Innoviz Technologies Ltd. Q3 FY2021 Earnings Call

Good morning, and welcome to Innoviz Third Quarter 2021 Earnings Conference Call. Joining us today are Omer Keilaf, Innoviz Chief Executive Officer, and Eldar Cegla, Innoviz Chief Financial Officer. Following the 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, 2021. I will now turn the call over to Omer. Please go ahead.

Good morning, everyone. It’s great to see you all. Let’s get started. I’m Omer Keilaf, CEO and co-founder of Innoviz Technologies, and I’m joined by Eldar Cegla, our CFO. I’m thrilled to be in New York meeting with investors and analysts, and to showcase our product, the InnovizOne LiDAR, highlighting its outstanding performance. I'm excited to be here today. Before I dive into our quarterly update, I’d like to introduce a very special guest. I’m honored to have Mr. Richard Rau, the VP of Automated Driving at BMW, joining us today from Munich, Germany. He will discuss the program and the process with us. We are fortunate that BMW has chosen Innoviz Technologies through our Tier 1 partner, Magna. It’s a pleasure to have you here, Richard. We’ve been collaborating for about three or four years now. Thank you for accepting my invitation to join us today.

Thank you, Omer. I'm pleased to be here to support you on this important call for Innoviz. I want to provide a brief overview of our joint project with Innoviz and Magna. However, I must first mention that BMW has strict policies limiting what I can disclose about ongoing projects, so I won't be able to share specific launch dates, features, or comment on other OEMs or laser scanner programs. That said, I can share some background on BMW’s progress in autonomous driving. Much of what I'm about to say is public knowledge but may not be fully apparent. We have frequently announced that we are developing a full Level 3 customer system, with true autonomous driving expected to launch as soon as regulations are in place and safety standards are met. We have publicly discussed the critical role that LiDAR or laser scanners play in our Level 3 system. For BMW, a true Level 3 system cannot exist without at least one LiDAR. We have chosen Magna and Innoviz to develop a LiDAR for our autonomous stack, aimed at meeting end-user customer applications and our performance requirements. This was announced online in early 2018, and the project is still ongoing. Designing LiDAR is crucial to an autonomous system and involves complex decision-making and optimizations. It is not just about choosing parameters like laser wavelength or mirror type; many factors need consideration. We have a strong team at BMW working daily with Innoviz and Magna to design the system and make the best trade-offs for compliance with Level 3 requirements. Decisions regarding which laser, whether 1550 nanometer or 905 nanometer, are critical, and the intellectual property Innoviz offers is geared more towards 905, which is beneficial for our project. Overall, the project is on track regarding design, validation, and industrialization, despite the complexity inherent in LiDAR systems. I can confidently say that we are progressing well in delivering what I mentioned earlier, and it’s a pleasure working with the talented team at Innoviz. They have remarkable expertise and valuable IP that significantly benefits us, and we are making great strides together. I hope this provides a good perspective on our collaboration with Innoviz. I will now hand it back to Omer.

Thank you very much, Richard. I really appreciate it, and I'm very excited to hear you talk about our team. It's been such a long journey so far, and as you know, we are super committed to continue to work with you and help you be very successful in your journey to be the first Level 3 car maker in the market. It's a real honor and I know it's very uncommon that BMW will participate in such a forum. I believe it's really thanks to the very special relationship that we've managed to develop in the last few years, and hopefully, we'll continue. Thank you very much. I think it should be enough for today, but let's continue. Let me move to our presentation, talking about what Innoviz has been up to in the last quarter. So before I talk about the exact activities, are you seeing my slide? Okay, good. Of course, for the LiDAR market, there are different applications of automation, whether it's logistics, agriculture, smart cities, or trucks. There are many ways you can leverage a good LiDAR. Innoviz has always been very focused on one category which we thought is going to be the most important and most relevant for us, which is the passenger vehicles. When you talk about passenger vehicles, it's important to understand that this market is highly sensitive to cost and requires the highest performance for highway driving. It has the highest standards on reliability; it's for a passenger vehicle that needs to last for 15 years. It requires perception software that comes along with the sensor, and also, a very strong industrialization process for a product that needs to be built in millions, as Richard just said. It has very high sensitivity to size and power consumption. And, of course, when it comes to very high volume, you need to work with suppliers that allow us to exit the market. If you combine all of those unique requirements, we see Innoviz standing out with our solution, which is the most cost-effective and highest performing. Of course, the opportunity in this market comes because it is the largest growing market until 2030. It is the shortest validation process in order to reach the market, and opposed to Level 4 or Level 5, Level 3 is much more simplified. Customer value has already been proven. OEM financial motivation is also demonstrated, as the car makers can charge customers for chauffeur driving and generate recurrent revenues monthly. When working in automotive, you generate also very good relationships for a long term, fostering strong customer loyalty for many years. Since this market is about to converge, we see many opportunities now regarding decision-making for programs set to launch over the following years. Those programs will last many, many years beyond that. This is our opportunity to take a significant market share. Now at Innoviz, we have a certain methodology on how we develop things. Over the last 5, 6 years, every year we stop and look at what we're doing, trying to identify the next 10x improvement or game changer that we can bring into our offering to make us much more attractive. What we identified right now is that our focus on Level 2 and Level 3 passenger vehicles is crucial, and we believe that Innoviz's two new products are already meeting the highest performance targets and are the most cost-effective solutions available. Our extensive automotive experience has revealed that with our financial stability, raising money through the SPAC gave us an understanding that strategically, we want to go and style to address this market as a direct Tier 1 supplier. This will provide us with meaningful access to the market and numerous benefits. A standout Tier 1 is when a technology company provides a certain technology, reference design, prototype, and eventually sells the components. The Tier 1 takes full ownership of the process: working directly with the car maker, integrating the product, designing the tools, designing the manufacturing, producing the samples, and basically doing everything in the program while Tier 2 only sells its technology. In our case, having worked very closely with both Magna and BMW, we were able to absorb a lot of knowledge. In this program, we are also responsible for manufacturing global samples. We were responsible for designing for manufacturing and for designing the manufacturing tools. All of these assets that we've been able to collect over the years showed us that there are still gaps between us and being a classic Tier 1, but those are gaps we can mitigate now. Raising substantial money allows us to strategically move in that direction and offer our solution directly to car makers. Some of those capabilities are now done in-house, such as integration of the software and operating systems, the production of validation, and of course, when it comes to high volume manufacturing, we will still leverage our existing relationships with our current Tier 1 partners who have automotive-grade high-volume manufacturing capabilities. This is really a win-win situation for everyone. The benefits for us are, of course, having higher revenues as we not just sell components but now sell complete solutions, which opens up substantially higher potential revenue streams for us. It also allows us to be much more flexible and have better control of the process when engaging with our customers' needs and requirements. This flexibility can provide us with a more competitive stance when needed. Additionally, offering a product with less margin stack because we are the Tier 1 allows us to create a much better pricing fit. Furthermore, since we are developing technology and bringing a new product to market, we can amortize those efforts across multiple programs, allowing us to provide better offerings to our customers. In project management, being involved in Level 2 and Level 3 programs is a highly complex technology project. We, Innoviz, are very technical, and shifting to simpler project management will enable faster processes. We believe this value proposition will help Innoviz be flexible with customers, getting them to market more efficiently, which is definitely beneficial for them. Finally, in the automotive space, car makers have thousands of suppliers. They cannot work with every supplier directly and therefore selectively choose which Tier 1s to source technologies through. As I mentioned in the last quarter, we've undergone various audits to become a Tier 1 for one of the biggest car makers in the market today. These audits ran for several months throughout the year and have significantly allowed us to demonstrate our capabilities across multiple disciplines, such as logistics, cybersecurity, software development, and quality assurance. I'm very happy to share that we have now formally been recognized as a direct supplier to one of the biggest car makers in the market and are eligible to be nominated as the direct supplier of the LiDAR. This nomination is part of a request for quotation process we believe we have good chances to win. This process also gives us higher confidence approaching other car makers, showcasing our certification as a Tier 1. What we're showing here is a reflection of the various orders and requests for quotations we've received in the last two years. The spread of requirements is divided between field view, range, and resolution. There's also an element here relating to cost. Premium vehicles typically target high-performance requirements due to fast-driving conditions. InnovizOne, our first product, was designed based on requirements from premium vehicles, as we recognized they are likely to be in the market faster because they are much more technical. Since then, we've also introduced InnovizOne Plus due to increasing market requirements. These products have very high performance but cannot support low-cost brands due to price barriers, which is why we designed InnovizTwo to be a great fit for the entire market. InnovizTwo boasts a 30-fold improvement over InnovizOne and will significantly lower costs to meet the demands of various brands. I have high confidence that this product will be a real game changer. I want to discuss the announcement regarding NVIDIA we made yesterday. NVIDIA is a company that we've partnered with to be a part of their platform. Innoviz is now formally part of the NVIDIA drive ecosystem. This platform is widely used by most of our customers who seek to develop autonomous vehicles. NVIDIA recognizes that our sensor is requested by several customers, and working together to incorporate our LiDAR into their platform will help our customers move faster and not deal with existing problems. NVIDIA's decision to include Innoviz in their platform is a vote of confidence coming from their customers who wish to integrate Innoviz LiDAR. We appreciate NVIDIA making our LiDAR accessible to the market and believe this will help our customers accelerate their autonomous vehicle development. When Innoviz went public six months ago, we prepared to provide guidance on potential future revenues. In building our business model, we considered several key factors, primarily our pipeline. Since then, many other customers have been added to our pipeline. Additional car makers that were not previously engaged are now providing requests for information and quotations. This gives us significant confidence as we see interest in LiDARs not only in premium vehicles but in high volumes across more car makers. In terms of progress, Innoviz is working on various programs at different stages. I can say that today we are in the final stage of three programs, where we know that in some of them, we are leading candidates with good chances of winning these meaningful programs. The average selling price will increase as we compete as a direct supplier, allowing us to expand our overall revenue potential and total addressable market. Reflecting on our market fit, when we began discussions with the market a year-and-a-half ago, we introduced InnovizOne, InnovizTwo, and another development called Innoviz SLL, which was the improvement of InnovizOne in performance. In the past year and a half, we effectively brought 30 times improvement into InnovizTwo, which not only targets cost reduction but also significantly enhances performance. This gives us high confidence in acquiring substantial business moving forward. The reference table is indicative of our ability to control our processes, allowing us to remain flexible and competitive in our market and translating this confidence into a greater market share. Given all of these elements, we are continually evolving. In the past quarter, we made several announcements, such as integrating with Tier 1 companies and employing LiDARs for roof mounting applications, working with NVIDIA and collaborations in electric vehicles, and engaging in intersection development projects using our LiDARs. We are thankful for all our partners. It's an honor to grow our ecosystem utilizing our LiDARs. A brief update on our funnel reveals that we have additional customers moving into advanced technology evaluation, and more customers progressing to phases of commercial and requirement negotiations, resulting in a potential order increase of $200 million. We will continue to keep you updated as these programs materialize. Now, concerning technology development, we expect InnovizTwo to debut soon. The team has been diligently working over the last 2 to 3 weeks towards a milestone with the customer to showcase the Innoviz B sample. I hold the Innoviz B sample here in my hand. This product is fully integrated with all components inside. One unique element we've implemented into InnovizTwo is vertical integration; everything is being designed and manufactured in-house. We have our own clean room with an active alignment process. We are currently building InnovizTwo samples, and the team is working on software integration. We anticipate being able to showcase InnovizTwo to our customers in the upcoming weeks, possibly even sooner. We look forward to presenting it publicly at a later date. Moreover, we are working on various design variants to accommodate different installation positions based on customer requirements, such as roof or windshield mounting. We aim to have a first B-sample available by the end of this year. A subsequent version will be designed for automotive applications, continuing the process towards C-samples. Overall, the InnovizTwo B-sample is expected by year's end. In addition, I want to acknowledge our recent partnership with JueFX. Although we consistently emphasize that passenger vehicles and OEMs are our primary focus, we are indeed exploring additional opportunities similar to this collaboration. My vision for LiDAR technology asserts that in 20 years, it will be as commonplace as cameras are today, with the demand for 3D sensing across various applications growing rapidly. LiDAR's capability to see the world in 3D facilitates seamless integration and extraction of valuable data in diverse environments, making it an indispensable technology for the upcoming decade. Thank you very much, everyone!

Thank you very much, Omer. And thank you, everybody, for joining us today. Revenues for Q3 2021 were $2.1 million, an increase of 106% compared to Q2 2021, and an increase of 13% compared to Q3 2020. InnovizOne related revenues in Q3 2021 were $1.6 million or 79% of the total quarterly revenues, an increase of 36% compared to $1.2 million or 66% of the total quarterly revenues in Q3 2020. The Company continues to see strong interest for its products and expects positive momentum to continue. Operating expenses for Q3 2021 were $30 million, an increase from $16.8 million in Q3 2020. Q3 2021 operating expenses include $18.2 million of stock-based compensation. The increase in operating expenses compared to Q3 2020 was primarily due to a $7.4 million rise in stock-based compensation and people-related expenses. Furthermore, the Company continues to invest in R&D with R&D expenses totaling $20.6 million, of which $3.7 million is attributable to stock-based compensation. This contrasts with $14.7 million of R&D expenses incurred in Q3 2020, in which $0.6 million was attributable to stock-based compensation. As of September 30, 2021, the Company had $139.6 million in cash and $185 million in short-term deposits compared to $58 million in cash as of September 30, 2020. The increase in cash was attributed to the closing of the Company's business combination transaction earlier this year. Thank you very much for joining, and I'm returning the call to Omer. Thank you.

Thank you, Eldar. So again, thank you all for joining us today. Let's use this opportunity to get some questions from the people on the line. Thank you.

Thank you. Our first question today comes from the line of Michael Pilato. Michael, you will be prompted to unmute, please go ahead.

Hi guys, can you hear me?

Loud and clear.

Okay. Great. So, thanks for taking the question and thanks for the presentation. My first question is around an article that came out with an interview with the Director of Development at BMW. He mentioned that BMW would put out a Level 3 platform on the 7 series next year. I know you can't comment on your customers' timeline, I totally understand that. But I want to ask when we'd be able to buy a car with Innoviz LiDAR in it, whether it's a BMW or something else?

As you said, the BMW article indicated having a Level 3 rollout following next year. I wouldn't provide any other indication than what BMW has offered. But as Richard Rau said, Level 3 from BMW would always consist of a LiDAR. Beyond that, I would only say that we can connect the dots elsewhere.

Okay. Fair enough. I had to ask. So the next question would be, I think you made it very clear what you feel the advantages are of being a direct Tier 1 supplier to OEMs. But it seems like that strategy may have changed since earlier in the year during the SPAC merger process when you emphasized the necessity of working through a Tier 1 supplier to supply high-volume series production. Could you explain what's driving that shift in your strategy, and are there any balance sheet requirements to supply directly to a high-volume program? Additionally, can you address exposure to warranty recall risks and how you plan on managing that?

Sure. The opportunity of becoming a direct Tier 1 supplier arose through different discussions with carmakers. We always allowed them to decide the best way to engage with us, considering we have several Tier 1s. Ultimately, they let the carmaker have their preference. We discussed potential advantages of us becoming a direct Tier 1, showcasing flexibility and cost-effective solutions. Working through a Tier 1 resulted in overlap and the duplication of teams, making projects more complex and costly. Some carmakers expressed interest in exploring direct relationships for high-volume production when it comes to hundreds of thousands and millions at sensitive price points. Our strategy was aligned from the start without the relevant experience in automotive and knowing how to interface with Tier 1s; it was a mandatory first step. Following four or five years of work, we gained tremendous knowledge through discussions with the carmakers, leading them to feel comfortable enough to allow us to complete directly. This provides us additional capabilities in the future. Our financial stability due to effectively raising substantial funds recently also offered the confidence needed to meet their expectations.

Excellent. Thanks. Just one more quick question. In these three programs nearing final stages you referenced, are you competing with the InnovizOne or InnovizTwo?

Those are for InnovizTwo. We are continuing with InnovizTwo as these are very high-volume programs, where the sensitivity for pricing is tremendously higher, along with growing requirements over time. InnovizTwo is significantly improved not only in performance but also in pricing. The industrialization has been simplified significantly; rather than using full lasers and detectors, we are now utilizing one laser and one detector, allowing us a much simpler assembly process, ultimately yielding a more robust design that facilitates reaching volume quickly.

Thank you, Michael Pilato from Berenberg. Our next question comes from the line of Mark Delaney from Goldman Sachs. Mark, please go ahead.

Yes. Good morning, and thanks very much for taking the questions. First, could I ask a follow-up on this Tier 1 approach? Can you comment on how broad-based you think that approach will be going forward? Do you anticipate many customers using Innoviz as the Tier 1, or is it still a select situation?

Since we have relationships with several manufacturers, we let our customers determine their preferred arrangements. For some car makers, we may remain acting as a Tier 2 supplier; many programs in Japan and China still operate that way. In Europe and the U.S., we believe our position as a Tier 1 will gain traction. Still, if our customers favor a different engagement model, we will accommodate that.

Regarding the financial implications, you mentioned higher profit dollars for Innoviz associated with this model. Could you discuss the margin percentages, as Tier 1 margins tend to be lower? Do we need to consider a different margin profile overall?

Yes, I'll let Eldar respond to the margin question, but first, I'd like to address Michael's earlier question on warranty and liability. Of course, when discussing this with car makers, we negotiate the extent of warranty and liability, ensuring a mutually agreeable position. We've successfully navigated this process up to now, fulfilling their requirements satisfactorily.

Thank you for your question. Yes, Mark, the overall top line, as you mentioned, is higher as we sell the whole system. However, this transition from a component-oriented model to a complete system impacts our gross margins. In summary, while we will see some lower margins, the overall benefits of this model significantly enhance our top line.

That's very helpful. Thank you both. I have one more question. You referenced a press release mentioning you are in final consideration with a large OEM for an L2/L3 program. Could you provide more detail on this? How many other LiDAR companies may be competing at this stage?

As far as we know, from the sourcing team, we are currently only competing against another supplier, which is another Tier 1. We believe we are close to securing the deal, and while I cannot provide specific details until finalized, we anticipate being able to announce this nomination shortly.

If you do win this opportunity, could you provide insights into the timing and magnitude of the business opportunity?

The timeline is expected to reach production in about 24 months, with significant volumes projected. We also have a non-recurring engineering (NRE) portion involved, and the growth phase is set for 2024 and onward.

Thank you, Mark Delaney from Goldman Sachs. Our next question comes from the line of Andres Sheppard from Cantor Fitzgerald. Please go ahead.

Good morning. Can you hear me okay?

A bit.

A bit on the lower end. If you want me to amplify, that'll be great.

Is that any better?

Much better, Andres. Please go ahead.

Great. Thanks, guys, and congrats on the quarter. Most of my questions have been answered, but just to follow up on InnovizTwo. You mentioned that the first engineering samples are expected to be delivered later this year. What is next, and what is the timeline going forward?

I hold one of the first InnovizTwo samples here in my hand. All components are integrated and functioning. We've also implemented vertical integration; everything from design to manufacturing is conducted in-house, which includes a clean room with an active alignment process. We are currently building InnovizTwo samples, and the team is working on software integration. In the coming weeks, we expect to exhibit InnovizTwo to our customers, possibly even sooner, before a public reveal at a later date. Moreover, we are working on various design tweaks to meet different installation positions requested by customers, such as roof, tree, or windshield mounting. By the end of this year, we anticipate availability of the first B-sample, and we aim for future iterations, including one designed specifically for automotive applications. Additionally, I want to thank you for your interest in our partnership with JueFX. While we prioritize passenger vehicles and OEMs, we also see opportunities in collaborations similar to this recent one. I foresee the LiDAR market expanding dramatically over the next two decades, evolving into a technology as integral as cameras today.

Great. Thank you very much, guys.

Thank you, Andres Sheppard from Cantor Fitzgerald. Our next question comes from the line of Kevin Cassidy from Rosenblatt Securities. Please go ahead.

Hi. Thanks for taking my question, and congratulations on your progress. I want to better understand the significance of the NVIDIA drive platform. Is this opening up more Tier 1 opportunities for you or broader market acceptance?

We are very impressed by NVIDIA's securehold in the U.S. and Europe; it seems almost all of our customers utilize NVIDIA. Consequently, seeking integration into this platform is key to offering a seamless experience, allowing carmakers or shuttle developers to make their own sensor set decisions. NVIDIA aims to predict which sensors their customers will adopt, addressing integration efforts proactively to ensure better products tailored to customer needs.

As they are the one processor controlling all cameras, LiDARs, and radars, does NVIDIA provide the fusion software, or are you providing some of that?

We do not handle sensor fusion; that responsibility lies primarily with either NVIDIA or the customer/carmaker. For functional safety reasons, the perception software for LiDAR and camera systems must be completely separate so that the system's reliance is not compromised by one failing.

I see. Thank you.

Thank you, Kevin Cassidy from Rosenblatt Securities. You have no further questions; please proceed.

Thank you very much. It's very exciting to be here in New York, and we will be happy to see you again in the next call and give you more updates on our progress. Thank you for the support and the questions. We are very excited about what we do. InnovizTwo presents an excellent opportunity for us to deliver a product we believe is a game changer, helping us accomplish our mission in enabling autonomous driving for everyone. Thank you very much again and to my team at home. Goodbye.

Bye-bye.