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Good day, and welcome to the Arbe Robotics Second Quarter 2023 Earnings Results Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Miri Segal of MS-IR. Please go ahead.
Thank you, operator and everyone, for joining us today. Welcome to Arbe's Second 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 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 our base Co-Founder and CEO, who will begin the call with a business update. Then we will turn the call over to Karine Pinto-Flomenboim, CFO, who will review the financials. Finally, we will open the call up for the question-and-answer session.
With that, I'd like to turn the call over to Kobi Marenko. Kobi, please go ahead.
Thank you, Miri. Good morning, everyone, and thank you for joining us. I will begin by reviewing some of our recent business highlights, then Karine Pinto-Flomenboim, our 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. We are pleased with the progress we have made in the second quarter.
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. Weifu high-technology group, a key Tier 1 we've been working with since 2019, placed an $11.6 million preliminary order for radar chipset which will enable our bank to meet we foods projects and sales demand for 2024 for customers across China.
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 Weifu with the most advanced perception radar solutions that can provide comprehensive free space mapping of vehicles surrounding.
Additionally, Weifu placed a $1 million order for professional services, including engineering services set up of a testing lab and advanced support from Arbe.
As we mentioned in Q1, Weifu has already successfully established a production line and has a functional base ab-ling operation which represents the production configuration. Other C1s are actively constructing their production lines and are in the final stages of B sample development as well. This achievement represents one more milestone for our expansion strategy, starting revenues from China in 2024.
In parallel, radars based on our best chipsets 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 full selections this year. In Q2, we were very happy to have successfully raised $23 million 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.
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 proceeds to further announce our penetration in the Chinese automotive market expedite our R&D efforts, increase our chipset line capacity capitalized on recently proposed safety regulations and strengthened our balance sheet.
Just recently, during Q2, we participate participated at the international wireless industry consortium automotive sensor architecture conference hosted by BMW, where we showcased our latest breakthrough in radar camera fusion. Arbe's advanced AI algorithms enable realtime 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 incumbent environment ultimately making it truly safe for drivers and pedestrian and the like.
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, Karine to go over the financials.
Thank you, Kobi, and hello, everyone. I'd like to review our financial results for the second quarter of 2023 in more detail. Total revenue in the second quarter was $0.3 million, a decrease from $1.2 million in Q2, 2022 and slightly below our expectations. Backlog as of August 9 is $1.5 million, not including the previously announced higher-end preliminary and Weifu preliminary orders. Gross margin for Q2 2023 was negative 1% compared to a positive 72.7% gross margin in Q2 2022 as result of our reduced quarterly revenue as we transition and focus on mass production.
Moving on to expenses. In Q2 2023, we reported total operating expenses of $12.6 million compared to $30 million in Q2 2022. The decrease in operating expenses was primarily driven by a decrease in research and development from $9.5 million in Q2 2022 to $9.1 million in Q2 2023, and a decrease in general and administration expenses from $2.3 million in Q2 2022 to $2 million 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&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 $1.2 million in Q2 2022 to $1.5 million in Q2 2023. Excluding share-based compensation expenses, sales and marketing level remains unchanged. Operating loss in the second quarter of 2023 was $12.6 million compared to an operating loss of $12.1 million in the second quarter of 2022.
Adjusted EBITDA, a non-GAAP measurement, which excludes expenses for share-based compensation and for nonrecurring items, such as fundraising costs, was a loss of $8.4 million in Q2 of 2023.
Over-performed company's expectations and compared to a loss of $9.5 million in the second quarter of 2022. Net loss in the second quarter of 2023 was $12.6 million compared to a net loss of $11.6 million in the second quarter of 2022. Net loss in Q2 2023 includes $0.03 million of financial expenses mainly related to exchange rate revaluation, offset by income of interest from deposits and to warrant revaluations. Net loss in Q2 2022 included financial income of $0.5 million, mainly related to warrant revaluation.
Moving to our balance sheet. As of June 30, 2023, Arbe had $31.6 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, we would like to reiterate what we previously shared. Our goal for 2023 is to achieve 4 design-ins with automakers. Revenue is expected to be in the range of $5 million to $7 million, 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 million to $35 million. Now we will be happy to take your questions. Operator?
[Operator Instructions] The first question today comes from Gary Mobley with Wells Fargo.
As we think about the fruition of the preliminary order from Weifu and the backlog from both Weifu and HiRain. Is the conversion of that primarily a function of having production bubble quantities available from GLOBALFOUNDRIES. And maybe if you can give us some update on where you stand in having some production-ready silicon out of your foundry partner?
Hi Gary, thank you for the question. Basically, yes, this is what it means. So we have around 30-something million dollar value of orders from our partners in China, and this means that GLOBALFOUNDRIES has for us at least this capacity for next year for 2024. Regarding the progress in production, we are more or less in line with our plan. Production of chips in automotive is around the 18 to 24 months plan.
And right now, we are basically meeting our milestones in the resolution of weeks. And basically, the 3 chips are in final stages of qualification for automotive AEC-Q100 and for the safety and we don't expect any issues with production right now.
We have the chips, the production ships already in our office. They are all functioning on radar samples. So when we are saying that there is a big sample of Tier 1. The base sample includes the chips from the final production version. It just -- and then we just need to finish at the time that those chips needs to work in order to get the final stance that they are qualified.
That's helpful, Kobi. And I was hoping that you can give us an update on the competitive environment you -- I think have been publicly company for about 2 years and the 4D radar market has evolved over that time. I don't know if we can say it is a slower-than-expected pace, but nevertheless, maybe it's given an opportunity for some competitors to catch up. Maybe if you can give us an update there on how you see the competitive environment?
Yes. 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 RFPs that we are in and mainly with the premium German OEMs that we see Continental as a Tier 1 based on TI chipset on the RF side and on 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 an order of magnitude lower amount of channels than our solution.
And from the other side, we see mobilize trying to take into production radar with a similar -- more or less similar amount of channels as we -- a bit less, but I think 10% less challenged than what we have -- we still believe that we have the 2, 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 Mobileye.
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 million, $200 million of dollars in order to reach to solution. So we're right now, I believe, till the end of the decade, this is the picture that we see two main -- 2 horse race mobilize 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 purses 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.
The next question comes from Joshua Buchalter with TD Cowen.
This is Lanny on for Josh. You called out that you're in the final stages of selection for 11 premium OEMs in Europe and China. I was just hoping if you could elaborate on your confidence in terms of the [indiscernible] Are they kind of full cost region and the magnitude of these engagement? Is they're leading to [indiscernible] production chips? And have a follow-up.
Sorry, I couldn't hear the question. Your line was too bad. Can you please repeat the question?
Sure. So you called out that you're in the final stages of selection for 11 premium OEMs in Europe and China. I was hoping that you could elaborate on your confidence that 4 of these will convert to meet your 2023 goal? And any color that you can provide on the magnitude of engagement or kind of the different progress levels across the regions? And I have a follow-up.
Yes. So 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 '25, which means that they need to get radars from the Tier 1s in early '25. And this means that they need to get chips from us by Q1, Q2 '24. So we believe that those selections will definitely provide us with the ability to fulfill our projection for '24 and '25.
Also, in China, I cannot elaborate, but there is two major OEMs that wants to produce also the radar 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 in terms of revenues. But the volume in Europe is much higher. And of course, the fact that the premium German OEM another big car manufacturer in Europe will select our technology, it of course means a lot for our technology.
Great. For my follow-up, I was hoping that you could talk about your $11.6 million order with Weifu technology a bit more. If this is unique, their estimated requirements for 2024, how can we expect this to kind of layer in and layer into the model for that course of time?
This is -- basically, the $11.6 million is the expectation of Weifu for '24. I remind you that we also have a preliminary order from HiRain from last quarter of another $30 million for '24.
So this is basically Altogether, this is what is giving us our focus for '24.
The next question comes from Jaime Perez with RF Lafferty.
Good day, everybody. 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 revenue?
I think that the gross margins sorry -- Just take it.
Just to say, this is, first, as expected. The revenue levels meet only the fixed cost of our cost of revenue for portion for the COGS. 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 profitable margin, which is above the 60%. So taking it all into a mixture it will drive us to higher percentage of -- and, of course, positive ones.
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, which you sort of levering the variable costs. 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? What sort of -- my question is, One is the revenue recognition? .
Basically will begin we begin to shift we will begin to ship the chips early -- 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 '24. Basically, the revenue recognition and Karine can elaborate upon delivery. On to the Tier 1.
Shipments, yes. Thank you, Jaime.
[Operator Instructions] The next question comes from Matthew Galinko with Maxim Group.
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?
So yes, as I stated, it excludes the recent Weifu and HiRain preliminary orders, but it does include -- we mentioned in our PR as well the $1 million of order from Weifu 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.
Okay. 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 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? .
The first 2 quarters' revenues this year were not really meaningful. So -- when we say it's below expectation, it's below $50,000 or something. So it's a matter of shifting of a few chipsets of 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.
This year, we're still selling chipset for evaluation, radars for evaluation, some [indiscernible] 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 radar or 100 chips that it's not relevant.
We are laser focused on the big lines on the big selections and not on small projects that we can always take.
Got it. 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 the their sensor stack 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?
So basically, we're acquiring 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.
The next question comes from Suji Desilva with ROTH Capital.
So congrats on the progress here. The customers that are in the final stage of selection, Kobi, what are the remaining steps in there process that they are evaluating and that are between here and sort of final decisions, just so we understand the remaining process?
I think there is two things here that the Tier 1 needs 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 are waiting to see is a full sample from the Tier 1, especially from Magna also from hiring. The fact that we have a big sample with Weifu is very good, but we need to have also a big sample with the last version of the chips going to production from HiRain and from Magna.
This is expected to be around, I believe, during September. So they -- both of them already have the harbor, and it's in the final stages to 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.
And then one other question, I apologize if you already covered this. the Weifu announcement, does that cover a single automotive OEM? Or is that multiple auto OEMs that they're working with -- if it is in auto, I just wanted to clarify that or if it's not audit?
It's a -- part of it is OEM and part of it is the project that we won together for -- with DiDi for the Level 4 trucks. That we announced last quarter.
This concludes our question-and-answer session. I would like to turn the conference back over to Kobi Marenko, Arbe's CEO, for any closing remarks.
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 semis Conference on August 29 and the Jefferies Israel Tech Track September 12.
Please contact us at investors@arberobotics.com or visit our sites to schedule a meeting.
Thank you, and goodbye for now.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.