Luminar Technologies Inc

NASDAQ:LAZR

Earnings Call Transcript 2024-Q1

[Aileen Smith, executive]

Welcome, everyone, to Luminar's business update call for the first quarter of 2024. My name is Aileen Smith, and I am Luminar's Head of Investor Relations. With me today are Austin Russell, Founder and Chief Executive Officer; and Tom Fennimore, Chief Financial Officer.As a quick reminder, this call is being recorded, and you can find the shareholder letter that accompanies this call at investors.luminartech.com. At 4:00 p.m. Eastern Time, we published our Q1 letter to shareholders, which hopefully many of you have reviewed. We're continuing with our format this quarter from prior quarters, which will primarily be an interactive Q&A session. I'm sure we have a lot of questions to get through.As a reminder, we will be addressing retail investor questions posted to the [ Safe ] platform. Institutional investor questions e-mailed to our investors in box and live questions from our analyst community. We'll be tracking these platforms intermittently through the duration of the call to address any that come in real time.Before we begin the Q&A session, I wanted to remind everyone that during the call, we may refer to GAAP and non-GAAP financial measures. Today's discussion also contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. Please refer to our shareholder letter for more information on the specific risk factors that could cause actual results to differ materially.With that, we can get into some of the questions that have been on folks' mind since Luminar Day and some of the developments over the past few weeks.

[Aileen Smith, executive]

So we'll jump right in with question number 1, when will you start mass production of your LiDAR sensors? And what future plans do you have for growth?

[Austin Russell, executive]

All right. Thanks. Hopefully, hear us okay?

[Aileen Smith, executive]

All good.

[Austin Russell, executive]

Awesome. And yes, thanks, Aileen, for the intro and excited to get the chance to jump first straight in and answer some of the questions, and thanks for taking a look at the letter of those output, or really presentation with all the information. A lot of stuff going on. We thought it was going to be something more simple, given that we just have Luminar Day, but with the new regulations, everything in the meantime. It's been quite a world win.But yes, in terms of the SOP question, that's, of course, one that we're really excited about. We did officially hit our starter production milestone with Volvo. So that's something that -- what the past decade of Luminar has been leading up to, and we're fortunate enough to get a lot of big congratulations notes from books to the industry that have been waiting at this moment for quite some time.And of course, with everyone from our other customers to other kinds of automakers to see this success is very meaningful all the way even to our own supply base that with the vast majority of programs not ultimately making it to production in the broader autonomous vehicle world, this is something that's, I think, a standalone shining beacon showing what is possible and people are very much taking notice.

[Aileen Smith, executive]

Our second question, what are the implications of the new [ net of ] rolling? And what impact will this have on Luminar? Can you meet these standards and broader autonomy without LiDAR like Tesla believes?

[Austin Russell, executive]

Yes. So we're not aware of any system that comes even close to meeting it without LiDAR. And what we've actually shown is that with our long-range LiDAR across all the different testing protocols, including specifically the ones that NHTSA has outlined, that we [ are ] able to successfully meet and beat those different protocols. And this is all confirmed as well by the testing that Swiss Re has done independently. We showed that at Luminar Day, where they're able to show a massive double-digit improvement in terms of the safety implications as well as when -- in reduction of vehicle accidents and crashes as well as when they do occur, still significantly a reduction in the speed at which the accident occurs corresponding to improved mitigation power, so to call it from that.And what that all means is that we believe that long-range LiDAR is required to be able to meet those kinds of new standards that NHTSA is mandating across the board and a massive tailwind overall for the adoption. I have to say I was pretty impressed by how far they went on these regulations.I mean we know it's been coming for some time, what -- a decade in the making. And the U.S. is really stepping it up, and I think we'll serve as the benchmark worldwide. We saw similar trends what, decades ago with everything from seat belts to airbags to even the concept of AEB in the first place that -- camera radar we're able to solve for.But as we know, the majority of accidents that occur today still occur even despite some of these advancements in AEB technology and it needs a fundamental step function improvement. And that's not to say that there isn't still room left to be able to do and improvements to be made with existing systems. Absolutely, that's the case. But we're talking a totally different world. In particular, there's a massive increase in the speed at which required to be able to do this as well as a requirement for pedestrian testing and braking during day time and night time.And what we've seen is -- across the automaker landscape is I think also a lot of surprises that this is now pushing forward so quickly kind of beyond the expectations. In the [ letter ] [ we ] outlined that, I think this is pretty clear in terms of driving standardization as much as a decade earlier than what it was otherwise thinking and 10x'ing our opportunity for what we have ahead. And this is all happening, like I said, literally -- in automotive years, this is like right around the corner in 2029. So I think this is possibly one of the best things to happen to Luminar, maybe even the best thing to happen to Luminar in our entire history. So very excited for that.

[Aileen Smith, executive]

Next question is around the announcement from last Friday. Would it be accurate to say that the restructuring goal is to outsource much or most of the manufacturing process in order to reduce capital need and related risks as well as to more rapidly ramp up production?

[Thomas Fennimore, executive]

Sure. Why don't I handle that question. So as Austin mentioned, we reached SOP a few weeks ago with Volvo. And that was a really intensive 4-year-plus period to industrialize our first product, Iris. During the last few years, we've tripled the size of the company. We put in a lot of blood, sweat and tears to get there. And we've learned a lot about ourselves as an organization. And upon reaching SOP and actually a little bit in advance, we really took a long hard look at ourselves and tried to decide what do we do better than anybody else out there, and a lot of that is related to our technology, our R&D, our semiconductor business, et cetera, and then what are some of the industrialization activities where, quite frankly, some of our existing partners like TPK do just as well, if not better than us.And so the primary focus of the actions that we took last week was to put Luminar in a position where we can move more quickly and more efficiently and more cost effectively to develop and industrialize our future products. I wouldn't say -- it wasn't primarily a cost exercise. It was more of an efficiency and speed exercise. Unfortunately, that resulted in having us to make some tough decisions on a personal level, but it was something that we had to do.When you kind of look at the magnitude of those savings that result in about $80 million of savings, substantially all of them should be realized on a run rate basis by the end of the year. A little more than half of those are going to be cash savings and a little less than half is going to be stock savings in terms of stock we issued to our employees and some of our vendors. Not included in that $80 million are going to be some of the benefits we get from being able to move faster on the industrialization as well as more efficiently. And let me try to quantify that.If I look at what it costs to put the capital in the ground, both to build out the -- building the clean room and the automation equipment for our Mexico plant, that totals to about nearly $60 million. What we expect to be able to launch our second facility in China with TPK 4 is going to be about 20% of that now, not 20% less, but 20% of that amount, and that's for almost triple the capacity.The other thing, if you look over the last 3 years, and I would say, if you look at some of the industrialization cost caused by inefficiencies from industrializing our product for the first time, over the last 3 years, between cost overruns on some of our [ NRE ] budgets as well as inventory write-downs and duplicative testing, and once again, all this stuff is normal when you industrialize it for the first time.We want to focus on getting more efficient the next time. Those 3 things alone over the last 3 years totaled nearly $100 million. And we think we're going to be able to substantially reduce that amount going forward for our Halo product from the lessons we've learned and doing it more efficiently.And then finally, we have our first Halo win. We'll talk about more of that in bid, I'm sure. But our SOP now for Halo is going to be in 2026, and we wouldn't be able to move that fast without industrializing our first product and putting in place this new structure with tech. So yes, there are cost benefits of it. But more importantly, the reason that we took the actions we did was to make us more efficient and leaner and meaner and to move quickly in our industrialization process.

[Austin Russell, executive]

Well said. And I think describes all of that. And it's been been a whole journey for us over the past decade. And I think if you really zoom out overall, what we've invested on the order of around $1.8 billion to be able to develop the technology platform, the IP platform and the industrialization muscle to be able to enable this to make this possible. And that's where now you look at, okay, what is the incremental cost to develop a new product, what is the incremental cost to be able to scale. And that has come down radically from relative to the total investment amount that we had to do in the first place to get to the stage, to get to this leadership position that we've been.So now what sort of becomes -- what starts out as a headwind, now we get to ride in terms of the respective tailwinds to that. And of course, TPK is one of the first steps of the evolution of the bid transformation, and there's going to be more to come. This is something that certainly, we're looking forward to.And when you take a look at the -- same thing, like you have a couple of billion dollars, what it takes to have the first kind of technologies products, Iris family now what, talking on the order of closer to like on the order of $100 million now for Halo because we already have this investment. We have the technology that now we're just iterating on each generation of chip, on each generation of subcomponent that makes that possible.So yes, excited for what's ahead, doing so very efficiently. And of course, you guys please look at the shareholder notes as well as Luminar Day if you haven't seen it to see some of the breakthroughs that Halo is enabling and beyond.

[Aileen Smith, executive]

We're going to switch gears and take some questions from the analyst community. As a reminder, for our analysts. We want to get as many questions in as possible. So we're going to allow an initial questions and some follow-ups. Our first question is going to come from Kevin Garrigan at WestPark Capital.

[Kevin Garrigan, analyst]

Wondering if you can expand on where in the process the 2 [ non-series ] production customers are that you noted in the guide? Is this next phase kind of the final stage before announcing the series production win? And are these contract kind of years to lose? Or are you facing some competition with these too?

[Thomas Fennimore, executive]

One of them is an automotive customer, and I would say we're getting to the tail end of the development phase. Once again, I don't like to predict when our customers are going to make specific decisions that we want them to make because that timing is largely out of our control, and it's been taking a little bit longer than we would hope for. But I think we're getting to the tail end of that process with them. The other is a non-automotive customer where we've been working with them for several quarters now, and we're kind of transitioning into the next stage of that and adjusting the size of the contract.So that one, it's exclusive. There's less competition. The first one, we've been working with them for a while. And while we're not too worried about the competition, it's not your business until you win it.

[Kevin Garrigan, analyst]

Yes. Got it. Okay. And then just a quick clarification. Your warrants with Volvo that you noted that are going to cause contract revenue for Volvo. I didn't see any other specific warrants with customers in the order book in any...

[Thomas Fennimore, executive]

No, this -- Yes, this is something that dates back to 2020 when we assigned the initial framework agreement with Volvo. It was compensation for them to help us industrialize our product for the first time. It's a little over [ $4 million ] more and strike price of about $3. And for accounting reasons, once we reach series production, we need to amortize the value of those warrants, which was about $3 million at the time over the first [ 22,000 ] and change [ latters ] that we make. And so that's going to put a little bit of headwinds on the revenue for the contra revenue reasons as well as to the margin that we achieve on those sensors as well. There is no other customers where we have warrants like that or a contra revenue issue and this date backs to something, as I said, we did it over 4 years ago at this point.

[Austin Russell, executive]

And that doesn't affect the cash flow what we get in, of course, or anything with the customers and the [ incremental ].

[Aileen Smith, executive]

Our next question is going to come from Joshua Buchalter at TD Cowen.

[Joshua Buchalter, analyst]

To start, I wanted to ask about your cost basis and any change that might have -- might be coming from the restructuring? So I know at the inaugural Luminar Day, you walked us through the $650 and then $350 milestones of your unit cost economics. Has anything changed regarding that trajectory as you've undertaken the restructuring efforts, moving more to outsourcing and in particular, I mean, with Halo on the road map?

[Thomas Fennimore, executive]

Yes. So all the actions we took, most of those are -- all of them are unrelated to sensor cost and sensor economics. One of the things we're doing now, our engineering team has almost been solely focused on getting to SOP because you got to get there. And now that they're freeing up and we're going to start aggressively attacking the sensor cost. There's still work that needs to be done there, but the actions we took in that $80 million, that's unrelated to the sensor cost.The targets that we talked about last year at the inaugural Luminar Day as you mentioned, those were always conditioned on us kind of having a first full year run rate of production. And so you need to get the economies of scale. You need to get the credibility and the contracts in place with your supply base. You need to work through the manufacturing kinks and you need to do some amount of kind of VAVEs to get there. And so we're in the early innings of getting there. We're not at those targets today. We're going to be much closer, and we still have a path to get very close to that $650 level.L-Tech and the industrialization, that's all going to be for Halo. And so there may be some resources that we put there on the cost downs for Iris and Iris Plus, but the vast majority of those resources as well as the benefits we're going to see on that is going to be for the industrialization of Halo.

[Joshua Buchalter, analyst]

And then for my follow-up, I know it's been only about 1 week or a few days since the automatic emergency braking regulations were announced. But I think it's been rumored for some time, and you guys have been talking about it potentially coming for a bit. I mean do you expect or have you seen potential customers preparing for this? Does it change any expectations for when you would get -- be able to bring things into your order book? And I guess, big picture to qualify for the new regulations and hit it, when would a potential customer need to sign a deal to hit that 2029 time frame?

[Austin Russell, executive]

Yes. So I think it's a great question on all of that. And I think this definitely took a lot of the industry by surprise in terms of the level that it was -- I think there was a lot of anticipation that it was going to be heavily watered down, so to say, in terms of the requirements. So for example, in particular, the majority of the automakers have been part of actually an alliance that's been lobbying to be able to significantly reduce the requirements there such that it would not be mandated, so to say, to align with something that would have this kind of level of capability on every -- because remember, it's not just high-end people. It's literally even the lowest end possible, like any -- like every single vehicle that's sold and they've said that it will take up to $4,000 in additional hardware and software costs per vehicle, which is obviously great from a content value standpoint.But the lobbying has been basically to try and reduce certain requirements, such as, for example, the sentiment was that you should be able to hit a pedestrian at up to 25 kilometers per hour instead of stop for pedestrians fully, has been the big push, which -- as you figure in negotiations with NHTSA, NHTSA says, no, it should be zero, they say 25%, and they split the difference right in the middle at 0.So you're taking a hard line on this. And we kind of laugh about it, but it is very, very serious safety implications. And the reality is that vehicles today should not let you run over pedestrians. They should not let you run into things in front of you. And we're talking about the most simple, basic safety functionality on a vehicle. And the current kinds of camera and radar technologies cannot enable this across the board in these required scenarios for what's needed to prevent the vast majority of accidents.And we've shown what's possible. Swiss Re, in particular, Luminar Day has shown what's possible. And we're also now starting to even see, hey, what are the insurance implications for this? If you actually -- that was like -- one of the points of inspiration as well for NHTSA is that, hey, as this happens, the insurance industry is going to be reformed to be able to from a total cost of ownership perspective reduce the cost. So there's a lot of different factors at play. But I would say this, is that I think from a timing standpoint to answer that specific part of the question, I think there's probably going to be a scramble over the next couple of years to really start getting plans into place.The beautiful thing with this is that this aligns perfectly with the timing for Halo, whereas this would have been very difficult to try and fulfill and accomplish with Iris and Iris Plus, which are more met for higher-end vehicles. Halo is designed to be able to be mainstream. So this couldn't have come in literally a more perfect time between the Swiss Re report and the safety report for what they put out on the insurance application of that and most importantly, a Halo product that's able to take advantage of this.So part of the whole concept is, if there was a concern around cost, hey, or something not in the thousands of dollars, but in the hundreds of dollars, you're able to have a product that can fill all these requirements. And not only that, in terms of meeting and exceeding it, as we've shown and we have those, for example, specific examples and the requirements in that letter.It's also able to enable a software upgrade in additional software. So it's the same hardware autonomous capabilities and start to advance those as well, which, by the way, we already know is already happening. The majority of automakers at this stage are now planning to have long-range LiDAR or Luminar in their road maps already by the end of the decade. So this wasn't like a crazy thing. It's just -- the crazy part is the sheer scope of what this is. And the fact that this is not, hey, you need to do this to get a 5-star safety rating on your car. It's you need to do this to literally even make a car.

[Thomas Fennimore, executive]

Or sell a car.

[Austin Russell, executive]

Sorry, to sell a car and -- yes. I should say, in the U.S. Obviously, U.S. is -- hopefully takes a leadership position and kind of proliferates throughout.

[Aileen Smith, executive]

We're going to transition back to a few questions from our investors. Next question, how has the delay in the Volvo launch from last year and the macroeconomic environment affected your capital situation? Will you have to raise an additional $1 billion in 2025, like certain estimates have stated? And what kind of dilution should your shareholders expect?

[Thomas Fennimore, executive]

Yes. I'm not -- Look, I would say the $1 billion is nowhere near what we think we need additional capital we need to get to profitability. Now that we're SOP, now that we've taken some of the restructuring actions that we've taken, we're still finalizing our analysis on what the additional capital need is going to be, and we're looking at a variety of scenarios, including downside scenarios. And even in our extreme downside scenario, we get nowhere around $1 billion. The number that we're sending around on is somewhere around a couple of hundred million dollars of incremental capital, plus or minus.And when you kind of look at where our balance sheet is today, we have enough cash to get us to at least the end of 2025. So we don't have a gun to our head to do anything soon. And we still -- we believe, have access to multiple forms of capital, so we can go get that additional capital when the timing and the situation is right.And look, we also would rather address the 2 balance sheet issues that we have sooner rather than later, the first being the additional capital, which I just talked about. And then the second is when you kind of look at our convertible debt, that's trading at a deep discount. And as I mentioned before, we're kind of looking at are there creative things that we can do given that dynamic.So now that we've reached SOP, now that we've taken the actions that we've done, we're actively looking to fix those 2 balance sheet overhangs that we have, but we want to do it at the right time, minimize dilution, get the best terms that we can, but also address it sooner rather than later.

[Austin Russell, executive]

No, it makes total sense. And I'll say this is that -- obviously, we're very sensitive around all these things and particularly when you have a lower share price there, you want to be really, really conscious for dilution. I'll say that over the, what, 8 years when we were private, I think in aggregate, over all the financings that we raised for hundreds of millions of dollars we got were -- diluted the company what, on the order of like 50% over half a dozen different rounds and going through that. That's how we have large ownership positions in the company more generally. So we take this super seriously, really thoughtful. Our own Board is also taking it very seriously in terms of that aspect of it.But we're in a strong position here. We know exactly what needs to be done. And most importantly, we want to show and continue to prove out the aspects of the business that show how significant this industry is and how much value we're able to really produce to get that realization. And we've been in a stronger position than ever with the fundamentals of our business from technology, product commercialization and scaling now with being the first company in a global scale to be able to go to SOP with us. So yes, that's what we have ahead.

[Aileen Smith, executive]

Next question, will you provide more detailed financial guidance for 2024 now that you've kicked off production for Volvo cars?

[Thomas Fennimore, executive]

That's something we're going to do in the second half of the year. We're getting more visibility into the Volvo ramp up. We're getting more visibility into when we're going to start to realize some of the cost saving actions that we took, both on the restructuring we did on Friday as well as starting to aggressively attack the sensor cost. And so once we get into the second half of the year, we're going to provide more visibility on what our quarterly financial performance is going to be.The 2 things that we talked about during our last call that we reiterate is we're going to get to a quarterly revenue run rate in the [ mid-30s ] by the end of the year, and then we'll end the year with $150 million plus of liquidity. Those are 2 things that we still remain confident in. I would say the path to getting from where we are today to those points by the end of the year, it's still going to be -- have some bumps on the road during that journey.

[Austin Russell, executive]

And just sort of the context of the [ $35 million ] call it per quarter if you're amortizing that, we're talking, what, $140 million run rate per year, so on an annualized basis. So I mean, pretty significant growth [ are ] to -- I mean, you guys all know last year's numbers and everything. The key is that all kicks in in the second half of the year. So when we talk about SOP for the revenue for this quarter and the next quarter, it's -- there's no series production revenues quarter, [ small ] for next quarter, but that's really where -- in the second half, and you start to see that kicking in and that exponential growth, really taking off.And that's where what we highlighted is that we have $3.8 billion in our order book, that's now kicking off that conversion into revenue. And that's what's going to be the main driver behind all this exponential growth, whereas historically, it's been development systems that we've been working with automakers on. Of course, Volvo was the first, but that's sort of kicking off a plethora of additional subsequent vehicle model launches. We've shown how we have 25 of them that expands across combustion end vehicles, electric vehicles, hybrid vehicles, all those kinds, which is also unique to Luminar in terms of the diversity of what kinds of vehicles we're on. So excited to make that happen. And then as Tom was saying there, that economies of scale and value is going to be huge.The other thing is that the most significant thing really with Volvo getting out there is also around the data collection. Right now, there's been a very -- I mean we're talking very, very small fleets of vehicles, [ near ] of hundreds usually that are going out collecting data. When you talk about something with Volvo, and it's tens of thousands of vehicles, just even starting this year alone, scaling to hundreds of thousands of vehicles and then ultimately, millions.Like this is at a scale of data that no one in the industry has ever seen at a global level. And that allows the AI systems to really train on that data to be able to understand the world. I mean, we're talking about creating a more accurate understanding of the world that has ever been seen before by this precise 3D data more than what you have the largest economies fleet out there today, it's like [ way more ] or what, less than a couple of thousand vehicles, some of that effect.So you take a look at that and the scope and scale of what we're talking about and the fact that every mobile driver is driven -- we don't pay them to drive. They drive themselves. So it's going to be pretty transformational as all of this happens.

[Aileen Smith, executive]

Let's switch gears and go back to our sell side analyst community. Our next question is going to come from Itay Michaeli at Citibank.

[Itay Michaeli, analyst]

Just I was hoping if you could just remind us the #1 focus now is the Volvo ramp. How should we think about subsequent ramps of the [ '25 ] plus programs that you have? Maybe if you could talk about roughly how many launches you're expecting in 2025? That would be helpful.

[Thomas Fennimore, executive]

The next big one that we have, which will be somewhere around the end of this year is going to be the Polestar 3. There may be 1 or 2 smaller programs next year between our current customers. And then I think the next big wave is really going to come around late '25, early '26 with Mercedes, and there's multiple platforms that will probably then launch starting in '26 over the next 2 to 3 years. And so this is the big one. Polestar 3 is the next one, a couple of other smaller ones and then the wave of Mercedes starting.

[Austin Russell, executive]

The only other thing I'd point out is that there are also variants in particular, the launch in different times and locations. And so for example, this is the launch for the X90 out of North America there. So we're shipping from Mexico into North America. Luminar has a unique globally diversified footprint here, which is special. And so we're talking about the launch there. Then you talk about launches in China. There's already been -- they announced EX90 excellence as well as EX90 China variant. There's more opportunity and upside beyond these things as well.Of course, we know -- we all know about the Polestar 3, but there's also different model variants as well of some of these things that can help further drive the growth of this. But this is -- so that's why you're going to see -- it's kind of like a flywheel effect, right, in terms of the compounding. So there's an exponential curve in terms of the ramp and the economies of scale for each one. And then when they sort of compound on top of each other, then you end up in this line. Very good pile up of all these things.But it's not so much -- and this is where we've been smart about it. It's the same thing -- like I think if we try to launch with like 5 different OEMs all at the same time, we would be drowned. So it's good. It's like good methodical spacing between the different OEMs and launches and everything. But it is definitely action packed, that's for sure. And the beautiful part is it is the same hardware setup that we have that's [ able ] to launch. Obviously, there's a kind of specific integration modes and certain kinds of incremental cost compensations. But the large part, it's 95% the same thing.

[Itay Michaeli, analyst]

And as my follow-up, Austin, you mentioned data collection. I kind of want to go back to that a little bit here. How much data are you getting from the real world fleet of some of your customers? And will you be getting data from the Volvo fleet as you ramp? And as you're getting this data back and iterating the software and AI, how much improvement are you seeing in safety and automated driving functionality? Such that when maybe the RFQs come in for NHTSA-related awards for later in the decade? How much better do you think the system could be by the time you get to that point?

[Austin Russell, executive]

Yes. So a couple of things on that. Obviously, the big step function from a product standpoint is with Halo. So that's what we're very excited about. But I would just say from a data perspective, more generally, there's 2 aspects. So one is from a customer standpoint of where they need the data, first and foremost, in terms of being able to build out the features, optimize them, introduce all the safety checks on it and then ultimately release the features. And that's where you're going to see the LiDAR get more and more utilized over time for these additional -- starting with safety features and ultimately autonomous driving features and other kinds of things that it can be able to enable, creating maps to the world, doing all those things.And so I'd say from a customer standpoint, they need this to build their and train their AI systems there. And then when it comes to our systems accordingly is that data is critical to say, feed the beast of this. We have our Luminar AI engine. We have some of our own initial vehicles that have sort of gotten that started. And we're very excited to be able to have the opportunity to start getting in customer data. So for some of our customers, we actually specifically have data [ clauses ] that allows us to be able to get access to data from customers. So that -- when that happens, that would be very accretive to the overall software efforts and scaling, and we're going to have more to talk about on the software front over the coming couple of months.

[Aileen Smith, executive]

Our next question is going to come from John Babcock from Bank of America.

[John Babcock, analyst]

A couple of questions here. I guess just starting now, you did mention in passing that Tesla is using your products and buying sensors. I was just wondering if you could talk a bit more about the extent to which they're doing that? Like are they just buying part of the sensors? Are they installing it for LiDAR? And also, are they growing business with you? And then if you could also just generally talk about how their relationship compares with that of other OEMs, that would be useful.

[Thomas Fennimore, executive]

Yes. So what I would say is, I'm not going to -- I don't think we're in the best position to talk about what they're doing with our LiDAR. This isn't the first time that they've ordered [ latter ] from us. But I would say it's been more lumpy than recurring. The reason we're talking about this is because if they're greater than 10% in the quarter, we disclosed who customers are. But look, they're buying the LiDAR for us and what exactly they're doing them, we can only speculate.

[Austin Russell, executive]

We -- they made us sign NDA.

[John Babcock, analyst]

I'm not surprised at all. I appreciate the color. And then just next on the cost savings program. I think you mentioned a bit more than half is going to be cash cost savings. Could you just confirm that? And then also, what are the total costs that it's ultimately going to take to get to that $80 million in annual run rate savings?

[Thomas Fennimore, executive]

Confirm the statement that you said. We kind of mentioned that in the letter. We disclosed what the cash costs are going to be there. It's on the order of magnitude of $6 million to $8 million. $6 to $8 million, so call it, less than $10 million.

[John Babcock, analyst]

And then might you be able to detail the contractor reduction piece associated with that and then provide any additional color on the other category that's driving that?

[Thomas Fennimore, executive]

Yes. I would say the vast majority of that $80 million is coming from the headcount, both our employees and then also contractors ramping down. As you ramp up and we industrialize our first product reach SOP, there is a lot of, I would say, non-recurring work that needs to get done, whether that's setting up the plant, working with our suppliers to ramp up, doing testing of the products that is required to do to meet our automotive customer standards. And what we try to do, if the work is not recurring to fulfill those needs with contractors, if it's going to be over a finite period of time. And then as that work is done and as the SOP and industrialization process for that product draws to a close, you can start ramping down those contractors. And then as we rely more on TPK and [ L-Tech ] for our Halo, which is our next-generation product, you don't need those resources to recur. And so that is what, I would say, driving the vast majority of the restructuring actions that we took last week.

[Austin Russell, executive]

And I'd say, in particular, when it comes to the contracting partners, we had what, over 100 contracting partners in aggregate to help us in one way or another, the majority of which were signed to help us reach SOP. Now that, that's happened, we're able to roll off the majority of those under contracting partners to -- which helps reduce costs, but it's something that we have planned anyway as part of this. And frankly, overall, the majority of the Luminar cost structure there is to be able to help advance the future of what we're doing, where it's a relatively dynamic structure that we're able to have. So of course, now post SOP, that's where I think that dynamic changes and the needs change and models can evolve accordingly as well.

[John Babcock, analyst]

Okay. And then if you don't mind, just one quick question. There was a seating supplier that recently commented about the EX90 being delayed due to software issues. Can you just talk about whether or not that's an incremental delay relative to what you discussed? Or is that something that [ have ] been announced previously?

[Thomas Fennimore, executive]

I think that's old news, John, from 1 year or so ago.

[Austin Russell, executive]

Yes. That's correct. And on top of that, I think there was some misinformation also that there was some delay that was caused by Luminar as well, which was also not the case there either. So we're very excited for the EX90 ahead, and that's going to be a huge driver of growth here for us over the course of the second half of the year, that's going to take us to new high.

[Aileen Smith, executive]

Our next question is going to come from Mark Delaney from Goldman Sachs.

[Mark Delaney, analyst]

One on gross margins. Your gross margin came in better than expected in the first quarter. Although in the letter, you spoke about some production kinks and lower ASPs as potential headwinds over the next few quarters. I'm hoping you can help investors to better understand the magnitude of those headwinds? And perhaps more importantly, what might be needed to reach a positive gross profit?

[Thomas Fennimore, executive]

Yes. So Mark, [ I'd say ] the improvement we saw during Q1, that was largely driven by the industrialization costs coming out of -- starting to come out of the system in good chunks. We're hoping that happening in Q4. It happened instead in Q1, as I said, the ability to kind of predict when you kind of do what needs to be done to launch your first product. There's some variability there. And so that kind of drove the process there. What's happening now is there is a -- once we start selling Volvo series production sensors and set of prototypes, there's a step function and immediate decline in the ASP, and we can't wave a magic wand and have our sensor cost decline at the same rate. It's going to take us a few quarters to start witnessing the benefits of the actions we have taken and are going to accelerate taking now to get those costs lower.We also need economies of scale. Things aren't going to go smoothly and as you start increasingly ramping up, we're expecting some unexpected surprises. And so I would expect the gross loss to get a little worse before it starts to get better. I don't want to predict exactly what that curve is going to look like and when exactly we're going to get there. But reiterating what I said earlier on the call, it's going to take us 1 full year of [ series ] production to get close to some of the targets that we talked about 1 year ago for Iris.

[Austin Russell, executive]

I would say overall, when it comes to the cost structure there, you have the industrialization cost and sort of launch costs that you have there that's bucketed separately from the actual product cost in terms of what it costs to be able to deliver each thing. The thing that we've done well on is that we've now been really starting to aggressively roll off those industrialization costs. So that's what's driven that improvement. And actually, we would have been positive this quarter, barring a couple of things that are unrelated to the [ actual ] product itself.But when it comes to that next wave, now the focus is going to be, as that scale's up, to get -- realize those economies of scale. And the key thing here is that -- from a supply chain perspective and supply chain basis is being able to now -- that we have that clear visibility into a volume perspective. There's a very big difference between when you're ordering components in the thousands versus hundreds of thousands and that's the key distinction from a supply base that we see -- we believe we'll be able to see those benefits up when you're not talking prototype pricing, where you're talking scaled surge production pricing. So that's kind of that next wave that drives that.If you look at the overall direct costs, for example, even for this quarter, it was only around like $16 million off of the $21 million in revenue in aggregate. So there are some things there that have shown that we've seen those realizations.But now that we're doing that, we're not stopping. We're not resting on our laurels by any means, and now we're focused on this next wave that will drive that. And we're going to give some more insight as well into specific parts of our business in terms of the profitability aspects like our semiconductor business as a preview over the coming months.

[Mark Delaney, analyst]

That's all very helpful. My other question was on the TPK agreement, you spoke around an expanded relationship there. I think in the blog post you put out last week, Austin, you called it an exclusive relationships. So I was hoping to better understand what exactly that might entail, how the partnership and work with TPK may differ compared to your current arrangement with I believe Celestica? And then also when you think you may go into production with TPK?

[Thomas Fennimore, executive]

Yes. Celestica, the relationship we have with them, that's more of a pure contract manufacturer, which is as we make products and series production. Celestica is making them. They made some of our late-stage prototypes just to make sure that their manufacturing system work the way it should have. But they're basically a series production manufacturing partner with us. What we're doing in TPK, the deal we announced with them last year was the equivalent of what Celestica is for us at our Mexico plant [ and ] the China plant. This new relationship with TPK expands that to more of an industrialization, particularly related to Halo, our next-generation products.So all the prototype manufacturing is going to be done by them. I would say a lot of the design validation and production validation testing, most of that, which we did ourselves is -- we're expecting them to kind of do most of that going forward. We're going to be sitting there verifying and doing some of the results. A lot of the supply chain management, a lot of kind of working out the manufacturing kinks. A lot of that -- the inventory management -- is going to be done by them as opposed to us. That's going to allow us to move faster, more efficiently.I shared with you some of the inefficiency costs that we experienced industrializing Iris. I don't know how much savings we're going to have for our next-generation product relative to Iris, but I'm expecting to be substantial. And none of that is in the $80 million number that we kind of talked about with the direct actions that we took last week.

[Austin Russell, executive]

Absolutely. And we'll also say, take a look at the Luminar Day speech that TPK gave, their CEO was on stage. And I think they described it as the relationship of kind of everything, all the work that they did back with Apple on the iPhone for its introduction in 2007, they really see this moment with -- that we've had with Volvo and part of the broader industry as a little bit of that iPhone moment to kick off the broader autonomy world. And in particular, you asked a question on exclusivity and those kind of leading up to that is that they have agreed and signed a deal to only work with Luminar in the world of LiDAR and EV more broadly, having the extreme amount of conviction that we'll be a winner or the winner.

[Aileen Smith, executive]

Okay. We'll take another question from our shareholder community. Now that Luminar has introduced Halo to the market, what has been the response from your existing and prospective customers? Do you expect Halo to drive new customers like Nissan and other large OEMs to make decisions sooner as it will be available in 2026?

[Austin Russell, executive]

Yes. I think it's been a great reception. Of course, as you figure, there's been some level of work behind the scenes with automakers on this, leading up to this. We've been working on the Halo design for like 6 years in terms of some of the technologies that have been going into this. I mean, this all goes back to this nearly $2 billion technology foundation and IT foundation that we've been able to develop to make this possible. That's how we get to ride all of those tailwinds and do so very, very efficiently this time. And of course, this is really taking into account the things that automakers are most excited about. And that's what allowed us to move so quickly to a point of where we can announce today our first OEM win with Halo. So very excited about that, and that's a start. There'll certainly be a lot more to come.And I would say for major automakers, I mean, the key thing is that, as you said before, people were really looking for 2 things. One was the validation that Luminar could successfully make it to series production in a world where the vast majority of programs do not successfully achieve that vast majority of companies, aren't successfully able to make it. Luminar has proven that it is very much possible and executing to that.The second part was just the product to be able to enable mainstream adoption. And that's something that -- it's clear there needs to be a step up from Iris to be able to do that at the kind of scale that we're talking about. And with -- it's about 1/3 of the size, double the overall efficiency, a fraction of the way -- wasn't half the cost, all the other benefits associated with Halo. And I think that is something that starts to get people really, really excited.So the other thing is that we, of course, understood some of these new regulatory requirements at a time where I think -- I don't want to say folks were maybe a sleep at the wheel on that, but there's definitely -- like it came as a surprise to some. And this is designed to be able to make sure that automakers can meet those new regulatory requirements as well. Of course, we exceed beyond those requirements. But that said, that is something that is meaningful and powerful to be able to do. And this is the kind of product that really can be standardized on mainstream vehicles. So it makes total sense and the reception across the board couldn't be more positive.

[Aileen Smith, executive]

We've got a little less than 10 minutes. So we're going to get through as many analyst questions as we can. Our next question comes from Kevin Cassidy from Rosenblatt.

[Kevin Cassidy, analyst]

My question is, Halo seems like a real game changer. And as the industry has evolved, can you tell me about more what's happening in the bidding content for your competitors? [ Well ] say, what's the competitive landscape? How has that changed? And also, what are the priorities that your customers are looking for now? Has that changed since when you first got into this bidding process?

[Austin Russell, executive]

Yes. I mean I would say that overall -- one thing that I think is significant in the case of Luminar specifically is that for most of the kinds of deals that we strike, we -- rarely so like a specific kind of bidding process, so to say, that the goal of what we like to do is that when we start working with someone, really go all in, you only have so much capacity and you have to have so much focus with different automakers. And what we'll do is we'll try and strike a more, call it, a company-wide deal for something that covers all the different kinds of scope of products and technology, other things that they're enabling rather than maybe say for like one specific point in time for one specific vehicle model for some arbitrarily low volume or not.I think that the way that you make this work is you have to have the big economies of scale. And of course, everyone can talk about opportunity all you want, but I think we've tried to set a really credible benchmark for the way that you define order book in terms of what's actually included in associated take rates and everything, not just saying, hey, magically you're not winning everything from even a given automaker. So long story short, of course, there are plenty of RFQs and everything that we're all a part of and the finalists, so to say, for the processes that are there.But every automaker probably always has some kind of RFQ outstanding for something. The question is like what's real, what's not real. And the reality is that I think historically, what we've seen every automaker -- like -- sorry, not everyone, so the majority of the, call it the top 20 automakers have, as I mentioned, the long range [indiscernible] into the road map at some point throughout the decade. Obviously, those are different introduction points.I think the question on the dynamic that we're excited to see is how the autonomy road map evolves and also gets radically accelerated with these new regulations. And that was something that -- it's a 300-page report, automakers are digesting it now. They're really -- it's probably over the next year we're going to be putting their updated road maps together.And I think that's where -- when we're talking about the kind of volume opportunity. It's -- whatever is there now is -- it's going to be a tiny, tiny fraction of what's going to be running in parallel. So that's what we're excited about, if people can take that same kind of model the Volvo has around showing that safety should be for everyone, not just as a standard product, not just as an optional feature like a seat belt, then you really win the game.And that's where we also showed that -- and I think I mentioned this in the letter, even just a small fraction of market penetration, like we modeled 3% to 4%, that's like a home run for this kind of business because that means into the single-digit billions in revenue, growing rapidly, other stuff if we can do that in 10x. I mean that's where I think it kind of changes the game, as you pointed out, and we have the perfect product to do it.

[Kevin Cassidy, analyst]

I won't have a follow-up. I'd save time for other people.

[Thomas Fennimore, executive]

Who do we have next Aileen?

[Aileen Smith, executive]

Our next question is going to come from Jesus Gonzalez Lopez from JPMorgan.

[Jesus Gonzalez Lopez, analyst]

Just wanted to ask about the $50 million run rate cost savings you guys called out. How should we think about that split between OpEx and CapEx? And then what's kind of like the ramp-up time line for those things to come online?

[Thomas Fennimore, executive]

Are you talking about the $80 million?

[Jesus Gonzalez Lopez, analyst]

Yes. Sorry.

[Thomas Fennimore, executive]

Yes. So the $80 million, I would say very little of that is CapEx. Most of that $80 million, a little over half of it is cash. A little less than half of it is saving in stocks we issued to our employees and vendors, as I mentioned earlier. And I would say substantially all of that $80 million is stuff that's going to flow through the P&L either as COGS or OpEx.

[Jesus Gonzalez Lopez, analyst]

And then -- so on the time line, should we expect that to like start coming online in the back half of the year and then really ramp up in '25 or...

[Thomas Fennimore, executive]

We should get on a run rate basis, I would say, very close, if not the full $80 million by the end of the year. You'll start seeing it show up in Q2 and then really start to ramp up in Q3 and Q4.

[Jesus Gonzalez Lopez, analyst]

And for my follow-up, just kind of wanted to switch gears and talk about the order book. I know you guys just called out the first product was Halo. But -- so should we think about some of those wins that you already have in the order book converting to the Halo system? Or what's kind of like the cadence, like the product mix that we should see over the coming years?

[Thomas Fennimore, executive]

Yes. The vast majority of our order book today as it stands as Iris and Iris Plus, we have had our first major win with Halo. And what I would say is we're in discussions real time with our customers to transition in the Halo sooner rather than later. Now look, you got to work through their production cycle, mid-cycle refreshes, making sure that you reduce as much as possible any additional software algorithm, training or validation that they need to do. And so it isn't something that you can do overnight. But I think it's in the interest of both parties, both to them because it's going to be a cheaper product and to us where we expect it to be a better margin product to do it soon rather than later. And so I would expect at some point in the future the order book to start converting and hopefully, at a very brisk pace to Halo.

[Aileen Smith, executive]

Tom and Austin, you want to take another question?

[Thomas Fennimore, executive]

Yes, let's do one more, Aileen.

[Aileen Smith, executive]

Okay. Our final question is going to come from Richard Shannon form Craig-Hallum.

[Richard Shannon, analyst]

Sorry, I got on the call late here, and I'm not really sure I have a question this time. Sorry, I didn't hit any button, so apologies for that. I'll have to -- I'll follow up later when I've got a more -- full consumption of your entire call. So sorry about that.

[Thomas Fennimore, executive]

Richard, that's the easiest question you ever asked. We'll talk to you soon, buddy. Aileen, let's do one more if we have it.

[Aileen Smith, executive]

All right. I think in that case, we'll take our final question from the [ Safe ] platform, which is, what is the outlook for the next 5 years?

[Thomas Fennimore, executive]

A lot of growth.

[Austin Russell, executive]

Yes. World domination. No. But in all [seriousness ], I think next 5 years, we got a lot ahead of us here. I mean, literally 5 years from now is 2029 when the new regulations go into effect. So that's going to be -- point the show. There's a lot that we have ahead to be able to do. Of course, like I said, we're realizing a massive amount of growth that's going to happen starting really in the second half of this year when the order book starts converting. We're going to realize those economies of scale. We're going to really start driving this like no tomorrow. And I mentioned in the letter and at the beginning that in terms of the strength of our business and fundamentals of what we're doing could never be stronger.And the reality is that if we're able to achieve even a fraction of what we think we can over the next 5 years, that's a huge win in a home run. And the key is just being able to make sure that we can continue to differentiate ourselves. Obviously, in the -- there's a skepticism for this world and type of company in a world of EV start-ups and other kinds of autonomous -- fully autonomous vehicle companies and other things that haven't been able to deliver products or in a way that wanted or LiDAR that wasn't able to make the technology work, et cetera, where we're in a world of companies that are challenged.And that's where I think being able to show how we can continue to succeed how -- from where we've come from, from when we were first at IPO and developing a theoretical technology concept into industrialized product, being the first to launch in series production and scale going from one to a dozen, major commercial customers and wins to now having a clear path towards broader standardization.Future couldn't be brighter for us. The key is we know what we have to do. And that's not to say that there aren't headwinds. We know the macro headwinds that -- in a broader scale that have come into place, that's clear to everyone. And it's not lost on us by any means, and we're the -- tackling head on.And I think that's where -- you guys saw some of the restructuring actions that we took place on Friday. It seems like it was a surprise to some, probably shouldn't be a huge surprise given we've kind of signaled that.And the reality is that as we're talking here today, over the course of the next 5 years, there's going to be other drivers of efficiency that we're taking. And it's not even going to take that long. I mean, we're talking literally over the next 12 months. This is the first phase of what we're doing. There's a lot more opportunity that we have ahead and we're going to be fully capitalizing on that. So I'm very excited for what we have ahead for that time frame.And thank you, everyone, for being on the journey with us as we make that happen.

[Aileen Smith, executive]

Okay. Thanks, everyone. That...

[Thomas Fennimore, executive]

[ Thanks, everyone. ].

[Aileen Smith, executive]

That marks the end of our question session. I'd like to thank everyone for sticking around and participating in the call and for the analysts that asked the questions and investors and other folks who have joined us. We look forward to talking to you guys next quarter.

[Thomas Fennimore, executive]

Thanks, everyone.