Earnings Call Transcript - INVZ Q2 2022

Operator, Operator

Good morning, and welcome to Innoviz Second 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 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.

Omer Keilaf, CEO

Hi everyone and good morning. I'm very excited to have you today for our second quarter of 2022. We had a very successful quarter following the recent announcement of our new customer Volkswagen, which we are thrilled to discuss. After receiving the contract from Volkswagen and reaching the first milestone of integrating our LiDAR for testing, we were pleased to finally provide a press release about this recent award. Additionally, we have made substantial progress on key programs and have met or exceeded all of our targets for 2022. Now, I would be happy to start with the formal presentation. Thank you. Innoviz’s vision is to become the world's leading tier one supplier for LiDAR and perception software for the automotive industry. Last week, Innoviz proudly announced that we will provide LiDAR sensors to several brands within the Volkswagen Group while integrating our perception software to fulfill automated driving specifications. As the program progresses, we anticipate more brands within the Volkswagen Group to be included. BMW is the second largest car manufacturer with more than 10 million cars sold annually, encompassing multiple brands including Audi, Porsche, Volkswagen, Skoda, and others. We are fully engaged with our samples already integrated into CARIAD’s top models. We expect revenue from this program in the upcoming years since the development and testing processes of our customers will require hundreds to thousands of units in the next three to four years, priced significantly higher than the official stock of production. Following the start of production, we foresee an exponential ramp-up over the project's lifespan of 8 to 10 years, resulting in tens of thousands to over a million LiDAR units annually for the Volkswagen Group at competitive prices. The Volkswagen Group selection is reflected in Innoviz's order book as an increase of $4 billion, bringing our total to $6.6 billion. Innoviz has received multiple RFQs from the market. Volkswagen's requirements were the most challenging we've encountered, driving us to design a best-in-class LiDAR. Our success in winning the Volkswagen program is attributed to four main factors: the exceptional price and performance of our new product InnovizTwo for high-speed highway autonomous driving, our extensive automotive experience with leading companies like BMW and Magna, the maturity level of the InnovizTwo product, and the tier one value proposition we offer. With the Volkswagen win, these four growing assets give us confidence in our ability to secure additional programs in the market. While working closely with multiple OEMs to become their LiDAR supplier, we also recognize the importance of solidifying collaboration with leading platform vendors. We are excited to announce unique events that Innoviz will host in the coming months. Innoviz is hosting partners, customers, and analyst events on September 19, featuring keynote speakers and a tour of our InnovizTwo automated production and testing lines. We are thrilled that Mr. Alex Vukotich, VP of Automotive Product Management at Qualcomm, and Dr. Richard Rau, VP of Autonomous Driving, Sensors, Integration Platforms, and Cooperation at BMW Group, have confirmed their attendance. Our second event on October 23 will be a 3D perception workshop, hosted by Innoviz and NVIDIA during the European Conference on Computer Vision ECCV, discussing the challenges and advantages of 3D data for autonomous driving. With this win, Innoviz is now serving two of the world's leading car makers, BMW and Volkswagen, which together account for 15% of the entire automotive market. From the outset, Innoviz has focused on leading industry car makers, particularly since German manufacturers set the industry's standards. Consequently, we have given these customers our utmost attention. BMW and Volkswagen are both innovators striving to introduce cutting-edge technologies to the automotive market. Our proven success in Germany has provided us with maturity and recognition from other car companies in Europe, the U.S., Japan, and China, enabling us to offer our solution as a tier one supplier. In May, we announced the appointment of Scott Craig and Brijesh Shukla as country managers for the U.S. and Japan, marking a strategic step to capitalize on our growth opportunities following our nomination with Volkswagen. We are already witnessing the benefits of this new business initiative as we aim for unprecedented success. We are currently conducting qualification processes to become a tier one supplier for more car makers and look forward to updating you on our progress. We believe these future partnerships will further strengthen and solidify our position as a leading supplier for autonomous vehicles. I would like to elaborate on our tier 1 strategy. This slide illustrates the value of becoming a tier 1 supplier. As demand for lower-cost solutions rises, pricing pressures compel higher vertical integration. As shown in the chart, as a direct tier 1 supplier, we can offer customers a low average price while increasing our revenues. This scenario is mutually beneficial, and we will continue to focus on this business model. Many have inquired about our need to invest in CapEx for our production capacity as a tier 1 supplier. In the showcased videos, you can see the production line designed for InnovizOne. Several machines have been developed to automate the production and testing of this product, ensuring no part of the assembly or testing is manual. The same is true for InnovizTwo, where we are developing full automation of the production and testing lines. Once these machines are finalized, we plan to ship them to third-party contract manufacturers with automotive-grade facilities for global production management. The cost of these machines is financed entirely by our customers. I am confident that our tier 1 capabilities, including mass production management, manufacturing proficiency, automotive-grade quality, hardware validation, and computer vision validation, will be key factors in other OEMs selecting their direct LiDAR supplier. Innoviz has recently transitioned to our new offices, which include our production lines, testing facilities, and the longest underground laser testing track in Israel at 300 meters. Having the InnovizTwo production lines in-house will enhance our process, reduce development costs, eliminate risks associated with travel restrictions that may slow ramp-up, and minimize production costs while volumes increase. We are currently relocating the InnovizOne test lines between locations and expect these to ramp up shortly. The InnovizOne production lines remain operational as they are located off-site. Simultaneously, we are establishing the InnovizTwo production line in our new facility to support volume ramp-up by early 2023. We remain committed to securing our leadership position in the automotive market with key OEMs in the near term while also leveraging the maturity of InnovizOne products to benefit non-automotive segments and expand our market share to drive revenue growth. We see significant opportunities in non-automotive markets where we aim to leverage our product maturity. We expect the average selling price to be higher in these markets, although volumes per program may vary. To highlight our strong momentum with non-automotive partnerships, we recently announced a cooperation agreement with Joowon Industrial, who will distribute a wide range of Innoviz applications across various industries, from industrial machinery to heavy equipment in the Korean market and beyond. We also disclosed that Innoviz LiDARs were chosen by Japan Post for constructing digital maps for postal deliveries, facilitating next-generation smart city services such as autonomous driving and unmanned delivery. Regarding our sales funnel and targets, we have already met or exceeded our 2022 goals. We continue to see momentum as we attract new potential customers into our sales funnel. Currently, we are managing 12 automotive RFIs and RFQs at various stages, almost all concerning passenger vehicle programs. We anticipate decisions on two to three programs within the next six months. Our overall automotive market share has increased by 12% to a total of 15%. We are excited about our progress and recognize that we are just getting started. We expect to generate significant revenue in 2023 from our previously announced series wins with BMW and the L4 shuttle program, as well as from non-automotive end markets. I am confident in our cash position. We have always been prudent in our capital allocation and will continue to be so moving forward. As we secure additional volume contracts and establish our reputation as a top direct supplier in the automotive sector, we will manage our expenses appropriately and evaluate all available options to ensure we are optimally positioned to execute our strategy. We will continue our investment in technology and perception software and are ramping up to deliver an improved sample designed for volume production. We are focusing on refining and automating processes to support volume increases targeted for early 2023. At the same time, our innovation team is finalizing the design details of the Innoviz360, with most components already under production. We plan to begin integration during Q3 and expect to showcase the first Innoviz360 samples by the end of the year, as scheduled. I would now like to show a brief video about InnovizTwo. We are eager to share our progress with our investors and take pride in our achievements to date. As showcased in the video, InnovizTwo has delivered outstanding results, impressing and exciting our customers. I genuinely believe it is the best LiDAR available today, and due to its attractive price-to-performance ratio, I am confident it will be widely adopted by many car makers in the near future. Now, I will hand it over to Eldar to discuss the financials.

Eldar Cegla, CFO

Thank you, Omer. And good morning, everyone. I would like to start by briefly explaining how our Volkswagen-related $4 billion forward-looking order book was calculated. In terms of volume production, the Volkswagen Group holds about 10% of the market share, which translates to over 10 million vehicles sold annually. The program plan is based on three years of development and validation followed by 8 to 10 years of sales. We expect to see a growing take rate of 1% to 14% over the course of the program, starting with the more premium brands and car models and trickling down over the years to the less expensive car brands and models. We expect to supply our LiDAR sensors for at least 8 million cars over the lifetime of the program, multiplied by the ASP, which aggregates to the $4 billion order book we have announced. We maintain a high liquidity level of approximately $246 million in cash, short-term deposits, restricted cash, and marketable security as of June 30, 2022. We're using our resources responsibly, staying within our expense budget for the second quarter of 2022, and maintaining a robust cash position which gives us both the flexibility to execute our 2022 strategy and provides us with a runway to invest in our new and innovative products and technology. Revenues for Q2 2022 were $1.8 million compared to Q2 2021 revenues of $1 million. Our revenues in Q2 this year were InnovizOne related; we are also targeting to send the first samples of InnovizTwo later this year. Operating expenses for the first quarter of 2022 were $28.8 million, a decrease from $170.7 million in the second quarter of 2021. Operating expenses in Q2 2022 included $4.4 million of share-based compensation compared to $49.9 million of share-based compensation in Q2, 2021. The decrease in operating expenses in Q2, 2022, compared to Q2, 2021, was primarily due to a decrease in share-based compensation, partially offset by an increase in headcount during the second quarter of 2022. Research and development expenses for Q2 2022 were $21.9 million, a decrease from $32.1 million in Q2, 2021. Research and development expenses in Q2, 2022, included $2.7 million attributable to share-based compensation compared to $17.6 million attributable to share-based compensation in Q1, 2021. To conclude, we maintain a strong position in the marketplace, as evidenced by our recent design win with the Volkswagen Group, and we believe that we are well-positioned to gain additional market share during this year and the years to come. And with that, I will turn the call back to Omer for closing remarks.

Omer Keilaf, CEO

Thanks, Eldar. And we will rejoice for how far we've come in these months and look forward to updating you on our progress on future earnings calls. Before I open up for questions, I'm happy to share that we will be back to New York during the week of September 5, taking part in both cities' Global Technology Conference as well as the Evercore ISI Annual Technology Conference. We are happy to meet with you there. Thank you for joining us today. And with that, I will turn the call over to the operator to take us into the Q&A.

Operator, Operator

Thank you. Our first question today comes from Mark Delaney from Goldman Sachs. Please go ahead.

Mark Delaney, Analyst

Hi, yes. Thanks very much for taking the questions. And good afternoon. Yes, first question is a better understanding on CARIAD and do you think there's been media reports around some software challenges at CARIAD and I think some of the brands, according to the media, were rethinking any of what they wanted to use from CARIAD but maybe doing some stuff themselves. So, I'm hoping you better understand to what extent you've already factored some of those dynamics into the order book. I think the order book calculation of $4 billion was pretty conservative, if I understood it correctly and if anything, perhaps chances to expand the number of models that you're on but maybe if you could speak a little bit more in terms of how confident the different brands are. Perhaps there the different brands are and using this product and what opportunities there are to perhaps even build on the amount of the order books or further.

Omer Keilaf, CEO

Sure. And thank you for asking the question. Innoviz is confident of the contract to become a supplier that supplies tier 1 and four other brands. Our agreement is with all of the brands within Volkswagen. The program is managed by CARIAD. CARIAD is responsible for the driving stack that eventually will integrate into the different brands. But our activity and integration discussions are with each brand separately. The discussions are ongoing. Our software is also integrated into this platform. The CARIAD platform will host our perception software as part of the whole software that will drive the car. No changes are related to the program, as it is going very smoothly, I would say. The dynamics are very positive. And to your last comment, I am actually very optimistic that additional brands will be included following the discussions we are having.

Mark Delaney, Analyst

That's very helpful, thanks for that. And for my second question, you mentioned that two to three programs could be decided in the next 6 to 12 months in the automotive market. Do you have any indications from those potential customers about how likely Innoviz may be to win or any more you can share on your expectations for potentially winning some additional programs out of those two to three that you mentioned? Thanks.

Omer Keilaf, CEO

I believe that Innoviz is positioned very strongly for those programs. Ultimately, it’s a decision that we are turning to. But with the level of discussions and the nature of the details being discussed, I would say that I am overall positive. But I would rather wait with the news until they conclude. These are related to passenger vehicle programs and are very interesting for us. Once we have the program with Volkswagen, we can guarantee the volume. Having this volume in our economics of scale allows Innoviz to be very competitive even with programs from car makers that are not at the size of Volkswagen. This is a key element in our ability to be competitive on all programs right now because we can leverage the guaranteed volume we have with certain programs. And this is why selections made by car companies like Volkswagen are so critical and why other car makers tend to follow decisions made by the Volkswagen Group.

Operator, Operator

Mark, are you there? We will proceed to our next question. Our next question comes from the line of Andres Sheppard from Cantor Fitzgerald. Please go ahead.

Andres Sheppard, Analyst

Hey Omer, hey Eldar, good afternoon. Congrats on the quarter and thank you for taking my questions. I wanted to say that slide about Volkswagen and the order book assumptions was very helpful. I just want to make sure I understood it correctly. So with this new agreement, the expectation is for revenues to start ramping up, I think in between three and four years initially. But once that takes place, the expectation is that the sensors will be used in over 10 million vehicles per year. Maybe you can give a little more detail on that? I just want to be sure I understood you.

Omer Keilaf, CEO

We definitely target that number. But no, I mean we're talking about the penetration rate from 1% to 14% of the total volume out of the 10 million. The kickoff is related now to several brands. There are several models already planning to launch with the LiDAR, and every year there will be releases of more cars. The total duration of the program is calculated based on roughly 6 million cars for the duration of 8 to 10 years. However, we believe that more brands will eventually use the LiDAR and the numbers could grow.

Andres Sheppard, Analyst

Got it. That's very helpful, Omer. Thanks for that color. And maybe in regards to then the BMW partnership. You mentioned today that you expect material revenue starting towards the end of next year. I'm wondering if you can maybe give us a little more granularity as to how you see those ramping up, possibly not necessarily quantifying it specifically but just at a high level can you just give us a sense of what that agreement will look like as those revenues begin to ramp up next year?

Omer Keilaf, CEO

There are two parts to the revenues expected from the program. One is related to NRE, which was agreed to be provided at the SOP time. The second part relates to the sales of cars which will be equipped with these LiDARs.

Andres Sheppard, Analyst

Okay, I understand. I have one final question if I may. Regarding the 12 prospective customer agreements you are working on, which seem to be primarily for passenger vehicle programs, how likely are you to secure those agreements? Should we take a more conservative approach and perhaps expect just a few of them? How confident are you in those 12 programs?

Omer Keilaf, CEO

Look, I believe that Innoviz is going to be or already is on the shortlist for each of them. Shortlist means that there is either one competitor or two. Our competitors are other tier 1s in the market because car makers would make their decision based on whether the supplier meets their standards. So you can probably estimate who might be our competitors, and InnovizTwo is a very strong product both on performance and pricing. With the stamp of a tier 1 supplier now by a credible car maker, which is the Volkswagen Group, this gives us a strong position and removes any friction in discussions we've had so far with any car maker to become a direct supplier to their program. I would say that we used to say that our conversion rate is one to three because that’s what we usually see between one or two companies competing on the RFQ in the last discussion. I would probably say that since we have increased our chances due to the recent win, I would likely at least take a 50% probability from my perspective. You can be conservative and more conservative than that.

Andres Sheppard, Analyst

Thank you, and I have one last question. Regarding your tier 1 status, do you believe it has enhanced your credibility with other original equipment manufacturers? Have you noticed an increased likelihood of securing deals or a positive shift in the perception of Innoviz's product due to this tier 1 status?

Omer Keilaf, CEO

Definitely. I mean, before you had the ability to talk about how design win with Volkswagen is a direct supplier. There were car makers that first perceived it as a risk, but that was completely removed once we were able to talk about the fact that we were able to go through the quality assessment processes to become a direct supplier to the group and to all of the brands in the group. We already kicked off with some car makers the process to become a tier 1, meaning that eventually for them to add you to their supplier system, you need to go through a process and ensure that you meet their group standards. All of their quality assessment for production, logistics, quality, software development. Since we were able to show that we passed that with a credible customer, the motivation to proceed has grown. And therefore those discussions were already starting. Interestingly, now that we are a tier 1 to the Volkswagen Group, we have been handed an RFQ for radar to compete. We do not plan to answer the RFQ. But it shows that once you qualify as tier 1 to a car company, it opens a door and connects a bridge between you and the car maker to offer different technologies. Because becoming a tier 1 is not related to the technology, it's related to the company. It means that you are a reliable supplier that the company can decide to work with. I find it as a very strong opportunity for Innoviz to grow going forward.

Andres Sheppard, Analyst

Wonderful. Thank you so much, Omer. Thanks for answering all my questions. I'll pass it on. Thanks again, and congrats.

Omer Keilaf, CEO

Thank you.

Operator, Operator

Thank you. Our next question today comes from Kevin Cassidy from Rosenblatt Securities. Please go ahead.

Kevin Cassidy, Analyst

Yes. Thanks for taking my question and congratulations on the win. Just in the CapEx discussion you mentioned that it's customer paid for the equipment. Can you give us a little more detail on how that arrangement works?

Omer Keilaf, CEO

No. I mean, Eldar, do you want to?

Eldar Cegla, CFO

Yes, sure. So our investment in CapEx is offset by decline. If a certain client needs a certain capacity, they are paying for the specific line that they're using. We are designing our own machines that build up the LiDARs, and we can very easily duplicate these machines and place them where needed around the world. The cost is covered by clients, so there isn’t an additional burden on our cash flow.

Omer Keilaf, CEO

Yes, maybe I'll add to it and sorry Eldar. In order to build the LiDAR, there are two machines that we developed. One is for the optical assembly. Those two became significantly simpler than InnovizOne because we only have one laser and one detector. Thus, the cycle time and all the processes have been significantly shortened. The footprint of the machine is similar in size to a large table. The capacity of each machine is quite high, around 100,000 to 200,000 LiDARs a year. It's very inexpensive equipment. Eventually, you can imagine, and I showed it in the video, it’s a robotic arm that places the optics. That's the design we've developed, and as Eldar said, we can place those machines in different locations where it is convenient for our different customers. The footprint is small, and production is simple because it's automatic. We have already experienced that with InnovizOne, which means this production line, consisting of this process, we designed, built, and tested in Germany before shipping it to the U.S. where Magna is managing this process and operating that machine. The second machine relates to the testing. It’s a similar chamber where you place the LiDAR inside, and basically the targets that move in and out need to calibrate and test the LiDAR. Once those machines are up and running, we can duplicate them and place them in different locations. They are not very expensive and have quite good capacity. Other than that, when it comes to the PCBs, the electronic boards are very standard material. We don’t need to develop those processes; we can use companies to produce the electronics. The assembly is very simple. I hope that adds more color.

Kevin Cassidy, Analyst

Yes. Thanks very much. It's great detail. And maybe just a simpler question on the LiDAR viewer. What's the configuration? Is it going to be just one of your LiDAR or are there opportunities for this to let’s say lane change LiDAR or other LiDAR on the vehicle?

Omer Keilaf, CEO

It's a single LiDAR configuration. I'm not sure I really understand the second question?

Kevin Cassidy, Analyst

It was just some talk about LiDAR for lane changing, side views.

Omer Keilaf, CEO

Well, the field of view is high enough. It's 120 over 40 degrees, which captures the field of view for any cutting scenarios required by the customer.

Kevin Cassidy, Analyst

Okay. Thank you.

Omer Keilaf, CEO

Welcome.

Operator, Operator

Thank you. You have no further questions. Please proceed.

Omer Keilaf, CEO

Okay. Thank you very much. In the theme of this, there is a rush of excitement. We definitely see both confidence from customers like Volkswagen, which is a dream come true. We are also seeing many other opportunities that we are excited about. I hope that we will be able to bring them to the table, and I'm sure we will. So thank you very much. Talk to you next time.