Innoviz Technologies Ltd. Q1 FY2022 Earnings Call

Good morning, and welcome to Innoviz's First Quarter 2022 Earnings Conference Call. Joining us today are Omer Keilaf, Chief Executive Officer; and Eldar Cegla, 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 March 30, 2022. I will now turn the call over to Omer. Please go ahead.

...our recent announcement. I want to thank people that reached out during the last week just to congratulate us. We definitely went through a very long process to make this happen, and we are very, very excited. Obviously, adding another $4 billion to our order book is a major achievement and will allow the company to do many more things. One of the most meaningful impacts of this recent announcement of our design win and award by one of the largest car makers is not only through the fact that we won additional business. What's actually a big part of it, that makes us very happy, is our ability to secure this business as a direct supplier to tier one. Becoming a tier one in the automotive market is a huge step for us that will help us to accelerate in the sector and secure many more of these opportunities. This is one of the things that we've been working towards for a very long time. It's very difficult to become a tier one in this space, but we are sure that this will allow us to move faster and succeed in many more ways. With that, I will please go to the presentation and elaborate more. Thank you. So following two years of working closely with one of the world's three largest vehicle groups, as part of their extensive request for quote process, we were very happy to finally announce last week that we were selected to be their direct and only largest supplier for the L2 to L3 multitier series production program. The selection of InnovizTwo out of any other lighter solution is a big vote of confidence for our technology leadership and product superiority. Both companies have agreed to have a joint announcement following the first delivery, which is expected in the coming months. This design win is our first automotive production build for InnovizTwo, which follows our two design wins for InnovizOne. Back in Q3 2021, we updated you about Innoviz being qualified as a direct tier one supplier by one of the largest car makers in the world. Being recognized as a direct supplier was a critical step in allowing this group to select us for series production, and we were waiting for the formal nomination. Last week, we were finally able to celebrate being awarded for the first time as a direct supplier by one of the most technically prestigious and largest car makers in the world. This win has a significant impact on our ability to generate future revenues. We are no longer only selling components as a tier two supplier but rather the entire product along with our perception software. This also means that we can leverage our success more easily to win other programs without being dependent on any other sales. This win is a testament to the quality and uniqueness of our technology and industrialization capability in the automotive experience. During this process, we demonstrated a variety of tier one capabilities, including our ability to manage mass production, manufacturability, automotive grade quality, hardware validation and computer vision validation. Being selected by a technology leader in the industry is an important vote of confidence in Innoviz, which we believe will influence the rest of the industry and create a domino effect, bringing us other business opportunities. I would now like to take a minute to explain the recent announcements we made regarding our partnership with LiangDao, a full-fledged tier one service provider based in China and Germany. This partnership will ensure we are poised to deliver on our commitment to our customers targeting the Chinese market. We needed a partner to validate our perception software in China and LiangDao is positioned to do exactly that. As a result of winning our third design win, our order book was increased by $4 billion, resulting in a forward-looking auto book of $6.6 billion, which is two and a half times larger than last quarter. Allow me to briefly explain how our forward-looking auto book was calculated. In terms of volume production, the OEM we were selected by is one of the three largest vehicle groups in the world with about a 10% market share. The program plan is based on three years of development and validation, followed by eight to ten years of sales, with the expectation to see a growing take rate of 1% to 14% over the course of the program. We expect to supply our lighter sensors for at least eight million cars, and there is potential to significantly increase this number given the fact that we are in discussions with the group on additional brands and models, expecting gross margins of between 30% to 40%. These amounts do not include B samples or C samples and NRE production tools that are also part of the denomination. These are exciting times for Innoviz, and I'm thrilled by what we have already achieved and what is still to come. Turning to our sales funnel and targets for the year, we increased the number of series production deals to three, emphasizing that the last is based on multiple brands, not just one. We currently have nine preproduction activities with customers that are using our LiangDao full development stage, and several of them are expected to turn into series production at a later time. We continue to bring new potential customers into our sales funnel. Currently, we have 12 different customers in different stages of RFI and RFQ, of which three are at the late stage of their decision process. We expect our conversion rates to increase as we win the confidence of more OEMs. We see that our new nomination as a direct supplier to such a high volume and prestigious program is already removing any friction received by other car makers in allowing Innoviz to become their direct supplier for sales production programs. This new design win enables us not only to meet our 2022 target but even exceed them with another before the first half of the year. We aim to sign at least one of the most commercial agreements and increase our order book, which is now 153% higher. I would like to explain the difference between a pre-production commercial agreement versus a series production design win. Pre-production deals mostly serve the customer's needs in testing, validating, and understanding the lighter requirements, and they help draft their RFIs and RFQs for a later stage. When it comes to making solid decisions for automotive serious production, it's a much more rigorous and lengthy process. Many other considerations come into play, such as reliability, industrialization, cost sensitivity, automotive grade, cybersecurity, and numerous other aspects that are covered to ensure the safe launch of a high-volume production line, all elements in which Innoviz is well-positioned. Pre-production programs are far more common, which is why we are able to secure more of them compared to series production nominations. However, as expected, the committed volume and order book size are significantly different. Our strategic priorities are what we've grounded our focus on so far and what we will continue to propel our success moving forward. So I'd like to take a moment to remind everyone of our three strategic priorities: solidifying our position as a leading supplier for automotive, expanding our market share beyond the automotive industry, and investing in our technology and perception software. We have a sustainable strategy to deliver against these priorities and position Innoviz for success. Automotive builds have a long sales cycle, high switching costs, and enterprise-level builds that come only following several years of development and testing periods. We believe our automotive applications for aligners and passenger vehicles, specifically the level two plus and level three applications, will be the main drivers for our revenue growth, which is expected to show significant growth in the 2024 to 2030 model years. These opportunities are at a critical decision time that will set the winners for the next ten years. Non-automotive deals have shorter sales cycles, lower switching costs and take place in quite a fragmented market. Non-automotive deals will deliver revenues over the new one and are much easier to penetrate. Given this dynamic, we see the importance of keeping our 2022 focus on our first strategic priority, which is solidifying our position as a leading supplier for LiDAR for automotive and leveraging our momentum. During this industry's critical decision window, we will keep pursuing many automotive opportunities that remain in play, and we believe we can secure more. These automotive wins could guarantee long-term and sustainable growth for the company. As we enter 2023 with several series production bills in our pocket with two programs expected to launch, we will take the next step of our plan, which is expanding our market share beyond the automotive industry to boost our revenue generation. To that end, we are building our production capacity for both InnovizTwo and Innoviz360 products today and have confidence in our ability to penetrate these markets quickly. With InnovizOne, InnovizTwo, and Innoviz360, we expect an uptake in revenues during '23 through the non-automotive market while we begin to recognize revenues from the automotive deals we closed earlier. With that, I'll turn it over to Eldar to go over the financials.

Thank you, Omer, and good morning, everyone. Our confidence in our future growth opportunity is supported by our robust cash position, which gives us both the flexibility to execute our 2022 strategy and additional runway to invest in new and innovative technology. These are exciting times for Innoviz as we are at the starting point of another major project. We maintain a high liquidity level of $275 million in cash, short-term deposits, and marketable securities. Our operating cash flow during the first quarter of 2022 was well within planned budget, and Innoviz's debt-free cash assets enable us to continue to execute our 2022 plan. Revenues for Q1 2022 were $1.8 million compared to Q1 2021 revenues of $0.7 million. All of our revenues in Q1 this year were InnovizOne related. The company expects InnovizOne sales to continue to increase, and we are also targeting to sell the first samples of InnovizTwo later this year. Operating expenses for the first quarter of 2022 were $31.1 million, an increase from $19.7 million in the first quarter of 2021. Operating expenses in Q1 2022 included $4.7 million of share-based compensation compared to $1.8 million of share-based compensation in Q1 2021. The increase in operating expenses in Q1 2022, compared to Q1 2021, was primarily due to the increase in the number of employees and the share-based compensation. Research and development expenses for Q1 2022 were $22.8 million, an increase from $16.7 million in Q1 2021. Research and development expenses in Q1 2022 included $2.7 million attributable to share-based compensation compared to $1.3 million in Q1 2021. To conclude, we gained a strong position in the marketplace with a recent win, and we believe that this win strengthens our position to gain additional market shares during this year and the years to come. As a direct supplier for the industry, we will continue to leverage our strong cash positions to develop groundbreaking technology and products for the automotive market and beyond. And with that, I will turn the call back to Omer.

Thank you, Eldar. I hope you can tell from our call today how excited we are about Innoviz's future. Years of blood, sweat, and tears have gone into achieving the agreement we just announced. I'm incredibly proud of what our team has accomplished and know that the best is yet to come. We are eager to exceed our customers' expectations as we deliver value to our shareholders. I will now open the call for your questions. Thank you.

Our first question today comes from Michael Pilato from Berenberg. Please go ahead.

Hey guys, can you hear me?

We can hear you.

Great. Well, first of all, congrats on the big win. I'm sure a lot of hard work went into that. So, well done. So I just want to ask for maybe a bit more detail on that win, right. You talked about multiple brands being in the win or being part of the win. So I was wondering if you could talk maybe how many brands are included and maybe how many models within each of those respective brands. You might have said it earlier, and I might have missed it, but if you could just provide any more color on that, that would be helpful. Thanks.

Yeah. So, Michael, I'll start this. We start with three brands, which are the more premium brands of this program. Later on, we expect that this program will trickle down to other brands and other car models. We are starting with certain OEM brands and models and slowly expanding over the time of this project. Part of the reason that this program was delayed— we were expecting the decision already last September—was the fact that this is a big group and there are multiple brands. Being a company with so many car companies and designs, each one has its own constraints, which required a lot of iterations of design, working with the team to help them find the right fit. Eventually, to kick off the program, because they didn't want to delay the launch of those cars, which are targeted to be launched earlier, the nomination was made today, but there are discussions yet with the other brands to be included. We didn't count them into our order book, but once that decision is made later, we will update the market. We expect to have more brands included in this platform.

Okay. Understood. That's really helpful. So just to clarify that the order book number, then it's just for those three brands that you mentioned those assumptions.

Right? Yes.

Yeah. Okay. Got it. Perfect. So just another follow-up question here. I see in the press release that InnovizOne's start production is targeted for next year when you plan on launching with your first customer BMW, I assume. I thought the start production was supposed to be, you're ready for production by the end of this year. Is that still the case or is there any change to the production strategy for InnovizOne?

No. Our readiness is by the end of this year. Our customers' launch is next year. There are two customers that we expect to launch next year. Both of them are relying on InnovizOne.

Okay. Yeah. Understood. And one last one for me, and then I'll hop back in the queue, just in regards to the programs you're currently competing on in the RFI/RFQ stage, those that are maybe higher volume series production customers. What's your expected sort of timing on the decisions for those programs? Are there any that you think could be decided this year? I know you don't want to get ahead of yourself, but just curious if you have any thoughts on timings.

I would say yes, there are three customers that based on the discussions could make a decision this year. Having come through this process, seeing that sometimes these decisions take longer than we would've wished, I can't really predict that it'll really happen, but yes, there are three programs that we expect to be decided this year. Again, we can't say how it will develop. But I think we are in a very good position, having won this nomination award, and the fact that we became a tier one has really stirred the discussions around several customers and even new ones. Before Innoviz, we tried to approach many car makers as a direct supplier, and not all of them even thought that it was possible initially. Now we are kicking off those discussions. I feel very comfortable saying that we are in a very good position on those programs that we are competing for in the short term.

Excellent. Thanks very much. I'll hop back into queue.

Thank you. Our next question today comes from the line of Mark Delaney from Goldman Sachs. Go ahead.

Yes. Thank you very much for taking the questions, and let me add my congratulations on the series production win. I was hoping to also ask more on that and for this newest production win, when do you expect to begin shipments for series production? Maybe you could talk about what needs to happen between now and then to get ready in terms of sampling, testing, getting the manufacturing ready, and things like that?

Sure. So as with any automotive program, the nomination was just made a week ago. Essentially, there is a very standard process of providing A sample, B sample, C sample, D sample, in which we are committed to the timeline. It will be in the next three years and three and a half years and beyond that, expecting the start of production. The next step is delivering the A sample, which is basically integration. That's also pending the joint announcement concerning the integration of our first samples into the car. As was possibly discussed earlier, we're not only providing the lighter for this program. We're also providing the perception software. In this opportunity, the perception software is embedded in a new platform. It's different from the platform we used for the first program with BMW. However, it's a very strong platform that will allow us to leverage other programs.

That's helpful. And then maybe you can talk about what some of the financial implications are during that intermediate term period between now and the start of series production. Can you talk to some of the puts and takes in terms of maybe there's some revenue from these samples that you could see, but also I imagine there's some operational expenses, and how should we think about some of those puts and takes netting out in terms of the profitability impact? Thank you.

Sure. So there is an agreed pricing for the different samples and actually those are at very good pricing points for us. We are expecting InnovizTwo. We are currently working to ramp up the capacity of InnovizTwo. We are eager to also penetrate the non-automotive market and get ready with our production line for InnovizTwo. Part of that capacity will serve this new customer, which is now a lead customer. Therefore, for the following years, Innoviz is going to be producing these units. We're going to have our own production line in our new facility. It's a production line that will have quite a large capacity, and there will not be a problem to serve them and many others. Additionally, there is an NRE portion related to the development of the platform and the development also related to our activity right now with the other brands to bring them to the desired configuration, which is part of our work now. Beyond that, there are the C and D samples. Again, there is agreed pricing on the different stages of the product and we made sure that we will also have good margins at those stages. I hope this answers your question.

Yeah. Sorry. Maybe just want to clarify regarding manufacturing, as you approach high-volume manufacturing, even as the tier one supplier, would you still envision using a contract manufacturing partner to help you with that, or do you plan to do all of that on your own? And then I'll leave it there and turn it over. Thank you.

We are in discussions with different contract manufacturers and also with a few others regarding taking ownership of the manufacturing and managing the supplier for the contract manufacturing. There is no plan right now to build our own manufacturing site. Our production line is currently only for the B sample. The focus of Innoviz is not only on designing the LiDAR. We are also designing the manufacturing tools. All the automation of the production is automated. To reach high-volume production of such a product, you need to eventually design a machine that builds LiDAR. That's part of what we do. The new customers felt comfortable with Innoviz becoming their direct suppliers because we demonstrated our experience in developing production tools and managing the design for manufacturing. We are currently exercising and developing the production tools, and these production tools will later serve anyone who produces our LiDAR. They will utilize the production tools we are developing, and this will solely be under our management.

Thank you. Our next question today comes from the line of Andres Sheppard from Cantor. Please go ahead.

Hey guys, can you hear me okay?

Yes.

Wonderful. Hey Omer, Hey Eldar, congrats on the quarter and congrats on the hard win through two years of a lot of work, very well deserved. And thanks for taking my questions. Just to maybe build on some of the questions that have been asked, help me understand, so when can we see revenue recognition from the increase in the order book, right? I understand it takes a few years, but maybe can you give us a sense of when we can start seeing those hits on the income statement?

Sure. As I tried to explain earlier, we see our path to profitability. Basically, we're expecting next year to have growth in our revenues coming from the non-automotive and, of course, the start of the automotive programs that we've already been awarded. Those revenue streams will grow over the years. Three and a half years from today, we expect to start generating revenues from the first order book with a growth rate of 1% to 14% over the course of 8% to 10% growth.

Got it. That's very good.

Sorry. And of course, our assumption right now is that, in a similar timeline to that launch, there are other car makers planning to make a decision. My expectation is that the order book will not come only from a single customer, even if it's from multiple brands. We do expect other car makers that are planning to launch at a similar timetable, which is something we can leverage.

Got it, thanks Omer. And then, I think we can all kind of deduce who the partner is, but when do you anticipate, I guess, to disclose the name formally?

Sure. Of course we are eager to share it; this customer is a very prestigious partner and obviously announcing the name would build a lot of confidence for everyone. I think the industry knows well about this deal. Many car makers and tier ones reached out to congratulate us on this huge deal. We've been competing on this for a long time, and while we were nominated, there were other components of the vehicle also nominated. It's a very important program for the industry as a whole. Right now, there is an agreement between us and the customer to do a joint press release announcement following the first delivery. As of now, it is contingent upon the first delivery of the A sample and then integrating our product into the vehicles, including our perception software. Following that, we will do this joint announcement. We are working closely with their teams for really two years and there is a good relationship. Today, I'm having dinner with the team. It's really a start of a new relationship, and I believe it will take us far in the coming years.

Got it. No, that's very helpful. Thanks again. And maybe one last one, if I may. I know you didn't provide 2022 guidance in terms of revenue, but you did say that you expect revenues to maybe increase or start ramping up throughout the year. I'm just wondering, can you give us a little more color on what that means and how you see revenue shaping up for the rest of the year?

Sure. Maybe I'll just start by saying, when we started, when we went public, our assumption was that this car maker's decision would arrive at a certain timeline and the decision window of the automotive market would occur at a set timeline. That has been pushed back by about nine months. Our focus was always to leverage that critical decision period, ensuring that we're not missing opportunities to lock in as many customers as possible, knowing that we were sacrificing short-term opportunities to make more revenues from selling non-automotive. For that reason, we identified that the decision window has shifted, but as we speak, I believe we are expected to accelerate; the focus for 2022 wasn't solely about automotive sales. I will let Eldar provide the expected revenue for the end of the year, but our current focus is on automotive. However, we know that securing several design wins this year will lay the foundation for non-automotive growth and generate growing revenues through our promising products like InnovizTwo and 360.

In terms of revenues, we do expect to see continuous growth in revenues over the year and in the coming years. As we stated, InnovizOne is the primary product that we will be selling this year, but even more importantly, there is a push to bring InnovizTwo to such a production state that we can start shipping it this year to see additional growth next year. This year, the focus, as we said, is on winning the market, and that will continue to be the focus for next year. We expect to see some revenues, not only from the automotive space but also from other applications and other market verticals. The teams are spending a lot of time now. We are seeking opportunities right now since we have received this award. Next week, I'll be traveling with my team to the US, visiting the East Coast and the West Coast, meeting with different customers. We're approaching meetings with the InnovizTwo, and those discussions will obviously provide us with more business opportunities to allow us to generate revenues.

Wonderful. Thank you so much, guys. Congrats again. I'll pass it on. Thank you.

Our next question today comes from Kevin Cassidy from Rosenblatt Securities. Go ahead.

Hi, congratulations. I'll add that too. I was just wondering about the competitive landscape or maybe the break-off you went through over the last two years. The way you describe it, what are the key attributes that InnovizTwo had that no one else could do?

Good question. The last two years were quite a long process. I think during the first year, we were probably turned down about five times. I told the customer team that through their negative results each time, we improved our product, eventually achieving a 30 times improvement. So much credit goes to them. Once we were able to reach their performance target and provided indications for pricing, it was clear that in order for us to win the program, we needed to be nominated and qualified as a tier one. This kind of car maker could not afford to nominate just any company due to the high volume program. It was necessary at that point to select a tier one that meets all of their group standards. We went through a process of about three to four months, involving different workshops that eventually concluded with our recognition as a tier one supplier. Towards the end of the year, we were in competition with another tier one, which, from our understanding, had technology that was inferior in terms of performance. Based on the different requirements we supported for the group, we pushed for even higher performance than initially expected. The other competitor couldn't meet expectations or the performance demands. Ultimately, the discussions from January to April revolved mostly around internal decisions at the group level, regarding some changes in configurations. We worked with the customer to redesign the light multiple times, particularly regarding the height of the light, which was crucial. We felt the level of engagement and discussions with all teams in the group made us think we were likely to be nominated, and we were pleased that it happened.

Great. Thanks for that detail. And is this why, I guess, in the prepared remarks, you had said that you think the process will move quicker now that you've learned a lot from this experience?

One of the challenges of being selected as a LiDAR supplier for a car maker is that they want to select a tier one that meets all of their group standards. They can't work with companies that can't fulfill this requirement. They have thousands of components in the car and need to ensure that tier one suppliers manage components effectively. They typically have a limited number of companies that meet their expectations. Some car makers are more advanced and willing to absorb some risk by going with new technologies. Most car makers aren't, however; they rely on decisions and due diligence performed by other car makers. The fact that we approached them with a very exciting technology was not enough; they required us to partner with tier ones. Initially, our preference was to work directly and once we were able to show that we were certified as a tier one several months ago, it made them comfortable with us starting the process. This nomination is another step forward, meaning we are credible as a tier one supplier. This also makes us more flexible. One of the advantages as a tier one is that Innoviz is a very agile company. We've demonstrated to the customer that we are quite skilled in terms of the RFQ process and that we can provide added value. Our experience with BMW enhanced our knowledge base.

All right. Great. Thank you very much. Congratulations again.

Our next question comes from the line of Michael Pilato - Berenberg. Please go ahead.

I'm still here. So just two clarification questions. First, you mentioned that you wouldn't be producing the InnovizTwo for this program yourselves and your own manufacturing line, right? Like you wouldn't the initial samples, but you said you might work either through a tier one or a contract manufacturer. So I'm just trying to understand, when you say you're a direct tier one supplier, how that sort of ties with manufacturing through a tier one, right? I guess try and clarify that for me.

Let me clarify. The first B samples will be manufactured by us. We are manufacturing today right next to us. One of the aspects of production is now completed. InnovizTwo's production design is done by us. Therefore, we're designing the product, but we are also designing the production line, and we are going to use the production line for the first time until we establish a stable process until we get it to C sample. The B sample for the upcoming year is going to be done by us in our new facility and that will ensure a large capacity. Ultimately, when it moves to high volumes and once we are qualified as a tier one, we had to indicate to the customer the location of the production line we expect to use. We worked with the contract manufacturer that the customer audited to ensure it meets automotive grade standards in terms of logistics, shipping, etc. Beyond that, when we get to the C sample and then beyond that to the D sample stage, it has to be conducted in an automotive grade facility.

Sorry. Just one more clarification on that, right. Is that not what you're doing with Magna right now, is shipping them the production tools as well as the components for the sensor?

Yes, it is. The production line that is now being managed by Magna was designed by us. It was quite easy for us to work with the new customer, showcasing our experience as a tier two supplier. We are more like a tier one and a half. It was easy to demonstrate our experience in producing tools for production lines. Today, Magna wholly manages production lines for BMW while they buy the components from us. As a direct supplier, we will be selling the whole system and software, which will impact our revenues and top line significantly.

Understood. Understood. Thank you for that clarification. And just one last question: you mentioned NREs is not part of the order book for this program, but will you expect to see NREs this year from the program, or when should you expect to see that?

Yes, we expect NRE also this year.

Okay, great. And one last one, given that you're now going to essentially being a tier one, is there any sort of change in your cash needs to support this program, or do you feel comfortable with the cash you have on balance sheet right now?

The cash on our balance sheet enables us to execute this program. We raised a sufficient amount of cash during our public offering process. We have all our needs covered. In fact, part of the qualifications to become a tier one was showing the customer our financial robustness. Therefore, when we went public and raised money for the company, we ensured that we had the funding in place to secure our efforts in the coming years and reach the standard of performance.

Understood. All right. Thanks a lot, guys.

You have no further questions. Please proceed.

Okay. Really exciting times. I can tell you that the atmosphere in the office is very, very good. We are feeling a lot of the pressure off. It was a very challenging time. We've been competing for this program for a long time, and it is super important for us. I am not sure if we managed to express how impactful this is going to be for us, but just from the amount of engagement we've had in the last week and a half from different customers, it is clear they're taking this event seriously. I have very high confidence in our ability to be very successful, and we're looking forward to a bright future. Next week, I'm traveling through New York and San Francisco, meeting with investors and customers and am happy to be reached out for any interesting opportunity. Thank you very much.

Goodbye.