Innoviz Technologies Ltd. Q2 FY2021 Earnings Call

Good morning and welcome to Innoviz Second Quarter 2021 Earnings Conference Call. Joining us today are Omer Keilaf, Innoviz Chief Executive Officer, and Eldar Cegla, Innoviz Chief Financial Officer. Following their formal remarks, we will open the call for your questions. I would like to remind everyone that this call is being recorded and will be available on the Investor Relations section of our website at ir.innoviz.tech. Before we begin, we would like to remind you that our discussions today will include forward-looking statements that are subject to risks and uncertainties relating to future events and the future financial performance of Innoviz. Actual results could differ materially from those anticipated in the forward-looking statements. Forward-looking statements made today speak only to our expectations as of today and we undertake no obligation to publicly update or revise them. For a discussion of some of the important risk factors that could cause actual results to differ materially from any forward-looking statements, please see the Risk Factors section of our Form 20-F filed with the SEC on April 21, 2020. I will now turn the call over to Omer. Please go ahead.

Okay. Hi. Thank you, Maya. Thank you very much. So today, we want to make another exciting demo for you. Last time, we did it from our garage and this time, we are going to do this on the highway. As you can see here, this is Road #6, it's the longest highway in Israel. You can see our car here and you can see our LiDAR, come check it out. You can see here, we positioned our LiDAR on the front of the car and we have a camera as a reference so you can see what it's looking at. Okay, so let's go. Let's go back. Can you open it? Okay. Okay. So basically, the demo that I'm going to show you now is for our LiDAR on the highway and our computer vision, which is running on this platform, which you can see here. Everything that we run is under a very small chip. It's actually a very low-cost chip, which is automotive grade. And now, let's go into the car and drive. Okay, so let's go into the car. Sorry about this. It takes a minute to go inside. Okay, let's go. Drive safely. Okay. So, we will go out to the highway safely. Okay, so what you are looking at is InnovizOne, this is the first generation automotive-grade product that I showed you. I showed you a second ago. And now we are going to turn on the computer vision as it's on. And okay, so what you are seeing is not a prototype; it's actually embedded in our platform, which is going to production and this is a very unique, I would say, advantage that we have because we have been developing this for many, many years. Innoviz has collected a lot of data. We have over a million object detection items that were collected. And you can see here that the LiDAR has very high resolution in very high frame rates. Now, this is important because whenever you are – whenever you want to get an impression of the LiDAR, it is very important that you will check the LiDAR performance in a moving vehicle, because I have seen many demos of LiDARs made in a stationary setup. And you are unable to really know the real frame rate and actual resolution of the product. So, you can see here, this is from driving at what speed? 100, you can go better than that, but drive safely. Okay, so this is obviously for highway driving applications. And this is a nice demo. You can get an impression of what we are capable of. So, this is what we do on a day-to-day basis. There is no other LiDAR that can actually meet this performance in terms of resolution, frame rate, and range. We are very proud of what we have today. And in a few months now we will have InnovizTwo, which will be raising. Okay, so thanks to you again and let’s move to the earnings call presentation, so we can move to this camera. So, let’s shut down this camera. Okay. So, okay, now we can go to the more formal way to do an earnings call. As you can see, we tend to try to do things a bit differently because I think it’s part of our nature to be slightly more innovative. Okay, I want to start before going into the quarterly details to reinforce our mission. As you know, transportation is a big part of our life. And yet, it is still the biggest threat, one of the biggest threats that we have on our day-to-day due to our need to commute whether we drive or not. And this definitely doesn’t need to be made. There should be no reason in the world why the right technology would not solve this problem. And this is why Innoviz is committed to develop the technology that will bring safety to us all. Every year, there are 1.3 million people dying on the road and up to 50 million people that are injured. I will share with you my personal story. When I was 10 years old, one night, my family got a phone call from the hospital telling us that my older sister is seriously injured in a car accident. It changed our lives, my family's. It changed my life. And it took my sister a few years to get back on track. She is fine now. And as you can imagine, it makes me understand very clearly why this problem has to be solved. And it could be solved. 80% to 90% of all accidents are due to human error. 94% of all fatal accidents are related to human error. So, we need to remove the human error, and it’s possible. We just need to develop the right technologies. My background is Unit 81. Some of you might not know Unit 81. It’s a very prestigious technology unit from the Israeli Defense Force developing very unique technologies. Our slogan and our spirit is about talent, passion, and commitment can make the impossible possible. And that’s why I believe many of our engineers that come from there decided to join Innoviz because they feel passionate about making an impact in this industry. Five years ago, when I started Innoviz, I was told many times that what I am trying to pursue is impossible, which was exactly what I was looking for. I was looking to bring the right solution that can actually make an impact. If my belief holds that if a certain problem is important enough, there should be no reason to assume that it’s impossible to solve it. Now, Innoviz for that is developing a very unique technology. Our high-end solid-state LiDAR, which is targeted for low cost, is developed in order to allow carmakers to accelerate the adoption of lifesaving technologies and that is what we are doing. Developing impossible and solving the impossible problems is not easy. It’s not only about the excitement of autonomous driving, it’s really about the very hard work that my team is doing day and night to make it happen. And I am very proud of my team's commitment to make it happen. Now, I want to go into the quarterly updates. And I will start with the technology development. We have InnovizOne, which we have gone through several design cycles and it’s on the verge of reaching its hardware freeze, which will allow us to reach high volume production. There are currently two production lines that are active; one is in Germany and one in the U.S. that will support InnovizOne manufacturing. InnovizOne Plus is an evolution of InnovizOne. It’s a new version that allows us to improve the performance of the product by extending its range and doubling its resolution, which serves more and more customers that will leverage a very mature platform. It will also leverage the existing production lines that can reach production faster. InnovizTwo is making great progress. We are making our plans. There are already samples that are in production. We are waiting for the last component to arrive. It should arrive in October, and that will allow us to do the integration and have first samples. It’s a revolutionary product that will have a substantial improvement in performance above 30 times and a 70% cost reduction that will definitely accelerate adoption of the technology in many spaces. I am happy to share with you some of the feedback we have received. And these are just a few of some of the comments that we get from customers that are using our product. It is very encouraging, and I would say reaffirming our mission. We have been working for many years to make this available, and it’s great to see that our product is creating strong value for our customers. We will continue to develop new technologies to support our partners. We have a few cars. We have served several cars around the world, and it’s growing in order to collect more data. And we collect data across three continents. This data is helping us to strengthen our computer vision. I am showing you here two videos that can help in understanding how it works. So, when we go out and collect the raw data, the data is stored and we use it in order to build a catalog of objects, whether it’s trucks, cars, or pedestrians. We write everything through our computer vision to get classification, and we use manual annotation to make it more accurate. We have over 1 million verified objects that are used in order to give us a grant through our perception. In parallel to this, we have simulation tools that help us again strengthen our computer vision by having endless objects to test, edge cases, and specific simulation. What you are looking at is a simulation of InnovizTwo, which is now in production and allows us to make progress. Now, moving to the commercial side. We have announced a few partnerships and new distributors throughout the last few months and I am happy to share more color on that. We have new partners in different countries. All of them will help us generate more sales and get our product more mature. We have a new partner in China, it’s a good startup called Whale Dynamic. Whale Dynamic is developing a full-stack Level 4 platform and has decided to use InnovizOne as their primary sensor in China. Cron AI, located in the UK, is developing computer vision solutions and applications for autonomous driving in smart cities. On the distribution front, we have a new partner in Singapore, which we just recently announced. Curium is a very interesting company that is developing robust autonomous driving software that is doing sensor fusion and has decided to use the Innoviz brand for their platform and will help us to distribute our solution in Singapore. EDOM is one of the largest electronic and semiconductor distributors in China and they will serve as a channel for us to increase our sales in China, but also provide support to customers. SpringCloud is a well-known B2B company in Korea that provides mobility as a service; in their intention to create a strong ecosystem for autonomous driving in Korea, they have decided to use Innoviz. I want to take this opportunity to thank all of our partners for working with us. It’s an important journey. Now, this slide discusses probably 90% of Innoviz's attention in the last quarter and basically throughout every day, it’s our engagements with new customers. When we work with customers that are looking to use LiDAR, the discussions are much more complex than just discussing the KPIs of the LiDAR, which are resolution, range, and frame rate. I would love to talk and explain why we believe InnovizOne and for sure, InnovizTwo, are the most superior LiDAR in the space, but the discussions are far more complex and go into every angle related to going to high volume manufacturing. Those discussions touch upon mechanical integration within the car, quality of the manufacturing plants, yield reliability, ASPICE, and cybersecurity. I am very proud of my team that maintains strong relationships with multiple customers and serves as a university for knowledge on how to develop an automotive LiDAR. We have been told by a strong OEM in the space that Innoviz is really the company with the highest level of expertise and knowledge in how to bring a LiDAR to automotive. I am very proud to state that. So far, we have revealed about two design wins for serious production in the automotive space. We told you about our award with a shuttle program in Europe in Q1 that is going to have the shuttles ready by the end of next year. This program is going well. We have had several integration sessions on both sides. Also, the BMW program is on track; we are on the verge of our designs that will allow us to go to the sample, having our product go into SOP of our line in the middle of 2022. Here I want to mention another category, which we haven’t discussed previously, but it's important for us to give this guidance. We have two programs that are in what we call advanced development projects. Those are customers that have evaluated different types of sensors and decided to use Innoviz as the primary sensor to equip all of their fleets. Now, I am happy to announce that we have signed another contract with a European truck company that decided to use Innoviz’s LiDAR, InnovizOne, to equip all of its trucks beginning of next year for testing and the development of their platform. This is, of course, going along with a lot of activities we conduct on many fronts. To summarize our funnel, we have seen nice propagation between different stages, with an increase in the number of partners and customers going into the commercial requirements and negotiation stages. We are showing here a new category of advanced development projects that has grown by one, increasing the potential order book by $200 million. I will be happy to explain more about our order book. These are questions we receive from time to time. I am referring to $2.4 billion that comes from the BMW program and the shuttle program. The way we calculated these numbers is straightforward. We took the average number of cars that BMW sells every year through the models expected to use our LiDAR, which are the 7 Series and the 5 Series, and others, and we multiplied it by the penetration rate we expect and took as a benchmark the RADAR technology, which was in a similar position, and multiplied it by the ASP agreed upon between the companies. This is how we reached the $2 billion. It’s a very familiar standard process that companies in the space use. For the shuttle program, there was no benchmark. So what we've done here is slightly different. We received from our customer three scenarios in which they believe the program will grow, and we took the minimum committed volume that was granted in our contract when we signed the deal. We did a weighted average by giving the minimum the highest probability to take a conservative approach, which led to the total sum of $400 million. I would also add that things are going well and we are even more optimistic about being in a significantly bigger position and growing this order book. Now, going into the corporate update, we have increased our staff to support multiple programs. We have had 29 hires; most of them are in R&D. Here I want to share something important for me as the CEO of this company. In the last two quarters, about 8 people who used to work at Innoviz in the early days left because they were exhausted, but they have decided to come back. For me, it’s a strong recognition to ask them for the reason behind their return, mostly because they missed working at Innoviz, and they feel passionate about going back and completing our mission. For me, as the CEO of the company, it’s the most important thing and hopefully, this trend will continue. I will hand over the call now to Eldar to go over the financials.

Thank you, Omer, and good morning everyone. Revenues for the second quarter of 2021 were $1 million, an increase of 39% compared to the first quarter of this year. We see continuous growth from our InnovizOne product. InnovizOne related revenues for the second quarter of 2021 were $990,000, an increase of 29% compared to the $770,000 in the second quarter of 2020. We expect the portion of the revenues from InnovizOne LiDARs to increase as we ramp up production to meet order volumes. Operating expenses for Q2 2021 were $70.7 million, an increase from $13.5 million in Q2 2020. The $70.7 million of operating expenses included $49.9 million of stock-based compensation as well as $1.8 million of issuance costs. The primary reason for the increase in operating costs was $47 million attributed to stock-based compensation granted as part of the SPAC business combination. In Q2 2021, we continued to invest heavily in R&D, with R&D expenses totaling $32 million, of which $17.6 million was attributed to stock-based compensation, compared to $11.5 million of R&D expenses incurred in Q2 2020, of which $0.5 million was attributed to stock-based compensation. Our balance sheet as of June 30, 2021, reflects the closing of our stock business combination transaction with $156 million in cash and $195 million in stock in short-term deposits. Through this transaction, we are maintaining significant cash levels of over $350 million that will support the company’s financial needs in the coming years. Our issuance costs were $26.3 million paid in cash and $77.3 million through equity. Innoviz private warrants are classified as liabilities and are measured at fair value through earnings. During the three months ended June 30, 2021, the company recorded an $850,000 loss related to the change in fair value of the private warrants. Before I turn the call back to Omer, I would like to briefly comment on the F-1 we filed on July 27. As part of the business combination with the SPAC, Innoviz agreed to file a registration statement on Form F-1 to register the release of shares and warrants of pre-closing Innoviz security holders and PIPE investors. Innoviz filed a registration statement and it was declared effective by the SEC on August 5, 2021. While the shares of certain pre-closed Innoviz shareholders registered for resale remain subject to a 180-day contractual lockup, the shares of PIPE investors are now freely tradable. This completes my financial overview. Back to you, Omer.

Thank you. Thank you, Eldar. So, last statement, thank you for joining us on today’s call. We are pleased with our developments in the past quarter and believe we are on the right path to grow and become the market leader. We have been and will continue to focus on several big opportunities that are out there for us. In everything we do, in all solutions, safety comes first. For us at Innoviz, safety is not just a LiDAR feature; it’s the reason we are in business, it’s our mission, our driving force, and as our customer base grows, the safer the roads will become. Thank you very much, and I will be happy to answer your questions.

Thank you. Our first question today is from Michael Pilato. Michael, please un-mute yourself and go ahead.

Hi, guys, can you hear me?

Yes, hi, Michael.

Great. Hi, how are you doing? This has been a great presentation. I really appreciate it. I don’t think I have seen an earnings call in a car before, so I am a big fan. Anyway, so first things first, I just wanted to sort of get an update on the BMW award. It sounds like we see started production in Q2 of next year, which maybe implies we start to see it in cars in the back half of next year. But I mean, is that the right way to think about it? And maybe could you confirm which model you expect to see it launch on? You mentioned the 5 Series, the 7 Series, but I guess there was a quote from the SVP of Automated Driving at BMW that said maybe the iX would have this new technology toolkit. So, any comments around that would be helpful?

Yes, sure, Michael. So, first, I can only repeat the quote from BMW public quotes. Recently, 2 months ago, there was a quote saying that they plan to use Level 3 technologies on the 7 Series, the 5 Series, and the iX as we mentioned. Related to the timeline and we cannot quote on behalf of BMW; we can give a quote on our readiness for production, which is mid-next year, and that is related to the production validation of Magna in Holly production line that is now in position to assemble.

Okay, understood, understood. And then Eldar maybe a question for you as well, you guys said in the press release you're reiterating sort of confidence in the long-term guidance. Now, I am not sure if that includes the 2021 revenue outlook from the SPAC presentations. But if so, that would imply a pretty big ramp-up in the back half of the year. Do you still feel comfortable about the target you have laid out for the full year and if so, I mean, what should we expect for the back half?

So, basically, we did not give specific guidance for this year. Of course, there are other projections that we showed during the SPAC, and what we are expecting is the ramp-up of our production following the freeze of the hardware, and this should be impactful on our revenue stream.

Okay, got it. And one more, just last quarter, you referenced 6 prospects in the late-stage commercial negotiations worth about $3 billion of order book, including 4 engagements, I believe, with OEMs. Now, that number of prospects has grown to 8. And I am wondering which is great news, but I am wondering if you could give an update on whether or not the same 6 prospects are included in those numbers? And then, what’s the mix? Are any more of those OEMs or other opportunities?

So, out of those 6, one of them progressed into the advanced development project, which is a truck company. There are an additional 3 that have entered that stage. The bigger programs are still ongoing and we are making very good progress. We will give updates once those converge in the next 6 to 12 months.

Okay, alright, great. Thanks a lot, guys. Appreciate it.

Thank you.

Thank you, Michael. Our next question comes from the line of Mark Delaney. Mark, please go ahead and unmute yourself and ask your question.

Yes. Can you hear me?

Yes.

Thank you very much for the presentation and the demo. Very helpful to see. A question on the intermediate term outlook and I think in the de-SPAC presentation, the company had talked about $23 million of revenue and the plan for 2022. Wondering if you guys still feel comfortable with that general revenue target as we are starting to think about next year?

So, we are not yet changing our guidance on that. We are ramping up our production line. As I said earlier, we are on the verge of completing our design, which will allow us to increase our volume and that will enable us to achieve much higher revenues. Anything you want to add to this?

Yes, that's good.

That’s helpful. And the follow-up question was around gross margin. And I think last quarter, you mentioned it’s very good progress on your manufacturing yields getting to, I think, in excess of 90%. Is this potentially some good progress on yields? At the same time, there have been a lot of increases in component costs, impacting a number of different parts of the automotive industry. And potentially some of those higher costs could be sustained into the 2022 timeframe. So, as you think about some of those inputs and your yields, could you talk about whether or not you feel comfortable with the gross margin trajectory you had outlined? Again, not trying to get specific to this year, but over the intermediate term? Thanks.

So, we still don’t know the full impact of the situation regarding the shortage of components at this level or during this year. It had some impact, but very low impact, because the volume – our volumes are low. And the impact factor of more of the production might ramp up, and the different overhead can reflect on the relatively low volume.

Maybe I can move to this.

Yes. Go ahead.

So, as you know, Mark, we are on a program for automotive grade. As such, we are required to keep our design open as long as we complete the design validation in order to make the needed changes. As of today, we have completed the design validation of the existing design, and we don’t see any reason to make any changes. So, we are optimistic that this design will not require any change. We have gone through a lot of testing. Once we get to the time that we see all of our tests have passed, we will complete the design and move to higher volume. Once you enter into high-volume orders, it will have an obvious impact on the cost of each part of the device. Therefore, once we were first designed to allow us to work with the bigger batches of the different components and that will enable us to improve our gross margins. I hope it provides some clarity.

Understood. Thank you very much.

Thank you.

Thank you, Mark. Our next question comes from the line of Kevin Cassidy. Kevin, please un-mute yourself and go ahead.

Hi, thanks for taking my question and congratulations on the progress. I just – maybe along the same lines of manufacturing, what are your agreements looking like as you are setting them up for holding inventory or how much inventory your customers might be asking you to hold for them or will the customer hold the inventory? And just want to understand the production ramp?

So, thank you for the question. So usually, how it works in the automotive space is that different customers ask for a minimum quantity. This minimum is usually a relatively low number and low commitment. These commitments are expected by the different vendors to be met. So, at this point in time, I don’t see any significant ramp or obligation to stock up additional inventories to meet these minimum orders. Of course, we are very optimistic about the ramp-up, and once SOP starts production, you can assess the real ramp-up into the market. According to that, and usually half a year in advance, you can assess the committed volume and make the relevant purchases.

Maybe I can add something; I think it’s also important to understand that in our engagement with Magna and BMW, our business model is such that the inventory is actually held by Magna and not by us. So, we sell Magna our components, so most of the inventory is actually held by the Tier 1 and not by us.

Okay, yes, that’s helpful. Thank you.

Thank you, Kevin. Our next question is coming from the line of Michael Pilato. Michael, please go ahead and un-mute yourself.

Hey, guys, figured I would come back for a little more. So, you talked about the InnovizOne Plus. Now I am just wondering, when you expect that to be ready for serial production or higher high-volume production? Is it fair to assume that the timeline to say, the sample product to the InnovizOne Plus would be quicker than it would be for a new product, given that it’s based off the InnovizOne architecture?

Yes. Definitely, based on the fact that it’s a very minor change in just basically a few components, so the design validation and production validation would be faster. Currently, when in discussions with customers, we are talking about an automotive-grade version, one year following the InnovizOne as a precaution, but we are planning to push it.

Okay, got it. And is there any way you could frame sort of the improvement in performance, in terms of quantitative metrics, between InnovizOne and InnovizOne Plus?

Sure. It’s doubled the resolution from 0.1 to 0.05 with resolution and about, I think, around 30% range improvement. So, it’s taking us to the 200 meters that we need. So, it’s a very interesting product. Just had a very good trip to the U.S. now, with COVID-19, allowing some more traveling; it’s great to get some firsthand demos and demonstrations. I think there is a very good fit for InnovizOne Plus for the truck industry. At least that seems to be a very good interest coming from that area.

Got it. Okay. Thanks. And then should we assume that the InnovizTwo is still on track to be delivering samples to customers by the end of the year?

Yes. We have already conducted several design validations, showing us 30 times and actually higher improvements in the optical performance. We are very eager to have the first samples in our hands starting to build it. Most of the components are on their way to production, and we are going to have it integrated for the first time during October and to be able to ship the first samples to those customers that we are in discussion with. It’s a very intriguing product due to the very high performance and cost. I mean, I can use this opportunity maybe to share more information. InnovizTwo features a 70% cost reduction versus InnovizOne. I was asked several times how we managed to do it, and maybe I can say that InnovizOne is based on four lasers and four detectors in order to scan the entire scene. In InnovizTwo, we are going to use only one laser and one detector, which explains how we managed to make it significantly cheaper, not only due to the fewer components of the laser and detector, but also because of the fewer optical alignments. The production cycle is going to be extremely faster because it requires alignment of only one channel versus four, actually more than InnovizOne. It’s a very attractive product. It’s intriguing to think about how we can use fewer lasers in the next product, but probably one would be the limit.

Got it? No, it’s helpful. Looking forward to hearing customer feedback when that gets to your customers. One last one, you talked about how KPIs sort of performance specs aren’t really – they are not the whole game, right? And there are lots of other factors that your customers consider when evaluating LiDAR. Maybe you can talk about how your experience with BMW sort of helps you win with these other OEMs, because we all know that it wasn’t the easiest road, and they have a pretty high bar for testing and validation. So, how that’s prepared you to win with other OEMs?

Definitely. I think one of the things I saw in the last quarter, in many discussions with customers, Innoviz is like a university for LiDAR development. We have the menu of many topics that I think Innoviz keeps a lot of knowledge around when it’s related to developing LiDAR for automotive products. These aspects are related to know how, cleaning system integration with the camera, and simulation of heat transfer. We have learned many lessons through this process, and we provide clients with a comprehensive understanding. I see that there are many things that we have gone through and experienced that car makers now looking at solutions leverage from our expertise. I think this is a vital element. But also in terms of KPIs, because when you think about an autonomous car driving on the highway, there are many use cases that we encounter, and we can provide guidance to customers to understand. This comes also from experiences with changing obscurity of the cars, including how to manage situations when suddenly dirt obstructs the view, and calculations regarding the response time of the car in specific scenarios. We have many simulation tools for driving and scenarios, which we share with our customers. So, it’s really end-to-end. It also relates to logistics and RMA processes. And for sure, in computer vision, there are several areas, including lane detection and driveable/non-driveable conditions. I can happily conduct a session next time to share more information about how the market is analyzing the requirements for LiDAR and explain better for the market how those requirements are eventually translated to LiDAR. I am happy to do it next time.

That would be great. Really appreciate the time. Thanks.

Thank you. Our next question is coming from the audience and I will read it on their behalf. What does the one million object annotations mean for the Innoviz App platform? Are there more platform developments coming?

Okay, so computer vision is growing. And what I mean is that the more data you collect in your catalog, the more robust the confidence level you have in your algorithms. To have strong AI, data serves as the fuel behind it. You need to have a very accurate dataset used for training one million validated objects, meaning that there was someone who not only collected the data but also verified its accuracy. This is the foundation utilized by our system. It extends beyond InnovizOne; it applies to InnovizOne Plus and InnovizTwo, and we've even collected data ourselves through our partners. They share interesting cases encountered while using our LiDARs outdoors, and whenever they see an intriguing case, they share it with us. Hence, it helps us cover some corner cases.

Thank you. You have no further questions. Go ahead.

Okay, thank you very much. Please continue to follow us on LinkedIn and Twitter. We aim to share our journey day-to-day and see you next time on the earnings call.

Thank you very much. That does conclude our call for today. Have a great day.