Anubhav Verma: Thanks, Sumit. Let’s move to the next question. It doesn’t seem like the industrial market overall has been doing well for companies in general. I would love to get management outlook and how they view the industrial market over the next few quarters.
Sumit Sharma: I think, I’ll start with this and Anubhav, perhaps you can add a little bit more to this. The industrial market, as we looked at it, we have our guidance. The more we look at the market, I think there’s something there. So, I still believe that direct sales is a tier of revenue that is very important for a LiDAR company. You need to work on this. You’ll have to solve it. Any LiDAR company that does not have this is, not going to be able to stand on some legs in the future. OEM wins are there. Yes, you’ll get NREs, but it does not cover your core engineering. Plus on top of that, you have significant long contracts that, once they materialize, there’s going to be a ramp up period, okay? Direct sales are important because if you have actually developed something that goes into the OEM market like our MOVIA sensor, which is ready and you can start addressing sales there, you want to ramp it up and you want to actually make a dent into that market that’s been stagnant.
There’s hundreds of millions of dollars’ worth of revenue to be made there, right? But you also cannot have a product that you give away for free at single digit gross margins. So, as we look at it, right, I remain very confident about this thing. I think this is important. This has to be a substantial layer of revenue, year-by-year they can count on that you’re saying, you’re getting an install base outside automotive, right? So you have a multi-market strategy, but you can’t be — people should not be promising hundreds of millions dollars with the revenue because the growth in those market is slow but it’s stable and predictable and you learn a lot more about your product and features if you’re going to be a dominant player in this space, right?
So I still believe that this is important thing and I think, yes, I think the numbers right now — everybody’s going to get on their earnings call and talk about the economic headwinds and all your things right and I know like investors kind of sometimes roll their eyes and they don’t understand this right because they just want results. I just want results, all of us just want results but the reality is that industrial markets take a little bit longer. We have a great team. I trust the team, they have a plan, it’s just a slow-moving behemoth, but there are ways to make significant revenues in that market and I’m excited about it. Anubhav?
Anubhav Verma: Right. And I think one thing that I would like to specifically add to while pursuing revenue is obviously in the industrial markets is a strategy but I want to make sure our focus on gross margins is extremely important right, because I think we’re out of the growth at all costs era where money was free and everybody was growing by just adding cost to the system and I think industrial markets is just exactly that pitfall and we have to very carefully trade it, what I mean by that is, I think what you saw in the Q3 margins as well. We want to pursue opportunity, which translates into a positive growth margin story because I don’t think there is any value of transferring wealth from our investor to these direct sales customers where we have seen companies which did that and are doing that actually, who are focused on industrial market.
Yes, they have very good revenues numbers, but again their margins are really either even in the negative [indiscernible] with them. So, I don’t think that’s something a business model that the markets and the investors will reward in the long run and I think this is pretty evident from just some of our peers who are focused on this market and their valuations because investors want companies to focus on growth that translate into growth margins and ultimately lead to a path to break even and I think as so much you mentioned it’s really hard to achieve economies of scale because all these direct sales revenue are non-recurring in nature and you have to spend a lot to get the same quantum of revenue. So, meanwhile having that said, it is extremely important aspect because this is also something that the OEMs are looking at us because what it does is the focus on this revenue at good margins essentially alleviates the need for or reduces the need for additional capital to grow the business and I think that’s sort of why what I mentioned the financial discipline is a very important attribute in some of these financial due diligence because like I mentioned as we are modeling out the next 5 to 7 years with these OEMs. This is also part of the revenue stream, which they understand is dropping to the bottom line as well.
Anubhav Verma: Moving to the next question regarding LiDAR, what will OEMs deliver to excite people to buy a new car, is it safety to prevent collisions with cars and bicycles around the vehicle, save life injuries and prevent costs?
Sumit Sharma: Yes, that’s a very good question. I think, you have to think about, as you get a new vehicle in the future, whatever the powertrain is, I think most likely it’s going to start with the internal combustion engine, because those are still dominant for a while. Passive safety and active safety is a very big part of it. So, certainly so many meters 15, 20 meters around the car having a safety cocoon, so you want to see 360 that can have, like, the MOVIA sensor, that goes around it. And, of course, also active safety and driving highway speed conditions. So, it’s all about safety. The first entry to this market is going to be, I think, like, there’s lots of articles recently that were published about that the first commercial applications are in trucking.
Yes, they’re going to make a lot of investments. They’re going to go forward. But as you can imagine, penetrating the trucking market, with high volumes, right, is again, it’s going to take a long period of time. It’s a very, very conservative market. But, yes, it’s sustainable revenues, sustainable volumes there. But passenger vehicles are significantly more, a number of them are launched every year. These OEMs are in a very competitive market with each other. Regardless of where the interest rates are, you have to be selling vehicles, right? And for them, they have to sell more value. You can’t just buy another vehicle with seven more airbags and feel safe. There is a definite push to having more ADAS features that kind of blend away, that create this active and passive safety cocoon around the vehicle.
So, yes, I do believe that safety is going to be a key differentiator for not just premium OEMs, all OEMs, as they look towards what are they offering their customers and how soon can they bring this technology from their premium segment to some of the other higher volume segments within their fleet.
Anubhav Verma: Thanks, Sumit. And I think, I guess, a related question. What do you see on the regulatory side that maybe gives you more or less long-term optimism about LiDAR being just there as a safety piece of content required maybe one day for many, if not all cars? This is actually a good question. So, as you can see, OEMs are qualifying the new technology they ship, they take the liability, and they are able to, through the NCAP process, deliver right now. The regulatory part you’re talking about is, if ever, there’s a body of data that shows that cars that ship with these features were significantly more safe compared to everything else. At that time, regulation will move in and mandate, like they did back in the 90s, that every car has to have an airbag.
Well, someday in the future, I expect that these ADAS features are going to be the dominant safety features. They will definitely deliver a huge amount of factors of safety to vehicles. And what everybody expects is that you’re going to get a regulatory move towards sometime in the future, is that going to be in the next couple of years. Probably not. It could be the body of data. So, no, none of the LiDAR companies that have announced anything, right, have shipped anything in volume. They’re just kind of cranking it up slowly, right? And they don’t talk about any of their volumes yet. What we’re doing is we’re telling you that OEMs must have enough data to now start putting forward these next set of RFQs for 2023 that have these kind of volumes, but that is still only scratching the surface.
