AEye, Inc. (LIDR) Earnings Call Transcript & Summary

Well, thank you, everyone, for joining us for this session with AEye as part of Deutsche Bank's Global Auto Conference. We'll continue with our marathon of LiDAR series. Again, my name is Winnie Dong, and I'm part of the U.S. auto and auto tech research team here at DB. AEye is a leader in the development of automotive sensing reception system and has introduced a solid state LiDAR sensor, which leverages bistatic mean scanner and receiver architecture to develop one of the highest-performing vision systems in the industry. Very pleased to be joined by Jordan Greene, Co-Founder and Chief Strategy Officer for presentation and Q&A. So before we dive into the Q&A portion, Jordan, would you like to start with the presentation?

Yes. Thanks for having me. I think if you've seen a lot of LiDAR companies say, hopefully, we're the most fun. That would be the goal. But I won't belabor this as you have seen disclaimer statements. So we'll jump right into it. I think the first thing to understand is the LiDAR market in general and what it means. So LiDAR right now is coming to market and is coming to market in just about everything. In terms of LiDAR adoption, there's everything from your mobile devices, through to tablets, through to aerospace applications and various different ways in which you're incorporating LiDAR to get to a unique type of data to get some value out of it. Within automotive, we're starting to see LiDAR adoption actually come to fruition. And it's super, super powerful because you can see that 6 programs today are expected to have a volume of about 6 million to 10 million lifetime units. This means that finally, we're seeing automotive come into play and actually incorporate LiDAR technology in the market. We have a super differentiated approach. So the pillars of what we usually talk about are the technology and the business model. Within the technology type, we use a differentiated approach that's similar to how the human eyes and the visual cortex work to be able to deliver better information faster through software. Within that, what we end up doing is we end up enabling new types of safety applications by really leveraging that capability so that you can get to the features that are desired for consumers. The features being automated driving, the features also being things like highway autopilot or advanced traffic jam pilot or urban safety mechanisms. But ultimately, what we're trying to do is deliver some type of value to the consumer through the sensor technology being the enabling factor. With that in mind, we also have a unique business model. We leverage the channel very effectively. And the reason that, that's super important is because we have a very leveraged model for limited CapEx and OpEx. We're able to -- similar to that of a Mobileye or an Arm Limited, sell through the channel, keep our expenses low and ultimately keep our manufacturing footprint extremely low as well. And that's where our strategic partner validation comes into play is through that model. We use Tier 1s to manufacture. And our first customer in that space was Continental, who is building a product based on our reference design called the HRL131. That product is ultimately -- and we'll go through it in an advanced stage of production and manufacturing in Ingolstadt, Germany, where they're going through the full design validation today. And then finally, I think it's important to understand that we have a long history in automotive and in semiconductors, building companies, taking them public and running those companies. So just to come back to it, I think it's super important to understand why LiDAR is important, and LiDAR is important because it enables a new feature set. And so this is the reason that OEMs today are adopting that technology. There's over 6 programs that are coming to the market today. But within the 6 programs that we're seeing, there's about 6 million to 10 million units lifetime volume that we're seeing. And this is really important because if you look at radar and camera adoption, radar and camera adoption happened over the past 20 years. And now it's pretty standard on every single vehicle. You have backup cameras that are actually standard on every single vehicle in the U.S. and you have radar that standard on about 50% of vehicles. LiDAR will follow a very similar adoption curve to that, and we're just starting to see that. This is the reason that we focus on automotive, and we'll talk about that here. But really, there's an enormous opportunity that amounts to about $5 billion in a gross revenue opportunity. So we'll go through what that means, why it's important. But I come back to why are OEMs integrating LiDAR? Why are they sourcing LiDAR? They're sourcing it for various different applications. There's parking lots, there's urban applications, there's highway applications. And ultimately, it really depends on what you're trying to accomplish, but you're trying to deliver safety features or advanced safety features or autonomous functionality. And in order to do so, you look at each of these different applications, and you say what is it that I'm trying to solve for. Usually, for an application like highway autopilot, you're trying to solve for being able to see a small obstacle that you can't drive over at a far enough distance that you could either stop or change lanes, if you need to. So having LiDAR that is capable of doing that is imperative. And that's why our LiDAR solution is so powerful. It's because through the human like visual cortex capabilities that we built into the system, we have the ability to enable these new safety features. We have the ability to see small obstacles far enough away that we could either stop or change lanes. And therefore, we're enabling those OEM partners to be able to deliver on that promise of that feature set to consumers like you or I, so that you can get a highway autopilot feature in your vehicle. And ultimately, it's extensible to all safety features though. It's not just things like autonomous, which is the misconception, everyone thinks lighter is associated with autonomous, but LiDAR is also associated with safety. Can you incorporate technology into your vehicles that allows you to get to really, really important safety capabilities in terms of having the ability to get to what people are calling Vision Zero or the ability to have 0 fatalities, 0 accidents, 0 injuries and so on. And with that, we're able to do that, and we're ultimately able to do that at extremely high speeds, addressing things like the small obstacles, addressing vulnerable road users and getting to those capabilities. This was supposed to be a very cool video, but we had to convert it to PDFs and now you just see a screenshot of it. But in order to really understand this, you usually look at a camera image and you correlate it to what you're seeing in a point cloud and usually people say, what's going on in that point cloud, I have no idea what that means. The way to think about it is if you were to look at a brick and you were to be, let's say, 2 football fields away from that brick, could you see it? Probably not. But a LiDAR can and our LiDAR specifically can. We have enough resolution to be able to determine how big it is. And if I need to stop or change lanes and if I can change lanes. And that's why this is so powerful. Is it's enabling a new capability? That is otherwise impossible. How do we bring it to market? This is super important. When we looked at the market, if you look historically at who has been successful in the last 20 years, you would say the semiconductor vendors have been enormously successful. The Mobileyes, the ARM Limited, NXPs and their business model is very tried and true. I'm going to leverage the value chain. I'm going to create a very capital-light model for how I bring technology to market. And I'm going to get super high gross profit margins by doing so. And so that's what we emulated. Started with Continental as our lead customer with the HRL131, but ultimately, we have the ability to expand to multiple Tier 1s and get to the largest possible market opportunity in a very, very low CapEx, low OpEx model. And that's imperative for our scalability, and that's imperative ultimately for our investors. So let's talk about Continental for a second. We have a strategic partner validation with Continental. Continental, as I mentioned, is going through design validation, which is where you run it through every different type of test to make sure that the system will perform in all different environments, various deep tests and thermal -- sorry, thermal tests and vibration tests and everything, just beating it up. Once you're through that, then it becomes simply scaling the production tooling to get to that high-volume manufacturing capabilities. So this is happening in Ingolstadt, Germany, and they have a super, super long history of doing this. Part of the power of working with someone like Continental is that they've done this for 150 years. They brought 150 million radars to market today. They brought over 20 million short-range, low-end LiDARs to market to date. And so they're leveraging not only their manufacturing expertise and their manufacturing footprint, which you can see in where we're manufacturing this product in Germany, but also they have system knowledge. They have the knowledge of what OEMs want and how to incorporate it with all the other sensors in the vehicle. And this is a super powerful offering to those customers. And by the way, we have a long history of leveraging our ecosystem to become successful, and that's why we have such strong strategic partners across the board, everyone from Kleiner Perkins to General Motors ventures through to Continental as long-term investors and shareholders in the company. So finally, just to recap. I said it to start with, but I'll say it again, which is there is a massive market opportunity that's forming. And automotive is just starting to take shape, which is why we focused on automotive. We have a very differentiated technology that allows us to use software intelligence. We call it a software-defined LiDAR to be able to enable key customer use cases. We have a super capital-light and scalable business model, leveraging that value chain, the automotive value chain to be specific, the Tier 2s for the critical components, the Tier 1s for the integration manufacturing and ultimately facilitating it. And then we have strategic partner validation with a market entry with Continental as well as an opportunity for exponential growth with additional partners. And we have a very long history of delivering on these visions in automotive in semis. So anyways, thank you, and I'll open it up to questions.

Thank you so much for that presentation, by the way. I'm going to start with a more industry high-level question. I guess in the next 5 or 10 years, where do you see auto ADAS and autonomous driving inflecting in terms of LiDAR penetration? We're already starting to see a lot of momentum. But where do you see that sort of inflection for the next 3, 5 years and then beyond that?

I think we're seeing it right now. It's interesting because when we looked at the market 5 years ago or so, the industrial markets were the only market that existed and automotive was a thought. And you would look at it and you'd say, okay, the total available market in industrial was like $3 billion and 0 in automotive. You're seeing today that there's an enormous market taking shape, and there's $5 billion worth of gross revenue opportunities that exist today. And so I really believe that, that is driven by safety critical feature sets that these OEMs are wanting to bring to market. There's a push and a pull. There's consumers that are pulling that technology because they're saying, I want a safety feature. There's 89% likely to buy your current safety features or better in your next vehicle. And I think that, that is driving that demand. And then there's the push, which is coming from the fact that it's an imperative. You have 42,000 deaths in 2021. It's an imperative to start moving the minimum standards for safety in that direction. So I really think automotive is starting to hit the knee in the curve where it will become a standard technology over the next 5 to 10 years.

Great. So there are several LiDARs in the market right now. What are the key differences with your architecture relative to your competitor? And then what are your motivation for choosing the main scanner? Can you discuss what's unique about your receiver?

Sure. Yes, happy to. I think the main thing that I ask when -- that I would ask, if I was evaluating LiDAR technology because there's a lot of complexity in it is what are you going out to accomplish? I mean it's just like asking what -- how do you compare against different cameras in the market. You say, well, there's GoPros you can take under water. There's cameras that you can put in your computer, they're super different. They're extremely different. So what are you trying to accomplish and then work your way backwards. If you're trying to solve this small obstacle, long-range problem that a lot of these OEMs are trying to solve because the most demanded feature set is highway autopilot or highway-assisted driving. And in order to do that, you need to see really small obstacles really far away. So if you try to bucket and compare, you would say, okay, I need that type of performance in order to enable that feature set and then you distill it down, you'll say, there's really only certain technology types that can get you there. That's why we started in 15, 15 nanometers because that gets you to that performance that you need. And then you look through and you say, okay, that's why we build an intelligent system so we can get what's actually needed to deliver those features. But if I were then to say how are you going to scale in the market? This is back to the business model. This is why we took a very different approach than every other player in the market. We said we wanted to enable through channel these different partners and customers to be successful and really just seed the market. And I think that's how we're super, super different. In terms of the MEMS technology, it is a pillar of what we deliver as a reference design, the ability to have agile scanning and ultimately, human visual cortex like capabilities to focus where we need and be situationally aware. That's why the MEMS is so powerful. But ultimately, I would say, we were looking at a system concept on how to deliver the feature sets that were needed to get to the functions that are desired by these OEMs. And that's what drove our design.

Okay. Great. There are so many LiDAR makers in the market right now. We're doing our marathon series right now. So how do you see the competitive landscape materializing over the course of the next decade or so? We're seeing some consolidations with Velodyne being bought, et cetera, do you think you will consolidate into a few players across different end markets or have maybe new different players with specific capabilities in different end markets?

Yes. I think there will absolutely be a consolidation always. In every mature market, there's consolidation. But that being said, there's still an enormous opportunity. And that's why I was making the case in the beginning of the presentation, and here, which is there's a ton of different ways to use LiDAR. A LiDAR in your phone is very different than a LiDAR and a street light is different than a LiDAR that's in a vehicle. So there's a lot of opportunity. And even within a specific market like automotive, you have multiple players. It's a very competitive market always because competition is what drives the aggressive cost down, let's say, targets from the OEMs because there is so much competition. So in radar, there's 5 or so players and cameras. There's 5 or so players and so in LiDAR, you can expect that there will still be 5-or-so players that will continue to be successful and drive that market opportunity.

You talked about Foresight being advantageous and that it leverages high-volume facility, manufacturing and commercially available inputs. Where do you ultimately see gross margin at start of production and then ultimately at scale?

It's a really good question because it plays into our business model well, which is the good news for us is because we took this approach similar to Mobileye, similar to ARM Limited, we are providing reference designs to people at Continental. And when we do that, we get super high gross profit margins because it's a licensing model. So our gross profit margins, I don't know if we've ever disclosed them, but you can imagine a typical gross profit margin for a licensing company of the order between 80% to 90-plus percent. And that's why it's a really powerful model because it scales extremely well. The more Tier 1s we sign up with the more product offerings into the market that then are delivering to all these different OEMs. The more effectively, we have a very, very steep accelerated growth curve. And we're getting a very high gross margin associated with it.

Awesome. Got it. So what would you say is you need about Foresight in terms of design, performance compared to similar sensing platforms in the market? And can you also discuss the puts and takes using camera and radar in conjunction with your platform, both for optimal adaptive performance? And then how is your software differentiated?

Sure. Let me unpack each one of those because they are very different. So the first one was how do you compare against other technologies. And the simplest way I'd say it is I tie back to the use cases. I would say there's only -- we're 1 of 2 in the market today that can hit the critical use case for small obstacle detection at very long distances because you need that to release a feature when you're going really fast. If you're going extremely fast, you need to see something far enough away that you can stop or change lanes with enough stopping distance. And we're -- like I said, we're only 1 of 2 that can do that. I would also say that of those 2, there's only 1, which is us with our business model, which is to leverage the value chain and to sell through, in this case, Continental as the first market entry partner. And so they're building a product called the HRL131 based on our reference design. The second part of your question, remind me again.

The puts and takes on using camera and radar in conjunction with the...

Right. The second part of the question that I think is important is when we're bringing a product together with Continental market, they're doing it because they believe that this is part of their overall sensor suite. They have cameras, they have radars, they have ultrasonics, they have the processors. And LiDAR was the final piece of the puzzle and long-range LiDAR specifically that they were missing. So being able to bring that system value, they have an enormous installed base. They have 25 OEMs that they work with in ADAS. Like I said, they sold 150 million radars. They've sold tens of millions of the other solutions. And for them to bring the HRL131 based on our reference design to market in connection with that in conjunction with that is super powerful. And the OEMs gravitate towards working with someone that can provide that because cameras and radar and LiDAR are all extremely complementary. Cameras provide really good color information. They provide very good resolution. They can't see if there's no light, they can't see, ultimately, if there's too much light, it could get saturated. They also can't measure in 3D. They have to interpret. Radar is good in bad weather, but it has very limited resolution, has a lot of false positives. So that's where LiDAR comes in is it's the final piece of the puzzle. It delivers really good, what we would say is, resolution at range, the ability to see with fine fidelity objects at a distance. And this is why they're so powerful together because it's really complementary to each other. And that's what Continental sees when they're bringing the system offering to the market.

Got it. So I guess, as you look out to your developmental milestones, what should investors be looking for as you ramp? What kind of fee that are you getting for your initial -- the sample shipment? And then what else they'll need to be done to reach automotive rate?

Yes. So the first part of that question is how can we track you over time? I think the best thing to do to track us over time is to track us on our progress with Continental and how that relationship is advancing. The progress on the product itself correlated to Continental. So the HRL131 as it goes through full design validation testing. We'll continue to update on that. And then obviously, as much as we can talk about it, the commercial success with Continental. So I would say those would be the 3 areas that you can continue to track us on.

Any sort of like metrics or anything like that, that you put out?

I mean, absolutely, as we go through it, we'll continue to publish metrics. I think to take a stab at it now, it would probably be a little premature. So we will publish metrics on each of those 3 different topics. But the market opportunity is just starting to take shape. And so I think there's some pretty promising opportunities in the future.

Awesome. So let's turn to some operational questions. Can you walk us through your decision to shift your focus towards licensing, right, for the auto market? And then how can you think about the opportunities in industrial markets now? And what benefit does this new approach provide for you?

Sure. So we didn't shift our focus to licensing. We've always been licensing in automotive. We shifted our focus to automotive. We had a much, I would say, more boil-the-ocean model, where we were trying to do a lot of different things simultaneously. And it was mostly because we were trying to see where the markets were going to emerge the fastest. And what we found and what we've shown in the first slide of the presentation and then shortly after, I think, it's the second slide, was there is an enormous opportunity that's materializing in automotive. It's starting to take shape. And with that, we really wanted to make sure that as a small company, we were very, very, very focused on executing on that plan to win that market. So in terms of industrial markets and where we see those markets evolving, we have always seen that as soon as we are able to conquer the automotive market, we can leverage the mature supply chain that automotive brings, the mature cost basis that we would get with it and that very, very mature product that we can then carry over into those industrial applications because a lot of those customers want the same thing, something very robust, very reliable that whether they're putting it in street signs or street lights or in construction and mining vehicles, they're going to want very, very robust implementations. And so that was always our plan was to really go in, win automotive. But now, we're very focused on that, and that will drive any future plans to play in the industrial markets.

Okay. What do you think the time line looks like in terms of mass adoption as you zero-in into that automotive market opportunity? And then where do you ultimately see the largest opportunity at scale? And do you potentially need to see a difference between passenger vehicles and commercial vehicles? And then where are you getting the strongest traction now?

Yes. All good questions. So the first one is mass production and what does that look like? I mean, I would make an argument that the volumes that we're seeing in the market today are the first sign of a mass market opportunity in terms of more than just premium vehicles that you're going after. You're going after 6 million to 10 million lifetime units is pretty sizable as, let's say, this first wave of opportunities can get. So I would say over the next 3 to 5 years, we'll see real high-volume installations of LiDAR technology into the markets. In terms of the 50% market share -- 50% of standard vehicle adoption that radar has or 100% backup cameras, you can expect that you can look at a camera and radar adoption curve and match it pretty closely. It took them about 5 to 10 years following the volumes that we're seeing today to get to a relatively standard component in those vehicles. And so you can expect the same thing here. So if I were an investor and I were betting on a macro, I would say the market is taking shape and that's a really good sign. And if I place strategic bets on companies that I think will be successful in that space, it's a pretty good opportunity.

And so can you talk about your approach in terms of your sales model and then your timing of programs? How are you seeing your customer conversations progressing?

Yes. I think our sales model is unique, especially in the LiDAR industry because we are licensing the technology to Tier 1s who then manufacture based on our designs and bring those products to market, and they sell to the final customers. We have -- as you can see in the slide that I put up with regards to the business model, we have direct access to the OEMs typically influencing the requirements, but we don't oversee the commercial engagement. We don't oversee the direct product development efforts with the OEMs and the application engineering and so on. So that being said, we have line of sight to a lot of great opportunities, and we have the ability to influence them, but our model drives through Continental and other Tier 1s.

Yes. And then you mentioned in one of the slides that you have 6-plus nominations between 5 million and 10 million units in serious production programs. What stage are you at with these conversations? Can you go into a bit more details about that? And then what confidence level do you have in converting them to a successful award?

Yes, so 6 opportunities. And conversion to awards is simply a matter of do you meet the appropriate technical requirements? Do you meet the appropriate commercial requirements, which is the cost that you're quoting? And are you mature enough as a product to be selected? And I would say we're in a really good position because from a technical standpoint, we can -- we're 1 of 2 that can meet the requirements of these OEMs. From a commercial standpoint, we're leveraging Continental, who is working with supply chain, and they are arguably one of the best in the world at getting to very robust and cost optimized solutions. And then the third thing in terms of product maturity, the production facility in Germany is already producing these samples that are going through the full design validation testing. So I would say we're in a really good position, and we have a high confidence with a lot of commercial success in our near future.

So have you disclosed any sort of like ultimate pricing target? Where is it now versus where you hope to achieve by market? And then how much do you need to flex the BOM to make it achievable?

We've never talked about it because it's not our pricing, it's Continental's pricing. So we have -- we can influence it by helping with the design to then get to, let's say, a better cost engineering structure, but we can't necessarily decide what the final quote is to the customer. So we've never talked about that. That's really up to them. The good news is our model scales well. Whatever price they quote, we're getting a licensing fee from that. And that's why it's super powerful is because we are not fighting against them to try and maintain margin on hardware in the product. We're trying to work with them to design for cost to ultimately get to the best possible cost structure that they can bring a product to market and get to the largest possible market opportunity. And so I still feel very strongly that, that model is very powerful and we can work with them to help their purchasing organization, which is one of the best in the world, go out and get to the appropriate cost needed to win business.

Okay. conscious of time, I'm going to -- any questions from the audience? Not. I think we're going to wrap up the session. Thank you so much. Yes.

Thank you so much. Thanks, everyone, for joining.