Fisker Inc. (NYSE:FSR) Q4 2022 Earnings Call Transcript

Fisker Inc. (NYSE:FSR) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Hello, everyone, and welcome to the Fisker Fourth Quarter and Full Year 2022 Earnings Call. My name is Bruno and I will be operating your call today. I will now hand over to your host, Frank Boroch. Please go ahead.

Frank Boroch: Thank you, Bruno. Hello, and welcome, everyone, to Fisker’s earnings call. As the operator mentioned, my name is Frank Boroch, VP of Investor Relations and Treasury here at Fisker. Joining me on today’s call are Henrik Fisker, our Chief Executive Officer; Dr. Burkhard Huhnke, our Chief Technology Officer; and Dr. Geeta Gupta-Fisker, our Chief Financial Officer and Chief Operating Officer. Before turning it over to Henrik, be advised we will be making forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

These risks include those set forth in the press release we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of today. We disclaim any obligation to update any forward-looking statements, except as required by law. We’ll reference our financial measures that do not conform to generally accounting GAAP principles today — during today’s call, including non-GAAP operating expenses. This information may be calculated differently than the non-GAAP data presented by other companies. Quantitative reconciliation of our non-GAAP financial information to the directly comparable GAAP financial information appears in today’s earnings release.

With that, I’m happy to turn the call over to Henrik.

Henrik Fisker: Thank you, Frank. Good morning, everyone, and thank you for joining us today. It’s a little earlier than our usual timing, but we moved the call as we are all headed back to Austria this afternoon to continue our hands-on manufacturing and supplier engagement. I want to thank all the stakeholders, teams and partners for an amazing progress we have made in 2022. Of course, 2023 is an inflection year for Fisker as we reached industrialization and pivot from vehicle development to customer deliveries. The 850 strong Fisker team is hard at work readying our inaugural Fisker launches and Center+s, integrated with our trade-in and after sales service and repair partners, and uplifting our initial mobile service vans among many other key initiatives.

We have a fantastic team and are partnered with world-class manufacturer and suppliers. These strengths were signed through this year, and it really is the basis for our business model. Let’s start with direct-to-consumer sales and service. We have made progress on last-mile delivery and support infrastructure. California DMV sales license is approved for the Fisker Ocean. We will utilize a third-party vendor for customer title and registration services in the U.S. and EU, which will be integrated into Fisker’s customer journey. We have home delivery partners identified for the U.S. and all European launch countries to complement our growing network of our own Center+ delivery locations. We are also planning initial pop-up delivery sites, specifically in areas where we may not have opened delivery centers yet.

Trade-in services are available in the United States and Europe in all the launch countries and launch areas. Our flagship launches in Los Angeles and Munich, which are slated to open in mid-Q2, as you may remember, they were a bit delayed because of COVID, will be complemented by quickly expanding Center+s, including Vienna, Copenhagen and Stockholm, where we will offer test drives, services — service and deliveries of our vehicles. In addition, we signed an innovative test drive and delivery center in Munich. We are currently in negotiations on more than a dozen properties for additional launches and Center+s, vehicle processing centers and service and pickup locations in the U.S. and Europe. We made charging — Ocean a more convenient and integrated experience with home charging and public charging partnership in Europe and U.S. now finalized.

Fisker’s flexible service approach includes third-party service and repair provider plus Fisker’s own service solutions. Externally, we have nominated partners for after sales service and repair in key U.S. and European markets, providing broad geographic coverage for Ocean customers, right from the beginning. Initially, we will provide service options via Fisker-owned service centers and Fisker mobile service. We have started uplifting Fisker mobile technician vehicles to support our flexible and convenient service option. In addition to service partners, we have quickly expanded the Fisker collision repair network in the U.S. and Europe for certified high-quality EV repairs. Now, let’s come to the Ocean update. Our number one priority is launching a high-quality Fisker Ocean with class-leading features and range.

We are excited to get the Ocean in the hands of our loyal customers once the homologation process is complete. The Ocean homologation testing is expected to be completed in March, which will be followed by regulatory approval processes. I had expected us to be farther along when we last spoke in November, but we encountered some testing delays due to weather and COVID absences and some complicated retest that slowed our process. We took on a lot by doing both U.S. and Europe homologation at the same time, but the ability to sell the Ocean in so many countries an important derisking strategy gives us the opportunity to increase sales and shift to whichever market offers the strongest growth. And I just want to emphasize that it’s not normal for any car company to actually do dual homologation in two continents.

But I think once this is done, it’s a huge advantage for us because we have also built out our complete service and sales network in Europe, so it really opens up endless possibilities for growth. We recently completed our EPA and WLTP range test and our internal findings show a longer range for the Fisker Ocean than we initially projected. And this reinforces our expectation that the Ocean will have the world’s longest range of any SUV or Crossover priced below $70,000 or €70,000, and Burkhard would go into that detail later. If you remember, we had announced 350-mile range here in the U.S. EPA. And I would just say, I think it’s going to be closer to 360 than 350. And in Europe, we had announced 630 kilometers. And I think this will be closer to 700 than 630.

We obviously can’t announce the exact numbers yet because they have to be verified by the two agencies, but we have run all these tests. And I want to say congratulations to our engineering team because they’ve done an amazing job in refining every little detail that attributes to getting this long range, more than we originally had expected because we actually use some of these vehicles from our start-up production to actually refine and refine and refine. And of course, there’s not one element alone that makes this long range. It’s really the genius, I would say, of our engineering team that has created this. And being a company that launched its first vehicle and achieved the world’s longest range, I think, is pretty amazing, specifically because it’s also an affordable vehicle.

So, congratulations on that. And I’m super excited when we get the final ratings, but they’re going to be good. All right. Let’s go to manufacturing and production update. I, along with other senior leaders, have been based in Europe actually for the past few months, working closely with all our partners, preparing for production ramp, ensuring we deliver the highest quality possible Ocean from day one. And I have to say, I love walking around on the production line, talking to the skilled Magna people and employees about the product, about the quality, doing reviews right there with the cars as they come off the line. It’s just fantastic to actually stand there with people, who has built cars, some of them for 20, 30 years, amazing high-quality cars.

And they actually — I would say, is the other way, almost learn from them exactly how you make such an amazing quality car. And I’m super excited about that, quite frankly. Last week, I oversaw the final extreme cold weather testing for powertrain and chassis systems. And I have to say, it was amazing to drive this car on a frozen lake in Northern Sweden. We also had our race car driver there Abbie Eaton, and of course, our engineers there as well. And everybody was just amazed how well this car performed. I’m super excited again to get it in hands of people. And I think what you really do on a lake like this, you actually push the car to an extreme and probably no normal customer will rarely ever do and it really shows how safe, how predictable, how well this car handles.

And part of that is not just electronics and everything else, it’s also the actual proportions of the vehicle. So, it has to do with the width and wheel-based length, to get that optimized is a hardware thing. And if you don’t get it optimized, you can do a lot of tricks with electronic suspension. But at the end of the day, this vehicle fundamentally has the right proportional setup, and that’s something that is just making an amazing experience when you drive it. The serial production lines are undergoing also final tuning. General assembly staff training is almost complete and supplier ordering is well underway. The high level of coordination and integration of the entire supply chain and assembly ecosystem has been impressive. Geeta will discuss the supplier ramp in more detail, key risk we are managing and how we are working with our partners to support the ramp.

While almost all of our suppliers are performing, a few have difficulties ramping. So, we are happy with our decision to begin with a slow ramp. We are confident we will be ready for customer deliveries once we have received the required regulatory certifications, and we maintain our 2023 production target of 42,400 units. Now, this is important because — of course, supply chain has to deliver, and of course, there can be hiccups. But here is something very important, I hope everybody will understand. And that is because of the amazing ability of Magna to ramp, and I’ll give you the example. Yes, we only made 56 cars since November last year, but that was on purpose. Today and actually even last week and weeks before, Magna can already make 20 cars a day on average.

That’s 100 cars a week, already now. So, the key here — the key takeaway is that when we are ramping up, specifically in Q2, we are going to have such a strong ramp that any units that may have been lost early on can easily be caught up later in the year. And that’s why we maintain our guidance of 42,400 vehicles for the year, extremely important note here. All right. Let’s get to the Ocean demand. Our reservations continue to increase despite new competition and competitors’ price reductions. Net reservations and orders now total approximately 65,000 for the Fisker Ocean, reflecting the large and growing global addressable market for a well-appointed electric SUV. As we start deliveries, we expect increased brand awareness to drive even more customer considerations and demand for the Ocean.

We priced Ocean extremely competitively, considering the many proprietary features such as class-leading range, California Mode, solar sky, solar roof. Of course, the amount of horsepower in this vehicle for the price is amazing, the 17.1 inch rotating screen and digital 4D radar and on and on, I could keep on, on that. But it really shows that people appreciate how unique our vehicle is. And as consumers have opportunities to interact in person with Ocean, we expect this value to increase and really resonate and drive even more sales. We continue to showcase the Ocean throughout a variety of brand-building activities. Two of the larger recent events include media investors and business partners in Austria and Las Vegas. Our pop-ups continue to be very popular with the reservation holders and prospective customers, many of whom drove long distances to get their first glimpse of the Fisker Ocean, which shows how passionate and committed our customers are to the brand.

And I really, really appreciate that. And I think it really builds, again, a strong foundation for our brand. And since our last earnings call, we also took the Ocean to six states in the U.S., Texas, New York, Florida, Las Vegas, Utah and California and also did pop up as many European countries. And of course, we’ll continue doing that and actually increase it as we move forward. I want to just highlight a couple of really innovative things that are inside the Ocean. One is the user interface. And I know there’s been, of course, a few videos on social media about it, but those were all early preproduction versions of this user interface. The final user interface, I just want to tell you, it’s amazing. When I go in the car — and let me tell you, I actually hate computers, quite frankly.

I’m really not good at and I don’t know when I use them, they always break down. But I want to tell you, when you get in this car and use it, you don’t need any instruction on how to use it. It’s just like the first time you picked up an iPhone. It just is intuitive. And that is what’s really cool about this user interface, and that was all developed in-house. Now, also what is super cool, and I’m really impressed about what we have done in-house is the Ocean over-the-air update capabilities, and they are now complete. It’s amazing to experience the vehicle getting updated and improved fully over the air. And this was all developed in-house. It’s just super cool to see. And then finally, the Ocean will come with advanced ADAS controller and sensor suite which is designed to be continuously updated through our OTA platform.

And Burkhard will talk more about that. It obviously also gives us endless opportunities to bring some really cool features to market later because the foundation is so advanced, like the digital radar, for example. Okay. Let me get to a short PEAR update. The PEAR program is progressing well. We achieved our goal of a drivable PEAR prototype before year-end last year, which you may have seen me driving around in L.A., was quite fun actually. Today, we are revealing more of the extra production design. For example, the rear lighting is a continuous light strip around the rear window with an integrated high-mounted brake light. The side view has a unique iconic graphic and a clean sculptural body side with pronounced fenders that really gives it a powerful wide stance.

And it also means the car in this price range is going to handle amazingly. The overall front lights have the signature of Fisker, dual light bars surrounded by high-tech light graphics. And then the vehicle sits a bit higher off the ground, and you also have a high seating position, even though it looks quite sporty. And that’s really as perfect, specifically for city driving. And that is combined with this big canopy that huge round window, which I think today might be the most advanced front windscreen on a modern car because there’s a lot of new rules and regulation on how to do front wind screens. So, we don’t see these super round windscreens anymore that we used to see in the 60s, but we have actually achieved that. And it gives you an amazing view of the road in front of you, anything that happens in front of you.

Finally, the dynamic shape has already undergone extensive aerodynamic testing in the windtunnel. And we expect the top version to achieve well over 300 miles. We will offer two different battery packs because I also think because of the price and the size of the payer, this may be a second EV for many EV buyers that already love CVs and drive CVs. And therefore, they may not need to carry around a giant expensive battery if they’re only using as a city car. So, we’ll offer some different variations there. We also have some super excited different interior variations, but we’ll talk about that later. And the PEAR’s being engineered using new automotive specifications. And that’s important, the new automotive specification, because that’s how we achieved the base price of $29,900.

That’s not a price we just threw out there. We’ve actually gone through all the development to ensure that that is the price that we are going to achieve. I’m super excited about that. The current PEAR reservations are just exceeding 5,600. We did release some new images today, so maybe that’ll pop up a bit as well. And then finally here, I want to talk a bit about our future product portfolio, because at the end of the day, we do have our goal to reach 1 million vehicles per year. So, later this year at our inaugural Investor Day event, we expect to showcase our future — at least some of our future product portfolio with several durable prototypes. And they will all be in new segments, and we are we are still keeping our promise of always having at least four unique features in each vehicle.

So, we will showcase the PEAR, which has some amazing features never been seen before on any vehicle. We will also showcase the Ronin. And then we will showcase our Alaska program, which is our take on a pickup truck. And we have some amazing features that have never been done on a pickup truck before. I’m super excited about showing that. There’s another cool thing about this pickup truck and that is that we actually are able to use a lot of the Ocean components in that vehicle, which means we’re going to be able to do it faster and more affordable. There are probably a lot of other electric pickup trucks out there. It’s going to look really, really tough, but still beautiful. So I’m excited about showing that. Anyway, I can get carried away when I talk about products.

All right. Let’s get to sustainability. That’s another of our super brand pillars. It’s really at the heart of what we are here for. And the hard work on ESG continues as a company. We are progressing on company targets aligned with the United Nations sustainability development goals that are materially relevant to our company. Additionally, as we prepare for our next annual ESG impact report, we have completed our life cycle assessment for the Fisker Ocean. And based on our foundation of transparency and to lead the auto industry, we expect to publish this LCA or life cycle assessment during the first half of this year. We are super excited to share the results, furthering our leadership in sustainability. And we mentioned on our last call that MSCI upgraded us.

And the positive momentum continues. In addition, based on all our hard work and public disclosures, Sustainalytics — the Sustainalytics recently upgraded Fisker 40 spots in global automotive industry rating. We are now the top ranked U.S. passenger EV OEM, the top rank, meaning we have the lowest risk rating based on ESG risk rating scores. So, I want to come back and say, I am super excited. I’m excited to get on the plane back to Magna, see the cars. But I want to say one thing that’s really the surprise here, and Geeta will go into details on that. And that is that we are going to be profitable this year, and she will explain that more in details. And just think about this for a moment, because what we could do, not that we want to, but we could essentially just abandon all our future programs and just live up the Ocean.

That is incredible derisk. And there is no other start-up that I’m aware of that makes EVs that is profitable from the get-go, from the first year. And I think that’s what I’m super excited about. So, I’m going to hand it over to Burkhard to talk some more about other exciting things. Burkhard?

science-in-hd-T2XeWHGZ7xU-unsplash

Dr. Burkhard Huhnke: Yes. Thank you, Henrik. Out of the entire vehicle development process, the final stage that we are currently in has always been my passion, encompassing aspects such as EE integration and final ADAS validation. Getting into the details of final tuning, especially around software debugging, excites me, as I see the tangible progress we are making each day towards completing the development of a truly spectacular product. Beginning with the Fisker Ocean, final engineering testing and validation has progressed quite well over the last few months. Of note, we have completed both, our EPA and WLTP range testing. And our results show even a longer range for the Fisker Ocean than we initially projected. We look forward to the formal proclamations to validate this significant accomplishment.

We are currently in the Ocean certification process to confirm all safety requirements, and we continue progressing through the homologation phase. Final validation activities to confirm our vehicle targets have shown that the majority of areas meet or exceed our engineering objectives. I want to commend our teams who have been fully committed to the extensive homologation testing process over the past few months, which has taken longer than originally expected. Let’s unpack the homologation process a bit, which comprises multiple phases. We start with supervised testing followed by documentation, some of which can be done in parallel with a testing component. Then, we submit final testing results to regulators followed by regulatory review and approval, then assurance of certificates, which is U.S. EPA certificate on conformity in the U.S., the European Whole Vehicle Type Approval certificate that enable us to sell vehicles.

Let me provide a sense of the scale and complexity of the homologation phase. First, we are the only startup that is homologating an advanced vehicle simultaneously in both North America and Europe that will apply to approximately 20 countries. There are over 100 regulations and around 270 various tests, covering everything from crash testing to software readiness and requires coordination with multiple regulatory authorities. But once this is achieved, it gives us the opportunity to launch in various markets, derisk the total addressable market and grow our brand in these critical markets. Each regulation could have hundreds of pages of requirements and testing. What’s more even stricter regulation supply for model year 2023, including increased safety standards and cybersecurity rules requiring hardened performance, all of which we now have to fulfill.

The new regulations became effective for this model year, including cybersecurity rules requiring hardened performance, spanning every level of control unit to the pipeline and the cloud to ensure functional safety resilience. We only have a few tests left that require calibration of parts and software by suppliers. This process is driving quality, improvements and final calibration of both hardware and software into the product. We expect both, European WVTA testing and U.S. FMVSS self certification testing should be completed in March. We are working closely with the regulators to facilitate efficient review and approvals by the ultimate time frames for these next steps are not in our control. Functional safety implementation has been a critical area of focus for our team.

We don’t want to risk anything when it comes to launching the Ocean. We want to release a product that is reliable from day one. So, we must make sure that everything is 100%. While the final implementation phase is very consuming, it is necessary to produce highest quality for our customers. Our functional safety software has been implemented as being validated and also needs to be documented. Through our various final testing, we have confirmed that the Ocean’s performance is amazing as we planned. We’ve taken early feedback on driving dynamics, also for instance, from automotive genres and have implemented those changes into the vehicle. Vehicle dynamics and ride tuning is complete, firmed with serious parts and tires in both warm and cold weather conditions.

Results have been finalized and industrialized with our partners with every positive — with very positive feedback. With the 56 vehicles we have produced post SOP, we saw there were certain areas where we needed to improve and strengthen the software at supplier level and in terms of integration, which is crucial for seamless high-quality experience. We set up a task force that uses HR methodologies for issued management and solving software matters with suppliers on a daily basis. We have seen tremendous progress optimizing and hardening the software maturity in the vehicle. Unlike the hardware aspect of the vehicle, we expect continual innovation and progress with the vehicle software. We are taking advantage of the valuable time we have until homologation certification is complete to deep dive into all possible customer scenarios, debug and perform additional testing to provide customers with the best experience upon delivery.

All of our efforts remain focused on launching a car with high-quality hardware and software functionality. For example, the Ocean comes equipped with a great set of base ADAS features. The Ocean’s ADAS functionality is very competitive and comparable to that seen in premium German brands, as Henrik alluded, too. However, there is more validation work needed to finalize our FI pilot ADAS system in the Ocean. We plan to launch OTA updates over time to continue to improve the customer experience and product performance. In terms of OTA readiness, we have successfully implemented OTA updates of key domain controllers, like ADAS, including its sensor set or vehicle control unit or cockpit computer, to name a few. All of the OTA components from ECU component level to Fisker pipeline and cloud have been reviewed by a third party and have been proven to be functionally safe and ISO 26262 compliant and furthermore, cybersecurity compliant following ISO 21434.

Similarly, the Ocean multimedia integration is quite impressive. The sound system delivers too unique experience in the car. And in cooperation with a leading sound studio, our multimedia experience has been optimized for low NVH and implemented with our unique UI, so users can enjoy a premium hassle free experience. Now to touch briefly on PEAR. While we are currently focused on launch activities for the Ocean, PEAR engineering continues to ramp up, and we have made great progress by utilizing our India lab. Our first driver of the PEAR prototype was built at the end of 2022 which marks a significant milestone in the program development. The PEAR will have a truly revolutionary electrical architecture with the many ECUs in the traditional vehicle consolidated down to just a few central computer units, which we call the Blade computer.

This enables us to execute a fully next-generation electrical architecture for Fisker PEAR, which will be a software-driven car of the future. We have built an amazing team in-house with significant design and development competence. We have organized ourselves very well to collaborate seamlessly across our Los Angeles, Europe and India teams and time zones and to fight the ongoing impact from COVID. Our team is focused on meeting our commitments and driving results that support the rapid scaling of our business. Thank you. I will now turn the call over to Geeta.

Dr. Geeta Gupta-Fisker: Thank you, Burkhard. Good morning, everyone. I’m extremely excited to be here today, and I want to start my remarks by thanking the entire Fisker team and all our partners and suppliers for continued hard work and persistence to launch an amazing vehicle. Building an innovative global EV brand is challenging, and our team remains focused on execution, no matter the obstacles and on delivering a very high-quality disruptive vehicle. I personally spent the last four weeks in Austria with the purchasing and manufacturing teams at Magna. I guess, that’s more of my COO hat than my CFO hat, and quite frankly, I’m loving it. Let me provide an update on our manufacturing and supply chain status. During the year-end holiday shutdown, at Magna Steyr, we completed the final modifications on equipment processes and structure and facility installation and integration work that involved 25-plus vendors and over 300-plus construction workers.

Final tuning is underway in the body and paint shops and the general assembly line, which is scheduled to wrap up by the end of March. Workforce training has occurred in lockstep with plant and facility readiness. Off-line commissioning is ongoing, processes are optimized and all relevant process partners are on site. In-line commissioning is also ongoing with integration and testing with equipment and software suppliers. And this is super critical for us to get into the phase of high-volume ramped up production. In parallel to manufacturing plant readiness, we had an increased presence of various suppliers in January and February on site at Magna Steyr, who are committed to supporting us during this launch phase. We have completed EDI integrations with all our suppliers and collars issued for near-term Q1, Q2, along with ’23 calendar year annual rolling forecast that has been released.

Long-lead material ordering commitments for critical items, such as batteries and drive units have been confirmed with suppliers. Material planning and preproduction teams are in constant communication, sometimes on a daily basis, multiple times a day with suppliers in EU, China and North America to make sure parts ordering is on schedule based on lead times and management of delivery to support the logistic modes Ocean truck and rail. Our China operations are beginning to ramp up, including hiring of our key personnel in China. And our China consolidation center is fully operational, executing Q1, Q2 material received and shipping out of China to Graz to support our production schedule. We expect to begin receiving parts in March in Graz, most likely spread out over the month as suppliers ramp up, and we synchronize just-in-time logistics for all the parts.

As we start getting initial parts and subsequentially ramp up in Q2, any part shortages may now become more obvious. Our teams are prepared and have set optimal inventory levels with continuous monitoring of supply chain risks and logistic delays and will react accordingly to avoid any part supply disruptions. Some of our suppliers have already requested more time for Ronin ramp to establish the internal feedback processes. And as Henrik mentioned, the slow ramp-up was a very good decision to allow suppliers to ramp up parts with high quality. Specifically, one of our TS one suppliers is constrained during this ramp-up period, and we are working jointly with them to try and compress this time line. We are partnering with logistical experts to manage the timing and flow of our components for all parts out of Europe and North America, Magna Steyr is executing logistics and managing shipping patterns based on plant production schedules.

Battery shipment from China has been tested and verified for all three modes of shipping, rail, truck and sea freight. For critical components like batteries with long lead and long transit times, we have partnered with a professional service provider Maersk who is managing our end-to-end shipments from China, including storing the batteries in Europe and managing the on-time delivery to the assembly plant. In addition, Maersk provides secure warehousing for our batteries. Whilst I was in Austria I visited the state-of-the-art 3,000 square meter battery storage facilities, which is only 40 miles from Magna’s plant, and it supplements battery safety stock on site at Magna. I was extremely impressed with the practices that Maersk follows for storage, advanced and sophisticated ways in which they lock material, they look at safety procedures.

Now, we’ve seen continued improvements in commodity and logistics costs. Steel and aluminum are both down over 30% from 2022 highs. Battery raw material prices, such as nickel and cobalt are down meaningfully from peaks, while lithium carbonate has started to ease in recent months. And we expect prices to continue to decline throughout 2023. I had an excellent discussion with our partner CATL in China, and they have assured us that Fisker will get the best prices as material prices come down. Now, we are even starting to hear industry watchers discuss potential oversupply of battery materials in the future. We’ve seen a significant improvement in European energy prices with European natural gas prices now back down to mid-2021 levels. Logistic costs and container prices have reduced meaningfully as more container capacity has become available, and we frankly saw this as Maersk were shipping batteries from China to Graz.

For example, Ocean freight costs are approximately 70% lower than a year ago. Slower economic growth and lower inflation this year could provide further commodity and supply chain relief and lower input costs in general. As a digital direct-to-consumer brand, our online ecosystem is a critical platform for interacting with our customers and connecting them with their vehicles. In November, we introduced our interactive 3-D configurator and an updated app website. I must say that we — I apologize on behalf of the entire Fisker team for early glitches in our digital offerings. We were little too excited to get it out to get some excitement with our customers. We will continue to evolve the platform as our customers provide feedback on their experiences.

The new version of our web application and iOS app is planned to go live this coming Thursday, March 2nd, and Android will go live on Thursday, March 16th. And we look forward to receive your feedback. This new Fisker web and app are improved for a seamless and intuitive way to explore and own a Fisker EV. The benefits of the new Fisker app are as follows: Number one, new My Fisker account profile management hub for reservations and orders, which I personally architected with the team. Number two, new Ocean ordering process, including a price estimator with delivery, trade-in and financing choices, which is an excellent task force that was done between marketing, between finance teams, between IT teams, a seamless collaboration completely developed in-house.

And finally, an enhanced 3D configurator with the most up-to-date product information, packages, options and accessories, and I must say it is one of the most easy-to-use configurators out there. Now turning to our Q4 results, balance sheet and 2023 outlook. Fourth quarter revenue totaled $306,000 driven by sales of Fisker branding, home charging solutions and merchandise. I know a lot of people are eager to understand whether we booked revenue for the 15 fleet vehicle sales to Magna. So, let me address this. We built 15 fleet vehicles for Magna in December. As of year-end, in 2022, these vehicles were still on our books as we built them in December. In January, Magna started using these vehicles for data collection, improvements and validating additional features to be added in months to come.

Due to planned vehicle use, revenue recognition per GAAP does not apply. One of these vehicles is currently being showcased to 15 OEMs in Sweden to highlight joint powertrain capabilities of both Fisker and Magna. And I’m personally super excited to go out there in about 10 days and see how that vehicle is doing. Our Q4 operating expenses were $178 million or $176 million ex stock compensation expense, while capital expenditures came in at $34 million for the quarter. Full year OpEx and CapEx of $702 million, excluding stock compensation expense, came in below the low end of our guidance range of $715 million to $790 million. We are pleased with this result and believe it is a continued testament of our ability to carefully manage spending while continuing to execute on our business plan.

Such discipline does not come by chance, it comes by design. SG&A was modestly lower on strong cost control and lean operations and also because we needed to do less marketing overall, since Henrik talked about the excellent reservation numbers we have. CapEx was also well contained, again due to disciplined management due to certain benefits with respect to FX, some real reductions in CapEx, which we didn’t need, and also certain payments moved into 2023. On the other hand, R&D was higher as we started to reach industrialization and certain key milestones, which actually triggers accruals of certain ED&D. In addition, in order to keep our program timing on track, we also made a decision to utilize some low-volume tooling during this period, which also increased R&D.

And as a result, some of the CapEx also moved into 2023. Our balance sheet remains solid. We finished Q4 with over $736 million in cash, better than we had expected and higher than consensus forecast due to deliberate cost management and opportunistic ATM usage. For reference, this is approximately $100 million higher than consensus average as we see it. This excludes approximately $28 million of VAT receivables, which are delayed to 2023 and would have added to cash balances if we had received them last year. During the quarter, we brought in approximately $57 million from our $350 million at-the-market equity program, which is part of the $2 billion shelf. We have demonstrated our agile business management and prudent liquidity. We remain focused on optimizing our investments and cost structure to remain fit for purpose and align with our production and delivery cadence.

Again, I want to highlight, in 2022 — our 2022 OpEx may seem higher than expected, but overall, CapEx, taking into account we are way ahead. Turning to 2023 guidance. Our overall non-GAAP SG&A, R&D plus CapEx guidance for 2023 stands at $535 million to $610 million range. This guidance reflects our efforts to advance our product development goals while maintaining liquidity that is commensurate with our asset-light model. We’ve also identified strategic levers we can pull if our sales plans change. We have the capital for Ocean launch. If we decided to focus only on Ocean, as Henrik mentioned, we can enhance liquidity further in case capital markets are tighter. We have engaged an investment bank to secure non-dilutive capital, and I’m pleased to say that we have received a couple of initial terms and are in discussion with lenders for working capital facilities for later this year as we go into see production.

We are currently evaluating these initial offers. We are targeting 2022 production of up to 42,400 units, provided our supply chain delivers as forecasted, and we received homologation in a timely manner. Similarly, we expect 2023 gross margins in the range of 8% to 12% and potentially positive EBITDA. These numbers could get better as we achieve efficiencies with our suppliers and if input costs keep going further down. We will be self-sustainable as a company with these margins given our asset-light approach. Fisker continues to strategically strengthen our in-house technical capabilities, total team members now over 850. We are broadening our geographic footprint reflective of our global business model. Today, we are incorporated in 16 countries, and we currently have team members in 10 of these markets.

We anticipate opening new markets shortly. Our technical center of excellence in India has accounted for significant hiring in the past few quarters, providing Fisker with round-the-clock technical expertise. I’m extremely proud of the Fisker team, our partners and suppliers for all these accomplishments we’ve made in 2022 and already in early ’23 and the unwavering focus on launching an amazing vehicle. We continue to show agility and resiliency and adjust whenever needed to stay on track. We’re now happy to take your questions.

Frank Boroch: Operator, please start the question-and-answer session.

See also 20 Largest Petrochemical Companies in the World and 12 Top Performing Energy Stocks in January.

Q&A Session

Operator: Our first question is from Chris McNally from Evercore.

Chris McNally: Thank you so much team. And really appreciate all the guidance details. It’s very helpful. So, maybe two questions, one for Henrik and one for Geeta on gross margins. Henrik, how do we monitor and sort of encourage the order conversion. I think investors seem super focused on 65,000 net orders is great, but it’s only a couple of hundred down. So how do you keep sort of the lower trends engaged where they may have wait times of over 9 months? I know you’ve talked about the higher trends mostly being delivered in 2023. But if you can talk about order conversion and how you’re monitoring customer engagement, that would be great.

Henrik Fisker: Yes, absolutely. So I mean, first of all, as I think most people know, we have already converted quite a lot of orders. They were done out of two reasons. One, we had a limited 5,000 Ocean Ones, where we took a nonrefundable $5,000 deposit. So those are pretty much gone. We actually have 1,000 people under waiting list to get an Ocean One. We then also have sold or fully firm orders for several, several thousands of other vehicles out of the U.S., which were — came out of the IRA where we had that one week where we took the opportunity to offer people to make a firm commitment. So, they had potentially the possibility to get this tax refund of $7,500. So, that’s already gone. Now, the next step is we’re going to open up for firm reservations starting with the Extreme very shortly, both in Europe and U.S., and we have a lot of people who are super excited about doing that, so they can obviously make a firm order, start putting in their colors and wheels, et cetera.

So, at this point, I think we’re seeing a really, really firm commitment from most of our reservation holders. What we are doing is we are reaching out to our reservation holders almost every week. We also don’t want to innovate them with stuff from us, but we keep them up to speed with what’s going on. I think the fact that we have not raised prices, we have been firm with our pricing. We set up pricing a long time ago, and it works with our business model. We make money on our vehicles. And I think that’s a very important part of why we have loyal customers. I also think once we get this vehicle on the road or even people who can go and actually try it, I actually think that’s going to be the ultimate conversion weapon when somebody gets into the vehicle and go, wow, this thing is amazing.

So, that’s all I will say. But the fact that we continue seeing a growth in our reservations, I think, really shows the unique product that we have because not everybody keeps seeing growth when you see more competition coming and somebody lowering prices, et cetera. But I think that really shows that we have a great product.

Chris McNally: And Geeta, maybe real quickly on the gross margins. Again, I appreciate the visibility. Could you just walk us through sort of the risk and opportunities around the range, 8% to 12%, how do we think about ramping that throughout the year? Could you be gross margin positive sort of in one of the earlier quarters, let’s call it Q3? And then, just remind us how the margin and the supply agreement works in contract manufacturing? Thank you.

Dr. Geeta Gupta-Fisker: Sure, Chris. So I think that the 8% to 12% gross margins that we have outlined, these are actually GAAP accounting base. They include stock-based compensation. So we have taken into account all the investments we have made, and we have factored those in when we look at these gross margins. I think you asked the question, what are the risks and opportunities. So I think from my point of view, to achieve these gross margins, I don’t frankly see a risk unless battery prices trouble. So, I don’t frankly see a risk on achieving the gross margins. We make these gross margins from the first car. And I think I’ve highlighted that multiple times in multiple earnings calls, and that is because of our asset-light strategy, and we don’t have those huge factory billions of dollars of cost to account or amortize against. Opportunities…

Chris McNally: Sorry, Geeta. I just wanted to — interrupt. Is it possible you could just give how long — I mean you have obviously visibility on your battery prices for a certain number of quarters. So, when you were making the comment about battery, is that for longer-term gross margins? Obviously, there would be more variability. I didn’t want to interrupt.

Dr. Geeta Gupta-Fisker: Yes, sure. So Chris, when it comes to battery prices, our battery contract is already set in stone. And what changes is the certain material prices which are linked to indexes, so which are common to everybody, not just us. The second place where you have the ability to influence the battery price is volume, obviously. So as Henrik mentioned, as our opportunity to grow increases, I’m expecting, as I discussed with our partner, CATL, volume can also have an impact. The third area that can have an impact on battery pricing is if we decide with CATL to jointly participate in mining. I don’t see that happening anytime soon. We’re an asset-light business. But I would never say never, should we have an opportunity to do something which is ethical and which is exciting to address the pricing.

So I’m not concerned about battery pricing. I think we’ve seen the highs of the highs, and I’m expecting that we are now going to get tapering off with respect to battery prices. In terms of — I’ll talk a little bit about opportunities and I’ll come to contract manufacturing. In terms of opportunities, if input prices keep going down, I see that as an opportunity for us to improve our gross margins. Also, I think that we have an opportunity here to look at a very sustainable product with respect to all the components and commodities. I alluded earlier to steel and other areas. Now, let’s look at contract manufacturing. So, contract manufacturing, again, I think we’ve talked about it many times, and you were in the plant, and you saw on your own why we don’t have the inefficiencies.

And Magna doesn’t have the inefficiencies that every startup has. There are multiple products made on the same line. So, we are part of the multiple product lines. That means that you share the cost base along with other customers. So, that’s the first thing. The second thing I want to highlight is that the way the contract — this is launch year. It’s not a full year of production. This is launch year. So any fixed cost they apply for next year, so we have a fairly defined manufacturing agreement. We don’t reveal our assembly cost. That’s our trade secret. So we keep that in-house. But we’re very confident that these prices stay. Of course, there’s been an increase with respect to inflation. So, those labor costs are very well known. The labor is union, but we factored in even those inflationary increases in the gross margins that I gave you guys.

Operator: Our next question is from Jeff Osborne from Cowen and Co.

Jeff Osborne: Two quick ones. Maybe just a follow-up on the prior line of questioning, Geeta. What is the lag of raw material price changes to when it would flow through on your battery pricing? Is that like 6 months, 12 months? Is there any time frame you can add to that?

Dr. Geeta Gupta-Fisker: Quarterly. Quarterly.

Jeff Osborne: Quarterly. Got it. Perfect. And then speaking of quarterly, how should we think about the cadence of production through the year? Last quarter, you had given some helpful commentary on what you thought production would be by quarter. You obviously reiterated guidance for the full year. I assume we should be all on the same page, not assuming any deliveries in calendar Q1. And then, is the old production ramp still applicable or no?

Dr. Geeta Gupta-Fisker: Those are a lot of questions. So, let me take one by one. So deliveries have nothing to do with production. Deliveries have to do with homologation and getting the approvals to sell the cars. So, I want to separate the two. We can produce cars today. As long as we get — like I mentioned earlier, we are starting to get parts. I saw batteries last week. I’m seeing other parts coming in. So, as long as parts keep coming in, we can produce the cars, no problem. But what we need is the certification to sell the vehicles in Europe and U.S. And I think Burkhard went into great detail about that already. Now, let’s come to production itself. We can produce Henrik mentioned 20 cars a day, and we have a very clear plan with Magna Steyr on how to increase this production capacity week on week on week, all the way through to December this year.

So, the numbers we had — the guidance we had given hasn’t changed in terms of what we can produce. What we need to monitor, as I mentioned, is supplier ramp-up. So, as I alluded to, certain suppliers, they feel they need a little bit more time for their own feedback processes, high-quality feedback processes, and we will monitor what that means between March, April, May in terms of where they get to peak production. But I’m expecting that by June time frame, all the suppliers are fully ramped up to our production needs, which is more or less 5,000 a month at this point in time.

Operator: Our next question is from Dan Levy from Barclays.

Dan Levy: I wanted to ask about the R&D guide. So, your guiding to 2023 R&D is $160 million to $190 million. And this is a significant step down from the $400 million plus you did in 2022. So maybe you could just talk about, please, the underlying requirements or dynamics in R&D spend, why steps down? And maybe what R&D is required in the future for new product, be it PEAR, Ronin or Alaska? Thank you.

Dr. Geeta Gupta-Fisker: Great question, Dan. So Dan, when a company starts up operations, you have a certain level of inefficiency, and that’s why we have a lot of outside suppliers and we have relied on Magna to do some of the engineering. Also, we relied on certain suppliers do some of the engineering, which is why you saw a higher ED&D bill for Ocean. Now, as we go into the second vehicle, on one hand, we have enhanced our own internal team, including a pretty significant employee base in India which, as we know, is a much reduced cost than hiring here in California. So, that accounts for some of the reduced costs where we brought some of the R&D in-house. The second point is that we have certain areas where we don’t have to repeat the engineering.

Let me give you some examples. So for example, the OTA pipeline that Burkhard talked about, once those investments are in place, we don’t have to repeat them. Henrik talked about UI/UX, once the development, the base UI/UX experience is developed, now you’re doing a spin-off, you’re going to modify that. So, there are many, many, many areas, including, I can talk about in EE architecture where we have the capability to take over certain components from certain suppliers and carry over and use those over our second vehicle. And finally, we are more efficient. We have a team that works together, smarter, just far more efficient when it comes to next year.

Henrik Fisker: And Dan, maybe just to add to that, you mentioned Alaska. That will be very broadly based on the Ocean. We’re going to call it the FT 32 platform, but it’s really a derivative of the Ocean. So again, you’re not now engineering a car from ground up. And that’s also why we can have — we can create a driver of prototype really quickly because when we created the first driver prototype of the Ocean, there was nothing there. Everything had to be new. That’s not the case with future vehicles.

Dr. Geeta Gupta-Fisker: Dan, I hate to say the final comment, but frankly, there is a price point per new startup. There’s a price of entry and suppliers generally charge you a higher ED&D. Once you get past that phase, you are welcomed into the club and you get treated like a real OEM.

Dan Levy: Great. Thanks. And then, just a follow-up. Maybe you can talk a bit more about the time line of PEAR. You mentioned you have a prototype, but how many incremental prototype stages are there? At what point do you start to do the supplier sourcing, when does the BOM get locked in? And I think you had mentioned at one point that there was a high amount of carryover content from Ocean to PEAR. Maybe you can reiterate if that’s still the case or any incremental color on that front, please? Thank you.

Henrik Fisker: Yes. So first, what I mentioned was a new way to specify a vehicle. And what I mean by that is that when anyone, anywhere in the world creates a car, it is a set of spec books, and spec books means that every part could be the mirror. For example, there’s a spec book on the mirror and that spec book, for example, on the mirror might contain 20 different things from the light has to be — to glass, the cap on the mirror, everything that’s in that mirror, a little electric motor whatever. And what normally happens is you create that spec book, specifically as a start-up together with suppliers, sometimes. What happens with normal OEMs or traditional OEMs that’s been added for a while, they take the spec book from their previous car and they apply it to the next car, which essentially — I mean, it’s just like a recipe in a bakery when the son or daughter takes over, they will use the same recipe as the mother and father did and nothing really changes.

In our case, we decided with a PEAR to actually completely redo these spec books. We obviously had all the experience with the Ocean, and we fine combed through it. And certain elements that are great at the Ocean that we can use real use, but other things may be too premium because at the end of the day, the Fisker Ocean is a premium vehicle that goes all the way up to $70,000. So, of course, it has certain engineering solutions that fit that premium segment. But when we looked at the PEAR, we wanted to come up with some ideas that has never been done before to achieve our goal of being able to sell this vehicle for $29,900 as the base price and make money on it. And we went through all that and have already gone through all that. We have also gone through how can we lower the cost of the total development?

Maybe we do less prototypes, maybe do prototypes at different stage. There’s a whole bunch of things we’re going through. Now, I’m not about to show our menu, just like Coca-Cola doesn’t show their ingredients, there’s laying in some safe somewhere and so it does here at Fisker. So I’m not going to elaborate more on that. But believe me, it’s a pretty exciting program, and it will come out at $29,900.

Dr. Geeta Gupta-Fisker: Dan, you asked a question about the BOM and you asked a question about supply engagement. So I think what I’m super excited about is learning more and more about EE architecture from Burkhard and how amazing and lean the EE architecture will be. So, I’ll pass on to Burkhard to explain a little bit, and then I’ll jump back in on the BOM.

Dr. Burkhard Huhnke: Let me talk about the central computers. So in original — or in traditional car manufacturers, we have many ECUs, which are now consolidated to just a few. If you imagine how many ECUs need power supply, need packaging, need housing, we can reduce that to just a few. With this saying, the complexity to consolidating into less computers is playing in that advantage, not just in regards to owning the software on one hand side and all the features and functions being implemented in those fewer computers but also reducing the complexity with suppliers, reducing the complexity on cost, reducing the complexity of wiring harness. Just a few centralized computers allow you actually to reduce extremely the cost from components to buying harness to ED&D, and that is we are doing currently consolidating into this new architecture, which really becomes now a software-driven car where we see the future-going.

Specifically for PEAR, it allows us to reduce drastically the BOM cost from the EE architecture, although the complexity of the domain computers are increasing, this is the advantage of the future EE architecture, which we are implementing into the PEAR.

Dr. Geeta Gupta-Fisker: So, Dan, just to highlight between Henrik and Burkhard, overall, the car has a fewer parts whether it’s electrical components or its mechanical components. Less material means less cost, also means that you have less integration, both electrical and hardware, means that your prototyping costs are less, means that your overall — overall complexity is less. So the way we look at PEAR, we are engineering the entire EE architecture in-house. It’s well underway. We are working with — we have identified some of our SOCs already. We have identified what chips we want with respect to infotainment. We are in the process of finalizing ADAS. And then, when it comes to the actual body and chassis, the development is being done in-house completely. We are almost final negotiations when it comes to powertrain. So, we have identified pretty much all long lead commodities and suppliers.

Operator: Our next question is from Itay Michaeli from Citi.

Itay Michaeli: Great. Thanks. Good morning, everybody, and congratulations. Just a couple of quick follow-ups for me. First, hoping you could just talk a little bit about the cadence you expect for gross margin this year. I think you mentioned earlier that, this is a launch year and maybe there’s certain, I guess, treatment of fixed costs. I was hoping if you could elaborate a bit more on the gross margin kind of in year one and year two in terms of the earlier comment.

Dr. Geeta Gupta-Fisker: Itay, I’m not generally giving guidance for ’24, sorry, is that the question? Are you asking me — okay. So, the gross margin, I’ve given this on an annual basis, not giving guidance on a quarterly basis.

Itay Michaeli: Got it. And I guess, would there be different treatment of certain costs next year? I just want to elaborate if there’s a comment you made around — sort of the gross margin treatment initially in the launch year.

Dr. Geeta Gupta-Fisker: No, because we don’t have our own factory, as I explained. All the costs we have are amortized over the period of time. We haven’t determined whether the life of those tools is 7 or 10 years. That’s still to be determined as we get into sales. But I don’t see minor launch costs, but I would not — if you’re putting a model together, I would not simulate it based on other vertically integrated EVs.

Itay Michaeli: Got it. Perfect. That’s helpful with one of that classification. And just secondly, maybe going back to the PEAR to the earlier commentary on the Blade Computer and the new electrical architecture, are you able to quantify maybe at a high level how much of that is contributing to more efficient R&D spending this year as well as what you think the ultimate BOM kind of benefit would be of that next-generation architecture?

Dr. Geeta Gupta-Fisker: At overall vehicle level, it’s enormous. It’s just enormous because you’re reducing the number of hardware and you fundamentally able to upgrade features through the application layer. So, once your hardware is in, your operating system is in, you’re fundamentally changing things through your application layer. So, reducing hardware means a lower BOM. I think this is our trade secret. So I would hate to give our trade secret on what the BOM is. But what I can tell you is that we are starting to develop the entire vehicle from the basis of the EE architecture because at the end of the day, you decide which ECUs to virtualize, but more importantly you also start to impact supply chain and you start to create a more beneficial supply chain and you also need less complexity in purchasing.

So, I think that for us, this is really critical to get a very, very sophisticated EE architecture. It does, by the way, impact powertrain and it impacts pretty much every other module. I just want to see if Burkhard wants to add anything.

Dr. Burkhard Huhnke: Besides reduction of the BOM cost, it increases the performance drastically. So, that is an interesting trade-off. Although the BOM cost is being reduced, the high-performance compute allows you future features and functionality, which is even beyond anything you could imagine. So that is quite amazing that you have a super powerful computer with a network inside the car which is even giving us more opportunity for the life cycle management.

Dr. Geeta Gupta-Fisker: The one item I do want to add Itay is, if in the future, you want to upgrade the vehicle, the more and more that sits on the application layer means you have less cost for model year changes or upgrades because they are software-driven rather than hardware-driven or black box driven that comes from suppliers.

Itay Michaeli: That’s very helpful. Thanks for that color. Just a final question. With cash at over $700 million in the guidance you outlined today, just curious how you’re think about minimum cash this year liquidity? And just kind of your overall plans there.

Dr. Geeta Gupta-Fisker: I think we are self-sustainable. So, we have a very good cash position. And as you see, the guidance is $535 million to $610 million. I think year-on-year, we’ve shown that we are always at the lower end or below guidance. So I would let you do your model yourself.

Operator: Ladies and gentlemen, we currently have no further questions. I will now hand back to Henrik Fisker for final remarks. Please go ahead.

Henrik Fisker: Thank you very much. This was a super exciting earnings call, but I will be jumping on the plane back to Austria to make sure we get full speed in the production. And as soon as homologation is there, we’re going to start delivering a bunch of cars. I’m super excited. Thanks for joining in, and have a fantastic week.

Operator: Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.