Embark Technology, Inc. (EMBK) Q3 2022 Earnings Call Transcript

Embark Technology, Inc. (NASDAQ:EMBK) Q3 2022 Earnings Conference Call November 8, 2022 8:30 AM ET

Company Participants

Adam Fee - Strategic Finance

Alex Rodrigues - Co-Founder and Chief Executive Officer

Richard Hawwa - Chief Financial Officer

Conference Call Participants

Chris Wetherbee - Citi

Todd Fowler - KeyBanc Capital Markets

Jeff Kauffman - Vertical Research Partners

David Vernon - Bernstein

Operator

Greetings, and welcome to Embark Truck’s Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Adam Fee. You may begin.

Adam Fee

Thank you, operator, and thank you everyone for joining us today. Joining me on today’s call are Co-Founder and CEO, Alex Rodrigues; and CFO, Richard Hawwa. Embark issued its third quarter 2022 press release and presentation, which we will refer to today. These can be found on the Investor Relations section of our website at investors.embarktrucks.com.

Please note this call will include forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect our views only as of today and should not be relied upon as representative about our views as of any subsequent date. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in-light of new information or future events.

These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the SEC including our Annual Report on Form 10-K filed on March 21, 2022, our Quarterly Report on Form 10-Q filed on August 12, 2022, and other documents filed with the SEC from time-to-time.

We will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Embark’s performance. These non-GAAP measures should be considered in addition to, and not as a substitute for, or in isolation from, GAAP results. These additional disclosures regarding the non-GAAP financial measures in today’s press release and our filings with the SEC are posted on our company’s investor relations website. Finally, we are recording today’s call, and we’ll make the recording available this evening also on our website.

I would now like to turn the call over to Alex.

Alex Rodrigues

Thank you, Adam. Good morning, everyone. I’m excited to provide our last quarterly update in 2022 and walk through what we said we would deliver on, how we have delivered on it, and how these milestones set the stage for our progress in 2023. Before I get into those updates, on Slide 3 I want to take a minute to talk about our Truck Teams here at Embark. In September, Embark celebrated national Truck Driver Appreciation Week, recognizing the around the clock contributions of our Safety Drivers and AV Operators.

At Embark, we deeply value safety, and our people. Embark’s Safety Drivers are some of the most experienced truckers in the industry, with an average of over 20 years of experience and over a million miles per person operating big rigs. Our Truck Team’s knowledge and experience are paramount to Embark’s perfect safety record, as reported this past June by the National Highway Traffic Safety Administration.

For those not familiar, a Truck Team consists of a Safety Driver and an AV Operator. The Safety Driver is focused on the truck and on the road, while the AV Operator is in the passenger seat, or now, sometimes remote. The role of the operator is to monitor the AV system, advise the Safety Driver on performance, and continuously capture feedback on the system to relay back to Engineering.

This company-wide collaboration between the Truck Teams and our world-class engineering team is paramount to building the software required to ultimately deploy commercial autonomous trucks safely. The underlying theme is always: safety first. While on the topic of safety, I also want to highlight one other recent development, which further underscores our commitment to having a world-class safety organization.

Last month, we were very excited to welcome Peter James as our new Head of Systems Engineering & Safety. Peter most recently worked for over 4 years at Outrider and prior to that spent nearly a decade working on deploying autonomous trucks for the Department of Defense, while working at Lockheed Martin and others. At Embark, Peter will leverage his experience and expertise creating military-grade autonomous trucks to further enhance the reliability, manufacturability, and safety of Embark’s autonomous systems, readying it for commercialization.

Now, turning to Slide 4. If you recall back in March during our first public earnings call, we laid out three primary milestones for 2022 and we have reiterated these milestones on each quarterly call earnings since. With this being our last earnings call in 2022, I want to walk you through how Embark is delivering on what we set out to do this year.

I’ll go into more detail on each of these throughout the presentation, but a quick reminder of our 2022 milestones: First, to deliver the first truck into the fleet of a carrier customer through our truck transfer program; second, to demonstrate two of the remaining five capabilities in our technological road map, bringing the total capabilities accomplished to 13 of 16 by the end of 2022; and third, to launch the backbone of the Embark Coverage Map across the Sunbelt region.

As I’ve said on prior calls, we set our objectives to provide a way for you to measure and track our progress as we continue on our path to commercialization. We measure success by our ability to deliver on our stated objectives, and to that end, I’m thrilled with Embark’s achievements so far in 2022, and happy to confirm that all these milestones are on track for completion, which is a testament to our team’s focus, determination, and consistency. We look forward to sharing next year’s milestones in the coming months, and more importantly, delivering on them in 2023.

Moving on to Slide 5, I will update you on our first 2022 milestone, the truck transfer program, or TTP, with Knight-Swift. Let me start by giving a little bit of context. All trucks on the road today operate under what is known as a Motor Coach or MC number, which designates each truck to the operating authority of a particular fleet. Prior to TTP, we believe all testing miles and pilots in the AV trucking industry operated under the AV providers’ MC number, not under the carrier or fleet. This means that the AV provider is legally responsible for the truck's operations, not the fleet or shipper.

We believe this configuration for testing and running pilots is driven in part by the fact that these trucks are effectively prototypes that haven’t yet achieved the maturity and reliability required for the technology developer to confidently transfer trucks to carrier customers with minimum maintenance and engineering oversight. To take that next step towards commercialization, we must go from prototype to creating a product that can stand on its own within a customer’s fleet. This is exactly what TTP is doing.

To our knowledge, TTP will be the first time that an AV technology provider has put its technology on a carrier-owned truck, under the MC number of the fleet, and which will have its day-to-day maintenance and operations performed by the carrier after training with Embark. This transition to installing our AV technology on a carrier’s trucks is truly unique in the industry and in order to complete this successfully, we have taken a comprehensive, three-pronged approach focused on hardware design, software, and operations.

First, on the hardware side, our TTP trucks include an improved AV kit with upgrades to critical hardware components designed to achieve reliability for everyday use, and to be easily serviceable by fleet maintenance staff with minimal training. We also believe this is a powerful proof point of the Embark Universal Interface, or EUI, and our OEM-agnostic approach.

We worked with Knight-Swift to select trucks from their order book, which happened to be a new brand for Embark. We then engaged that OEM alongside Knight-Swift and received the necessary information, which we required to ensure EUI could be integrated with that platform. Next, we completed and validated the hardware integration on that new OEM platform on behalf of our carrier partner.

I want to highlight this process because it really reinforces the differentiation of Embark Universal Interface for two reasons: First, our experience with TTP demonstrates that carriers do have a strong preference about vehicle platforms and will choose AV components to meet the requirements of those platforms. And second, this shows that Embark’s platform agnostic approach is further validated by efficiently being able to integrate our hardware kit on a new truck platform in only a couple of quarters.

With the completion of component level verification and validation, or V&V, testing, the next and final key hardware milestone remaining for the TTP program is the conclusion of track and climatic chamber testing at the proving ground. Second, Software. In order to achieve the seamless integration required for Knight-Swift to implement our technology in their fleet, we made several key upgrades to the software that allows for a frictionless AV system launch experience handled by a single operator.

In many cases, the AV-system boot-up process is a multi-step process often requiring incremental staff and time, compared to a human driver preparing to depart. Our system start-up process has been streamlined now to allow for the AV system to be operable in a comparable time to a human driver preparing for departure.

Another software upgrade I want to highlight is our ability to automatically detect trailer presence and weight. It's one thing to test software with a single test weight load, but in a real-world setting every trailer is a different weight, and our software is now able to adapt to this real-world scenario based on the weight of the load.

And finally, we are excited about our over-the-air data strategy, which reduces the data transmission needed to operate our AV trucks by approximately 95%. I want to share a quick anecdote on how our PDP program led to this innovation. About a year ago, during regular discussions with one of our PDP partners, who was also testing technology from another AV player, we heard feedback that the other AV player was asking them to install complex, expensive data transmission infrastructure at each of their existing sites to increase bandwidth and support the hundreds of gigabytes of data they were producing per truck per day.

It was clear to us that this would be a pain point for our carrier customers and that asking them to install dedicated bandwidth infrastructure was not a solution. Using that carrier feedback, Embark has developed an intelligent data prioritization system that reduces our bandwidth needs by 95%. This brings total bandwidth needs to within the bounds of a typical industrial site.

Instead of sending every data point all the time, our system now only sends data associated with specific topics or tags that are critical to technology development and safety. This is a step-change improvement in data efficiency that allows our carrier customers more flexibility operating AV trucks on their own and at third-party sites. Our focused, data-optimized strategy is another example of how Embark Driver software continues to evolve from an R&D system to a commercial product.

And that brings me to operations. Embark and Knight-Swift have been working closely to develop and test the standard operating procedures for dispatching, monitoring, and maintaining a commercial grade fleet of AV trucks. People often don’t appreciate that AV trucking has never been done before, which underscores the importance of developing these standard operating procedures and honing them through real world operations with leading partners.

We are going deep into the nuanced details to work out all the kinks and enable a frictionless customer experience. A few operational achievements I want to highlight are transitioning our driver-only configuration to Knight-Swift, integrating with Knight-Swift’s dispatch system, and completing the initial maintenance program training.

Our driver-only configuration is an AV operating configuration that allows trucks to operate in AV mode, without needing a passenger-side AV operator. Today, the industry standard for most AV testing as I spoke about at the beginning relies on having a person in both the driver and passenger seat. Using Embark’s driver-only configuration, which we were one of the first to explore back in 2020, each TTP truck will be solely operated by a Knight-Swift driver following an extensive Embark training program.

To put this into perspective, this is exactly how we envisioned the AV industry evolving: First, a Truck Team, as I explained at the beginning. Next an Embark safety driver, now a Safety Driver that works for the carrier and then ultimately no driver. The basic premise of TTP is to validate this hypothesis, and as I mentioned earlier, we have hardened and updated our hardware and software to enable this new configuration, which now enables no Embark staff in the vehicle.

We’ve increased system stability and the need for monitoring or providing feedback to the driver or to engineering has been greatly reduced. These can now be done with automatic alerts, which we believe is the logical pathway to having a safe and reliable system that can ultimately operate with no driver.

To support this configuration, integration with Knight-Swift’s dispatch system allows their dispatchers to share critical load details directly with Embark Guardian Operations, which allows for more robust remote support.

Finally, as I mentioned, we continue to work closely with Knight-Swift to create the maintenance program training, which is the first AV truck maintenance education program between a carrier and an AV software provider. While the initial training is complete, we expect this training to be ongoing throughout 2023 as we transition additional maintenance activities to Knight-Swift and focus on harvesting real world learnings from operating the Embark Driver software in Knight-Swift’s commercial fleet.

As Knight-Swift prepares to receive the trucks, we will continue to run pilot tests on the system, as well as take our Embark’s driver training program to Knight-Swift drivers. In summary, today our competitors are running under their own operating authority. Handing the trucks over to a carrier to own and operate is a significant milestone, which illustrates our confidence in the product and the maturity of the system. This is not a demo or a collaboration where we have engineers nearby to adjust the system if something goes wrong. It’s truly handing over a product to a customer.

TTP also further highlights the benefits of our close collaboration with Knight-Swift, enabling us to be asset light and focus on building world-class software, while leveraging the operational expertise of the largest carrier in the United States.

On Slide 6, I’m excited to go under the hood on a few of the key hardware upgrades that we’ve delivered to enhance the reliability, serviceability, and manufacturability of our AV system for deployment in commercial fleets at scale.

Starting with the autonomous domain controller, we have been working with One Stop Systems, or OSS, who specializes in building military grade compute and storage solutions focused on reliability and performance. Through our collaboration, OSS has customized a solution for Embark’s autonomous trucking application, including attributes such as additional ruggedization, secure system monitoring and control, and dedicated cooling technologies, all elements critical to the durability and reliability required for commercial operation of autonomous trucks.

I would also highlight, as I mentioned during our last quarterly earnings call, having partners like OSS enables Embark to be asset-lite, capital efficient, and focus on developing high value software solutions.

Regarding sensor integration, the hardware upfit for TTP features new individual sensor pods designed as independent assemblies and optimized for a commercial duty cycle. Each pod is designed to resist harsh environmental conditions at both the sensor and module level. The side-sensor pods include upgraded LiDAR sensors and utilize the truck’s existing mirror mounts making installation and servicing more efficient.

Likewise the lower front sensors are integrated into a custom bumper element designed to allow easy access to Embark’s sensors, while retaining the serviceability of OEM components. This was an important consideration for Knight-Swift as part of TTP.

The upgraded hardware modules have been put through a significant verification and validation testing campaign to ensure the necessary levels of safety, performance and reliability are upheld throughout extremes of shock, vibration, temperature, exposure and more. We are excited to wrap-up system level V&V testing both at the track and in our internal pilots before handing over the trucks to Knight-Swift.

Before moving on, I want to give a shout out to the Embark operations team who has been working around the clock to complete the testing required for TTP. In the last two quarters, we have completed 4x the number of weekly AV tests versus 2021. This increase in AV tests conducted is just one example of how our operations team is focused on accelerating the commercial and engineering progress here at Embark.

Turning to Slide 7, I want to provide an update on our capability roadmap. Again, this is a very consistent slide that you have seen many times. Coming into 2022, we had demonstrated 11 of the 16 capabilities we determined were required to safely commercialize our technology.

At the beginning of the year, we laid out our objective to demonstrate Emergency Vehicle Interactions and Evasive Maneuvers this year. And then back in August, we successfully demonstrated the ability to interact with Emergency Vehicles on a public highway by completing a routine traffic stop without any driver interaction.

Next up for Embark is Evasive Maneuvers. Enabling evasive maneuvers is an important step for commercialization because unexpected things will happen on the road, and sometimes drastic steering or braking is required in order to avoid dangerous situations that can be caused by unpredictable actions from nearby drivers. I am happy to announce that we are on track to demonstrate Evasive Maneuvers by the end of the year, which would accomplish both of the 2022 items on our technology roadmap.

In addition, we have also been making significant progress on the remaining capabilities, such as Inspections, which I’ll now talk about on Slide 8. The traditional trucking inspection process has long presented barriers to operation of AV trucks. This is because the traditional commercial vehicle enforcement system requires all trucks to be able to stop at weigh stations and engage with law enforcement if not granted a bypass, which poses a couple of challenges for AV trucking.

First, each weigh station is a unique, unmapped and unstructured driving environment, which differs from the on-highway environment. Second, roadside inspections at weigh stations necessitate driver involvement, which an AV truck could not easily execute. The solution was to remove the need for weigh station stops by conducting rigorous AV truck inspections before every trip.

We worked closely with the Commercial Vehicle Safety Alliance or CVSA, which represents state law enforcement leaders from across the country, as well as leading national fleets to develop an enhanced commercial vehicle inspection standard for AV trucks. CVSA also developed a training course to qualify carrier technicians to perform autonomous truck inspections at carrier terminals.

CVSA officially voted to adopt the new standard in September. The standard will require comprehensive inspection by CVSA-trained technicians before each trip and at least once per 24-hours of truck operation. The inspection results will then be reported digitally to state highway patrols, allowing all pre-inspected trucks to bypass weigh stations, except in cases where there is an imminent hazard detected. This new inspection standard raises the bar for truck safety, as 100% of AV trucks will be inspected by CVSA-trained technicians daily to ensure there are no safety defects prior to departure.

By comparison, in the existing process for conventional trucks, only a small percentage of trucks receive roadside CVSA inspections, and this happens at the discretion of weigh station personnel. In fact, during an enforcement blitz, when systematically evaluating the full set of trucks on the highway, CVSA recently found that 23.8% of trucks had out-of-service safety violations, according to their 2022 Internal Roadcheck Results analysis. We are looking forward to providing more updates on the progress of this important capability in 2023.

Turning to Slide 9, last week, we launched the coast-to-coast backbone of the Embark Coverage Map, which contains nine transfer point sites near key cities across the Sunbelt, including new locations in Dallas, El Paso, Atlanta, and Jacksonville, to accommodate the freight volume in key markets and provide operational support for carriers and shippers using Embark-powered trucks.

We strategically selected these nine transfer point locations to open crucial shipping lanes, which represent 28% of U.S. shipping volume in the Sunbelt, for our carrier partners to begin hauling goods autonomously once Embark’s technology is commercialized. The lanes in the expanded network cover 9.5 billion miles of annual freight, including San Antonio to Houston, Dallas to Atlanta, and LA to Phoenix, which are some of the highest volume inter-city lanes in the United States.

Our partnership with Alterra and Ryder were critical to achieving this milestone, allowing us to secure optimal real estate sites and support services. We leveraged these partnerships to accelerate our deployment timeline, access superior properties for AVs, and deliver infrastructure for fleet partners, while doing it all in an asset-light manner.

Partnering with Alterra has allowed us to access deep industry knowledge, a team providing nationwide coverage, a portfolio of over 150 existing properties, and a fully discretionary fund, to quickly identify sites and to structure flexible usage agreements that will enable Embark to scale across specific properties in alignment with our network’s growing volumes.

Upon commercial launch, our carrier partners will be able to operate without the need for driver breaks, which we expect will result in delivery times that are significantly faster than what is currently possible. According to Embark’s analysis of government data, 41% of U.S. shipment miles in the coast-to-coast Coverage Map are on lanes that are longer than drivers can complete in a single shift due to hours of service regulations, and which could be accelerated by an autonomous truck.

Our proprietary, patent-pending Vision MAP Fusion, or VMF, technology is uniquely positioned to allow for utilization of the coast-to-coast transfer point network by our carrier partners. VMF minimizes reliance on cumbersome HD maps by instead integrating real-time inputs from Embark’s suite of sensors, allowing the technology to navigate its environment utilizing a light and easy-to-create and maintain map. This map-light approach allows Embark to expand to new markets in a way where effort and cost do not scale with mileage.

Establishing the coast-to-coast backbone of the Embark Coverage Map was the third and final 2022 milestone that we laid out in the beginning of the year and is key on our path to commercialization as it provides our carrier partners the visibility they need to plan their deployment of Embark-equipped trucks, improving the ecosystem’s ability to rapidly scale following commercialization.

And with that, I will turn it over to Richard to discuss the financial details.

Richard Hawwa

Thanks Alex. On Slide 10, I want to highlight some of the key financial metrics that support our business progress. Our cash and cash equivalents were $191 million as of September 30, 2022. Our free cash flow spend for the quarter was $29.4 million, compared to last quarter of $24.7 million.

I’ll provide a bit more detail on the quarter-over-quarter change, as most of this increase simply reflects the timing of cash payments, and not an increase in the go forward run-rate free cash flow spend, which is why we are also reaffirming our guidance for the full-year free cash flow spend, as provided last quarter. This brings us to our total free cash flow spend for the year to $74.1 million, which is in-line with our expectations.

I want to reiterate, we fully expected much of the free cash flow spend to be second half weighted in Q3 and Q4, which is why we are able to reaffirm our guidance for full-year 2022 free cash flow spend to be $100 million to $115 million.

And, since it's a question we commonly get asked, you can think about our current run-rate free cash flow spend of around $27 million per quarter, which is reflective of the mid-point of the guidance.

And, as you remember, we were able to bring down our original guidance earlier this year of $125million to $140 million, as we continue to adapt to market conditions, which highlights the benefits of our asset-lite business model.

To provide a bit more color, the previously provided guidance earlier this year would reflect a run-rate free cash flow spend of around $33 million per quarter, at the midpoint. The actions we took earlier this year resulted in more than half a year of incremental runway, which is why we are very happy with our cash position today given how we planned for market conditions earlier this year.

When we revised our guidance, it was our expectation that we would be in a prolonged market downturn, and our view on this has not changed and we continue to operate and plan as such. This swift action we took earlier this year has given us flexibility without compromising our ability to commercialize the business and deliver a product in 2024.

As we discussed during the last earnings call, we wanted to really flex our plan to extend the runway, but also ensure we have the appropriate team to execute on the plan to deliver on our timelines. The progress we have made this quarter clearly demonstrates this is exactly what we have done.

I’ll provide some metrics on the next slide to show how disciplined and consistent we’ve been on our free cash flow spend. But, before moving on, I do want to talk through the increase in quarter-over-quarter free cash flow spend and how to frame that in the context of a run-rate number.

Essentially there was about $5 million of pre-payments related to certain agreements that get paid in Q3 every year, but they are expensed over the course of the year. Also, we had some incremental expenses this quarter as we began to move employees into our new headquarters, which I should state, is really cool. When you adjust for these items, we continue to have conviction, based on what we know today, on the run-rate spend I discussed.

Moreover, as you can easily extrapolate based on Q4 expectations, we do expect a higher amount in Q4, hence why we reaffirmed our original guidance for 2022. This also will not reflect a change in the expected run-rate, but again, simply a timing consideration.

I’ll talk more on the next slide around our discipline, consistency, and focus as it relates to managing the balance sheet. But, before I go to the next slide I want to summarize the key takeaway here:

Free cash flow spend and full-year guidance is in-line with expectations. Two, timing of cash payments throughout the year results in some lumpiness, particularly in the back half of the year; however, it does not change the full-year picture or run-rate expectations; and finally, three, we believe the current free cash flow spend and ability to focus and flex the plan is sufficient to advance Embark towards commercialization in 2024.

Moving to Slide 11, I’ve discussed our balance sheet discipline, but let me put some metrics that really demonstrate what this means. As we’ve consistently said, having an asset-lite business model provides flexibility to refine and define the key initiatives we intend to deliver on based on the resources available. This is why in Q2 we refined our plan to ensure we focus resources, as we assumed a pro-longed market downturn. This chart shows the improvement already realized two quarters into the focused hiring initiative, which I’ll walk through shortly.

We’ve spent a lot of time talking about focus. It’s very easy, particularly in markets where capital is easy to come by, to get distracted. Trying to do too much, without being able to define the capital required doesn’t work. This is exactly what differentiates Embark. And this differentiation is even more critical today given market conditions, but goes back to our founding and is part of our culture of being focused. This is why we’ve been able to deliver a leading technology in a very capital efficient manner, particularly relative to competitors. And, it’s why we feel very good about the resources we have today to execute on our commercial plans.

The self-driving space broadly is beginning to realize this insight. Certain business models aren’t profitable, certain organizations tried to do too much, and a lot of money has been spent without a product. This is not Embark, Embark is deploying capital against high ROI projects that we believe will result in an economically viable commercial product. Alex will speak a bit more to this at the end, but I want to really highlight this intersection of not simply a great technology, but a great technology that has an actual commercial business plan.

The chart on this page shows effectively our free cash flow spend per employee. Given the lumpiness of cash payments throughout the year, as I walked through earlier, I have used adjusted EBITDA minus CapEx as a proxy for free cash flow spend, which we present each quarter on our non-GAAP reconciliation tables.

To summarize the key takeaways here: Even as we’ve grown, we’ve had a fairly consistent spend per employee. This is important because headcount is our biggest spend, accounting for approximately 60% of our free cash flow spend. This is exactly what you see in Q2 and Q3, after we lowered our free cash flow spend guidance and implemented focused hiring, you can see a slight drop in our spend per employee.

Lastly, I would highlight that we ended the quarter with 317 full time employees. Doing the quick math based on Q3 spend per employee, you can further extrapolate and triangulate the $27mm of run-rate free cash flow spend number I referenced earlier.

With that, I’ll pass it back to Alex.

Alex Rodrigues

Thank you, Richard. Moving on to Slide 12. I want to talk through how some of the core design principles that led us to identify the trucking use-case, are continuing to be applied today to ensure a clear path to commercialization in 2024. What we observed early on was that we needed to simplify the operating domain and focus on customers with a clear and present need for our technology in high value applications.

Back in 2016, Embark was one of the first players to focus on trucking when others were focused on passenger cars. We made this decision, which was controversial at the time, because it achieved the objectives that we thought, and continue to believe, are critical to advancing the technology development in an economically viable manner. This allowed us to make rapid progress in a highly capital efficient way, achieving our first intervention free run between two cities in 2018 with a few dozen engineers.

We were able to achieve this high return on human capital because we took the time to form a view of how to commercialize AV in a focused manner. Since then, as we have continued to develop the system, we’ve also doubled down on this thinking, and in the subsequent years, we’ve further divided the trucking market into sub-segments, enabling us to pull forward the segments of the market that best met our criteria of a simplified operating domain in high value applications.

To provide some specific examples, there are three key divisions we made within certain trucking sub-segments: First, focusing on the Sunbelt region. This allows us to operate in primarily good weather, which simplifies a variety of constraints for the initial deployment of our software. Second, pioneering the concept of Transfer Hubs, which allows us to focus on highway driving, and enables us to develop a differentiated technology stack, including technologies like VMF, that are highly critical to address the use-case.

And third, focusing on long-haul, which represents the most high value segment of self-driving because of its high utilization, but also addresses macro challenges, like the driver shortage issue, which allows our technology to create a lot of value for customers and ultimately benefit consumers.

As we’ve always said, the best way to advance the technology and operationalize in a commercial setting is through real-world experience and this is a critical aspect of TTP. This is also a significant contributor to how we refine and simplify the problem to ensure we’re able to deploy a commercial product in 2024. The Intelligent Data Prioritization system, which I described earlier, is a great example of the output of these real-world learnings.

These learnings have supported the evolution of Embark, from testing AV trucks within our own fleet to transitioning to carrier-owned and operated AV trucks in their own fleets. We believe the next natural step is to demonstrate our ability to have Embark-enabled AV trucks operate in an economically viable commercial setting.

I want to reiterate this last point. As Richard alluded to, the self-driving industry has slowly followed Embark on some of our key early insights. For example, as I mentioned previously, the focus of some players evolving from robotaxi to the trucking market, or the focus on the transfer point model.

This key insight of simplifying the problem sits at the intersection of developing a product that can be deployed safely and ensuring that once it is deployed, that it can be done economically. With that, let me turn to the next slide and speak in a bit more detail on how we see this evolution continuing.

Turning to Slide 13. As I just walked through, Embark has a history of simplifying the problem. We started by segmenting the AV Industry into trucking, and then further segmented down to lanes and route types, and this has accelerated our technology development significantly.

As we now move into the next inning of commercialization and we take stock of the ecosystem's progress and our real-world learnings, we realize that it is time to continue this process even further by evaluating the trucking sub-segments through the lens of the current realities of: one, a manufacturing ecosystem that is taking longer to work down the cost curve; and two, a macro environment that is requiring tech providers to focus on financial metrics and pull forward commercialization.

The objective remains the same. Simplify the problem and ensure we address high value customer applications. We have therefore been undertaking an exercise that begins to further segment the trucking market by different market verticals served to uncover sub-segments that enable us to further simplify the ODD, and most importantly, control our own outcome of commercialization in 2024.

We believe this approach provides an opportunity to achieve regular commercial hauls on our 2024 timeline. I think it’s also important to note that, in contrast to some of our competitors who are focused on running deliveries that are fundamentally uneconomical, we want to ensure that when we commercialize we have a sustainable business that not only generates revenue, but also has compelling margins, and a clear path to generating positive free cash flow.

In summary, I wanted to provide this additional context, which I touched on last quarter, on how we are thinking about commercializing our technology under the timelines we’ve put forward. We are in active conversations with partners, which I can’t share more detail on today, but are excited about the multiple opportunities this will provide for us to have regular commercial deliveries, with driver-out operations, and compelling financial metrics.

The real-world learnings from TTP and our PDP program, coupled with all of our projects completed to date are finally coming together as we chart the path to an economically viable commercial business. We are excited about some of the developments on this front and we’re looking forward to sharing more early next year.

With that, I will now turn the call back to Adam.

Adam Fee

Thank you, Alex. Operator, let’s begin the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Chris Wetherbee with Citi. Please go ahead.

Chris Wetherbee

Thanks and good morning guys. Maybe we could start with cash and just sort of getting a sense of how you think the trajectory looks towards that revenue realization in 2024, Alex, that you just mentioned? So, I think maybe two questions embedded here. Do you think that there were 100 million to 115 million of annual run rate, is it good numbers we're beginning to think of 2023? And then in terms of the fourth quarter, there's a decent, sort of spread between the 100 million and 115 million in terms of what could happen in the fourth quarter? So, any sort of help in determining what the factors would be that would get you at the higher or lower-end of that number for the fourth quarter?

Alex Rodrigues

Yes. Hey, Chris, how's it going? I can talk on the balance sheet first. I think to your first question, we haven't provided guidance yet in 2023, but we try to give you the roadmap of at least how to think about what runway looks like. And I think as we've said, we feel very good about the team that we have today. So, I think it's probably a good place to start. And then as it relates to fourth quarter, I think we want to continue to reaffirm the guidance that we gave. And I think you can expect that guidance to be fairly consistent before we expect. I think there's obviously some timing things that could change one way or the other, but we feel pretty good around the numbers that we provided.

Chris Wetherbee

Okay. So, just the timing of specific items in the fourth quarter that could, sort of account for that 15 million spread. You guys have been running in a relatively tight spread. So, I guess, is that the dynamic for some timing of things that could be there in fourth quarter or first quarter?

Alex Rodrigues

Exactly.

Chris Wetherbee

Okay, that's helpful. And then maybe, I just want to touch on, sort of Alex where you left off, which was, sort of this used-case that could be achieved by 2024. So, I guess I just maybe want to make sure that I'm clear of what you mean by that language, sounds like you're suggesting that through the end of next year and into 2024, there could be a revenue generating case. So, I want to sort of understand how you think about that? I know you can't get into too much detail about specific partners, but maybe a sense of what that might look like? And then I guess a follow-up question would just be on the TTP. Just want to get a sense of how many trucks are being delivered, and if there are any revenue generation opportunities there or if it's going to be solely for testing? If you could just give us a little bit of color on that – those two items, please.

Alex Rodrigues

Yes. Maybe I'll do the last question first there. The TTP program is going to be a fairly limited number of vehicles, really focused on testing. I think what's critical from our perspective is that these will be the first iteration of a real product. And obviously, I spent a bunch of time today walking through some of the important ways that it's going to be a lot more mature and it's going to be able to actually be handed over and used in regular operations, but it's not going to achieve some of those other milestones yet where we're talking about the scalability or the driver out.

So, that's really what we're talking about next as we look to what I talked about at the end of the presentation is now that the system has reached a level of maturity where it's ready to be delivered as a product, we're starting to get very serious about making sure that we have a clear path to have that product in the hands of customers that meet those other two criteria, right? They're ultimately scalable and economical. And I think we have a pretty clear path to do that going into 2024.

Chris Wetherbee

And just one follow-up on that. If you bear with me here, just in terms of the time, in terms of production to take to enable the EUI to work with production line vehicles? Do we think that that lead time or do you have a sense of what that lead time is, how long you need to work with the truck or you need to get the OEMs to work with the truck to make sure there's the ability to deliver trucks in 2024?

Alex Rodrigues

Yeah. So, this ends up being an evolution over time. If you look at what we did for TTP, I think that's a pretty good illustrative example where we started a couple of quarters ago in terms of having a brand new OEM platform that Knight-Swift wanted to be ordering on and we'll be delivering first trip by the end of the year. And so, a couple of quarters is a pretty good view of what does it take to go from raw, never having worked on a platform before to able to deliver a first truck.

That said, I think there's incremental work that goes in there, right? We're talking about delivering vehicle via an integration, but that level of manufacturing integration is able to go up over time, right. And so, I think as we look at driving efficiencies, there's incremental time and effort to move that installation up in the supply chain, so to speak, so that it's more efficiently done closer to the assembly line. If you think about, sorry, what is the base case requirements to get started on a new platform, a couple of quarters is probably a pretty good yardstick.

Chris Wetherbee

Okay. That's helpful. Thanks for the time this morning. Appreciate it.

Operator

Next question comes from Todd Fowler with KeyBanc Capital Markets. Please go ahead.

Todd Fowler

Great. Thanks. Good morning, Alex. Good morning, Richard. Alex, just sticking with the truck transfer program with Knight, it seems like you're on track to deliver the truck by the end of the year. Once that truck is fully in Knight’s hands, is it immediately operational at that point or are there things that they'll need to be doing on their end? And then maybe if you could share, kind of what's the operational range that they'll have with that truck, the frequency of using lanes, those sorts of things? So, just a little bit of, kind of the once you deliver the truck to them, what happens next?

Alex Rodrigues

Yes. Great question. So, we – if you think about what we're doing on our side, we're actually in, sort of final stage testing right now. And so by the time the truck gets handed over to Knight, the truck will have been through its paces and really be ready to be used immediately. The final incremental work that we're going to be doing once they have the truck in their hand is they're going to be going through the same driver training program that we put our safety drivers to at Embark.

So, they're sort of fully up to speed. And I mentioned that we've already gone through training for dispatchers and for maintenance staff. And so that sort of the first thesis just making sure that all the staff at Knight are ready to utilize the vehicle. So, I think it’s going to a really important piece of the learnings and the work we're doing with TTP. And then following that, it's going to go into their regular operations and do regular commercial loads on one of the highest volume Knight-Swift lanes that they operate.

And so, it'll pretty quickly go into our regular service. And I think one of the – if notable and important pieces here is that we've been targeting the same duty cycle as the other trucks in the fleet. And so, when we think about what is the maintenance cycle, what is the number of runs per day, what is the overall availability? All of this will be consistent with the other vehicles they're running. And I think that's really an important objective that we set out for when putting together TTP?

Todd Fowler

Yes, that's great. And that's just helpful just to think about, kind of the next steps beyond when you turn over the truck. With the announcements, I think it was earlier this month about the nine new terminals and expanding the network. Can you maybe provide some context? I think that in the presentation today, I talked about multiple pilots with PDP partners, what is the scope right now? If there's anything you can share either number of trucks, number of partners that are currently utilizing the expanded network? Just kind of any sense of scale would be helpful from where you're at with the network at this point?

Alex Rodrigues

Yes. I would say that the way to think about the network at this stage is really focused on allowing our partners to plan for the future. If you look back at the 14,200 reservations we had through the PDP program, one of the important commitments that we made to those partners is to use those reservation, use the rollout plans that we developed together those management team to be able to really lay the groundwork for them to be able to deploy the vehicles at scale.

And so, we have been working with our partners and running loans through these sites, but I think the bigger and more important role that they serve to really be able to provide clarity on what the rollout is going to look like in commercialization and how those partners can think about what percentage of their existing lanes and runs are they in a position to be able to bring online in the medium-term.

Todd Fowler

Okay. That makes sense. I got that. And then Richard, I think you've been clear on this, but I just want to spend one more moment on it. It sounds like that the message here is that the rough baseline for cash burn is around 27 million per quarter, but there'll be some variance around that based on timing of working capital or payments and sounds like second half of this year, maybe a little bit above, but it sounds like just for planning purposes and understanding that you're not giving guidance for 2023, but it seems like you're kind of pointing us to thinking about that 27 million as being the baseline. Is that the correct message that you're providing today?

Richard Hawwa

Yes, I think that's a good assumption.

Todd Fowler

Okay, good. Thanks for the update today and all the additional information on the call here this morning. Thanks a lot.

Operator

Next question comes from Jeff Kauffman with Vertical Research Partners. Please go ahead.

Jeff Kauffman

Thank you and good morning everybody. Alex, Rich, team, I just want to thank you for all the clarity in your slide presentation and congratulations on the achievement of the new milestones. I'd like to follow-up on Todd's question on the nationwide network. The one thing that you've made very clear is, you're not a builder and they will come company necessarily that when you do things, it tends to be driven by customer discussions and customer requests. So, with that in mind, you're testing this nationwide network concept with your PDP partners. What are you being asked to do today that might be a little different than what you were being asked to do, say, six months ago by your partners?

Alex Rodrigues

That’s an interesting question. One of the things that I would highlight about the Coast-to-Coast network is, I think this is a really useful demonstration of Embark’s asset-light approach here, where Embark is able to bring these sites online, but without going on and buying a bunch of physical facilities, and in fact, we have a lot of flexibility to scale up and scale down the actual footprint on many of these sites because of our partnership with Alterra.

And so, what we've been able to do is in a very capital efficient way, get access to these sites, bring them on in the form of leases, and then have the flexibility to be able to adjust the scale of those sites to match demand as it scales up. And so, I think that has been something that's been really well received. The next push, I think, for these, for the coverage map is really going to be starting to talk to customers about private sites.

So, we typically talk about this Coast-to-Coast coverage map as the backbone and I think that it serves a really important purpose as the backbone to be able to give all of these carriers access to important markets, but the thing that we're now hearing is people are really starting to think about how can they go above and beyond that and deliver a more specialized product that gives them even more value.

And that means we're starting to talk about the potential to bring private sites into the coverage map. And I think that's an area where Embark again really differentiates [their selves] [ph] from some of our competitors who want to be, sort of owning their own physical infrastructure.

Jeff Kauffman

Okay. Thank you. And then just a follow-up. One of the things I found interesting was to talk about all the sensor upgrades, and the slide that you had on that. And I think many of us are focused on, okay, let's see the timeline for solving these additional three cases and kind of the timeline of commercialization, but to your point, whether it's the sensors, whether it's the technology, whether it's a software behind it, there's upgrades consistently going on with each iteration of what you're doing?

So, I guess my question is, we've talked about the used-cases, what are the technology or hardware opportunities that are out there that would make a meaningful difference in the product to customers, if you still haven't had a chance to get or maybe the technologies where it needs to be, but what are some of the big opportunities on the hardware technology side as opposed to say, road triangles, inspections, [indiscernible]?

Alex Rodrigues

Yes, I think the biggest opportunities for hardware at this stage are actually really starting to become fairly iterative. So, we're quite happy with the capabilities. And even if you look at sort of what we talked about for the upgrades we made for TTP, in many cases, this wasn't the top line spec sheet that we're changing, rather it was the reliability, in some cases the pricing, the serviceability. And that's really where we start looking at those improvements.

So, I wouldn't say, we're necessarily looking for big step changes in performance, but really taking a couple of years ago cutting edge performance and starting to see it become more commoditized lower price, better reliability and performance. That's really where we see the opportunities. And I think that's really going to push the industry forward.

Jeff Kauffman

Okay, Alex. Thank you and congratulations.

Operator

Next question comes from David Vernon with Bernstein. Please go ahead.

David Vernon

Hey, good morning, guys. And thanks for the presentation today. Alex, can you talk a little bit about the TTP program as you move from one driver to and Embark to a Knight driver? What's the commercial relationship there? Are you guys still going to be licensing the technology at that stage? I'm just trying to get a sense for how we from two Embark drivers to one Embark driver to one Knight driver to eventually – to eventually no driver. When is it that we should expect the meter to start ticking as far as kind of licensing the technology?

Alex Rodrigues

Yes. So, the way to think about this is, I think there's that really big shift from trucks that are owned and outside of the one run are maintained, operated, sort of fully under the operating authority of a self-driving company. And here, although – even when we talk about the number of trucks that Embark has, we're not even counting the TTP trucks.

They're not our trucks. Their trucks that are owned by Knight-Swift and that we're working on the integration and the upgrades for, but that are not [Embark trucks] [ph]. And so, I think that's a really, sort of meaningful difference in that upstream of all of the changes in staffing that those are then moving to Knight-Swift drivers.

I think that in this initial phase, the way that we're really thinking about the value creation is similar to if you think about how an electric vehicle gets deployed. You have a very small number that are getting put into the fleet early, so that they can go through their paces, they can demonstrate maintenance intervals, performance, uptime, and that's the final step for a fleet to really get comfortable to then be able to buy them in much larger volume.

So, the initial pilot deployment, we don't have any guidance to give on, sort of when we would see that, let me just start running there. I think the scale is going to be small enough that this is really more about the learnings and the progress towards being able to scale that up.

David Vernon

And could you maybe comment a little bit on your conversations with Knight in terms of what their process would be for making that decision then within the TTP program to take the driver out? I'm just wondering like, how long does this trial and sort of, you know, deeper, sort of testing in my own truck if I'm a trucker, how long is that – how long is that stage will last, do you think?

Alex Rodrigues

Yes. The way I was thinking about this is that, this is going to be the TTP trucks themselves are designed for the 2023 testing phase. And then driver-out is something that will occur as part of commercialization in 2024.

David Vernon

But as far as kind of Knight, sort of thresholds for when they might be – make that decision, right, because, obviously, when they take their driver-out and it's their hardware, then they're going to be [liable] [ph], right?

Alex Rodrigues

[Liability] [ph] is a pretty complex question, but obviously Knight takes their safety and their authority extremely seriously, and so has a really high bar for this stuff. I think that's exactly why TTP is theirs for them to be able to take the tires, so to speak, and see the trucks up close and personal. I think one of the things that they asked us for and sort of part of the reason that the TTP program exists is I think a lot of carriers have been in [demos] [ph] where they've seen a track run for a handful of hours. And in order for them to get comfortable, they really want to be able to see the system performance over a much longer period of time, right.

And so, I think that's one of the reasons why it's notable that it's Knight drivers in these trucks. It, for us, demonstrates a level of confidence this system is going to be performing day-in and day-out. And then for Knight, it represents one of the most important things they're going to be looking at is talking to their drivers and looking at the actual performance level that they see over an extended period of time.

David Vernon

All right. Thanks again.

Operator

Next question comes from [indiscernible] with B. Riley. Please go ahead.

Unidentified Analyst

Hi, guys. Kind of piggybacking on the last question there. So, how long does the training program take with the Knight-Swift employees before they can be in the vehicles?

Alex Rodrigues

Yes. So, we've already spent a lot of time getting this kicked off and working with different parts of the Knight-Swift [asset] [ph]. They were pretty far along. The training program is a handful of weeks to do that final step where folks are going in and really learning the specifics of how to interact with a truck that has a self-driving system installed.

Unidentified Analyst

Okay, great. And then just one more from me. So, in terms of overcoming, I guess what would be the biggest issues in terms of overcoming road triangled inspections and blown tires, kind of where do you expect to be held up on those initiatives if you expect hold ups at all?

Alex Rodrigues

Yes, I think each of these is a significant and challenging – a significant and challenging milestone that that's going to require a meaningful amount of work, but I would say that we feel very good about our position on all three. I think, going into next year, there's actually been a lot of progress that some of that we've talked about on these calls, some of it that we haven't had a chance to talk about yet, but we have a pretty good line of sight to the key pieces that need to go into place for each of these next year. And so, I think we're feeling pretty good about our ability to execute on all of them.

Unidentified Analyst

Okay. And if you could like, could you give any tangible examples of, like, those key pieces?

Alex Rodrigues

Yes. So, I mean, I think a great example is on the inspection side, one of the biggest inputs to the inspection solution was having a clear direction from the regulators as to what would be an acceptable solution that meets the guidelines without needing to pull into weigh stations and perform level one inspections without a driver present. And as I actually talked about this on one of the slides, so two months ago back in September, the work that we've spent a number of years with CVSA on paid off and they endorsed basically a set of procedures that would allow a driverless truck to be inspected at the transfer point and then [no need to stop] [ph] at the weigh station.

And so, we have pretty good line of sight there now to, okay, the procedures have been approved. There's work to be done in terms of both implementing the technical pieces to be able to actually get the bypass. And there's work to be done in terms of training program and that getting rolled out across state. But as far as the coming up with a solution and getting endorsed by the regulators, that's pretty much done at this stage, and so it's a matter of execution. So, I think that's probably a pretty good example.

Unidentified Analyst

Perfect. Thanks for taking my question.

Operator

There are no further questions at this time. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation. Have a great day.