Luminar Technologies, Inc. (LAZRQ) Earnings Call Transcript & Summary

Great. Thank you. Welcome to Baird's Video Webcast with Luminar Technologies. I'm Tristan Gerra, semiconductor analyst at Baird. We're pleased to have with us today, Austin Russell, Founder and Chief Executive Officer; and Tom Fennimore, Chief Financial Officer. You can ask a question through the webcast question feature. Please refer to the event calendar published research or Baird's website for important disclosures regarding the company's discussions during this event.

And with that, let's get started. So thanks for being with us today. I wanted to start maybe with a high-level question. As the supplier of leading lidar technology for Highway Autonomy, could you provide us with a recap on what you're seeing this year in terms of traction? You've put obviously a very nice target in terms of what you see in terms of design win funnel target? And maybe talk about opportunities you see for this year, interest for your technology? And also, any changes in the way customers look at lidars and proactive safety versus a year ago? I know it's a multifaceted question.

Yes. So a lot to unpack there, too. And certainly, it's been an incredible year for the first year that we've also had out as a public company in terms of meeting the critical milestones that we had laid for then to set up ahead for this whole next year. We laid out some aggressive, but we believe absolutely achievable milestones that we'll be able to, as you described, continue to pioneer the industry with these key design wins or major commercial wins as we have them defined where we see, ultimately, 90% of the value coming from the top 10% of programs that we're going to be able to have the opportunity to see through into the market. And holistically, I think the overall question around the value of what we're bringing to the table in the eyes of customers and OEMs and all that is definitely only been increasing over this past year as we continue to be able to try and get more content value on vehicles and be able to see greater volumes of vehicles out there. One of the biggest things that we had happened over the course of the past year was the notion around standardization. For example, in the case of Volvo, where going from being an option on a high-end program to now being standardized on the launch vehicle and then, ultimately, all vehicles, that's a huge step forward, you think, for us and the industry at large to be able to see this happen. And then as you were alluding to, that's driven by both the Highway Autonomy side of things historically, but more recently, it's also been driven by this whole notion around proactive safety to be able to ultimately move towards building the "uncrashable car". And that's what can make all the difference towards volume implications of what we're delivering and the value that it's creating for the consumer, the OEM and ultimately with safety improvements, making a dramatic difference and even second order effects like insurance and other things that happen [ on the line ]. So a lot to be said, but I couldn't be more upbeat, excited about what we have for this upcoming year. We certainly expect to continue the trend of realizing this. And of course, the biggest thing is actually getting to start of production. There's a lot that's happening ahead in terms of -- you could say that everything that we've been doing is culminating up to the end of this year in terms of the first launch of our products into the market for series production and being able to actually get this into consumers' hands. So that's something that, obviously, we can be more excited about to be able to have realized.

Great. Could you perhaps describe the threshold you're looking at, as you're getting ready for production later this year? What are kind of the key things we should be looking at? And what do you think is really important to mention as you get ready for that?

Yes. Maybe, Tom, do you want to walk through some of the target milestones that we have set forth for this year?

Sure. And Tristan, we set 4 public milestones this year, consistent with the 5 we set last year. The first 2 really relate to our execution. The first one is to get to series production readiness by the end of the year for Iris, which is what we call our lidar, as well as the core software associated with that. The second milestone is to release the beta version of our Sentinel software package for Proactive Safety and Highway Autonomy. We released the alpha version at the end of last year. At CES, we publicly unveiled some of the functionality for Proactive Safety and Highway Autonomy. In this year, we want to bring that up to a beta version. The third and fourth milestones relate to our commercial activity. We ended the year with 9 major commercial wins, which includes our 2020 and 2021 tallies. We want to grow that number by at least 40% this year, so call it 4. We already announced one so far this year with our Mercedes-Benz announcement in late January. The final milestone is to grow our forward-looking order book. So, this is the estimate of the business that has already been awarded to us under our major commercial wins. That tally at the end of 2021 was $2.1 billion, and we want to grow that number at least 40% this year. So, those are the 4 milestones that we want to achieve this year, and we want our investors to measure our success against. We did set some financial guidance as well. And while near-term financial results are always important for any company, for us, we're really focused on the longer-term shareholder value creation. And that means we need to execute this year and reach SOP, and we need to continue to grow our commercial pipeline. For this year, we guided to $40 million of revenue. That is higher than the guidance we gave for 2022 for revenue when we went through our SPAC progress or SPAC process in 2020. That number was $35 million. We're guiding to $40 million. For 2021, during our SPAC process, we guided to a number of $26 million and we achieved $32 million. So, we're actually kind of doing better than we were expected when we went public, at least at the top line. The other financial metrics, which we guided to was to have our cash spend, call it, operating cash flow less CapEx to be slightly higher or moderately higher than what it was last year. And last year, that number was about $155 million. And so we're going to continue to invest in our business, to execute upon the business we won. But we're also going to do it in a very disciplined manner and make sure that our cash spend is done at a reasonable pace.

Thanks. That's a very nice recap. Obviously, you've demonstrated the performance of your lidar relative to the competition, which has enabled you to win all those very important sockets. But you've also talked about the software as part of the 4 or 5 key things you're going to be focusing on this year. So any other things that investors should be looking at in terms of differentiation and what you offer to customers even beyond the hardware superiority relative to other solutions out there?

I think this is where the whole conversation is shifting when it comes to like, comps, for example. Historically, people have talked about us in the context of like a Luminar versus, I don't know, say, like a Teledyne type example out there for lidar when it comes to R&D. And now this has really transformed itself into a -- for series production vehicles for the lidar landscape and being able to see the first opportunities to truly realize this at scale in the market with this next level and generation of functionality. But on the other side, from a software perspective and full stack AV perspective, this is where we've become as much a systems company than, so to say, a lidar company. And this is a really important aspect of the overall strategy and what we're doing. We were at a stage where you have just as many software engineers as we do hardware engineers and the team. And this is driving forward a holistic solution around the lidar that's based on the foundation of lidar and only made possible by that, but something that can help better accelerate the technology and holistic capabilities in the market for Proactive Safety and Highway Autonomy. And this is what we already started to show off in -- I mean, in the last quarterly business update, we actually showed off that functionality and even in the case of Proactive Safety showed it live at CES. So it's here, it's real, it's working. And this is what we see as a huge market opportunity to be able to really capitalize on this holistically as kind of the only company that has that lidar and software that's developed in-house together for series production vehicles. And that's part of the significance of what we're able to do here. So, I would say that as much as anything, we're playing in the same sandbox as the NVIDIAs and Mobileyes and other stuff in this world rather than in the same sandbox as some other type of lidar R&D efforts or whatever it may be. And that's a fundamental distinction that's evolved, kind of culminated most recently.

Great. And then specifically on the manufacturing side, what are really the key things that you need to focus on as you get ready for production and how do you differentiate yourself with the competition in that regard as well?

Yes. I think there, Tristan, we, at the end of last year, entered into the C-sample phase and started to build our initial C units. And so that's an important step for us to get to series production. And then actually in the automotive industry, there's typically a -- after you are awarded a piece of business, there's a 2- to 3-year period where you do the necessary engineering and development work. And most of the time, the OEM customer is actually paying you development revenue or NRE revenue to do that work. In our first awarded development and series production contract, we actually completed that work. And so, I think that those are 2 important milestones as we get to where we want to be at the end of the year to make sure we're ready to go on the start of production. The other critical thing that we're focused on this year is to make sure that we install the necessary capacity, including automation equipment to produce the units that our customers are asking us to be ready to produce next year in 2024. That capacity that they asked us to install is actually higher and is increasing relative to what the initial expectations were. And so this year, we're going to be investing a fair amount of capital into automation equipment and making sure that we're ready to go and scale for what our customers are asking us to do. And once we get into that series production, and look, we always said this wasn't going to be an easy task, building these complicated optoelectronics devices. Nobody's really ever done that before in the scale that we're being asked to do next year and working through that process and putting in place all the necessary qualifications not only for us, but all the 100-plus sub suppliers that we have is going to be important. It's going to be a huge competitive advantage, being the first in that series production scale, having that process in place that is work and that is scalable, and then also enjoying the economies of scales with both our material costs as well as our manufacturing costs. And that is going to be an increasingly huge competitive advantage for us. It's going to expand our competitive moat. And having products and series production scale at auto-grade quality is going to make it even easier for us to go out and win new business because we've done it and we proved it. And we're going to have something more or less off the shelf that we can sell to other customers.

Great. A couple of questions from the audience. The first one is, if there's going to be an insurance product that's going to be launched concurrently with the cars that are going to feature your lidars? Or does that come later as we get to a higher level of functionality?

Yes. It's a great question, Tristan. Particularly with our Proactive Safety products, and you can kind of go look at some of the videos we released at CES. We believe that, that Proactive Safety feature is going to significantly improve the safety of vehicles relative to the legacy ADAS systems today that then manifests itself in insurance savings. And we've kind of talked in the past briefly about figuring out ways to capture those insurance savings and working with our OEM customers on that. We partnered with Swiss Re, who is one of the global automotive reinsurance companies. We hired the person who set up Tesla's insurance business. And we are investing in insurance product to do just that. And so we look forward to talking more about what that was going to specifically look like as we approach SOP and our customers start selling cars, but there's real interest from several OEMs in really trying to utilize, let's call it, an insurance product to capture those safety improvements from lidars and using that to subsidize the cost of the technology to drive standardization.

Yes. So in other words, yes, it's on the roadmap and just what we talked about, we don't have anything in interim to announce our launch plans today yet, but we look forward to what's ahead.

Great. And then the second question from the audience is that in terms of Iris being available by end of this year, is that going to be available for Volvo to put in their vehicles? Or is that going to be Volvo models to be available to consumers? I think it's a question about timing in terms of launch, in terms of when you ship versus when it's available to actual consumers.

Yes. So, I think the distinction here exactly is that, ultimately, we're in a position to be able to announce when our product is series production ready, everything where, for example, we can't have one of our milestones be specific vehicle models on behalf of the OEMs. Obviously, we're not in a position or allowed to announce that much less, have it 100% always in our control, but it's generally in line with the timeline of what we're talking about here. So -- but our comments in terms of our milestone for Iris being series production ready at year-end, that -- as it relates to our product and then, obviously, we'll intend to buy OEMs implementing that in the series production shortly thereafter as they get units off of series production line.

And Tristan, the only thing I would add to that comment is we have 3 customers that are trying to be ready to go around the end of the year to incorporate our technology on vehicles. They're going to sell to consumers. You mentioned Volvo. Polestar, which is a sister company of Volvo is on the similar timeline. And then the other one is SAIC, Shanghai Auto, which is the largest automotive company in China. So, we're kind of on tight timelines with all 3 of them. And so it would be intriguing to kind of see who gets there first in terms of putting our technology on their vehicles and sell it to consumers. It's the same product we're selling to each, and we're working around the clock to be ready to do just that.

Great. I think as a follow-up, my question would be around the sweet spot in terms of design win timing to get into L3 and L4 vehicles ramping in that '23 to '25 year window. When is that sweet spot in terms of design wins and what does that imply for you being not only ready with the technology, but also demonstrating very soon that you're going to ship in volume versus other lidar companies? So in other words, what timeframe people need to have in mind to be -- to have the right product and win those sockets before they potentially lose really the first wave of adoption?

So, I think as it relates to this, it's straightforward. It's over. It's done for the 2023 to 2025 window. If you don't have your wins not just today, but months ago, there's no way that you could be put into, at least with any of the major OEMs, so to say, something into that timeframe. And that's largely just because it takes multiple years in advance to be able to successfully see these products designed into series production vehicles as part of the launch plans for these different cars that are up ahead. And that's something that why we also had an incredible focus on making sure we can successfully lock in these different programs, again, seeing that these early programs are going to create tremendous value and a tremendous flywheel for the success of the product technology and everything else that's there. So like I said, we've effectively captured a majority, if not all, of the most significant wins in the market when it comes to things towards this timeframe in the window. And that's something that -- again, there's so much work that has to go into preparing successfully for these series production launches. That's why it’s multiple years in advance for what's going to define ourselves ahead. But yes, obviously, we've been public with some of these different examples, some of the ones that Tom mentioned in addition to the recent Mercedes win that we just announced as well. So, we'll be looking forward to accelerating full speed ahead into that to be able to see if this realized in that window. And that's the critical inflection point we think about this business.

So as a follow-up question, what does that imply in terms of market share you think you can get over the next several years? I think, pre-SPAC, you were probably talking about a 30% share target. And how do you see that evolving given the design win window that you just talked about?

So, I think effectively, the thing that's evolves more and, by the way, hopefully, we're ultimately getting the reputation of underpromising and overdelivering as opposed to being in the world of companies today that overpromise and underdeliver, so to say, when it comes to things like that. But that said, the most important metric, I think, going forward as much as anything is less about market share. I mean, we've more or less dominated the market when it comes to these critical design wins that are going to be defining significant volume for the next handful of years. And in some of these cases, these platforms are defining their architectures for the next decade plus. So it's really locking that in was key. But when it comes down to it, the most significant thing has really shifted to market penetration as opposed to market share. Because the question is we're effectively leading the charge into the market. And the question is not really about what -- how big of a slice of the pie can we get out of this, but rather how big can we make the pie as quickly as possible. And that's where we have the broader objective that we think also is relatively conservative of 3% to 4% market penetration over the course of the next decade or I should say, more accurately by 2030. And that's something that -- while not seemingly a lot, can be able to drive as much as $5 billion in revenue, $2.5 billion in EBITDA with the $60 billion forward-looking order book. So some pretty significant numbers even with a relatively small percentage of market penetration and not even taking in account the full value of the software of what's possible there. So it goes to show that to the extent that we do that or overachieve on that, then that's how you create an incredibly valuable business as opposed to just trying to eat someone else's lunch, so to say. You're never going to be able to create a $1 trillion company by just doing that. So, that's the significance that you see ahead in terms of defining the respective opportunity. And standardizing the technology, where I mean, to be honest, I would be surprised if we didn't see this technology standardized or have a plan for standardization on every major OEM before the end of the decade. So that's the objective.

So when -- obviously, people saw the joint announcement you made with Volvo last year. What's been the reaction from the automotive OEM management team and CEOs? Has this accelerated the level of interest? Was that a surprise to people? And is that basically in line with your commentary that basically you're trying to push to that 3% to 4% adoption by 2030? So do you think that an announcement like Volvo and people looking at your technology is really accelerating the plans for inclusion of lidars versus what some automotive OEM CEOs were expecting just a year ago?

Yes. I think it completely changed the way that people are thinking about it. And when I was first talking to some of the other different automotive CEOs or management team and whatnot, they were like, Volvo, did what? It was a pretty big shocker throughout the industry that this -- I think maybe less so about the notion of it ultimately happening, but also just so that it was happening so quickly. And people were kind of scrambling to be able to get their responses into place as part of this and analysis of the business case, because I think there was just some assumption that this kind of technology just would be primarily implemented on robotaxi use cases. And even for the consumer vehicle use cases, it would only be on like really high-end initial vehicles as just an option. It's kind of like a one-off thing. But this is where the entire landscape is completely changing. And it's really revolving around the whole notion that it can make a dramatic difference, not just on autonomy capabilities but also on general safety of the vehicle towards that vision of building the uncrashable car. And there is a -- and this is the part that I think was a surprise is that with the economics that we're able to achieve and the business model that we have, there is a business case to standardize this on pretty much every vehicle out there right now. And that's something that was -- Volvo had done a deep analysis on it and come to the conclusion of. It's obviously -- it's a big bet. It's a bet the company type decision when you go and do a standardize a technology like this. But I wouldn't be surprised to see more and more OEMs falling in line with that. It's just really a question of when.

So what you described seems to be really a shift in terms of expectation where 1 year, 1.5 years ago, people were primarily talking about robotaxis and automated shuttles, which is great, but probably low in volume, right? And now there is this whole concept that lidar is not just about L3, L4 capabilities, but really Proactive Safety even if someone is going to keep driving the car and putting their hands on the steering wheel. They want something that can basically take over for when a human driver may not be able to see. So is that really a shift that you think is pervasive now where you're going to see more automotive companies really embracing that Proactive Safety or versus just the focus on automation and L4 capabilities? And how do you see the timing of those 2 roadmaps involving? Because clearly, L4 has some regulation, I think, capabilities as well where you need to basically put a framework, a legal framework in place. The Proactive Safety is a bit different. So maybe if you could help us understand how those 2 focuses on end markets are unfolding?

Yes. So a couple of thoughts as it relates to this. I mean, there's really kind of 3 different distinct products and features in terms of holistic market capabilities, the things that converge down to. And everyone will throw out their various acronyms of what's being done. But at the end of the day, there's this Proactive Safety capability of improving safety vehicle and there's Highway Autonomy capability. And then on top of that, there's the urban robotaxi like capability. The first 2 are with the driver still there in the seat. But in the case of Highway Autonomy, not necessarily having to constantly pay attention to the road ahead. The robotaxi scenario is historically what most of the AV companies have been focused on of taking out the driver all together and being able to pick up, drop-off passengers in urban environments in an Uber-like use case that's there. And I think that's the part that, that last one is going to be the one that is the most challenging when it comes to time to market, feasibility, just getting to a general technology that can actually support that and have the product business case everything like in line to be able to make it all work from a technology standpoint. But that said, our objective -- and this is a fundamental distinction with Luminar. It's much -- it's not about removing the driver altogether, but about enhancing the driver. And this is a fundamental distinction and part of what goes hand-in-hand with us actually going into series production consumer vehicles, is that having this Proactive Safety capability is unquestionably a key driver that people really didn't see coming as part of the importance of this. But I don't want to overlook ultimately what is possible with Highway Autonomy capabilities because it is the same hardware that we have that enables both of those kinds of capabilities. And what we're seeing is OEMs building into their business models is that you can be able to start to have these kind of safety features as standard because we think that safety should be available to all. But when it comes to comfort-related features like Highway Autonomy, then you can flick a switch and then be able to upgrade it accordingly. And that's the kind of a business model that we're seeing more and more of, when it comes to these different automakers using our technology. So a lot to be said there. But again, the focus is on enhancing the driver as opposed to replacing the driver.

Great. And then there's a question from the audience about when should we anticipate Japanese OEMs following the lead of the German and Chinese brands in terms of embracing lidar technology?

I think there's probably a -- what, couple year lag, few year lag with this. I think it's been public before that we've been working with Toyota's research institute and other-related programs associated from a development program perspective as part of this. So people are doing it. People are working on it. They just -- I'd say the Japanese OEMs generally fall into line after the adoption of the German OEMs that are there as part of their programs. So, that's usually just the way that things work in the automotive cycle for this. And I don't see any reason why we could expect it to be any different when it comes to this kind of technology. I think it's -- will ultimately fall into place nicely. I guess there's still a lot of work left to do for this, but I think that's -- there's no question that's going to be a key market. And China has already been starting to fall into place as well when you look at things like SAIC and other, and the lead automakers that are there. We partnered with the best to be able to start working towards the initial vehicle launch. But when it comes to this, I think there will be a similar trajectory.

Yes. And Tristan, let me try to give you an example, which I think quantifies the 2-year period that Austin mentioned. We already talked already about how into this year 2023, you'll kind of see the first wave with Volvo, Polestar and SAIC. Nissan has said publicly that their goal is to start putting lidar on vehicles around 2025, with the goal of standardizing it on virtually every vehicle they sell by the end of this decade. And so that 2025 point being compared to 2023 period is kind of consistent with that 2 year lag Austin mentioned.

Great. And then I guess, something that's been topical recently is in terms of the well-advertised supply issues that the whole semiconductor industry is facing. But I think it was also a lidar company that blamed some of the revenue outlook on basically supply of some components. And I just wanted to get your view, high level in terms of how you see that either as a risk or as an opportunity? And particularly in the context of your earlier comment that you're basically getting ready for a volume ramp by end of this year, how is the supply chain basically a challenge for you guys? Or do you think that it's not going to be a problem?

Yes. Look, I think, Tristan, this is something we're monitoring. What we see today is it's not going to be a significant issue for us. We -- everybody is very well of this issue and so we've been actually investing a lot in our inventory and making sure we have the parts on hand. And if we have to pay expedition fees in order to make sure we have a [ part ] that's something we're doing. And as we get into next year in 2023, once we get to the series production and we're buying parts in much higher quantities, we're making sure that we're locking everything down today to make sure that we have the parts in hand. Right now, it's not a significant issue for us. There's a little bit of pain, but nothing significant. And we're doing what we can to manage through this.

And part of this is that this is a driver behind probably 6 months ago. We brought on Cheryl Zula, who's our VP of Supply Chain. She previously led supply chain for these kind of systems at Stellantis and ZF. And there has been a huge addition in securing the supply chain for what we have for the year ahead and when it comes to a semiconductor standpoint. So -- but I think the key is there. There is no -- you don't expect there to be any material impact. And I think most of these blames, I would say, as much as anything, can often be redirected from looking inward at the technology and capabilities itself rather than on the demand side, rather than on the supply side. But that said, from a semi standpoint, one of the key drivers behind this is we actually successfully acquired and integrated, closed the acquisition of a company, OptoGration, which is an InGaAs chip supplier. So, we now have that fully controlled and vertically integrated in this. The other custom chips that we have are part of the standard process that we have to supply for as part of just a TSMC process. But for the more exotic, so to say, InGaAs chips, that's 100% under our control and something that we're able to scale to millions of units per year with -- for what we're doing in-house. So, this isn't any kind of remote supply constraint for any foreseeable future.

Great. And then another topical question. Your traction is really more in EVs and hybrid cars as opposed to gas engines, I guess, from what I can see with Volvo, for example. So given the -- and it's kind of a random question. So maybe it's not one of them, but maybe you can help me on this. So given the high energy pricing, do you think or is there a sense within the industry that if this continues, it actually accelerates a transition to EVs and hybrid vehicles as people look at the gas pricing at the pump? And as such, could that help traction for lidar to accelerate because, again, there is a greater tie of lidar adoption into EVs? Or is that a one event?

Actually, I think that a lot of people assume that these kinds of systems will only work on EVs or new vehicle architectures and other stuff that are designed for the ground up. And I think, actually, contrary to that belief, we can have systems that work perfectly fine on combustion engine vehicles. And in fact, we have centers designed for production vehicles that are designed to work. And as it is, it will work perfectly fine on combustion vehicles and will be implemented on combustion vehicles. So it's really independent of the equation of the EV. Now that said, you would say that there's a lot of parallels that are happening with EVs more generally. And that's just as part of a broader industry trend that's happening. And you could say that the whole notion of the EV wave that was initially pioneered by Tesla and now being implemented by a lot of these other OEMs. As much as that was happening, we're pioneering the whole AV wave and Proactive Safety wave that's up ahead. And this is where -- I would say that this is much a concurrent trend as anything that's not directly tied together because obviously, the vast majority of vehicles that are shipped today are not EVs. So that doesn't stop us from getting designed in. But I mean, I think we know the general notion of the direction of where the industry is going and are aligning our roadmaps to that.

And the other thing I would mention and we're actually seeing a lot of interest in this with our OEM customers as they're launching more and more electric vehicles and making the decision to allocate the capital to development of those EV programs, in particular, if you're at that premium/luxury segment where you're competing against Tesla, one of the best ways to compete against Tesla is to put a lidar on the vehicle, particularly since Elon has been very vocal that it isn't necessary. And so putting a lidar on there and bringing enhanced safety to it is one way that these OEMs who are trying to expand their market share in the segment can differentiate and compete against Tesla. And so we're seeing, I would say, that's an increasing theme that we're seeing in our conversations with automakers.

Great. And then....

It's an easy way to leapfrog them.

From L2+ to L4 capabilities, how should we look at...

Or by the way -- or even just better, I mean, L2+ is a very loose term. As it stands today, the L2+ systems out there literally won't stop for things that you have right in front of you as part of what we were showing off at CES, even just basic safety cases there, too. So, there's an opportunity for a 10x, 100x improvement of where we stand today, even for just the basic safety systems, much less even the levels of autonomy that can be achieved.

Yes. That's a very good point. How should we look at then the evolution of your lidar technology? Do you think that the architecture you have today is good really for the next 10 years? And you've talked about standardization. I'm assuming there's obviously opportunities to further improve on both the performance and the cost of your existing architecture. But are there opportunities to also potentially launch different architectures, whether it's to target different end markets or things that you think would be more mature technology wise in a few years that you will consider? Or do you think that the platform you have is really what you want to be focusing on right now?

So, we're 100% all in on this technology platform. And this is pretty significant in the sense that it's very easy and tempting to go down the path of, okay, let's develop a new product for every market and tweak it accordingly. And by the way, these are design trade-offs that you normally have to be able to make way. You use off-the-shelf parts for a lidar system. Part of the objective with this is to be able to have that more. Are you able to achieve the extremely stringent spec that's needed to be able to get the highest end applications of being able to drive at like highway speed for autonomous capabilities and then scaling that to the key respective markets? Now the reality is, is that we see -- I mean, there's really 3 key markets at the end of the day for this, that we see the vast majority of all the value being with. There's the consumer vehicles, there's trucking and there's robotaxis, with the consumer vehicles, then ultimately trucking being first and robotaxis being more of a next decade thing. But that said, I think -- and this is the part that's unique to Luminar is that we've basically gone -- we're a one-product organization, a one-product company when it comes to the hardware side of things. And why? You'll see a lot of times with other lidar offerings from legacy systems is that you end up with this mortgage board of a dozen-plus different products that are out there today to try and do these different trade-offs and optimizations and everything because no single product actually meets the needs of everything. That is completely not the case with Luminar, is that we have Iris. This is it. This is same thing that's getting designed in, which does a couple of things. One, obviously, from a performance standpoint, it gets what's needed for these various applications. It is really the first and only product to be able to do so from a performance capability standpoint, spec standpoint, et cetera. Second is that there -- it drives the economies of scale of this to dramatically greater heights than you ever could if you had such a wide product portfolio. This is actually not an industry where you want to have a product portfolio in the same domain of capabilities of what you're talking about. So, that's really important to be able to drive this forward. And not to mention, by the way, of course, the reality is complexity. I mean, it's already -- it's industrialized one product, even just a single product for -- to be able to have auto-grade capabilities and specs and everything. I mean you're talking about many years' worth of work, probably in aggregate, $0.5 billion, plus assuming you're superefficient at what we've been able to do, and there is an incredible amount of stuff that goes into it. But we are extremely confident in this platform and basically been pushing the limits of physics to what's possible. There are additional optimizations like cost optimizations and other stuff that are coming with economies of scale on this and even further design optimizations that we'll have for future generations. And we'll have every few years, next generations and iterations on the core product itself. But in terms of the architecture behind it, I mean, we basically already pushed the limit of physics to what's possible when it comes to the capabilities of the device. So again, it kind of goes back unless it becomes less about market share, more about market penetration. And what we have -- honestly, what we have today already, already meets the needs of what's actually out there in the market to drive forward the capabilities of what we're talking about with Proactive Safety and Highway Autonomy. So, there's a lot to be said about that. And that -- you could say that's the holistic objective about what we're driving forward with. But here's the key is we've been talking about the lidar the whole time. The big improvements for everything are going to come as much or more on the software side as they are for the hardware side. And this is the game that we're playing that really no one else has been playing is that how you can successfully advance this integrated software stack with the lidar to be able to enhance not just like, okay, we shoot a few more laser pulses here and there or whatever it is. It's about what does it actually do for the end consumer? Like what use cases does it -- how does it provide additional value from a safety case standpoint and just a comfort standpoint to the end user when it comes to autonomy use cases and expanding that operating domain. So it's all of those factors that get taken into account when we're talking about the vehicle level, function level from a software standpoint, do we think is this whole next wave.

Great. And you've mentioned on your last call that you're on track, tracking -- reaching your $500 ASPs target by end of '23 reflected in your gross margin.

$500 BOM. ASP is much higher.

Higher, yes. And then that will be reflected in your gross margin in '24. So how should we look at the evolution of gross margin, particularly at the time you start actually ramping in volume? And any commentary you could provide in terms of whether initially you have the yield potentially as something that is going to be an offset until you cannot get that economies of scale?

Yes. Good question, Tristan. So if you actually look at where our COGS or cost of goods sold is today, there's a lot of things that kind of go into that, which make it not reflective of our medium-term profitability potential. For example, in 2021, we had over $20 million of engineering costs, which would typically go into R&D or OpEx that is up in cost of goods sold for accounting reasons. Because we're getting NRE or program revenue, we need to move that cost up into our COGS. In addition, we also have our own advanced manufacturing line in Orlando, where we do a lot of our prototype and small batch sensor runs. There's about a couple of million dollars a quarter of fixed costs in there as well. In addition, we're going through the process of ramping up our C-sample phase, investing in our supply base to get them ready for series production. And that's going to inflate a lot of the cost last year and this year as well as we start to get into series production. Once we start to get into 2023 and towards the latter half, what's going to happen is a lot of those costs will still be there. But because we're going to be producing a lot more sensors in scale, the predominant costs are going to be the material cost or BOM that goes into each sensor, as well as the contribution cost from that Celestica is going to charge us to assemble each of these products. And so those are just going to be a much bigger rate. Those costs are still going to be in the COGS line, but it's going to be a smaller percentage. And thus, you're going to start to see gross margins that will look more like what they will be once we get to series production scale.

I think it's fair to say that we're tracking to the targets that we laid out years ago and kind of from what we're describing. So, there's no substantial deviation from that. It's something that we're still obviously bullish on. But like I said, we've got a lot of work left to do as well.

Great. Well, thanks for elaborating on that. Just going back on the design wins and the kind of the platform that you've announced with Zenseact, also with NVIDIA. There's been more companies recently that have announced engagement with NVIDIA and Mercedes, obviously, was one of them, but also Jaguar, Land Rover. And it looks like one of the vehicles that are going to feature is going to have L3 functionality that's going to be lidar enabled. So how should I look at this whole platform? What's the likelihood that companies that are engaged with NVIDIA are also going to use your lidar? And I don't want to try to ask about things that you have yet to announce. But I'm just trying to kind of look at the engagements with other of your partners and what it means for you in terms of opportunities?

Yes. And I think from that standpoint, I think we -- as you're saying, you can't comment on other people's programs or our partners' programs but -- in the case of NVIDIA. But that said, when it comes to this, there's obviously a reason why we partnered with NVIDIA to be able to have an even closer working relationship there and why they selected us as the lead partner for Hyperion and whatnot. So yes, lot to be said about working with the key platform providers. Really, what we're seeing is NVIDIA and Mobileye are the 2 key companies that have been dominating the landscape there and they both selected us as the key lidar provider for their system and platform. And this is why we see this as a key channel in terms of proliferation into the market to be able to see through a successful adoption of the product and technology on a more broad basis. But, yes, I think that it's fair to say that these things are helped to the extent that we see the platform providers not as -- not just as ultimately significant customers on their own, but more so an integrated channel into the market that are going to be helping drive the holistic market penetration equation as much as anything that we were talking about earlier.

Great. You've talked about having the white architecture and having already pushed the limits of physics and obviously, you have this platform, including the software that you've discussed. So how should I look at potential M&A activity going forward? Do you see any tuck-in type of acquisition in terms of building your platform? Any commentary there?

So what we said publicly on this, Tristan, if you look at our last 2 M&A transactions, I think they're consistent with what we're going to be focused on here in the near term. The first was, last year, we bought OptoGration, which allowed us to vertically integrate with a critical suppliers of ours. It was a small transaction, all stock, a supplier that we've been working with for years and building their technology. And by taking them in-house, it allowed us to expand our competitive moat. It allows us to accelerate some of the R&D efforts that we're working on with them. And then it also allows us to work together with them to scale up the series production a lot easier. And so, I think that one is vertical integration, critical suppliers, a lot of benefits from doing that. I think that is a theme that we'll continue to focus on. The one prior to that was actually done in 2020, and we did an acqui-hire Samsung's autonomous software team in Munich, Germany. And I think that's an effort where we were able to buy a great team to help accelerate some of our software development efforts. When you look at the Proactive Safety demo videos that we did there, that team took the lead in developing that functionality. And so there, that was something that we were able to do to expand out our software capabilities. And I think that that's an area or a theme that we're going to continue to focus on in M&A. Once again, that was an all-stock transaction, small. I think the bar to do -- the bar for us to do something on the big transaction side is high. I never want to say never in life. And I think that if we were going to do something sizable, it would be much more likely to be on the software than on the hardware side. We get asked frequently about what our areas of interest are. And I think it's those 2 things; vertical integration, software, focusing more on smaller deals, using more of our stock as the preferred currency. And anything big will have a very high bar to get over for it to make sense to us in our current state.

My rule of thumb to everyone when it comes to these things is that we have to see a very clear opportunity to have a 10x to 100x return on every dollar spent when it comes to these things. And actually, the 10x is even more of a general rule of cost of capital for us as we do, but the same has to apply to M&A to help accelerate that. And that vertical integration, we've already seen has been incredibly invaluable with the key providers that we had. We wouldn't be able to get to this level of technical capability if we hadn't done that years ago in the case of Black Forest Engineering or even for the next gen system through what we have with OptoGration. But it's these best-in-the-world type companies that focus on specific areas that can make such a dramatic difference. And this is a fundamental differentiator from what we've been able to lock up. And by the way, part of our strategy with some of these companies is lock them up early on with an exclusive agreement before we can do any kind of -- before we do an M&A-related activity when it comes down to it. And this has been the case already for some of the companies that we brought in-house.

Great. Anything we haven't talked about, that we haven't asked, that you wanted to highlight briefly before we conclude?

I think we got some good coverage around things. Tom, anything comes to mind?

Nothing. I think you asked great questions, Tristan. So, we are all set from our side and appreciate you hosting us.

Great. Well, thank you very much for participating today. And this concludes our presentation. So everybody has a good day. Thanks again.

Yes. Great questions. Thanks, Tristan. Good to see you guys.

Take care.