Earnings Call Transcript - INVZ Q1 2021

Operator, Operator

Good morning everyone and welcome to Innoviz First Quarter 2021 Earnings Conference call. Joining us today are Omer Keilaf, Innoviz's Chief Executive Officer, and Eldar Cegla, Innoviz's Chief Financial Officer. Following the former 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 April 21, 2021. I will now turn the call over to Omer. Please go ahead.

Omer Keilaf, CEO

Thank you, Maya. Good morning, everyone. Welcome to our garage. We want to show you InnovizOne to demonstrate its high resolution and quality. Here you can see a BMW with InnovizOne mounted, along with other cars. The LiDAR is positioned at different heights to collect data for various applications. This is a great way to present Innoviz to you, in our workspace where we bring things to life. Before we dive in, I want to reassure you that all is well at our headquarters in Israel. Our employees are working as usual, and our production lines are fully operational abroad. We hope for a resolution to the unfortunate situation. In this call, I’ll give an overview of our business, key performance indicators, and future guidance before handing it off to our Chief Financial Officer, Eldar, for the quarter's financial review. We announced an exciting press release this morning regarding a major design win. After a thorough two and a half years of due diligence, including multiple tests and audits to confirm our products' reliability and certification, we've been chosen by a leading tier one automotive supplier as the LiDAR provider for their autonomous shuttle program. Innoviz will supply InnovizOne solid-state LiDAR units for shuttles across Europe, expected to launch by the end of 2022, transforming public transportation. This selection underscores the quality of our technology and the benefits of partnering with Innoviz. This design win is incredibly exciting for us. It validates our standing among global OEMs and puts us ahead of many other LiDAR companies. Each new automotive customer using our LiDAR not only generates extra revenue but also strengthens the validation of our technology and enhances the Innoviz brand. We'll keep you updated on our work with BMW as the project progresses. This project is just one of many we're currently pursuing with various partners and well-established companies worldwide evaluating our LiDAR technology. As a company aiming to become a top automotive supplier, we uphold high confidentiality standards expected in the industry, which prevents us from disclosing company names due to internal policies. Some partners may share their projects publicly on their own timelines. This cautious approach allows us to build long-term relationships and maintain a solid order book. We also have a growing pipeline of applications, which I'll detail later. It's vital for you to grasp our strategy. Winning just a few of our prospects would allow us to exceed our targets. We're always searching for ways to innovate and will continue to provide updates when permitted. Recently, we were pleased to see Subaru showcase our work with InnovizOne in a YouTube video, as part of their autonomous driving framework supported by the Japanese cabinet office. Subaru has integrated Innoviz LiDAR in their vehicles for demonstrations in Tokyo. They've recognized Innoviz's early leadership in the LiDAR market. Earlier this year, we gained traction in Japan, partnering with Macnica, the largest distribution company, to sell InnovizOne across various applications. From a production standpoint, we have begun ramping up our automotive-certified high-volume production facility in Holly, Michigan. Key equipment is already in place and producing units, marking a significant milestone for Innoviz. As we boost production volume, we anticipate greater market access for our products and increased exposure to diverse sectors. We've also enhanced our automated assembly processes and achieved a 90% yield at our contract manufacturer in Germany. This improvement to our yield hasn't yet influenced our financial results. Additionally, we've implemented an automated and offline system in Holly, which has passed the site acceptance test. To meet our customers' evolving needs and ensure the highest product quality, we achieved ISO 27001 certification for cybersecurity and VDA 6.3 for supplier management this quarter. We're committed to maintaining these certifications as we strive to become an automotive-certified supplier. Even as we ramp up production, our design team remains diligent. Recently, we updated our specifications for InnovizTwo, our next-generation LiDAR sensor following several key technology breakthroughs. We earlier shared updates on two new products: InnovizTwo and Innoviz SLR, focusing on providing a low-cost variant while enhancing performance. Our engineers’ outstanding work allows us to offer the advanced performance of Innoviz SLR at the lower cost of InnovizTwo. This integration into one high-performance, low-cost device will significantly enhance our competitive advantage. Customers have been very positive, which bolsters our confidence in gaining new accounts and expanding existing ones. InnovizTwo is expected to deliver a 30-fold performance improvement over InnovizOne and a 70% reduction in the bill of materials. It will also feature an embedded perception system and a unique service addressing integration challenges, ensuring seamless platform integration. We believe its high performance and affordability will boost our market share. As many know, the LiDAR sector has been noisy, with many providers not disclosing product specifications. We set ourselves apart through full transparency. Transparency is integral to our operations. We are willing to share the full specifications of InnovizTwo, recognizing that while this informs competitors, we believe our offering stands unmatched. We invite others in the market to also present their performance and technology transparently and accurately. In the automotive space, safety is of utmost importance in defining OEM quality and brand. We adhere to stringent values of transparency, reliability, and accuracy. In the realm of autonomous driving, we believe people will embrace technologies backed by companies that uphold these ideals. We have also made strides in software development. Our automotive perception platform, Innoviz App, is now being shipped to automotive customers evaluating InnovizOne. Innoviz App works with our sensor hardware to help autonomous vehicles detect and classify objects using AI algorithms designed by our engineers, analyzing point clouds, detecting objects up to 250 meters away, and estimating velocities with precision. Alongside Innoviz App’s progress, we are collaborating with Nvidia to integrate InnovizOne LiDAR into the Nvidia ecosystem, with plans for expansion. Concurrently, we continue gathering real-world data in Israel, Europe, the U.S., and East Asia to train and validate the AI behind our perception software. Returning to our business strategy, I want to reiterate how we acquire customers. Innoviz collaborates with tier 1 automotive suppliers, which produce and distribute our products to OEMs. We have established relationships with four tier 1 partners, more than any other LiDAR provider. These partnerships offer us significant visibility and access to various OEM programs at different sourcing stages. One key relationship, established through our first tier 1 partner, Magna International, is with BMW's autonomous driving initiative, which we expect will generate approximately $2 billion in total revenue by 2030 as our LiDAR is adopted across car series, including the 7 and 5 Series. Alongside working with automotive tier 1s as a key business model, we also sell products directly to customers and distributors, exemplified by the design win announced today. Securing design wins for LiDAR typically involves several stages and can take two years or more in automotive programs. The process begins with assessing LiDAR fit against customer use case and performance metrics like size, weight, cost, and reliability. This is followed by customer testing, commercial negotiations, and potentially a formal sourcing process involving RFI and RFQ stages. Before ramping up production, we encountered bottlenecks getting customers through our pipeline. Many units were allocated for the BMW program and other high-value projects in final evaluations. Today, the situation has changed; with expanded capacity, we are shipping LiDAR units to a broader range of companies across various sectors and providing samples to more customers. We expect to see a surge of customers entering initial evaluation stages. LiDAR applications span many key verticals, and InnovizOne fits well in diverse areas. In recent months, we've partnered with over 20 companies across multiple industries and announced collaborations with Macnica for distribution in Japan, as well as partnerships in security, autonomous driving, and smart cities. After evaluating our agreement with BMW, we previously projected $2 billion in cumulative hardware and perception software sales through 2030. We now increase this projection to $2.4 billion to reflect today’s design win announcement. Currently, we have 32 prospective customers in late stages of technical evaluation, RFIs, and RFQs, including six in advanced stages of RFQ and commercial negotiations, representing over $3 billion in potential future sales. We anticipate some of these programs will lead to contracts by mid-2022. In conclusion, we have several positive growth drivers ahead, including validation of InnovizTwo, further Innoviz App development, yield improvements, and ramp-up of our production line. Our robust pipeline of new customers across various verticals, driven by our technological and economic advantages, positions us well. Following our recent major design win announcement, we now project $2.4 billion in our forward-looking order book, which we expect to grow as more prospects become contracts. Following a successful capital raise, we are well-positioned to invest in our business and meet both short-term and long-term production and R&D objectives. We are in a very strong position. Now, I’ll turn the call over to Eldar to discuss our quarterly financials.

Eldar Cegla, CFO

Thank you, Omer. Thank you. And good morning, everyone. In December 2020, we entered into a definitive agreement to merge with the SPAC, which resulted in Innoviz becoming a publicly listed company upon closing of the transaction in early April this year. The transaction included a $230 million fully committed ordinary share PIPE which included a strategic investment from our tier 1 partner Magna International. On April 5, 2021, the business combination successfully closed, providing Innoviz with approximately $371 million in gross proceeds comprised of the SPAC's $141 million of cash held in trust as well as $230 million from the PIPE. A $30 million increase from the original subscription on the date of signing of the business combination agreement. The cash from this transaction will be instrumental in supporting us to ramp up to meet near-term production targets, invest in next-generation research and development programs as well as sales and marketing initiatives in the longer term. Ultimately, we believe that our strategic cash position will help drive organic growth now and in the future. Our total revenues for the first quarter of 2021 were $728,000. InnovizOne related sales in the first quarter increased by 48% to $682,000, and represent 94% of revenues compared to $459,000 or 55% of revenues in the first quarter of 2020. Innoviz expects the portion of revenues from sales related to InnovizOne LiDARs to increase as production is increased to meet order volumes. Turning to our operating expenses for the first quarter of 2021, our operating expenses increased by approximately 9% to $19.7 million from $18.1 million in quarter one of last year. Driven by continuous investment in R&D and an increase in G&A expenses in connection with becoming a public company, we anticipate that nearly 80% of the OpEx budget will be spent on R&D and expect to increase R&D headcount by approximately 30%. We also intend to ramp up investment in business development and other marketing activities now that our product is maturing and we are penetrating new markets. To quantify this, we believe that our sales and marketing budget will almost double this year and are looking to grow the team headcount by upwards of 60%. Separately, we anticipate that we will recognize additional transaction costs related to the business combination incurred during the second quarter of this year. These expenses are currently recorded on our balance sheet as of Q1, 2021 and may have some impact on our operational costs. We also expect to record share-based costs in relation to management measures to be granted as a part of the business combination closing. This is a non-cash impact cost and will be reflected in our operational costs. On the balance sheet, we had $199 million in cash at March 31, 2021 compared to $50 million at December 31, 2020. The increase in cash is a result of a portion of the PIPE proceeds received in escrow as a part of the business combination closed on April 5, 2021. As previously mentioned, our use of cash in both the near and long term focuses on making key investments in R&D, sales and marketing, and improving our production use, and investing in tools to drive automation. This completes my financial summary and with that, we are ready to open the call for your questions.

Operator, Operator

Thank you. Our first question today is from Michael Pilato. Michael, please go ahead.

Michael Pilato, Analyst

Hi, can you hear me?

Omer Keilaf, CEO

Yes.

Michael Pilato, Analyst

Great. Thanks for taking my question. Glad to hear everyone on the team is safe and doing well and congrats on the first quarter. So just a quick question about the six projects that are in commercial negotiations at the RFP stage. I know you can't provide any, obviously company names, but I'm wondering if you could maybe provide details around where these companies lie in terms of the end markets whether it's OEMs and for ADAS applications or shuttle companies, etc. Just a little detail there?

Omer Keilaf, CEO

So it's. Can you hear me? Okay. So out of these six, four are carmakers for level three programs. The other two are shuttle programs.

Michael Pilato, Analyst

Okay, got it. Thank you very much. And then maybe just a little detail around sort of the volume numbers in terms of the units you sold this quarter and the average ASP or the weighted ASP, and then how you expect that to sort of progress throughout the rest of the year in into 2022?

Omer Keilaf, CEO

Yes. At this point of time, we don't disclose these numbers. In terms of the number of units the ASP is north of 10K. It's mainly sample units.

Michael Pilato, Analyst

Okay. Understood. And when you're having these negotiations with ADAS customers and shuttle customers, I guess what is the price point you're quoting them ads for InnovizOne and InnovizTwo, I know it depends on volumes, but roughly, is it that the $1,000 point for the InnovizOne and then the InnovizTwo 500 or sub 500?

Omer Keilaf, CEO

Yes. So those are the overall average ASP through the entire program kind of lifetime. So InnovizTwo is targeting sub $500 to support several programs with very meaningful volumes.

Michael Pilato, Analyst

Got it. Thank you very much, and congrats on the first quarter.

Omer Keilaf, CEO

Thank you very much.

Operator, Operator

Our next question will be coming from the line of Mark Delaney from Goldman. Please unmute yourself and go ahead. Mark, are you able to hear us? Okay, Mark will be back with you in just a few moments. We will take another question now from the line of Kevin Cassidy. Kevin, please go ahead and unmute yourself and go ahead.

Kevin Cassidy, Analyst

Okay, can you hear me? Okay, great. I just understand the transition from InnovizOne to InnovizTwo. When does that happen? What does that mean for your gross margins?

Omer Keilaf, CEO

Sure, happy to answer this question. Actually, maybe we can upload the certain slide about the transition to InnovizOne to InnovizTwo. So since the company first founded, we've done incremental improvements of the technology. Every year we were able to improve the performance between a factor of 20 to 40 times coming from different contributions of different parts of the technology as you might be able to see now on the screen. So you can see in 2016, going into 2017 and 18, every year, we're able to improve the performance by a factor between 20 and 40. Maybe you can click it to play. And also being able to reduce the price quite significantly, as every year we are also pushing the boundaries on that. So we were able to make that through the last five years and now moving from InnovizOne to InnovizTwo providing another very substantial improvement in performance in a factor of 30, on top of InnovizOne and also a very substantial cost reduction which is roughly 70%. We always target a 50% gross margin when it comes to our business model working in a component model, which means that with the tier 1 that we work with and eventually do the assembly in their sites; we sell the components with a gross margin of 50%. Put aside the perception software which we bundle or we add on top of it at around $50 per license. Did I answer your question? Just making sure.

Kevin Cassidy, Analyst

Yes, absolutely. Great answer. Thank you. I was leaning towards the next question is just how long can you keep up this type of pace? Is it all just a Moore's law, but it's $50 to target.

Omer Keilaf, CEO

I think Moore's law doesn't talk about 20 times improvement in a year. I think it talks about maybe two times in every year and a half. We drastically kind of running at a faster speed here. And the reason behind it is because the Moore's law is pretty much accurate. But it's always, mostly focusing on when you’re making an improvement to a specific technology. One of the advantages in Innoviz that we are actually developing multiple components that help in building our device. So by providing incremental improvements of a factor of two or even sometimes five, when we really do a very good job. Those are additive improvements that eventually you can multiply them. So we're a very multidisciplinary team. We're not just doing a very good sensor or very good scanner or very good optical design. We work on all fronts and we're also going into additional layers of the design because we try to find additional ways to improve, always look at that kind of 10x improvement. I always believe that a company should have a linear plan, but should always keep an exponential plan, meaning that you need to leave some space for variance. And we always keep some investment into our CTO office to work on technology that can actually leapfrog in some cases, and those contribute every year. I think that having the fact that we have such talented engineers help us together, and I already know kind of how InnovizThree will look like and we know exactly where are the knobs that we need to continue to push. Eventually, LiDARs need to be not sub $500, they need to be sub $100. And we always try to find the best ROI on where we should put our investment or focus in research and I would say vertical integration and improvement to performance. So those are things that we keep always working on. And we believe that InnovizTwo would give us an excellent way to penetrate the market until 2030 from what we see in the market on requirements for performance and also price point. It's interesting to see that we actually moved to an offensive kind of approach. We actually educate customers about the requirements they should provide to the LiDAR. InnovizTwo is providing performance metrics that are unmatchable and we try to educate customers to understand better about the use cases, which InnovizTwo solves in the application. And I believe that it will give us a lot of opportunities to the market and we'll continue to push on it.

Kevin Cassidy, Analyst

Great. Thank you.

Operator, Operator

Our next question is coming from the line of Mark Delaney from Goldman. Let's try it again. Please go ahead. Okay, unfortunately, we cannot hear Mark. Please stand by for further questions. There are no further questions. Please proceed.

Omer Keilaf, CEO

Okay. One second. So thank you all for joining us on today's call. I hope that what we shared with you helped you understand how Innoviz is positioned to grow and become the market leader. We have been and will continue to be focused on several big opportunities in the market, but now we're also positioned to grow our customer base as a result of the growing availability of our production line. I especially want to thank our employees, partners, and investors for their continued support. As you've heard today, there are many things to be excited about and we can't wait to update you about this in the quarters to come. Thank you very much.