Innoviz Technologies Ltd. Q3 FY2022 Earnings Call

Thank you, Ralph, and welcome to the team. Good morning everyone, and thank you for joining us. I am excited to provide another update on the significant progress we are making at Innoviz. This quarter has been fast-paced with new design wins, technology partnerships, improvements in our manufacturing throughput, and a major advancement in our expansion into the non-automotive market. Let’s begin with our latest customer win. After announcing our collaboration with Volkswagen last quarter, we mentioned that we had two to three additional OEMs likely to decide within six months. True to our word, in September we announced another production award with a new customer based in Asia. This marks our fourth production win and our second as a Tier 1 supplier, highlighting our accelerating momentum with consecutive production wins in a single quarter. We will explore our pipeline further later, but first, let’s examine this recent deal. The new contract is with an Asian OEM, which we cannot disclose yet, but it is poised to become a global leader in electric vehicles. There are key aspects of the deal that I want to highlight. First, this OEM is very tech-focused. They thoroughly evaluated our technology and the platform partners we can work with, ultimately selecting our solution over competitors, affirming our position as a Tier 1 direct supplier. They are aiming for a rapid increase in LiDAR installations on two models, with production revenues expected to commence in 2024. This deal aligns well with our long-term strategy. Large agreements, like the one with Volkswagen, will drive substantial volumes, which will help us reduce unit costs quickly, while smaller agreements will enhance our contribution margins. Each new deal we secure increases our pre-production NRE revenues and supports funding for production machinery and tooling, bringing us closer to our long-term margin goals. Globally, this is our first automotive win in Asia, which expands Innoviz’s geographic reach and production capabilities. This is a crucial step in our platform expansion and illustrates the significant progress we have made. Alongside our advancements in the non-automotive sector, Asia is becoming increasingly vital for Innoviz, and we anticipate sharing more developments as this market evolves rapidly for us. Another important aspect of this deal pertains to the technology partner we are collaborating with for this customer. As you may know, there are three leading autonomous driving platforms in the industry that manage the hardware and software stack integrating sensing and perception inputs from ADAS components like LiDAR, radars, and cameras. With this announcement, we are thrilled to reveal that we have secured production awards, not demos or partnerships, with two out of the three primary platforms in the industry. Integrating with these platforms can create a significant competitive barrier. We believe that once you are on a platform and establish a working relationship, it allows for deep domain collaboration that could accelerate future business opportunities. I encourage investors not to overlook this element of the deal; several of the RFQs we are competing for have already committed to using this platform. We believe this partnership enhances our chances of securing additional business shortly. We are genuinely excited about this advancement. Now, let’s discuss why we are succeeding in the automotive market. In conversations with investors, there seems to be a belief that success in the LiDAR industry hinges on a singular factor, like range or resolution, but that is insufficient. Based on our experiences with customers, winning requires meeting all requirements: price, performance, automotive standards, manufacturing capabilities, and company maturity. Customer feedback indicates that we are winning not just by a narrow margin but excelling across all categories. Don’t just take our word for it; we want to show a brief video from our event in September, marking the opening of our new headquarters with a broad audience of investors and customers. Hearing directly from our customers and partners is invaluable. Another point worth mentioning regarding our strategy is our strong focus on the Level 2+ to Level 3 segments of the automotive industry. Recent headlines highlight slower-than-expected progress toward Level 5 full autonomy, with timelines pushing towards 2025 or beyond. We want to remind investors that we've consistently believed full Level 5 autonomy would take considerable time, which is why our strategy has centered on the Level 2+, Level 3, and Level 4 categories of the autonomy spectrum. The trend of OEMs downplaying or canceling Level 5 initiatives coincides with customer frustration over Level 1 and Level 2 safety features, prompting some to disable them. Together, these trends indicate that OEMs are quickly recognizing that Level 2+ and Level 3 autonomous systems will become key differentiators in the automotive industry over the next decade. Our pipeline reflects this shift. A significant milestone we track is our OEM share. Once established with an OEM and integrated into their software stack, it becomes simpler for them to involve us in more product lines. Once embedded, we should grow alongside them, as LiDAR-based L2+ and L3 systems are rapidly becoming standard. Currently, we hold about 15% of the global automotive market share. Simultaneously, we have 11 OEMs in either the RFI or RFQ stages, who together produce around 40 million vehicles annually, representing approximately 42% of global market share. When added to the 15% share currently in Innoviz's order book, we are either engaged in or competing for business with OEMs accounting for roughly 57% of the global automotive market. This pipeline features many of the largest OEMs and is rich with opportunities. In fact, six of the OEMs have annual production levels exceeding 4 million units, with an average production in the pipeline of around 4.2 million annually. Furthermore, we believe most pipeline decisions will be made by the end of 2024, with many likely concluded within 2023. When meeting with investors, I often hear the question: why focus now? Why not wait until production begins? However, the key point is that a significant land grab is occurring now, and a large share of early market opportunities will be distributed in the next six to twelve months. We anticipate that this market will be primarily winner-takes-most, with us in the lead, and this market share should remain stable for the next decade or longer. Moving from the long-term perspective to last quarter, we experienced some exciting developments that I want to highlight. I am pleased to share that during the quarter, we started shipping D-Samples from our production line in Holly, Michigan. The D-Sample is the pre-production version that will eventually enter full production, produced through our final tools and processes, already meeting automotive standards. This stage is crucial for OEMs to validate before beginning series production. The excitement about being so close to starting production for our clients is palpable. Another noteworthy advancement this quarter relates to our production process upgrades, which were part of achieving the D-Sample milestone. These upgrades were implemented during our planned downtime due to our headquarters move, including the relocation of calibration and testing lines. The effort has been extensive; I personally devoted numerous late nights collaborating with our engineers to enhance our process, optimize yields, and minimize downtime on our production lines. This upgrade is vital for mass production with BMW and upcoming programs launching next year and will allow for increased output in the non-automotive market starting this quarter and expanding into 2023. Previously, we prioritized our production for larger volume automotive clients, but this upgrade enables us to pursue both markets fairly. Although we have been less vocal about our achievements outside of automotive, the non-automotive market holds significant potential for growth, and we've begun solid partnerships, as indicated on this slide. A key takeaway for investors is that every time a customer selects our LiDAR solution, it reinforces the credibility of our hardware and software. While not every deal is as large as those with Volkswagen and BMW, each announcement signifies a customer thoroughly assessing our technology and opting for Innoviz. This validation, combined with our enhanced ability to deliver units, marks an important advancement. The overall total addressable markets from non-automotive applications could rival those in the automotive sector. The product design cycles in these markets are shorter, leading to quicker revenue realization, often with higher gross margins. This creates an excellent complement to automotive volumes, which can reach millions and enable us to achieve industry-leading unit cost efficiencies. In terms of scale, both markets represent approximately $30 billion total addressable markets where we see strong progress. To accelerate our penetration in the non-automotive market, we plan to collaborate with more distribution partners. Next week, we are launching our inaugural three-day Global Distributors Summit at our headquarters in Israel. We will host nine industrial and technology distributors from various regions to educate them on our technology, equip them with marketing resources, and guide them through our ordering and logistics systems. Engaging distributors marks a significant evolution in our go-to-market approach. It serves as a cost-effective means to boost our sales outreach in the non-automotive sector without a substantial increase in headcount and fixed expenses. As previously mentioned, 2023 is set to be a pivotal year for our non-automotive growth, and we are making strides in establishing partnerships and a strong foundation for future success. With that, I will hand it over to Eldar to discuss the financials.

Thank you, Omer, and good morning, everyone. Starting with cash, we continue to maintain a high liquidity level with approximately $218 million in cash, short-term deposits, restricted cash, and marketable securities on the balance sheet as of quarter end. As we have said in the past, our cost structure has already largely matured. So, our operating cash outlays remained mostly stable during the quarter and were in line with our 2022 budget. Moving to the income statement, revenues in the quarter came in at $0.9 million compared to Q3 2021 revenues of $2.1 million. Sales in the quarters were impacted by the upgrades we made to our calibration and testing lines during the move of our company headquarters, as Omer previously discussed. While the timing for the upgrade took slightly longer than expected, the investment was well worth it, giving the meaningful improvement in throughput. With these changes behind us, we expect our revenue cadence to normalize going forward, with an uplift to InnovizOne unit deliveries in the coming quarters. In fact, our current unit delivery in Q4 2022 has already surpassed Q3 2022 deliveries. On the cost side, operating expenses for the third quarter of 2022 were $31.3 million, an increase from $30 million in the third quarter of 2021. This included $4.9 million of share-based compensation, compared to $8.2 million in Q3 2021. The year-over-year increase in operating expenses was primarily due to an increase in headcount during the quarter, partially offset by the lower level of share-based compensation. Research and development expenses for Q3 2022 were $24.2 million, an increase from $20.6 million in Q3 2021. The quarter included $3.2 million attributable to share-based compensation, compared to $3.7 million in Q3 2021. In conclusion, while the setback in our unit delivery this quarter was slightly larger than expected, the volume should be recovered in the following quarters and the long-term benefits that we expect it to unlock are meaningful and a step in the right direction for the company, as we move to full series production of the BMW and shuttle programs next year. This progress further strengthens our position in the marketplace and improves our ability to gain additional market share going forward in both the automotive and non-automotive segments. And with that, I will turn the call back to Omer.

Thank you, Eldar. Before turning it over to the Q&A, I wanted to wrap up our prepared remarks with a quick review of where we stand today versus our original 2022 goals. On the right-hand side of this slide, you can see the goals that we have set ourselves at the beginning of the year and where we stand now. In terms of pre-production programs, we came into the year targeting 10 and today we are at 14. We targeted one design win and we have already delivered two, with two more months left in the year. And in terms of the order book, we originally targeted a 30% increase thanks in particular to the VW deal and now our most recent win, we have blown through that goal with a 165% gain, moving to $6.9 billion, and again, the year is not over yet. In terms of our pipeline, we previously disclosed 12 programs in the RFI or RFQ process, with two to three expected to make a decision in the next six months. With the announcement of our new Asian OEM deal, the 12 goes to 11 and now we have one to three customers who could make a decision in the upcoming six months. When I talk about the momentum that we have at Innoviz, you can see from this slide, we have already delivered on the things we promised to deliver for 2022 and we believe there is a lot more to come in 2023 and 2024. Okay. With that said, I will turn over the call to the Operator to take us into the Q&A.

Thank you. Our first call today comes from Mark Delaney from Goldman Sachs.

Yes. Thank you very much for taking the questions. The first one is, I am wondering if you can give any preliminary input on how well Innoviz is doing with the one to three OEM decisions that could be made in the next six months and can you elaborate a bit on how impactful being qualified with two of the key platforms has been with those decisions?

Okay. So I would say that with those opportunities we are already at the shortlist, meaning that the last stage of the RFQ, and generally, I would say that we are in a very strong position. We have heard several times that our award with VW is very meaningful; one of them is using one of the platforms, the other one is using the other, and the third, actually, I am not sure which platform they are using. But I would definitely say that from the first two I mentioned, the fact that we are already integrated into those platforms is a key advantage.

That’s helpful. My second question was hoping you can give more of an update on how the D-Sample process is going and any more clarity you can provide on when you think the company will be in series production. You said next year for a couple of programs, but is there more granularity you can share? Is it more first half or second half weighted? Thanks.

Sure. Let me explain what we've accomplished in the last quarter. Transitioning from the C-sample to the D-sample signifies that for the C-sample, we needed to complete all design validation for automotive grade. The D-sample relates to production validation and can only begin once all production processes are finalized. Prior to starting the D-sample, we had to address all necessary changes from the existing issues in our production processes to achieve that milestone. We have already started shipping the D-sample and are currently conducting its production validation. This essentially means that by early next year, we expect to be ready for the production start for our customers.

Okay. Our next call comes from Jared Maymon from Berenberg. Please go ahead.

Hey. Good morning, guys. First of all, great to see my colleague Michael on the video referencing our channel checks; there's no doubt the feedback from those customers and prospective customers shows you guys are in a great position. First question for me, you guys talked about it on the press release and on the call as well, but on that new platform partner. So given your existing partnership with Qualcomm, as you guys pointed out, that kind of leaves Nvidia or Mobileye; either one of those, obviously, great to kind of hitch yourselves to. So I guess the question is can you expand a bit on what the mechanics of that relationship are, and then given a key competitor has called out past partnerships with those platform partners, can you explain how your competitive positioning and the procurement process changes for you?

The way these platforms operate, particularly this one, is that ultimately it is up to the customer to decide which sensor they would like to use. However, there is significant value in adopting our sensor, as it simplifies the process of data collection and algorithm practice. Once a customer is using our sensor, it minimizes the need for repeated efforts, and while they have the freedom to choose their sensor, there are associated costs if they require platform support for different sensors. In general, being selected for a program with this new platform provides a substantial advantage, not just for us but also for prospective customers, as it utilizes existing work and lowers overall program costs. I hope this is clear.

Yeah. No. Definitely. Thanks, Omer. And then…

Great.

… second question, so great to hear the update on the forward looking order book. Just on the order book in general, we have been trying to get a better sense of how the kind of top LiDAR players are approaching those calculations alongside the customer. So can you help us better understand how estimates on things like take rates are arrived at and then if any unconfirmed wins are considered in there like what some of your peers are doing?

No. We are only referring to design wins we have and those are based on volumes that were provided as part of the RFQ. We give some weighted measures to the different scenarios that are given to us and based on the number of vehicles that are expected to be included across the several years of the program. We are assuming a moderate take rate, which is starting from 1% to 14%. It’s actually different between the different programs, because for passenger vehicles there is more clarity on the number of vehicles per customer. Specifically on the shuttle program, this is based on just the volumes that we got from the customer itself, because there are no volumes out there already.

Got it. That’s it for me. Thanks, Omer.

Sure.

Okay. Our next question comes from Andres Sheppard from Cantor. Please go ahead.

Hey, Omer. Hey, Eldar. Thanks for taking my question and congrats on another quarter. A few quick questions from me. In regards to the revenue numbers, Eldar…

Yeah.

… so that was a little bit lower than Q3 in 2021; looks like the primary reason was, it says here, downtime from the company’s headquarters move. I am just wondering can you explain a little bit on that and I know you are not guiding in Q4, but should we expect a stronger Q4 to finish the year? Thanks.

Okay. So it was very important for us this move; the setback is primarily due to the upgrade that we did in relation to the D-Sample, a stage that we transitioned to, which means currently the throughput is much better than we had before. As I said already, now with the deliveries that we made to this point in Q4 is larger and exceeds the deliveries that we did last quarter. So, definitely, I expect the momentum to pick up on that. Maybe one important change from last quarter is the fact that we won another program, which has some NREs to it, some considerable NREs.

Essentially.

Yeah. Which will impact us next — already next year, so this is something very important that we won a very nice program that will contribute to our revenues next year as well.

I want to maybe add to that, if I may. As a company pursuing automotive, our commitment to our customers such as BMW is to follow their quality requirements. Moving to the D-Sample required us to modify our production processes to meet with their requirements. So it’s not only the product that needs to be automotive grade, also a lot of production tools and processes need to meet certain requirements. We had those open issues to cover in order to move to the D-Sample. In a way, we had to sacrifice the short term in order to do those necessary changes so we can move to the D-Sample. So the downtime was, I would say, unavoidable. But in general, it is to support our customers that we are expecting to launch next year. And maybe to add to the recent design wins, as Eldar said, there are two very important elements here related to the revenues. One, as Eldar said, is significant NREs, but also the production tools; the customer is funding the cost of the production. Another element which is super critical is the fact that this program, out of the different RFQs that we were completing, was the one to launch the earliest and with quite substantial volume already in 2024. For us, it was very strategic to win this program because it allows us to see growth of our revenues in a — I would say in a good way already in 2024.

Wonderful. Thank you both. That’s very, very thorough; I appreciate it. Quick follow-up; earlier this week we saw some consolidation in the LiDAR sector with the merger between Ouster and Velodyne, which I am sure you are aware of. I am just wondering, maybe Omer, in regards to strategy, is this something that you and Innoviz might be considering? Obviously, you guys have great partnerships with BMW, CARIAD, and the Asian OEM, so in some ways you are ahead of the competition. I am just wondering, are you exploring or contemplating any M&A activities? Thank you.

No. It’s a good question. So I can share with you that in the last, probably, year, we came across with different ideas coming from banks, etc. to consider that kind of path. I have to say that in my point of view, the only thing that matters for us is whether this acquisition will help us to gain momentum in the automotive space and whether the technology that we might need in order to have a better offering in the market will help us to do that. From that point of view, we didn’t see and we don’t see a good reason to look at that point to look at that approach.

Got it. Fair enough. And maybe one last one, if I could, Eldar, maybe for you, can you just remind us on your capital needs, how are you thinking about capital raising needs as we go — as we approach 2023 and beyond?

Yeah. So basically, we are looking at next year in terms of what are the expected revenue or inflow sources. And as I said before, we expect both the launch of the BMW program, which will both generate the final NRE that we are expecting there, and revenues we expect; the shuttle programs to launch. We have additional revenues coming from the new client in Asia. So we have some expected inflows. In addition to that, we have a strong cash position. So I think we are in a good position, and of course, there might be certain opportunities depending on what we do in the market, but currently this is our plan.

Maybe I will add to that as well, if I may. We are pursuing additional programs right now and with programs that we are competing with, there is a substantial NRE requirement that will also support our efforts, which is quite meaningful. So in that manner, it supports our needs. We are also — I would say that the company’s organizational structure is very efficient. The way the company is able to support different programs is based on the fact that the technology is highly flexible, which actually makes the order requirements we have seen less. As such, it doesn’t require a large or meaningful need to grow the company to support additional customers. Basically, with every company that we need to support, the headcount is not required to increase meaningfully.

Wonderful. Thank you very, very much. Again, thanks for taking our questions. Congrats on another good quarter and I will pass it on. Thanks, guys.

Thank you.

Thank you.

Our next call comes from Samik Chatterjee from JPMorgan. Please go ahead.

Hi. Thanks for taking my question and hope you can hear me. I guess a couple from my side and I will ask them together as one. Firstly, in terms of your pipeline, can you talk about the sort of geographic diversity or sort of how the pipeline looks like in terms of the split between the GOs or the OEMs there and are there any geographies where you feel you are sort of underrepresented today and even in terms of your pipeline you need to focus more and invest more towards over these sort of next 12 months or so? And the second question I had was around this new win that you have where the customer is trying to rush to LiDAR sort of series production in 2024, with the Asian OEM that you referenced. I mean as a company — as a LiDAR company that’s been providing safety, how are you trying to mitigate some of the rest of the OEM trying to rush this to series production? What is allowing the customer to rush this or compress the timeline? Is it that the software stack is much more developed or they are more confident about the software stack? How do you as a company then mitigate some of the challenges in trying to balance sort of safety versus compressing the timeline to production? Thank you.

Okay. So, first of all, thank you, Samik, for the questions. Starting with the first question, geographically we are spread now. I mean, we started with Germany because we saw it as the base of the automotive market. I would say that even some of our — I would say, even our Asian new customer, R&D team, most of their big team is there also in Germany, which is also helpful for us. Other than that, we are currently in discussion, within those 11 OEMs; I would say that, probably, it’s everywhere, Japan, U.S. and other areas of Europe. I don’t think that we have a blind spot, but blind spot by definition is probably something I don’t know about. But I think that we — I don’t think there is a car maker that is pursuing LiDAR now when we are not engaged. So I hope that answers your first question because it’s — I think that maybe just I will add, I think that there is good progress in Japan now, moving faster, and also in the U.S. maybe a little bit following that. Other than that, the second question about safety, look, the second program — the new program that I mentioned, the partner that is responsible for the overall driving decision and testing is a very credible player and I believe that eventually they would manage to do — I mean, eventually they are responsible for all of the driving testing and safety. We are responsible for the LiDAR and the perception software. Eventually, I believe this is a — this is with a very credible team behind it, so I am not concerned.

Okay. I would like to pass over the next question to McClain Culver from Rosenblatt Securities. Please go ahead.

Hi. This is McClain on for Kevin Cassidy. Thank you for letting me ask the question. I had a few questions around the Innoviz360 RFQs. Have you already started accumulating RFQs and is the process different than the automotive market? And I had a few follow ups. Thanks.

Sure. So the short answer is, no. The Innoviz360 was designed based on discussions with specific customers. Generally speaking, I would say that the Innoviz360 would be delivered as samples to different customers. The 360, maybe there’s one RFQ. But I would say that generally speaking, the automotive market is not yet at the stage for Level 4, is making meaningful progress in terms of making decisions on the product, but we do see the trend going there. I believe that next year, that’s the time that we will start to see it more meaningfully. Right now, the discussions are more on the, I would say, the technical aspects to see that we designed the system that meets all of their needs. But no, I would say RFQs in the automotive market. There are discussions with non-automotive customers. I would say that one of the changes we have made to the product is related to discussions about the industrial design. Many customers that we have showed the product, they have made their comments about having a more seamless integration just by having a product that is more similar in terms of shape. Therefore, we did change the product, the way it looks and connects and we hope to show this product by the end of this year. I think it would be a very disruptive technology because it introduces a very significant improvement of the price performance that is offered today by others.

Okay. Thank you. That’s helpful. And for those RFQs, about how many competitors do you have? Is it kind of the same, about two or three as before?

So I would say that different geographies sometimes introduce different competitors. In general, we mostly compete with Tier 1s. Some of the Tier 1s that you are probably familiar with have their own LiDAR. I would say that, in general, we don’t really see a lot of other LiDAR companies competing directly.

Okay. Thank you again and that’s all from me.

Thank you.

You are welcome. Thank you.

Thank you very much. That shall conclude our Q&A session for today and I would like to pass the call back over to Omer. Thank you.

Okay. Thank you everyone for joining us today. I just want to take a minute to give you a quick advertising for CS. We are excited to meet with both customers and investors in January at the conference. Without saying too much before the event, we plan to highlight, not just our technology but some of our actual products that we are integrated on, and we will showcase some of the capabilities of our new Innoviz360 LiDAR, which is going to be an exciting new addition to our product suite, an important part of our continued growth in both the automotive and non-automotive market. For investors that look to connect at that event please feel free to reach out to our IR Department directly through the email address on this slide or in the press release; we will help you find the time to visit the booth and meet the team. Okay. With that said, I am excited with where Innoviz stands today and the progress we have made over this quarter. Thank you for joining us. And with that, we can end the call. Thank you very much.