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

Great and I think we're live. Welcome as we continue the Barclays Global Automotive and Mobility Tech Conference. My name is Dan Levy. I lead autos research coverage at Barclays. And very pleased to have with us Luminar, one of the new mobility entrants focused on lidar, key sensor in automotive and industrial applications, they're more focused on the automotive side. Very pleased to have with us Tom Fennimore, the company's CFO. Also in the background, Trey Campbell and Tushar Jain from -- who lead the company's IR efforts. Should promise to be very insightful. Tom, thank you so much for joining.

Thank you for having us Dan.

So I think a good place to start is I want to touch on something that was mentioned on the last earnings call. And as we think about the journey of Luminar thus far, you were previously in a phase where you're working on sort of early commercialization. Now you're nearing the start of series production. So maybe you could just zoom out a bit and help the audience understand the transition to this next phase, what it entails and how this looks up like from a 30,000-foot view?

Sure. And when you think about the journey of Luminar over the last 10 years, really the first stage was developing the tech that we believe was the right solution for the automotive industry to enable safe autonomy. The next stage after that would be to convince an initial automotive customer to actually buy that technology, not to test on a bench somewhere, which they're going to have to do, but to ultimately make the conscious decision to put that technology and integrate it into vehicles that they're going to sell to the consumer. In 2020, we won our first customer, which was Volvo for series production. And really, over the last 2 plus or minus years, we've been working around the clock to get ready for that start of production, actually taking that technology we've developed and getting it to the stage where not only it meets the specs and the quality, but the automotive customer is confident to put that on the vehicles that they're going to sell to the consumer. I'm pleased to reiterate what we announced on our earnings call, but we crossed that goal a few weeks ago. Right now, in China, you can buy a R7, which is Shanghai Auto, the largest automotive company in the largest automotive market in China. They have their flagship electric vehicle, which is the R7, which they are producing. It's a model that's competing against the Tesla Model 3 and Model Y. You can buy that vehicle now in China with our technology on it and there's actual vehicles on the road who buy real people like you and me with Luminar's technology. So that was a very important goal. Also, what's happened over the last few weeks is Polestar announced with the Polestar 3 that they're going to be selling vehicles shortly with our technology on it. Volvo, I was actually in Sweden a couple of weeks ago for the launch of their next-generation SUV, the EX90, where our technology is going to be standard on it. And so we're really going from -- we're making the transition from the company that has good technology, but still some lingering investor questions about whether or not you guys can actually make these things and put them on vehicles, we're now at the stage where we're making these and putting them on vehicle, albeit, I went and said in a big scale now. And really what we're focusing on over the next year or so is going from start of production where that box is [ ticked ] to really scaling that start of production. And so we're going to have site, we're going to poll start. We're going to have Volvo. We're going to have Mobileye. We're going to have all those really coming together. We're building out our new dedicated facility, which we expect to come online in the second half of next year. So we're going from proven we can make these things to making them in real scale. That's the focus of Luminar now. The team has done a great job of getting us to this point. And now we're focused on taking it to the next level.

Great. Let's unpack some of those customer engagements. We'll talk in a bit about the scaling process. So maybe let's start with Volvo because I think one of the first announcements that you had in the past 1.5 years that generated some excitement is about the potential to scale this technology was with Volvo on X90 the point at that time, the electric version of XC90. It's standard fit. What is the path to cascading a standard fit technology to other vehicles in Volvo line up?

Right. And let me talk a little bit and for those that aren't well versed in the automotive industry. What the benefit of standard fit is and why this is a big deal? What we're doing now for the site R7 is we're an option on it. And so when a consumer buys an R7, they have to make the election at the time they purchase the vehicle, whether they want a Luminar lidar on it. And not only when you think about the volume assumptions that we built into our production forecast, not only do we need to make an assumption around how many R7s are going to be built in. You can look at what the customer is telling you what IHS, which is a third-party industry is saying to get how many total or R7s, but you need to make an assumption on called the take rate, which is what percentage of customers are actually going to select that. And there's some uncertainty because there's never been a lidar like ours put on a vehicle. We've built into our forecast very conservative assumptions. Right now, look, it's very early. We're actually seeing the actual take rates exceed what's been modeled by a fair amount. But when you're standard, you're on every vehicle that is made. And so for the Volvo EX90, we're really only taking the volume risk over how many of them are made. And if they're made, there's Luminar lidar on it, we're not taking take rate risk. What that allows us to do, and Volvo has said publicly that ultimately, their goal is to standardize our technology not only on the EX90, but every vehicle that they made. But the more that we get in there on the EX90, the more that we perform and deliver the more that Volvo develops their autonomous system, their algorithms, their software around our technology. And assuming that works, and there's a lot of receptivity from the consumer, it makes it easier for Volvo to roll us out across the rest of their vehicle platforms. Volvo's CEO, Jim Rowan at his launch event for the EX90, he stated that this technology is going to significantly improve the safety of a Volvo vehicle, significantly reduce the number of collisions on the vehicle, significantly reduce even if there is an accident with our technology, you're going to mitigate the crash, slow down in the vehicle, do other ways to mitigate it. And so it's -- the more that our technology performs the way that we expect it to, the way that Volvo expects it to and the more that the consumers see the benefits of that, that is going to be helpful to demonstrate to Volvo as well as other customers, the real value proposition that our technology delivers to the OEM as well as to the consumer.

Just a follow-up on Volvo. Another thing that you've been working on with them was the software offering. I think your software is being packaged into Zenseact. Maybe you can give us some sense of sort of the early take rates on software within EX90. And again, how does that cascade to the rest of the Volvo lab?

Yes. It's too early to say. Once again, we're going to be standard there. We're working with Zenseact to really get the software system ready to go for the vehicle, not only to enable that enhanced ADAS or safety, but ultimately to enable that highway autonomy package that Volvo has talked about. We haven't seen any data yet in terms of the take rates on the consumer side around that. So I can't really comment on that. But the team is working real time with Zenseact to make sure that, that software package is ready to go.

Great. You mentioned Polestar. I think we know there's a broader family as well. Is there any potential that what you're doing with Volvo and Polestar also gets adopted by Geely?

Absolutely. We're very close, as you know, with Volvo and Polestar that has given us relationships with the broader Geely family. One of the things we did earlier this year is there is the technology arm or at least as I view them the technology arm of the Geely family called ECARX. It's a company that's actually in the stage of going public. We have entered into a strategic partnership with them. We're investing in them. It's really kind of like a stock swap with a cross ownership there. And the point of our strategic partnership is to take our technology, integrate it with ECARX technology and develop a system that is designed for the Geely family of brands, particularly in China that can be rolled out across the broader Geely family of vehicles. That's not only Geely, but they now have Lotus and Zeekr and Lynk and a handful of other brands. And so Volvo and Polestar were our foothold into the broader Geely family of organization. We have multiple relationships within that family. And we think that, that is going to prove fruitful in terms of more business here in the future.

Great. Let's talk about another one of the customer engagement. And you mentioned you just launched -- or you just started selling into SAIC for the R7. You can now buy an R7 that has your lidar and those are on the road today. I don't know if there's any -- maybe any early learnings, early takes on how that rollout has gone. And again, I would ask the same question. Starting with the R7, is there potential to roll this out to the broader SAIC lineup, which I think is interesting, especially given that's probably a more price-sensitive automaker given what's going on in China.

Yes, absolutely. We learned -- we built a very good relationship with SAIC and particularly those that are working on the R-TECH brand. We're going to use those relationships to try to expand the business that we have with them. The team over -- we built out our team over in China. We hired a person earlier this year, a gentleman by the name of Jackie Chen, not the actor, but he used to run Schaeffler's and Harman's China business. And so he's out there. He's building a team for us. As I mentioned, we're using what we're doing with SAIC. We're using what we're doing with Volvo and Polestar, which have great brand names in China and the fact that we're working with a company like Volvo to implement cutting-edge safety systems carries a lot of weight, not only in China, but globally. We talked about our relationship with ECARX and what our goal is with that partnership. And so we do see a lot of opportunity in front of us in China, not only with SAIC where we already have a good piece of business and hopefully more but with other OEMs. What I would say is for some of our other customers, I mentioned Volvo and Polestar but when you look at a company like Mercedes-Benz, a good chunk of Mercedes-Benz existing volume is over in China as well. I forget what the exact number is. But I think it's on the order of magnitude of about 30% to 40% of their units sold each year are over in China. And so we need to have a good presence over in China not only to serve our local customers on the ground there, but it's also an important region for our global customers as well.

We'll get to competitive environment in a bit, but just on the topic of China, is it a different competitive environment for you versus West?

It is. There are, I would say, a few lidar companies over in China, whether it's in Hesai or Robosense, which have come out with a solution and have made some traction there. But their lidar, it's more of a 905 lidar. It's a much lower cost version of ours, but it has a lot less functionality and robustness than ours. And so there's going to be a segment of the car market in China, where there are some government regulations in China that encourage lidar adoption, but if you have a low-priced vehicle taking a Luminar lidar, which [ calls on ] the order of magnitude of about $1,000 plus or minus today, we're going to bring that cost down over time, particularly in scale with our customers or a few hundred dollar 905 solution. And so in China, we do see some locally priced lidars that compete on price at the lower end of the segment that we don't necessarily see globally.

Okay. Also on the topic of cost, we've seen an interesting development on your end with Nissan that you are going to be in their model by mid-decade, and I believe you noted deployed in virtually every new model by 2030. Maybe you can give us a sense of where this collaboration stands? Is the award firmly secured? Could it be dual sourced? And then maybe you could just give us a sense like Volvo we associate with luxury or premium brand, meaning a much higher price point, so they can afford a higher level of your content. Nissan is generally lower-priced vehicles. So what does that imply in terms of what you have to achieve in terms of BOM reduction and types of ASPs?

Yes. So when you step back and look at the big picture, Austin, our CEO and Founder, set a goal at the beginning of the year that over the next 100 years, he wants to -- he wants our technology to save 100 million lives and 100 trillion hours of productivity. 100 years seems like a long time but when you have a CEO, Founder and largest shareholder that's 27 you can enjoy the benefit of setting 100-year plans. But when we look at the technology and the safety improvements that our technology enables, we want to democratize safety. It can only be available to people who can afford a $80,000, $100,000 luxury vehicle. We need to bring this technology to every brand name at every price point. Nissan is, as you highlighted, our first mass market win, where we are explicitly is they are developing their next-generation safety system with our lidar technology incorporated. They announced this in April and made a presentation describing that system, including the vetting they did of the entire lidar industry and why they selected our technology to include in their development system. Their plan is to start rolling this out in the middle part of the decade. While Nissan has a lot of mass market brands, they do have some higher-end vehicle platforms where it probably makes sense for that to start first. And then their goal, as you mentioned, is by the end of the decade to put this on virtually every part they make, and they make 4 million plus or minus vehicles a year. And so we're very excited about that win. We do need to bring -- we're getting this pressure not only from Nissan, but from all our OEMs is that $1,000 ASP that we have now that's based on a product where our target is a $500 BOM and a $100 plus or minus conversion cost. Our goal is to ultimately bring our BOM down from that $500 to a longer term target of $100. The good news is, is that we have the plan in place. We've made some acquisitions recently, particularly with Optogration, which is our chip company as well as Freedom Photonics, which is our laser company that allows us to get there. But bringing down our price point, which -- our BOM allows us to do without sacrificing margin allows us to really create that much stronger value proposition to put this on more of the mass market vehicles and really democratize safety, which is an important objective of ours.

Great. Maybe you could just give a comment briefly on non-auto. You have a few or at least non-ADAS, I know you have a few different engagements there as it relates to Pony, Airbus. Are those still in focus or have those moved a bit more to the back burner as you're focusing more on scale production?

Yes. Those are still a focus of ours. They have -- some of them have different launch times, and SOP dates than the Volvo Polestar Mobileye and SAIC, which are kind of those first phases of launches, particularly with Airbus. There's a real opportunity here to put our technology on helicopters. I didn't realize -- somebody told me a stat actually yesterday, but I didn't realize this, but about 75% of all helicopter accidents are caused by the failure to see power lines or other obstacles like trees or understanding exactly where the ground is. If you take our technology, we really highlight where those power lines are. There was a video shown of black power lines in a dark green field or trees and you just can't see them as a pilot even in the bright daylight. So there's an opportunity there to significantly reduce the number of helicopter accidents by introducing our technology to that. Airbus sees it. Other operators in the space see it. And so that's an area where we're looking at. Is that as big as the passenger vehicle market? No. But it's very -- our technology is very applicable to that and finding the right partners like Airbus to help us sell through that space is important to us. Last year, we partnered with a company called Robotic Research. We kind of did a small cross-ownership swap with them. They're very good in the government vehicle space. And so that, once again, an opportunity where our technology can be very applicable, not as big as the passenger vehicle market, but partnering with the right company to help apply our technology in there I think is very helpful as well. Pony, while we have a general point of view at Luminar that robotaxis are still relatively far out. It's more end of the decade type proposition where that is really going to scale. We believe that Pony one of the leaders in this space and in particular, going back to the China theme, they have a very strong presence in China. Dan, I lived in China for 3 years. And one of the things -- one of the stats that jumped out to me is in the U.S. there are about 1.1 vehicles on the road for every licensed driver. Most people have a drivers license in the U.S. unless you live in New York City, own a vehicle. And some people own more than one vehicle. In China it's actually the reverse. There's about 3 licensed drivers in each city for each vehicle owned. If you go to some of the major cities in China like a Shanghai or Beijing, the car ownership rate is about 20% to 25% compared to about 70% to 80% in the U.S. and Europe. In Shanghai and Beijing in the major cities in China are already limiting number of vehicles that can be sold each month because the roads are too crowded. And so there is a much bigger demand for shared mobility in China and robotaxis, we think, is going to be a great solution to that problem and which is why we think the adoption rate in China could be higher than it is elsewhere in the world. And so we're focusing most of the internal resources at Luminar on that passenger vehicle and commercial truck market because man, if you win a Volvo, it's easy to scale that technology and get a ton of volume from it. There are other end-use markets where our technology is applicable. It can be profitable for us, great ROIC, but the volume just isn't as high as it is on the passenger vehicle side. And so in those end-use markets in the near-term, we're going to partner with who we think are companies that can take our technology and really disseminate that in that specific market and be the right partner for us.

Great. Let's pivot broadly to the competitive environment. I wanted to start with understanding the bidding environment. One of your competitors has noted that the bidding environment right now is quite robust. Decisions are being made over the next, call it, 6 to 12 months that will impact the flow of product over the next handful of years. So there's a lot that's sort of in the pipeline. Maybe you could just give us a sense of what you're seeing in the bidding pipeline? And should we expect in the next 6 to 12 months further color or further insight on the commercial opportunities to have.

Absolutely. We're seeing -- we're very confident in the Luminar commercial outlook here in the near term over -- whether it's over the next 3 to 12 months. And when we think about the bidding environment, I want to divide it into 2. One is there's the bidding environment where there's competition, right? There's -- the OEM hasn't made the decision about which lidar they want to use, and it's kind of open game for what they're going to use. And there are a number of opportunities out there that we are focused on. But at the same time, we have such fertile ground in front of us is what really distinguishes Luminar is that long-range lidar. The ability to see 250 meters out, we believe we're the only company that can meet all the specs that are required to deliver that type of functionality for highway autonomy and next-generation proactive safety. If you want to deliver a traffic [indiscernible] pilot or a moderate improvement to our ADAS systems, our lidar can do that, but quite frankly, there are other lidar companies that can do that as well. And in fact, you can probably design a good enough system without a lidar to do it. And so there are going to be certain RFQ processes where we kind of look at it and say, you're not maximizing the benefit of our lidar. The functionality you're trying to enable isn't really unique to our technology. And so those are some of the RFQ processes where we will deemphasize those. On the other hand, there are certain processes that we're in where it's more or less only us. And what we try to do is get in early with our customers. Some of them are new, some of them are the existing ones where we've already built them a good track record and reputation. We work with them to explain what are the functionalities that our lidar is actually -- can enable highway autonomy, proactive safety and there's some great value proposition from working those 2 together. And those are the ones where our technology is unique. It's the only lidar that can deliver it. And we're going to focus our resources on those type of situations. We think ultimately, the former ones where they're just trying to get to the traffic jam pilot, they're ultimately going to migrate to highway autonomy and the next level of autonomy. They're going to need a long-range lidar. And so there's going to be a second bite to the apple for some of the RFQs, which we kind of deprioritized.

How would you characterize the set of lidar companies out there right now? We saw one lidar company close shop a few months ago. We know that there's already been a fair amount of pivot from full autonomy to advanced ADAS. But Argo, I think, just begs the question, anyone who is focused on advanced autonomy, that shut down begs a question of how you move going forward. So is there more consolidation required?

I don't know if consolidation is the right word, Dan, I think it's rationalization. We track the publicly traded companies and their cash balances and the cash burns and many of them are going to start running into issues in the second half of next year. I think you saw the Argo news. There was a European lidar company, which recently filed for the German equivalent of bankruptcies. We're getting more and more calls in terms of companies that are running out of options and looking to do things. There are too many lidar companies. We're now at the stage where a very small number of us have one real business. I think those companies have a higher chance of surviving. But you also need the balance sheet and the team in place to get to basically work through this current storm that we're in. I think there's going to be rationalization in the lidar space over the next 12 to 18 months. Some of that would be actual consolidation and some companies coming together, and I think you've seen the early stages of that. I think some of it is just going to be some of these companies going away. What we said publicly on our M&A strategy, we've done vertical integration. And I think that, that's something that will continue to be on our radar. But I would -- the 3 most critical components, the laser, the ASIC and the chip we brought in-house. So our top priority is we've already vertically integrated software. We think there are some interesting add-on opportunities. But once again, we're going to do it opportunistically. These are going to be small deals. And I think there could be some interesting stuff we can discuss around that at some point in the future. I think the bar is going to be extremely high for us to buy another lidar company outside of maybe an acquihire opportunity where we can bring on a good team to help support the growth that we have. I don't want to never say never, we would never do it but it's going to be an extremely high bar here for us.

Great. Let's wrap with the manufacturing side, supply chain, and then we'll get into the financials. So you are -- as you get into scaling your commercialization and the ramp on series production, you talked about on the recent earnings call that you are creating a new facility in Mexico, and this opens in the back half of 2023. 250,000 units of initial capacity. Maybe you can give us a sense of the benefits of moving to your own facility, what the shape of the ramp looks like? And then what is the path to expanding that capacity?

Yes. I think the benefit is we're just out of room in our existing shared facility in Celestica or we will be out of room in the second half of next year. And specifically, when we went from being an option to standard on the EX90, it just increased of what the volume demands were going to be from our customers. And so we decided with Celestica to build our own dedicated facility right down the street from Celestica's existing facility in Monterrey, Mexico. It's going to be a facility operated by Celestica. We're building it out, and it's going to be only Luminar products made at this facility. Right now, our products are being made by Celestica in their big manufacturing complex in Monterrey where they make not only products for Luminar, but several other companies as well. That plant will have a capacity of about 250,000 units on an annual basis. By the time we get to 2025, we're probably going to be full there. And so we're going to need more capacity. And there's a couple of ways that we can get that. One is we can expand at the existing facility in Mexico that we build out, and we've built that facility and we've designed it, so it's scalable. Or does it make sense for us to open a second factory somewhere else in the world and get a little bit more of geographic diversity. And so that's something we're thinking for now. And once we make a decision, we'll share with our shareholders of what exactly that plan is going to be.

Great. As you ramp on capacity and as you go further and to scaling your commercialization, maybe you can give us a sense of the trends on spend. Generally, we see other suppliers that as you ramp on commercialization the spend actually increases. Should we expect OpEx to run higher as you get deeper into commercialization or is there some offset? Have you already incurred some of that spend? Maybe you can give us a sense of what the spend pattern look like?

Yes. So we -- what we really focus on, Dan, in the current time right now is what our net cash spend is or free cash flow burn. That's what we're focused on. The thing about the automotive industry is you got to put all that investment upfront before you launch. So you got to bring on the engineers to help do the engineering work. You got to invest in the new manufacturing facility. You've got to buy the equipment. You got to ramp up your suppliers. You got to pay for some of their [ doubling ] CapEx. And so we're now in what I would say the peak investment stage. Once you get to SOP, that's when you start to get the real revenue come in, and that starts to offset some of that net cash spend. And so we'll give more guidance for what we expect our 2023 spend as well as our future spend when we do Luminar Day here in February. But I think it's fair to say that 2022 is going to be pretty close, if not the peak year in terms of our net cash spend.

Great. And just on the top of the cash. We know that the capital markets have been shut down here. Is the shutdown capital market at all risk to you? Or you have, I think, a little over $0.5 billion of cash on hand. Is that more than enough to get you through this period of ramping?

It's more than enough plus a healthy cushion to get us to the profitability and work through this ramp. Look, I think like every other company in corporate America, it's been a tough year for us in the stock market, and a lot of that is outside of our control with what's going on in inflation and what the Fed is doing and all the geopolitical tension. So a lot of those factors are outside of our control. And so while we were wishful for a better stock market given our strong balance sheet and the fact that we're launching all this -- have started to launch and we'll launch more business here over the next few quarters. On a relative basis, we're in a very strong position. And so we -- about a year ago in December of 2021, we did a large capital raise, and so we kind of built our storm shelter before the storm hit. And I talked about before with other autonomous software companies as well as other publicly traded lidar companies. They're going to be running out of cash soon. And they're not in a public markets that are going to be receptive to them raising new capital. And so I think this tough market is really going to hurt a lot of other companies in this space. But from a Luminar perspective, given our strong balance sheet, it's going to hurt us a lot less if at all.

Great. I think we're at time. I would ask what to expect at CES for Luminar Day, but I think you'd probably just leave us in suspense.

I'm not going to give you any Easter eggs or hints, but we're pretty excited about what we're going to show off at CES as well as what we're going to show off at Luminar Day. So more to come in January and February here at Luminar.

Leaving us in dispense. All right, great. Well, thank you, Tom. Very insightful and thanks as well to Trey and Tushar. We really appreciate the time. We look forward to seeing the narrative further evolve.

All right. Good to see you again, Dan. Take care. Happy holidays everyone.