Good afternoon, and welcome to the AEye's, Inc. Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Clyde Montevirgen, Vice President of IR and Strategic Finance. Please go ahead.

Thank you, and welcome everyone to AEye’s third quarter 2022 earnings call. With me today are Blair LaCorte, our Chief Executive Officer; and Bob Brown, our Chief Financial Officer. We will also hear from Luis Dussan, AEye’s Co-Founder and Chief Technology Officer to celebrate significant company milestone with official launch of our ground breaking 4Sight adaptive lidar platform. Earlier today, we announced our financial results for the third quarter 2022. A copy of our press release can be found on our website at investors.aeye.ai. Before we begin, I would like to remind participants that today’s discussion may include forward-looking statements, as defined by United Securities laws in connection with the future events, future operating results or financial performance. Forward-looking statements are based on our current expectations and assumptions regarding our business, the industry and other conditions. These forward-looking statements are subject to inherent risks, uncertainties and changes in circumstances that are difficult or impossible to predict. Our actual results may differ materially from those contemplated by these forward-looking statements. We caution you therefore against placing undue reliance on any of these forward-looking statements. You can find more information about the risks, uncertainties and other factors in our reports filed from time to time with the Securities and Exchange Commission, including in our quarterly report on Form 10-Q for the period end of September 30, 2022. All information discussed today is as of November 10, 2022, and we do not intend and undertake no obligation to update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. In addition, today's discussion will include references to certain non-GAAP financial measures. These non-GAAP measures are presented for supplemental information purposes only, and should not be considered as a substitute for financial information presented in accordance with GAAP. A reconciliation of the measures to the most directly comparable GAAP measures is available in our press release and you should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures and our earnings release. Let me now pass it over to Luis.

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Thank you, Luis. And congratulations to the entire AEye team and our partners on achieving this important milestone. Let me begin today with three thoughts to frame our presentation. First, the feedback from the market. We see an accelerated demand for information to help automate processes that increase safety and/ or drive productivity gains. This demand transcends terms such as software defined cars, intelligent infrastructure, smart assets, and network-based defense systems to name a few. It is also finally accepted as fact that lidar will be an impactful player in the sensor market, providing unique deterministic data and high performance and high-risk automation environments. Second, some feedback from our partners and customers. AEye’s newly launched 4Sight platform, with its superior performance and intelligence, rocks. Technology adoption has clear patterns, hardware will need to become a platform to become more adaptable and intelligent to expand market opportunities and to reduce per unit costs. Software is an excellent way to customize features to verticals, and leveraging a sensor-based operating system to transform data into information is where the real value is created. As Luis outlined earlier, we took a different approach and one that is designed to add value in this paradigm. Our goal is to show you what we believe is the next generation of software driven adaptive lidar that will greatly enhance autonomous systems. And with this launch is here today. Finally, we know our investors need a compelling investment thesis. If you believe that automation and autonomous systems are the next major advancement in technology, and you believe that intelligent lidar will be a key enabler, the only question would be why not lean forward now? Our answer comes in a very old quote. If the basis of your investment approach is to buy great companies at low prices,…

Thanks, Blair. Good afternoon, everyone. I'd like to discuss our third quarter financial performance, our strategic financial management in this challenging macro environment, and then speak briefly on our outlook for the balance of the year. To begin, I wanted to address some of the questions we've gotten about our stock price. As you see on the slide, we're now experiencing some of the most bearish US investor sentiment in the market since 2009. For those that believe in contrarian indicators, this could present an interesting opportunity. We believe the impact we're seeing on our stock price is predominantly related to overall market sentiment, rather than something company specific. We've seen particularly negative sentiment around growth stocks given the dramatic rise in interest rates coupled with a potential recession looming. We'll continue to focus on improving our shareholder value over time by controlling what we can which is executing well on our product development goals and on our business plan. Revenue in the third quarter was $768,000, which was slightly above consensus estimate and up 9% from the prior quarter. We saw a significant increase in lidar sensor sales in the third quarter on both a sequential and year-over-year basis as we move from engineering samples to production quality units. This reflected the initial ramp of our foresight and product in the industrial market. We generated revenue from software licenses in the industrial market in the third quarter, which takes advantage of our unique adaptive capabilities, and enables our customers to more effectively deploy our sensors for application specific use cases, such as road tolling and intersection management. Our development contract services revenue was down in the third quarter due to variations in contract specific activity, but we expect that category to grow in the fourth quarter. We've been managing…

Thank you, Bob. So let me take a few minutes to explain how this launch of our 4Sight platform and unique product architecture is providing groundbreaking performance and system capabilities that our customers have been requesting. The majority of commercial lidar companies today are building hardware centric, static lidar sensors passively transmitting raw detection data to other software systems to then process much like the original Motorola StarTAC flip phone, this analog approach allows for collection and transmission of data, but no intelligence. As Luis explained, we took a fundamentally different approach. First, we can control the hardware components individually, using a software-based operating system located on the sensor with two-way communication to change the way the sensor works, depending on different environments. In addition, the AEye 4Sight platform does not silo itself from the other sensors like our peers, allowing our customers to create unique systems that can use maps, cameras, radar and IM use to trigger our lidar so they can be more intelligent and efficient when collecting critical information. Finally, and most importantly, our software defined architecture is natively compatible to manage data over its local sensor network, and to be enabled for over the air updates, perfect for this new era of software defined vehicles, intelligent infrastructure, and smart assets. In our last call, we announced that we had patented the ability to add optical communication to this network, and enable applications in smart infrastructure, as well as compartmentalize industrial sites, and unique aerospace and defense scenarios where other communication modes are not practical or require a secondary channel. Today, we will announce another industry first, enabling perception data to now be processed and triggered in the cloud. As we will demonstrate later, this native network architecture extension opens up enormous capabilities for our customers. While…

[Operator Instructions] The first question is from Suji Desilva with ROTH Capital.

Hi, Blair. Hi, Bob. Congratulations on the progress here. So Blair, I'm kind of trying to understand the foresight of launching and implication, is this now the customers can have a working kind of end product in their hands to test or have they already had some version of that already to test, just to understand what the customer facing and its implications are watching [inaudible]?

Sure, thanks for the question. Because it is a little bit different than what you would have seen out of many of our peers. As you recall, when we first engaged a few years ago, we actually decided out of the blocks that in order to drive adoption of a sensing technology, like lidar, that there are two key critical things that we believe you had to do. One was to build a horizontal software platform that could control modular hardware, so that you could use the same product across any market, it could be customized, and you could drive cost down for the hardware piece of this puzzle. The second piece of it was that we believe that you would need multiple manufacturers and a capital like business model. So what you're seeing in Q3 of this year, is one of the major milestones in the strategy. We now have released the 4Sight platform, when we say platform, that means the software platform, that software platform is being used by Sanmina to construct a product for us for industrial aerospace and defense. That same software system is also being used in automotive by our first licensee to build a customized automotive grade. One that will be functionally safety tested for automotive and trucking. And they have slightly different hardware configurations. But that we can actually leverage one software platform. And most importantly, as you saw today, one data network, giving them the synergy of being able to actually use data in different ways to drive different customer engagements. So what you would see from a customer facing today, if you are in the industrial or aerospace markets, we have been giving them early versions of our products and early versions of our software, we can update our software much…

Okay, thanks Blair. It's very helpful detail there to understand, given your unique business model, and then also just a quick follow up. When you talked about six RFQs, if I heard that correctly with Continental, is that six different customers, just want to check?

Right. So we said early on and one of the things that we did, which is part of our culture is finding truth, we went back and listened to every call we've done since our -- since we've gone public, and went back to take a look at what we've said. So if you go back and take a look at it, we're engaged in a lot more than six things. But we have consistently said that we are focused that we will do a minimum of six engagements through the evaluation RFI and RFQ process, primarily with the installed base of Continental who they already sell to, but also new customers who are approaching us that Continental approves. So what we say in general, since they are engagements, since it's a Continental product, what we say is that we're engaged in at least six of those processes. That doesn't mean we're not talking to more than six people. But that's the commitment from them as our channel partner that will be engaged at a minimum of six processes. They're all separate customers. And I would say you can break them up half between trucking, and half between automotive and as I hope and again, I'm Italian and I may be too loquacious in my explanations. But what I would say and I hope you got from the presentation is that we really focused on a particular capability set that was high performance. Now in trucking, it's automatic, you need high performance, because the amount of time it needs to stop a truck, you need absolute distance. And because most of the trucking automation that there want to implement to begin with is on the highway, you need to be able to do it at high speed, and you need…

The next question is from Joseph Osha with Guggenheim.

Hello, this is actually Hillary on for Joe. And I apologize. I'm in Kansas, I'm going to state both my questions up front and then hop back on mute. First question just on the industrial side, as we start to ramp, the various end markets and stuff throughout the next handful of quarters, wondering if you could provide any color on what that margin ramp looks like. And then second question, just on the OpEx, understanding, we're going to exit the year hear a little closer to what the first half a year looks like. But just wondering if you could provide any context for what that spend rate might look like, as we head into next year. Thank you.

Sure, thanks, Hillary. I'll handle the first one. And I'll let Bob handle the second one. We have been I hope over our first year as a public company, been very transparent, but also giving you our opinion, on how things will actually roll out. And I think we've been pretty accurate throughout the cycle. I would say that as we start to roll out into the IPS segments, again, there's very, very different segments, for instance, intersection management, is extremely important. In fact, 50% of the pedestrian deaths happen at or around intersection. So those are funded by states. And we believe that they that this isn't a margin issue. This is a safety issue. So we believe that they will be good margins. They're not like a high-volume aid system where they're -- they have a certain thing they have to hit. We do believe, however, that margins for customizations at high speeds like toll roads, or incident detection, could even be better margins. And as Bob alluded to, that's where you see us doing two things that is the basis for our model, one is partnering and reselling other people's software, we're open system with API's and the more people that can build on top of this, the more value we can add, it allows us to take some margin from those pass throughs. And the second is, as Bob noted, we do have some of our own software now being implemented. As you'll recall, two calls ago, we said I think very differently than maybe a year and a half ago, what some people said when they went public is that we believe that the ADAS market which has software capability, but it's integrated with the hardware in its high volume, lower margin, we don't believe…

Okay, and let me answer the second question, Hillary, this is Bob on the OpEx. As you noted, we do expect the OpEx in the fourth quarter to go back to the levels it was in Q1 and Q2. We had some favorable items occur in Q3, that are not going to be repeated in Q4. So that's the reason for the increase as we noted in the prepared remarks. And we're not going to give guidance for 2023 at this point, but I think is a working assumption with the way we're thinking about OpEx is that we're going to again continue to manage it carefully. So we're not expecting significant growth in OpEx next year off of that Q4 level. So we are going to try to maintain that somewhere close to that level in all likelihood for 2023. But is it fair or I should say for you safe to say that when you take a look at our OpEx for this year, we have adjusted with the market significantly, without major changes or slowing down our product development. Is that -- yes, they are very much true. We've, I think made great progress in terms of product development and launching, as we said. And within that, we've obviously been very careful with the spending, trying to keep it as low as possible while still achieving all our business objectives. And I think we've been able to do that this year. So I think we'll continue to keep a tight rein on the expenses for next year, and continue to execute well on the business and the product side is our goal.

The next question is from Hans Chung with D. A. Davidson.

Hi, thank you for taking my question. So first, I want to follow up on the 4Sight end production with Sanmina. So what's the ramping kind of ramping schedule for AEye? I mean, over next is a six to 12 month and in how much inventory are you going to build to prepare for the demand?

Thanks Hans. So the plant in San Jose, where we also have that world class testing facility that we're so grateful for Sanmina for helping us build and giving us the place to actually put it, that is a low volume line, its production volume, low volume, the Thailand facility is intended to be a high-volume line. And when you break out high volume for low volume, you're talking in a low volume line for industrial, you could be in the 10s of 1000s in a high-volume line, you could be to 100,000 or more. So that's kind of the way we look at this, the San Jose line is a -- is an extremely big jump for us. And one, we think that covers us in the short run. But we also believe that the ramp over the next two to three years, will require us to actually produce more than we could produce at the Sanmina line. So that gives you a little bit of a context.

Yes, just to add on, again, we're not going to give guidance on 2023 on this call. So what we've set for the fourth quarters is a million of revenues, our expectation, so we'll continue to ramp, they're still fairly modest volumes, as we ramp for Q4. And we do expect our development revenue to snap back a bit in Q4 as well. So as Blair said, we're expecting growth next year. But we don't want to get into specifics on guiding for 2023 at this point in time. Yes. And, again, I always appreciate the question, because you get right down to the nuts and bolts of how a business run. And I appreciate that you understand that. One of the things from our culture has been that we did not hype at all last year, and we have a very pragmatic approach to how we're actually rolling out through the market. And one of the things we're going to talk about internally is, how much volume do we really want to do in 2023? So, but thank you for the question.

Okay, got it. So next, what's your go to market strategy for 4Sight? I mean, do you work with the distribution partners, or your kind I mean go through a market directly just kind of curious what's your marketing strategy here?

Right. So I, every, I would tell you, I'll tell you what we're doing today. And I'll tell you what our belief is over time. And maybe I'll start with the second is, as you remember, we went through that long meeting. And we talked about yes, we do believe that building this system from the software down making it modular, making it intelligent and integrating it with other sensors and network will make us much, much different. But just as different is our product is our business model is very different. We assume from the beginning, that what we'd like to do is drive adoption by integrating with people who are already into the markets. As you remember from our IPO video, we've picked the largest integrators who are already working with the largest train companies or the largest integrators like Continental who are already working with automotive companies, right. In the automotive market, we are exclusively going through licensees, and you'll see that over time. In the industrial and aerospace market, we will go to a customer directly. But we were also very open to bringing in integration partners because we believe that real the value of the system is integrating that data into a network. Or we are now rolling out reseller agreements now that the products ready where if a systems integrator could take our product and resell it by themselves, we're open to that model as well. Again, our business model is one of flexibility, cost reduction, and using the experts in every industry to actually drive channel demand. But at the beginning, they're oftentimes because this is a, it's our product is just rolling out, we will go in and do the initial sale. But over time, we hope that the majority of our sales will be that we're making other people money and that they're so happy with us that they're going to drive a tremendous amount of volume. And that's our goal. And that's very different, by the way than any of our peers. And that's okay. In every market, there's often direct and indirect models, we just have a point of view that since our system is intelligent, the best way to get the intelligence out of the system is to work with the best of breed integrators, who can actually configure it for more value for the customer.

The next question is from John Roy with Water Tower Research

Thank you. So Blair, I know you're not naming names in trucking. But will your successes in trucking help you with automotive in a sales way or in technology way? Any kind of color on that would be helpful.

Sure. And it's an excellent question. I appreciate it. If you look at the high-performance trucking, because again, I said, remember, we have to think about this through the eyes of the customer. In trucking, they already own the truck, this is an ROI decision, it isn't, hey, I'd like to put this thing in, I'd like to go sell some truck drivers that they want to buy this truck because of it, they are buying an asset and they want to get -- they want to get return on investment. So for them, this is a high performance, while call automation on demand, hub to hub trucking means when I get on the highway, I can actually use this technology to make the driver more efficient. Right? If you look at highway autopilot, while this one is sold to a customer as a new feature, you still need the same capabilities. So we look at penetration into trucking, which we think is moving much, much faster than automotive, as the key differentiator of how we actually win automotive deals. Because if we can run on the highway with trucks, and allow them to stop with the kind of distances we have, that gives us a massive advantage over anyone else who's selling lidar systems in the automotive industry, who can't actually have that kind of high-end performance. So we kind of in some ways, they're -- it's a different sales discussion. But the capability that differentiates us is exactly the same. And we believe that this going to trucking first, in some ways, is going to give us a huge advantage in automotive. This concludes our question-and-answer session. I would like to turn the conference back over to Blair LaCorte for any closing remarks.

Well, I just want to say thank you for everybody. We had a record number of people on our call. I don't -- it's amazing. And we appreciate everyone that came through and for those of you who are celebrating a holiday tomorrow. I hope you have a great long weekend. So thank you.

Thanks, everybody. Have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.