Luminar Technologies, Inc. (NASDAQ:LAZR) Deutsche Bank Global Auto Industry Conference 2022 June 15, 2022 1:35 PM ET
Company Participants
Tom Fennimore – CFO
Conference Call Participants
Emmanuel Rosner – Deutsche Bank
Tom Fennimore
I’m ready whenever you are.
Emmanuel Rosner
You guys good? Beautiful. All right, good afternoon, everybody. Thank you so much for joining us for this session with Luminar as part of Deutsche Bank’s Global Automotive Conference. My name is Emmanuel Rosner, and I’m the lead U.S. Autos and Auto Technology Analyst here at Deutsche Bank. We’re extremely pleased to be joined by Tom Fennimore, who is the CFO of Luminar.
As many of you are probably familiar, Luminar is a LiDAR technology company founded in 2012. It has partnerships with many of the top global OEMs and multiple production contracts with major series program awards with Volvo, Mercedes, Nissan, and more.
So, here to talk to us about all this, hopefully, latest development, all fresh and new information, we have Tom. The format for today will be a fireside chat around sort of my prepared questions. I’d also encourage you to ask questions as well. So, we’ll probably run about 20, 25 minutes, some of the topics and then we’ll hand it over to you if you have any questions.
Tom Fennimore
Great. Good. Ready to go.
Question-and-Answer Session
Q – Emmanuel Rosner
Awesome. All right. So, just to set the stage first, before we dive into milestone operational, type of questions, can you provide us with the state of the industry update in terms of LiDAR penetration, safety standards, like what are you seeing in terms of where are we now? Are automakers finally adopting it for ADAS purposes for Level 2, Level 3 purposes? Where are we in the adoption curve?
Tom Fennimore
Yes, so we’re still in the very early innings as we sit here today in the middle of 2022, but as you know, Emmanuel in the automotive industry, it typically takes three years for an OEM to start developing a program to when they’re actually able to launch in and start selling it to consumers. And so we, Luminar, are on the verge of our first phases of launching with our initial customers. And we really have three and a half, which are ready to go sometime around the end of this year and that’s Shanghai Auto, who is the largest automaker in China, Volvo, who was our initial customer, Polestar who’s going to follow quickly after Volvo, I’m counting them as my half. And then Mobileye, which is putting us on their mobility-as-a-service vehicles, which they’re planning to launch in two cities later this year, Munich and Tel Aviv. And so that’s going to be our first wave of launches.
We then have a second wave that is coming with Mercedes Benz, Nissan, a few others, sometime around the middle of this decade. And then we are in active discussion with several other automakers that would probably be launching in that 2025, 2026 timeframe.
So, the level of activity has increased substantially over the last couple years, and not only increasing with our existing customers that are looking to put our technology on more vehicles that they’re producing, but with also new automakers as well.
Now, going back to the functionality, I know that everybody kind of talks about all these different levels from L 0 to L 5, and then you starting to see a little bit of inflation, it’s now L 2+, and then L 2++. And we at Luminar, we look at it in a more simple point of view. When you actually look at the technology that you’re putting on a vehicle, it’s either assisting the driver or it’s driving the vehicle, ensure autonomy, there’s really no in between. And so we think of it more as a matrix-assisted and autonomy.
And then the other one is the actual domain. And so a lot of times when people think of Level 4, Level 5, autonomy, they’re thinking of autonomy everywhere, Robo-taxis are kind of the example of that. We think that that is a very, very difficult problem to solve. And from our perspective, that’s probably end of this decade at the earliest when you’re going to see a large number of full Robo-taxi vehicles on the road.
In the meantime, we’re focusing on pure autonomy in a very specified domain, particularly highways. And that’s what we’re working with Volvo and Polestar as our initial launch customers on it.
Now, going to dramatically oversimplify the problem for highway autonomy, but it kind of boils down to two rules. Stay in your lane, don’t hit anything in front of you. Now, on a highway, there’s hopefully going to be a lot less obstacles on the road, right? You shouldn’t have children hopefully be running on the middle of I-95 or dogs, et cetera. And because you have — and highways around the world generally looks the same. And so highway autonomy, it’s staying in the lane, don’t hit the object in front of you. The challenge is you’re operating at very high speeds 70, maybe if you’re like me, 80 miles an hour and so you need a sensor that can see very far with a high degree of resolution, typically 250 meters. Why 250 meters? Because that is the distance that you need to detect an object and bring the vehicle to a full stop, gives you about seven seconds reaction time.
What our LiDAR does, we operate at a very specific wavelength, called 1550. A lot of LiDAR companies operate at a different wavelength than 905. At 905, you’re very limited in terms of the laser power, you can put through a 905 wavelength. 905 is just outside the visible light spectrum. It’s actually regulated by the FDA because you get too much power through a 905 laser, it can blind you.
You can’t have a bunch of vehicles, driving around putting through lasers that can blind everyone. Don’t have that problem at 1550, we need a different type of architecture, which we have. We need very specialized components to bring the cost down to where it needs, which we have. But effectively operating at 1550, we can put 17 times more photons in the air than at 905. And so that allows you to see further with a high degree of resolution and basically see all objects in front of you at high degree of resolution in all conditions, 250 meters out, 120 degree horizontal field of view, 30 degree vertical. And so that enables highway autonomy.
And so what we’re focusing on today is that highway autonomy, some call it Level 4, but it’s really eyes off, hands off the road, driver completely out of the loop. And then we’re also working on what we’re really calling the next generation ADAS systems for what we’re calling Proactive Safety.
I would encourage you to go out and look at some of the videos we put online that demonstrates just how much better this system is. Because today’s ADAS systems are primarily using camera or 2D technology. The problem with 2D is you don’t know how far everything is away, you have to do take a bunch of pictures and do a bunch of computation to try to estimate it. But if you’re, once again, operating in that 250 meter, 120 degree, 30 degree cone, and you’re doing real-time 3D laser mapping, you know where precisely every object is in front of you and you can create an ADAS system that stops when it needs to stop and doesn’t have any false positives.
Those are the two areas we’re focusing on, we’re seeing a lot of interest from our customers, that technology is going to be ready to go at the end of this year. And you fast-forward three or so years from now, we’re going to have several 100,000 vehicles on the road with our technology, driving around real highways, by real people, and getting that technology on the road.
Emmanuel Rosner
That’s a great overview. And in terms of geography and the notable differences in terms of who’s moving faster, I think yesterday as part of some of our virtual conferences, my colleague Edison was having fireside chat with some of the Chinese automakers, it feels like half of them are coming up with LiDAR for the rest of this year, is China moving faster, is somewhere else?
Tom Fennimore
So, I’m going to — the two fastest movers, one is going to be geography, China, we’ll talk a little bit more about that in a second. And then I would say, on the western side, where you’re really seeing the technology, the OEMs that are moving the fastest, it’s less geography-based, it’s more the luxury and the premium makers make sense. They’re the high end vehicle with the highest price points, that’s typically where new technology is launched.
Let’s get back to China because you’re right. So, China, as probably everybody knows, is the world’s largest automotive market. China, however, they’re making good progress on EV and some battery technology with CATL, but historically, they have not been a technology leader in the automotive industry.
Historically, they’ve been buying a lot of the cutting edge technology from some Western suppliers. China — and I spent three years living in Beijing, China in 2010. So, I have some first-hand knowledge of the experience and stay very close to a lot of the OEMs as well as some of the Chinese regulators there.
China views this upcoming autonomy wave as an opportunity to become a technology globally. The Chinese government is heavily encouraging automotive companies to adopt autonomous technology to put LiDAR on as many vehicles as they can. And then the overall Chinese government, if you look at both the central government as well as the local government, they themselves, the government, in aggregate, buy millions of vehicles a year, so that they can be a very big consumer of this technology as well.
What I would say one of our first initial launch customers is Shanghai Auto. And what I would say is Chinese OEMs have a different risk tolerance than some of the Western brands in terms of how much vetting and testing they need to do of the technology before they put it on the road. And so when I kind of look at which of our customers we think is going to get there first in terms of putting our technology on vehicles they sell to consumer, my personal money is on Shanghai Auto, because I think that they’re, once again, just have a different risk tolerance.
We’ve talked about Pony.ai as one of our initial customers, in addition to Shanghai Auto, when you kind of look at that Robo-taxi, our car sharing model, the number of vehicles on the road in the U.S. per licensed driver is about 1.1. Effectively, everybody who has a license in the U.S. has a car. There’s practically very little obstacles in car ownership in the U.S. if you want to own it.
In China, if you look at the major Tier 1 cities, whether it’s Shanghai or Beijing, there are limitations on how many vehicles can be sold in those cities each months, the government will either limit it via lotteries or the number of license plates that they issues. And the reason for that is there’s just so much room on the road for vehicles on the road. So, if you actually look at the car ownership rate from Shanghai and Beijing, it’s about 20% to 25% of the population, compared to about 70% to 80% in the Western world, there’s just no more room to put the cars in these major cities.
So, when you actually looked at the number of cars on the road in these major cities in China to licensed driver, it’s about three licensed drivers for every car. So, there’s actually going to be big demand in China for car sharing and Robo-taxis in some of these mobility services.
And so the Chinese government is really pushing the local automotive industry to become a leader in autonomy and thus, LiDAR as a result. I talked about some of our wins with Shanghai Auto and Pony.ai. A couple of weeks ago, we signed a deal with ECARX, which is the technology arm of Geely Automotive. Geely Automotive owns Volvo and Polestar, which are two of our initial customers as well.
What that agreement does is we’re basically going to work together with Geely’s technology arms to take the technology not only our LiDAR, but the software that we’re working with, with Volvo and Polestar to, and we’re going to localize that together for the China market, and eventually deploy that to the Geely family of vehicles in China, which are Lotus, [indiscernible], Geely, a handful of others.
There are going to be certain things we can do in China’s foreign companies such as data storage, mapping, and local software work. And then there’s also going to be what I would say certain engineering support where we have the right local engineering team in China that can move a lot quicker and interact culturally better with Chinese OEMs.
So, China’s a big market, they’re moving very fast. I think they’re going to be a leader in autonomy. We already have a very good leadership position in China there. And I think we’re — we already have some partnerships, which we’re probably going to need to be successful in there and probably more to come there.
Emmanuel Rosner
Right. Let’s shift gears to some of the milestones operational progress that we could expect that of the company. I think last quarter, you commented that Luminar remains on track to achieving series production readiness, as well as for the software for both the hardware and software in this year, in 2022. Can you please update us on this process?
And then as part of that — I guess, it’s part of this, but this — 2022 is also the year where you’re starting to put it on a series production, right? The Volvo XC 90 will have your LiDAR starting this year?
Tom Fennimore
Yes. So, as I mentioned, we got three initial customers, Volvo/Polestar, Shanghai Auto, and Mobileye. All of them are expected to get to SOP around the end of this year. Polestar is probably going to be a little bit later than Volvo just getting to production timing.
To kind of summarize our goals by the end of this year, we want to be in a position to make our hardware that is going to be sold to our OEM customers and they’re going to put it on vehicles to sell to consumers. That’s what we’re going to do.
We’re calling it SOP readiness. By the end of this year, we want somebody in the world or somebodies in the world to be able to buy a car with Luminar technology on it. Based upon what we’re seeing here today, part of that is going to be within our control to make sure that we’re ready to go and that’s within our control. And I’m confident that the team is going to get there.
But we also need our OEM customers ready to go as well. And look, we live in an uncertain world. We have chip shortages, global conflict, et cetera. We can’t control if our customers naturally delay, for reasons unrelated to Luminar. But I’m confident we got three shots here, at least one of them is going to get there by the end of the year. And then if they don’t get there by the end of the year, they’ll do it shortly thereafter.
So, by the end of this year, somewhere in the world, you’ll be able to buy a vehicle with our technology on. And that’s ultimately we want to do. The hardware has to be ready to go day one. It’s going on a vehicle, you can’t do over the air updates, on hardware.
The software, you need to have initial capabilities ready to go at the end of the year. But software — and Tesla does this very well. It’s something that’s going to constantly involved and there’s going to be increased functionality to add. Hardware, it’s got to be ready to go, the software, you need initial batch with continuous improvements thereafter.
Emmanuel Rosner
Can you talk about your initial capacity and then expansion plan?
Tom Fennimore
So, six months ago, our plan was to do our series production at a shared facility of Celestica down in Monterrey. Celestica is your traditional contract manufacturer, we were going to be one of many customers that they had in this Monterey facility. And we’re on track to kind of ramp-up that initial production line within Celestica-shared facility.
But since this happened is as we’ve kind of worked with our customers in terms of the initial volume that they want us to be prepared to produce in 2023, it was coming in much higher than expected. And so we needed to do two things as a result. One is we needed to accelerate the purchase of automation equipment to ramp up at much higher levels. And so this year, we’re going to be spending close to $30 million on automation equipment, which is expected to be delivered and installed around the end of this year.
In addition, we — Celestica ran out of space for us at their shared facility in Monterrey, Mexico. So, our initial products that we’re making this year and maybe the early part of 2023, will be made at that shared facility. And we’re in the process of getting that ramped up and ready to go.
But more importantly, we’ve identified a brownfield site down the road from Celestica and Monterey, we’re going to be building out that facility has a dedicated Luminar facility that is going to be operated by Celestica. So, when the automation of equipment arrives at the end of this year, it’s going to be stored in that brand filled facility. That facility is going to have six-figure initial annual capacity, the ability to ramp up there. And the goal will be during the early part of 2023 to have that facility up and running and ready to operate at the run rates that our customers want us to be prepared to produce that.
Emmanuel Rosner
So, one of the goals for this year is to grow your forward looking order book by 40%. Who are these conversations with? Is it existing customers that would expand it to other platforms? Is it new customers that you’re speaking to, and how are these conversations going?
Tom Fennimore
We’re going to see growth this year in the order book, very confident in that 40% number and it’s at least 40%, it’s the guidance that we’ve given. And it’s going to come from both existing customers that are giving us new business as well as from new customers. So, far this year, we’ve announced the Mercedes Benz transaction or contract and then Nissan at the end of April. And Nissan is a little different than all our other customers, because they’re the first mass market brand that is really adopting our technology.
Nissan is developing their next-generation safety system around our LiDAR. We’ve been working with them for over a year on this. The plan is to get that system ready to go where Nissan is going to start deploying it on their vehicles around the middle part of this decade. And Nissan has said publicly as their goal is to deploy this next-generation safety system on every car that they produce by the end of 2030. And Nissan makes about 4 million vehicles a year.
Emmanuel Rosner
So, how would you go about adding this to the order book would go out of your–?
Tom Fennimore
Yes, so — like — it’s — we’re very, very conservative in terms of what we put in our order book. We only put things in there where we have a written contract with our customer and agreement on what vehicle programs are going to be in and what end pricing.
And so I’m not going to — I’d be very surprised if we put all 4 million units for Nissan in the order book. We only — we update our order book at the end of every year. We’re working with Nissan on what that vehicle deployment schedule is going to be and the specific commercial terms for each deployment schedule. And once we have agreement on the specific schedule, in the specific commercial terms, that is what we put in there.
And so those discussions with Nissan, there’s some agreement today and hopefully, more agreement by the end of the year. And as we come to that formal agreement, we’ll include it in there. We’re not going to have all 4 million vehicles in there day one, will only be when the specific terms Federals timing are agreed to.
Emmanuel Rosner
But to be clear, should we also expect additional agreements before the end of the year, meaning with additional customers?
Tom Fennimore
So, we’ve announced effectively, that we called major commercial wins when we kind of have an agreement with our customer that they’re going to use our technology to put on vehicles, they sell to consumers. That’s our definition of a major commercial when.
It’s not, they’re going to buy our LiDAR to put on some lab tests where and tested it’s, we’re actually going to work together, we’re going to take this technology, we’re actually going to put it on vehicles we sell. And there’s some agreement to do that, as well as identified vehicle programs in commercial terms.
So, one of our milestones this year is to get at least four major commercial wins. We’ve announced two so far. The momentum remains intact for us to get there. So, I don’t think we’re done winning yet this year and as we win, that will also help –.
Emmanuel Rosner
All right. When you look at your existing contracts, as well, the conversation with — additional ones, how important is software part of it? Are you selling this separately yet? Or is it sort of like just embedded inside the hardware that you’re selling?
Tom Fennimore
Yes. So, it works both ways. So, you need software in order to enable our LiDAR. Our LiDAR is just a very expensive box that produces some nice, pretty point-clouds. You need the underlying software to actually do the object identification and tracking that is produced by our point-cloud, we call that perception. And then the output of that perception software needs to be fused with the other sensors and then do decision-making and path planning [ph] for what the vehicle does. We call that full stack.
Not only do we have multiple wins for our hardware, we also have multiple software wins. What we’re seeing with some of our customers is as we get in there, and they try to do some of the software themselves, they realize that developing perception software for 3D point-cloud is a lot different than developing perception software for cameras or radars. And so if we have a solution that is ready to go, it may be easier to kind of pivot to use ours as opposed to use it themselves.
And so software is an area that we see great opportunity. As I mentioned, we already have multiple wins. We’re working jointly with Volvo to develop it together. And then a couple of weeks ago, we hired CJ Moore to run our software business. CJ built the ADAS software business at Tesla. We tried to hire him a year ago when he left Tesla, he decided instead to go to Apple to work on their car development program and we were able to pull them out of Apple after a year to come run our software business.
And — say what you want about Tesla and what they’ve been able to achieve in autonomy, but Tesla has probably done a better job than any other automaker in terms of taking software and industrializing it and putting it on vehicles and figuring out a commercial plan to sell it to consumers.
Emmanuel Rosner
Agree with that. And then pricing was on the software side, is it — that part of the question is it embeded the way you–?
Tom Fennimore
It works differently with each customer. One of our customers, the initial ones, we have an all-in price with them. For that, they get the hardware and the perception we didn’t bifurcate it. But in that case, it’s substantially higher right that ASP than what we’re selling to LiDAR-only customers.
For some other customers, they kind of want a one-time fee for perceptions. A lot of historical OEMs, they view the pricing as transactional. I get my money when I sell the car to the consumer. I want to pay my suppliers one-time.
Other OEMs are trying to move the way that — once again Tesla’s going which is working on subscription models and we’re going to follow them and if they’re going to charge the consumer for subscription pricing for the software, we’ll take subscription. So, how we do our pricing is going to match how the OEM charges the consumer.
Emmanuel Rosner
Understood. Let’s talk about your build materials that the initial target or assumption was by the time we get into production, you will get it towards the $500 range. And then longer term maybe towards the $100. How are you tracking towards that?
Tom Fennimore
Good. So, a little bit of background there. So, as I mentioned earlier, we operate at a wavelength of 1550. Easiest way to build a LiDAR is you go buy components at the 905 wavelength. The telecom industry grew up around that wavelength. So, if you wanted to go buy an ASIC, a chip, and a laser, you go by 905. We’re at 1550, the military kind of grew up around 1550. Military doesn’t really do stuff in scale and the military isn’t known for doing stuff cheap. So, we’ve custom designed a lot of our components. We’ve actually vertically integrated by buying those suppliers. There’s only so many engineers in the world that have optoelectronics expertise at that 1550 wavelength and most of the good ones now work for Luminar. So, that helps expands our competitive moat.
But because we’ve custom designed a lot of these components, we’re — our bomb is going to be heavily dependent upon volumes. Now, the good news is, is that getting volumes certainty from having things like standardization on the next-generation, Volvo SUV gives you very visible path to getting to those high volumes. So, what we said publicly is our first full year of series production, right, so we get in series production in scale next year, it’s probably going to be more in the 2024 timeframe. We want to get to that $500 bomb.
The team has done a great job over the last year of getting us there. We’re not 100% of the way there, but we’re getting very close. And then when you think about what our variable costs are going to be, the two biggest components are going to be that bomb, which we want to get to that $500 target.
And then once again, we’re using Celestica as our contract manufacturer and it’s going to be whatever Celestica is going to charge us to assemble each of those. And our target, once again, kind of, when we get to that first full year’s series production scale, is to get them into that $100 plus or minus range. So, that $500 plus $100 is going to be our biggest variable costs.
Now look, there’s going to be some additional fixed costs on top of that, but that fixed cost is going to significantly ramp down as a percentage of revenue as we ramp up as well.
Longer term, Iris or Model I, as we call it, is our current generation and our initial generation, what’s going on series production vehicles. Our next-generation product, which we’re creatively calling Model J, after Model I, will — we’re probably going to be talking more about what that’s going to look like at some point in the near future here.
One of the biggest changes in the architecture is going to be on the laser. 1550 laser and Iris is going to be a fiber laser. Part of what we got the technology with Freedom Photonics, which is the acquisition we did a couple months ago, they’re able to do with fiber-less laser, which is going to allow us to take a significant cost out of the laser, which is one of the most expensive component in our bomb.
So, Model J is going to have a significantly lower bomb. There’s going to be some improvements in the specs, but we’re kind of already doing what needs to be done to enable autonomy. So, we don’t need any step function improvements, it’s still going to be better. And then it’s also going to be a much more compact form. And so cheaper, better performance, easier to put in the vehicle is going to be the foundation of Model J.
Emmanuel Rosner
Understood. Can you speak a bit about pricing? So, we spoke about costs here? What is your pricing model? Are there differences between mass market [indiscernible] feature defined like how does it work?
Tom Fennimore
Yes, so it’s — for the underlying hardware, we’ve said publicly for Iris that it’s going to be in that $1,000 ASP range. In smaller volumes, it’s going to be — its volume-based pricing, so smaller volumes, a little higher, larger volumes a little bit lower.
Where I think you’re going to see the step function down change in pricing is when we get to Model J. The lower bomb is going to enable us to price it lower than that $1,000 plus or minus, which will allow us to penetrate better the mass market brands.
Emmanuel Rosner
Understood. And maybe just finally for me. Can you provide us with an update on your collaboration with the NVIDIA. This is a partnership that’s you’ve announced, which seems that it could provide a pretty good platform for multiple — how is that going?
Tom Fennimore
So, we’re working real time with NVIDIA on Mercedes Benz. So, we’re the LiDAR provider in Mercedes Benz, NVIDIA is doing the full stack software. NVIDIA is designing their autonomous system. Mercedes is going to be their initial launch customer, we’re in there with them. So, they’re really designing everything around our LiDAR.
LiDAR isn’t like camera, you can’t plug and play a LiDAR maker there. Take a look at everybody’s point-clouds, everybody’s point-cloud is dramatically different. So, NVIDIA is going to be building their initial platform and the reference platform around our LiDAR and that’s going to give us a significant advantage of getting designed into their system with very high switching costs.
And so as NVIDIA goes and wins more and more OEMs, and they go to them with a system that was initially designed to work for Mercedes Benz, we’re going to be in the lead position to piggyback on that business as well.
So, that’s our — where we are with NVIDIA and we have a very good working level relationships where the teams are working together on almost a daily basis on the Mercedes Benz side.
Emmanuel Rosner
Right. Let me open up for questions. Any questions in the room? I asked all the questions.
Tom Fennimore
Good job.
Emmanuel Rosner
That’s basically. So, in that case, really, thank you so much.
Tom Fennimore
Thank you, Emmanuel. Thank you for having us.
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