale up order volumes.

17:49 We are on track to reach our 312 million revenue goals for 2025. Now, I will turn the call back over to Kobi, and then we will be happy to take your questions.

18:02 Thank you, Karine. As we move into 2022, I'm confident in our strategic plan. Thank you and we are now ready to open the call for questions. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

18:53 The first question comes from Joshua Buchhalter with Cowan. Please go ahead.

18:59 Hey, guys. Thanks for taking my question and congrats on the results. In the press release, you mentioned the project with the top five OEM progressing towards selection in 2022. I was hoping you can give any more details here on the process regarding either timeline or the overall how competitive it was. Thank you.

19:20 So basically we are not really allowed to elaborate about this project since we are under NDA with the customer, but what I can say is that, as you mentioned, The project is on track. We, together with Valeo, need to provide the customer with two kinds of radars, one for the front and one model for the side. This should be done during this quarter, Q1, and we believe that selection is going to be in the second half of 2022.

20:06 Thanks for the detail there. And I understand on that note, there's only so much you can share. But any more you can give us on the perception project with the top 10 global OEM? Is it a similar type of application and volume potential as the top five pre-production project? Thank you.

20:25 Yes. So basically, with this top 10 OEM, They are basically trying to achieve the same. The idea is to have a radar that can actually do a full free space mapping. On the project with the top five OEM, we are responsible only for the radar. So we are providing a radar that can enable this kind of free space mapping. In the other project, on top of the radar, We are providing also our stack of the software of the free space mapping, at least as the reference code for the OEM.

21:10 So it can take the radars that are already installed in their testing calls and they are driving with our software. So they can take our software and connect it into their full stack and see how a free space mapping based on the radar is improving the total system, especially with the fusion with the camera and how it helps to solve the entire level 2 plus level 3 problems. Again, we believe selection is going to be here by the end of this year.

21:54 Awesome. Okay. Thanks, guys. We'll head back in the queue. Again, if you have a question, please press star, then 1. The next question comes from Suji De Silva with Roth Capital. Please go ahead.

22:12 Hi, Kobe. Hi, Karine. Congratulations on the progress in Calendar 21 here. So, Kobe, on the Tier 1s, the five that you have, Do you expect all of those will be in production readiness at the end of calendar 2022 or will they phase in at different times? And I'm just curious, are they all leveraging Global Foundry's supply chain?

22:31 So, first of all, by the end of 2022, we believe that the Chinese T1 will be in production. The European and American will be during 2023. Yeah, basically, everyone that is buying chips from us, buying the chips from Global Foundries, or actually from us, but the supply chain is managed by Global Foundries. So, Global Foundries are our only source for production, and the chipset will be shipped to the Tier 1 from Global Foundries. Technically, by the way, it will pass through our Israel office, but just touch and go to the customer.

23:22 That's helpful, Kaveh. Thanks.

23:24 And then in your calendar 22 revenue, I know you talked about AutoX being a significant number of units over the next five years. Is any of that in calendar 22 or is that in the guidance for 22 or is that starting calendar 23?

23:37 All this will start generating meaningful revenues already in 2022.

23:45 And lastly, can you just talk about the decision to choose imaging radar versus the traditional radars? Just give us a thumbnail of the OEM's decision point. Are they just all doing studies to validate that imaging radar can work and be perhaps even a lighter alternative? Is that what's going on in the OEM and Tier 1 base now? Thanks.

24:07 So I think that basically there is two trends here in the market that are moving in the opposite direction. So the regular radars, what we call a 3x4 or 6x8 radars, so radars with low amount of transmitters and receivers, which has also a low amount of pixels and low resolution, Those radars that are basically part of any vehicle that is manufactured more or less, those radars are basically going into commodity mode, so their price is going down, and the chips behind it, TI chips, NXP, and Infineon, the prices of those chips are going down, the processing power that is needed to process it The same is commodity today and there's no real innovation in those kinds of radials. From the other end, the car manufacturers are beginning to understand that those radials won't serve them for level 2 plus level 3 and more and more OEMs taking decisions to put more advanced hardware on their car, even if the software stack for Level 3 is not yet there.

25:36 So those radars will be there to enable the system to be in Level 3 or Level 2+, with just a software update over the years. So the advantage of 4D imaging radar As opposed to regular radar, 4D imaging radar is actually generating a picture of the environment, almost as good as the camera. This is a picture that almost a human being can see and understand what is going on. As opposed to the traditional radar, that basically are based on Doppler, so they see The Doppler, the relative speed of the object.

26:24 And they basically have the ability to identify the objects based on the fact that they have a Doppler. So if they don't have a Doppler, they won't be recognized. And this is what also creating some kind of phantom bracing Phenomenons with the false targets that those radars are generating. So I would say that till the last few months or maybe till 2021, the radar was not part of the perception stack. So the perception stack was built mainly on a camera, on vision, The radar was used mainly for blind spot detection and for automatic braking, and there was no real connection between those two stacks.

27:27 This creates a huge problem, because the vision sensors, including the LIDAR, that is the laser-based sensor, are vulnerable to weather. and also they cannot see a target on the long range. So they are very good in 50 meters, 70 meters, sometimes even 100 meters, but after that they are useless. So basically the way to get to a real safe level two plus level three Must have a kind of stencil like the radar that can see up to 350 meters, can see a pedestrian in 200,250 meters, motorcycle in 300 meters, and have a good resolution and can work in any weather and any lighting condition.

28:27 and now there is a huge effort in integrating this kind of sensor into the full stack. Our free space mapping is actually a shortcut for the OEMs to do that. So we are coming with this stack and we are saving to the OEMs years of development From scratch for this technology because without it basically they just need to take our radar and start the development now because our radar is the only one that you can take the point cloud that is coming from this radar and generate a full free space mapping on that.

29:13 Earlier, we mentioned the top 10 OEMs that selected Arbe for perception projects. Actually, we were competing against another one or two radars, and we were older of magnitude better. Actually, all of the other radars were not qualified for this perception task. So I believe that 2022 is going to be a year of imaging radar perception and the fact that it's doable and the fact that you can take an image out of a radar, merge it or fuse it with a camera and get to a point cloud that is 100% reliable, 100% safe, is a breakthrough for level two plus level three.

30:12 And I think this will even accelerate the acceptance and the readiness of those technologies to the market.

30:22 Well, Kobi, I appreciate the incredibly detailed and very helpful commentary. I'll step back in the queue. Thank you. The next question comes from Matthew Galinko with Maxon Group. Please go ahead.

30:37 Thank you for taking my questions. First one is, can you speak to the gross margin potential or difference between selling just the radar versus selling the full perception stack?

30:53 Sure, so first of all, we are not selling the full radar, we are selling the chipset, so we are a semiconductor company, and as a semiconductor company, we have around 60-something percent gross margin. Of course, the software stack is software, and the gross margins in software are much better than in hardware, but the price that you can get... For this, per car is very limited. I would say very few dollars. In our model, at least until 2025, the software is not part of the revenues. Right now, the software is just expense. So we are just investing in R&D for that.

31:42 Our entire model is based on selling chips. By the way, we believe that the software stack will find itself its way also to the silicon in the next generation of our processor that's going to be in the market in 2025. We will also support deep learning algorithms that will help with this perception. And maybe just to go a little bit deeper into that, is there a significant latency benefit to integrating the software into the chip?

32:44 Is that important in higher levels of autonomy?

32:52 The software is a different stack from the chips. If you take our chips, basically we have three chips, transmitter, receiver, and a processor. The processor is generating a point cloud. Something like a picture, a video, sorry. And this is going to the central processor of the car. And then all of this post-processing, like the free space mapping, is done on the central unit of the car. And there's no latency here. It's an Ethernet one giga per second. So basically the data is moving very, very, very fast and there's no latency that is caused by that.

33:45 What we're trying to achieve with our next generation of the chip is to reduce the total processing power that is needed to enable autonomous driving. I think right now, today, the central units like the NVIDIA, Qualcomm, and what Mobileye is offering cannot really deal with the amount of processing power that is needed for full autonomous driving because They are doing some kind of processes like we can do on our chip. And the idea is to move some of those items to the edge and by that they reduce the total power and the total processing power that is needed for the car.

34:45 Got it. That's very helpful. And then last one for me, just in terms of the guidance range for revenue for 2022, can you just cover kind of how you get to the high end versus the low end? Is that just, you know, mostly timing on how things move through the pipeline or, you know, what gets us to the top versus the bottom?

35:10 I would say about our 2022 revenues a few things. First of all, basically, 2022 is the pre-game. The real game starts in 2023 when we will be in full production. And when we will be in full production and there will be exact timelines of deliveries, of course, our guidance will be much more accurate than today. Today, we are selling low volume of evaluation chips and we are charging NRE. Basically, when you're doing that, the revenue recognition is based on milestones that are achieved by the customer.

36:01 So, for example, if we got an NRE of one million dollars, and this NRE already paid to us, actually part of our backlog is like this, that already paid to us, but the customer, I don't know, delayed with his production. and the radar unit that is building with our chipset, instead of going to the market on Q1, they move to Q2, then those revenues are shifted accordingly to Q2. So when we are giving this kind of guidance, we basically say that the sales team will do the sell, our delivery will do the delivery, But this year, because we are not in a full production, we are a bit dependent on the timetable of the customer in terms of the revenue recognition.

37:05 And because of that, we gave this kind of borders between full revenue recognition and partly revenue recognition. But from the business perspective, there's no real difference for us between 7 million this year and 11 million this year because the sales and the orders will be there. So if we will have 7, we will have more bookings, and if we will have 11, we will have less bookings. From cash, from any other aspect, there's no real difference between the two figures. It's just about revenue recognition.

37:50 Thank you.

37:51 And just to add, I think closing the gap going forward to 2025, it will be, of course, closed by the mass production. And we anticipate, of course, to reach the revenues that we wrote.

38:09 So I guess not to put words in your mouth for 2023, but, you know, we'll be seeing just more traditional product revenue and less NRE, you know, come next year.

38:20 Exactly. So, as we are in production, there's no way to read.

38:27 So, go ahead. I assume 24, 25, and the back end of the 23. Thank you. The next question comes from Jamie Perez with RF Landry, excuse me, RF Lafferty. Please go ahead.

38:48 Good morning, everybody. Thank you for taking my questions. So we've been hearing a lot of the OEMs saying that they're looking at this supply chain shortage lasting to at least to 2022. And I mean, I know you started a ramp up production, and at the end, do you think that once, because customer demand for automobiles is still strong, and you think there's going to be a pent-up demand where These OEMs will just require product because they're backed up in their production and would you be able to handle these, foresee that environment? And yeah, that's my first question.

39:32 So basically, when we are shipping chips in 23 to our tier one, just to understand the timetable, so let's assume that we are shipping chips in Q2 23, to the Tier 1s, they're shipping a full radar model to the car manufacturer just by the end of 2023. And this is going to be on a car only on 2024. So I think right now the supply chain issue for us is not really going to affect The actual results in 2023-2024, because the chips that we are shipping now is for cars that are going to be sold to the customers by the end of 2024, which is part of it is practically year model 25. In China, maybe a bit earlier, but it's not on the timetable that this shortage occurs.

40:41 is influencing the total amount of the calls. Also, remember that Imaging Radar and any other new technology are getting to the high-end calls, and those are calls that, from the OEM perspective, are the most profitable. So they are focusing their supply chain and their inventory on delivering those cows instead of cows that their gross margins are lower. I think overall the supply chain is an issue, but I don't see it affecting our results in the next few years.

41:30 Based on the business model and the production ramp-up, you're basically going to miss the next couple quarters of the supply chain issues. Pretty much When all this issue is history, you'll be in for production. Pretty good timing on that. Second question, have you looked at any non-automotive applications?

41:57 Sure. There is, I would say, new automotive and non-automotive at all. So delivery robots, for example, I would say near automotive. It's not really clear yet today if those robots need a full automotive grade component. But we are actively in this market. Same as other applications like shuttles. And we are also in some projects of non-automotive at all, even smart cities, mining, and heavy machinery, and agriculture.

42:45 In all of those markets there is potential. We have a partnership for this market, a large Swedish company called Camcom, and they are basically supporting the customers in those low-volume, high-margin markets.

43:09 Due to your lower competitive costs, it's probably very profitable to add Abe Robotics radar to some projects like Robotics or Drones, as opposed to the other technologies, a couple thousand dollars.

43:27 Yeah, so when we started, our vision was to enable also robotics and drones, and we're still with this mission, and we believe that those verticals are valuable for us, but of course automotive is our main market, Thank you for taking my questions.

43:57 Have a great day. This concludes our question and answer session. I would like to turn the conference back over to Koby Warenko, CEO, for any closing remarks.

44:13 Thank you everyone for joining us today. We look forward to seeing you in our next conference call. Have a great day. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.