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

Hey, everybody. I'm Jesus Gonzalez, the Junior analyst covering the latter space, we're excited to have Tom Fennimore from Luminar here. I don't know if you have any opening remarks, but I'll pass it over to Tom for a second.

No, thanks for having us again. Always a pleasure to be here at JPMorgan. So we didn't have any opening remarks. We just announced earnings a little less than 48 hours ago. But I know you guys had over some great questions. So should we just hop right into the Q&A?

I mean, first off, just kind of wanted to touch on Sentinel. I know you guys announced on the call that you set out some initial test kits. I just wanted to kind of like what's the feedback you're hearing? if you can also remind us what that platform means for you guys like all the capabilities that the offers of the OEMs?

Sure. So as a reminder, Sentinel is what we call our suite of software products. It can be anything from the perception software we offer to the 3D mapping software to even a bit more than that. So this is something we've been working on for several years talking to our customers about. this is now, I would say, the ability to ship products to them so that they can try each of these together. It's a way to really take the conversations we've been having to the next level with working demos that our customers can now download and try themselves. So we're very excited about marrying that with our next-generation product as well, Halo. So I think the 2 of them together can be very powerful. Early feedback has been very positive, but I would still say it's early.

Then you kind of touched on Halo already, but can you remind us of some of the performance benefits that you're going to see from going from that current generation that second-gen system then also the unique economics you're going to see at scale for Halo.

Sure. So the primary benefits of Halo if you actually look, we have some samples here, but probably not the best forum to show. But if you kind of looked at Iris today, it's a product that meets the specs that our customers want for everything from L0 to all the way up to L4. So from a technology perspective, it was designed to meet the standards in the minimum form factor function. By minimum, I mean minimum standards, maximum size as weather elements. It was really a product designed by our Optics PhDs as we spent the last several years industrializing it, we've learned a lot. We really didn't design this for maximum production efficiency scale. Iris today has, for example, over 100 fasteners in it. When you're manufacturing things in scale, there's probably fewer screws that you can put in there. So what we've been able to do with Halo, yes, the technology is better, but it's really shrinking the form factor it's half the size. It's reducing the integration, so it requires less active cooling, less integration costs into the vehicle, it's going to cost us less than half to produce that than what it's going to cost us to do Iris. Once again, I wouldn't say that it is better technology. But the feedback we're getting from our customers was to make our next generation product smaller, easier to integrate into the vehicle and cheaper, less than you need to step up your technology game because we're already doing a lot or most, if not all, of what they want us to do.

Then I think one of the things that most excited you about the Halo was that you can integrate that in the roof line behind the windshield. What's the feedback you received from OEMs for being able to make that change where a lot of it has to be on top of the vehicle to where it can actually be designed into the frame.

Yes. So I would say Halo can go anywhere on the vehicle that the automakers want us to put. Bumper, no problem, but you kind of lose some performance when you put it lower on the vehicle, right? There's a reason as I like to say, God put our eyes on our far head not in our belly button, you get better visibility from a higher vantage point. The bumper is also called a bumper for a reason. You don't want to put expensive sensors into it because it maximizes the odds of them getting damaged, like somebody backs up in your parking lot. The challenges of putting it into a windshield, there's a few things. One is you need to have the right thermal NVH. By NVH, I mean like vibration and noise, et cetera. It needs to be very quiet. If you put it in the interior, which Halo is, it needs to basically not require a lot of thermal management, which Halo is. It also needs to be the right form factor where it can fit behind that windshield. The other challenge is, and this is true for any LiDAR, when you actually put photons through a windshield, there is actually absorption and other loss of photons. It can be anywhere from a 10% to 20% amount if it's straight on. Then the more that it goes to angle, it can actually get to a much higher number. So you do lose some performance by putting it in the windshield. Now luckily, where we send out 15x more photons than 905 LiDAR. So we're still able to push through there. But there are some performance sacrifices by putting it through the windshield. We're working with several manufacturers about whether there's coding, notching whatever you can do that. But the good news is from an NVH thermal size, fit and form, it can go back there.

So on Monday, when you announced earnings, you also announced that you were deeming or pushing out some of the 26 convertibles. Can you kind of like walk us through the transaction? What drove the decision to do that and then the capital sourcing decisions going forward from here?

So LiDAR adoption has taken a little bit longer than we all were expecting a few years ago. There's a variety of reasons for that. A lot of the factors are outside of our control, some of them are within them. As part of that, though the longer-term adoption of LiDAR, we've never felt stronger about. You can even look at some of the recent NHTSA regulations that are going to encourage adoptions. So end of the decade, we think LiDARs and our LiDAR in particular, are going to be on a lot of vehicles on the road globally. But the path to getting there, it's going to take a little bit longer, and there have been a little bit more bumps on the road than we were all accepting. So that had 2 implications for us from a balance sheet perspective. One, we had debt maturing in 2026. We needed to extend that out. We extended nearly 70% of that debt from 2026 to the next decade January of 2030 to be precise. In addition, we were able to capture some of the discount that our debt was trading at. So we were able to reduce the total face amount of our convertible debt by $150 million. So that helped give us more of a runway to capture this longer-term growth. The second thing we did is those investors that we transacted with. They're also big believers in the longer-term Luminar story. So in addition to giving us more time with the maturity extension, they gave us more capital. So they gave us $100 million of incremental capital in the terms of a first lien senior secured note to help fund the additional capital that we need to get there. So while things are slowing down in the industry, largely outside of factors of our control, what we're trying to do is focus on the things we can control. Those are give us the balance sheet flexibility for the revised time line, which we achieved most, not all of what we needed to do earlier this week. Two, we need to get our cost structure right, our fixed cost structure, where we took the first step of doing that in April after we reached Volvo SOP, more to come there. We're aggressively attacking our costs. Three, we need to get our sensor unit economics right on Iris, and we're working real time on that and making good progress there. Then finally, we want to get halo to the market as soon as possible because that's, as we mentioned before, smaller, easier integrated, vehicle cheaper in that, in and of itself will help encourage adoption as well.

Then so I think you kind of touched on the latter got pushed out a little bit relative to expectations in '22 or '23. What are you guys seeing in terms of the platforms that you guys have been quoted on because you know there's a perception that a LiDARs [ synonymous ] with EVs and you guys have kind of pushed back on that. So give any kind of balance between those? Or what are you seeing there?

So first of all, from a purely technological perspective, LiDAR is powertrain agnostic. Our technology works on an electric vehicle, hybrid electric vehicle or internal combustion engine. So we are indifferent to what type of vehicle an automaker produces. We need them to make a decision on what their product strategy is going to be. From my personal opinion, what we've seen in the industry over the last few years have been 2 trends. One is, a few years ago when some of the initial decisions on which LiDAR to put vehicles on, there tended to be a higher co-relation to the EVs, particularly the higher end EVs. My personal opinion on why that was happening is the automakers wanted to throw more of their tech R&D dollars at the high-end electric vehicles to penetrate that market and take share away from Tesla. So that made our order book in the near term more co-related to the electric vehicle space than the overall industry. The other thing that's happened now that there's been a slowdown in EVs, the automakers are revisiting how much additional dollars and where they're going to be devoting their platform, whether it's they're going to continue to be on EVs? Or do they want to start hedging with more internal combustion engines or our hybrid vehicles. I think they've kind of put a lot of their new product planning decisions on pause as they figure out what strategy they want to do. That in turn has driven some of the slowdown we've seen here in the LiDAR adoption. We can go on any vehicle that they decide to build. We just need them to make a decision on which vehicles are going to build before they move forward with LiDAR RFQs.

My colleague has a couple questions.

Sure.

I mean you mentioned some of the OEM decisions continue to be pushed to the right. What actions are you taking in the near term to execute through that delay? What else can you do to like maybe improve the product or like just manage the cost structure accordingly?

For us, we're focusing on the factors we can do in the near term. It's rightsizing our balance sheet for that revised time line. You saw the actions we took earlier this week as a first step to do that, get our fixed cost base and really making sure we're getting that to the right point and being as efficient as we can on that. We took a first step of that back in April. We're constantly evaluating if that's the right one. Getting Halo to the market as quickly as possible. We've been able to move up that time line by learning lessons from our industrializing our first product and bringing in and working more with our partners like TPK, and then finally, we're aggressively attacking our sensor economics on Iris to make sure that we can get the gross profitability and overall profitability as fast as possible. So those are factors we can control. We're also staying in front of our customers, both existing customers and new customers, keeping them updated on our progress, on our products and our technology so that when they're ready to make those decisions to use a LiDAR, and it will be a when, not an if, we're in the best position to continue to grow our business. That last part we can't control when they're going to make that decision. What we can control is to make sure that we're in there on almost a daily basis, keeping them update to us, spending time with them and optimizing our chances of winning once they ultimately make those.

On the same lane, you've announced some restructuring actions as well to right-size, maybe a little bit more on the time line of the savings. How should we be modeling the expected run rate?

So back in April, we started actions to take about $80 million of cost out of our business. A little more than half of that would be in cash, a little under half of that would be in stock and things like stock-based competition. That included reducing our workforce by about 20%. Most of that if not all of that workforce actions, have already been taken out. Because we were launching a product the first time we brought on a lot of consultants and contractors. We're going to ramp most of that down by the end of the year. We're sub-leasing some extra space that we have. So all those actions kind of total up to $80 million. It started to show up a little bit in Q2, but because we took those actions midway through the quarter, you're going to start really seeing that roll along in Q3 and Q4. I think by the time we get to the end of the year, most, if not all of those savings should be recognized on a run rate basis.

Then to switch gears a little bit. At your Investor Day, you guys announced the potential for Luminar and expand into the insurance business. Can you remind us like how that business progressed and what some of the potential benefits that customers may see for use?

As I always like when I meet with our automakers to talk about this, if you don't think our technology is going to significantly improve the safety of the vehicle, you wouldn't put it on our technology on it. So we're going to significantly improve the safety of the vehicle. We won't know exactly what that is until you get on to the real world and see real life data. Having said all that, what we've done in the meantime is we've done our own internal tests. Our customers have done our internal tests. We've actually been partnering with Swiss Re, one of the largest global reinsurers over the last few years. What they did earlier this year is they completed a series of their own independent testing with vehicles deployed with our technology on it, and they released the study of the results. Relative to the safest car of the 15 that we tested, and we kind of tested what we thought were the safest cars. The vehicle equipped with our technology reduced the accident rate by approximately 30%. Even when you're unable to avoid the accident, we were able to reduce severity of the accidents or unable to avoid by 30%, i.e., you're getting in an accident at 10 miles an hour instead of 30 miles an hour. It's doing less damage to the car. That quantifies itself in very significant insurance savings. Right now, if you buy a Volvo EX and SUV, you're spending about $2,500 a year on insurance. We think we can capture a lot of those savings. So one of the things we're doing is we want to partner with our automotive customers to capture those savings by offering discounted insurance to the consumer to encourage adoption of our technology, but also doing it in a way where you can hopefully make some incremental profit to subsidize the cost of our technology to our consumers. We hired a couple of years ago, the person who bid out Tesla's insurance business. We've been building it out at Luminar. We've been doing it in a very cost-effective asset-light way are going to be in a position in select states to start writing insurance policies at discounted rates to people who buy the Volvo EX90, we're targeting by the end of this year.

Then just to follow up on that. Can you kind of quantify the long-term revenue opportunity you see from me here or how that would materialize in our models over the coming years?

I don't want to give formal guidance on that because I want to see like what the ultimate consumer take rate is going to be. I want to see some real-life data. I'm personally convinced there is real opportunity here. Legacy insurance companies are going to want to see several years of data before they adjust their pricing. But at the same time, the cost of our LiDAR, it's not cheap, but it's creating a lot of value in the ecosystem, and we want to build tools to work with our automotive clients to capture that value to subsidize the cost of our technology and thus encourage faster adoption.

Then maybe given you guys did the capital raise on Monday and there's potential limited capital availability over the coming years. How are you guys prioritizing capital spending and R&D dollars going forward?

Look, this is something that we're thinking through real time. We are going to be much more disciplined about where we're putting our capital and spending our money. We realize that we have finite capital and finite resources. We also recognize that our cost of capital has increased substantially here over the last couple of years. So we've already started to reduce the number of projects we're working on, and we're going to continue to do that. The good news is now that we've successfully industrialized Iris, there's still some additional work there, but I think there's a lot of costs there that are going to roll off as we continue the successful ramp up there.

Then following along those lines, I don't know if you guys have been out formal time line for when you guys expect to reach EBITDA or free cash flow profitability. But can you kind of remind us around sort of like timing for the company.

Yes. We haven't formally updated that guidance yet just because there's a lot of moving parts in the industry outside of our control. What I would say is with the actions we took earlier this week with our balance sheet, we have enough capital to get us to the end of '26. We've also said we probably need about $100 million more of capital to get us to profitability. So you can probably get a sense from those 2 data points on the rough timing of when that would be.

I'm going to see if the investors have any questions at this time. If not, I think we all have a couple of follow uplift.

Okay. Good.

So I don't think there's any questions. Rajah?.

So could you give us just an update on like some of the start-up production time lines? For some of your OEMs, Volvo to Polestar. Just remind us of what's included in your order book?

So in the near term, we ramped up or we hit SOP with the Volvo EX90 earlier this year. We're in the process of ramping that up with Volvo. They're building these SUVs at their South Carolina plant. They're going to start building them at their China plant sometime around the end of this year. So that will be the primary platform that we're building for, call it, over the next 6 months. Shortly after that, we're going to be ramping up for the Polestar 3 probably sometime early next year. After that, there may be some smaller derivative-type platforms from Volvo through the balance of ‘25, probably sometime towards the ‘26 time frame, you'll start to see our production volume for Mercedes ramp up. All in all, over the next few years, we're working on 20 vehicle lines across our variety of customers that we expect to launch. Our order book is close to $4 billion, $3.8 billion to be precise at the end of this year. We have a lot to do from the business we've already won over the next 3 years.

In this current like RFQ environment, you talked about your order book and you gave us some expectations around the growth there and the wins that you're going to have. How does the transition from Iris to Halo play into this.

We're in the early stages of working. I'd say 2 things. One, most, if not all of the new business we're quoting today, whether it's with existing customers on new platforms or with new customers on new platforms, it's Halo. Typically, in the automotive industry, when you're doing something the first time you need, call it, 2 to 3 years of development time frame. So Halo is based upon new business you win, it's kind of aligns with our roll-out schedule for Halo and our development time line for Halo. With existing customers that are either using Iris or Iris+, we're kind of working through them real time. Now it isn't just as easy as shipping them, Iris one day and then shipping to them Halo the next day. You have to find the right point in their product transition, whether it's at the end of the platform, a mid-cycle refresh, provided you can do that. Our automakers have also spent a lot of blood, sweat here and treasure on developing their software algorithms around Iris. One of the important aspects of them is as we transition the Halo. as we develop Halo for them, they want to make sure that there's what we call point cloud equivalency, right? So you want to make sure that from a software algorithm perspective, we can make it as simple as plug and play as we can. They want to minimize the amount of effort they need to go back to re-bed or retrain their software algorithms, particularly when it took a lot of effort to kind of get them to where they are today on that front.

You touched upon a little bit at the beginning around the regulations and how that's the benefit. Could you just elaborate a bit more on some of the recent regulatory dynamics such as the NHTSA mandate for advanced AB? Then what that means for Luminar in the industry?

So NHTSA came out a few months ago and introduced new mandates around the end of the decade. I think it's 2029. That is going to significantly increase the standards. We're mentioned in the report that it's published, I believe, 27x as justification for introducing these new standards and have the technology exist to meet them. What I am confident in saying based upon where we are today is you can meet those new standards with our technology. We're confident that our technology is good enough today, and we'll get better over time to meet those standards. We are unaware of other ways to get there without a LiDAR, particularly our LiDAR. Now those standards are, as I mentioned before, expected to go in place at the end of the decade, and we think that's going to create a pull for our products with the automakers out there. Are they going to try to figure out ways to do with camera or camera and radar systems, Absolutely. But we think ultimately, they're going to conclude that they're going to need our LiDAR in order to make that happen.

Maybe just a few more thoughts around the competitive landscape. You've seen some M&A in this space over the past year. What's sort of opinion on that? Do you think it continues? Where is Luminar focused in terms of this landscape and your position there?

I think when you look at the LiDAR space, there's still a lot of players. I think there's going to be rationalization and fewer LiDAR players, one way or the other. What we're focused on here is executing. We're keeping our heads down. We're getting our cost structure on line. We're getting our balance sheet right. We're launching these 20 vehicle lines that we have awarded over the next few years. We're getting Halo to the market as fast as possible. We're going to continue to stay in front of our customers and win new business when they're ready to make those decisions. If we do that, there's a ton of upside for us, whether we do it by ourselves, that's what we're focusing on now. I think strategically, the stuff we did in the past has been more smaller bolt-on type of stuff. I would say, in this market, I never say never, but the bar is extremely high given everything that we have going on in front of us over the next few quarters here?

I think one more question before we turn it over to the investors too. But we've seen share prices across the latter industry in general just depressed relative ‘22, ‘23 levels. What do you think it's going to take for investors to start buying back into the Luminar story and how the price is very high.

I think we got to do 3 things. One is we got to continue to successfully ramp up with Volvo and launch on these platforms that we have over the next few years and execute without hitting a significant bump on the road. Number 2 is we got to provide a clear path to profitability, right? I said on the call yesterday that we're going to get the gross margin positive sometime next year. I expect to get more precise timing on when exactly that's going to be. We need to see more of a visibility on when we're going to hit that steady-state Volvo production. We're in real-time discussions with our key suppliers and other partners to try to get the economics where they need to be that. But I think we need to show a clear path to profitability. Then 3, I think you got to see this current industry-wide pause button hit get un-paused and us to win our fair share, if not more, of the new business that's currently in the pipeline. I think you need to see those 3 things: continued execution, better clarity on the road to profitability, unlocking of this new business out there and more clarity on the adoption rate. I think you're going to see a ton of upside in the overall LiDAR space and particularly in our stock.

I think one of the things that we've seen push out line of demand on the right is the delay in L4 or those higher levels of autonomy. What are you guys seeing in terms of the time line for OEMs to deploy those higher levels of autonomy and is that something you got to see near term? Or is it still getting pushed out further?

I would say a very, very small percentage of our order book is on L4 stuff and above. We've made a painful decision to walk away from L4 projects over the last year or so because these things take longer than expected. We see people struggling with the current L2 and L3 systems that they're trying to get out there, let alone L4. So the thing about that is we have to be very disciplined about the projects we take on. We think L4 and the robo-taxis, there's a big longer-term potential there. But right now, we're focused on the passenger vehicle space, which is more of an L0 to L3 type functionality. That's what we're focusing on. We're confident that that's going to play out here over the next few years. But there's a lot of opportunity there. Then as we capture that opportunity, not only will we go to the L4 and the L5, but also other markets besides automotive. But right now, for us, it's head down focused on execution and getting done what we need to get done.

I don't think we have any questions for the audience, you have a follow-up there?

The only thing that I would want to add is part of the earnings we did earlier this week. We really went what I would say, back to the basics in terms of our investor strategy and really going back, describing our technology, it's differentiating factors, the road ahead in terms of how we think the LiDAR industry and the autonomy industry developing. So I think Austin did a good job of kind of refreshing some of our historical slides discussing that as well as how we talk about it. I think you'll be seeing us doing more around that here in the coming months.

Obviously, you know we're very excited to see the prospects for you guys at the latter industry in general over the coming years, and thank you for participating