Innoviz Technologies Ltd. (INVZ) Earnings Call Transcript & Summary

Good morning, everyone. Great to having the Innoviz team here to kick off our Automotive and Mobility conference this morning. My name is Jared Itkowitz, Director in our Automotive and Mobility Banking team at Barclays. With us today is Omer Keilaf, Founder and CEO of Innoviz Technologies. Innoviz is a leading manufacturer of LiDAR sensors and software, and one of the many companies that we will speak -- speaking with today, who are helping to pioneer an evolution in the automotive sector. Good morning, Omer, or afternoon, and great to have you.

Thank you very much for inviting me.

So I'd just like to kick things off with pretty basic question. There may be some viewers on who are less familiar with Innoviz or perhaps less familiar with the sector. So it would be really helpful just to discuss a little bit the company's origin story, right? Having now been founded for about 6 years or so. And then maybe a little bit about the sort of product use case and application and why LiDAR relative to some of the other automotive sensor applications? So if we can maybe start there.

Yes, sure. So as you said, we started about 6.5 years ago realizing that one of the biggest bottlenecks for safe autonomous driving. It doesn't matter if it's Level 3, 4 or 5, is the LiDAR. LiDARs were very expensive and very large. And actually there was a huge gap related to the capabilities that were needed from the LiDAR. Generally speaking, any feature of the vehicle that is related to safety cannot have a single point of failure. And for sure, when talking about driving automatically or autonomously, one drop of water that can blur the camera, obviously, is not a function of a safe capability. And in order to overcome issues such as rain, low-light conditions, direct sun. And actually there are many cases where cameras fall short, are related to what the car is actually able to understand from what it looks at. And the way to solve this is by using a LiDAR. And we decided to develop a LiDAR that is very small and very low cost, and we started developing our first generation, InnovizOne. Our first customer who decided to work with us is BMW. So BMW is our first customer who's actually also planning to launch next year with our technology, to launch a Level 3. And since then, we continued to develop our technologies. We also have a series production launch next year with a shuttle, which is a Level 4. And recently we announced an additional 2 design wins. One is with the Volkswagen Group and the other is with an Asian car company, which we haven't yet disclosed its name. For the last 2, it's with our second-generation, InnovizTwo, that introduces a very significant cost reduction, about 70% between InnovizOne and InnovizTwo. And a very major step in performance. We improved the overall performance of the system in about 30x. Improving the performance and reducing the cost allows us now to -- allow our customers to support even higher velocity of autonomous driving and have it available on even low non-premium vehicles. Maybe one of the other major, I would say, steps that Innoviz did in the last few years is becoming a direct supplier Tier 1. And we can talk about that as well.

So as you think about the past sort of 6 years or so, is the business where you thought it would be when you founded the company in 2016? And kind of what's kind of gone right? And what have been some of the challenges?

Well, I have to say that when we started Innoviz, and it's true for any company, any start-up that you open, you need to understand kind of the industry that you are at, right? And you need to understand who are the relevant customers, what's the time to the market and what the product eventually needs to do. I think Innoviz started many years after most of our competitors. And still we are, I would say, running the fastest, and today leading in the market with most of the design wins. And I think the reason that we were able to do it is because we came late enough to let our customers understand better what they are looking for. And we did not -- we had, I would say, the ability to develop the technology based on a much more mature understanding of what our customers are looking to solve. We knew that autonomous driving is not going to happen in 2017 or '18. We knew it's going to take several years after talking with many of our customers, and we knew that we have sufficient time to develop the right technology that will enable our customers to launch. So generally speaking, we -- today, we have InnovizOne available for our customers to launch next year. So I think that we were very much accurate in our understanding of where the market is going. Another part is related to the fact that in automotive, and this is something I always tell companies in our space, it's very important to understand how this market operates -- this industry operates. Like every industry, you need to learn who from the different prospects of customers are more likely to be the first to adopt the new technology. In the automotive market, those are the German car companies, companies like BMW and Volkswagen and Daimler are the 3, I would say, leading technology car companies that tend to adopt technologies faster than the rest. And therefore we really focused our attention on the RFIs and RFQs of those companies. And I think that it's -- it should not surprise anyone that our first actually 3 customers, even the shuttle program that is launching next year, it's a German company. We didn't disclose its name. So it shouldn't surprise anyone that all of our first customers are German. By the way, even the Asian car company, its R&D center is in Germany. So definitely, I think that we knew how this market is going to evolve. We currently see what we expected is that many other carmakers in the circles around Germany, are now starting to converge in the sense of, there are currently 11 car companies that we are doing -- we are going through an RFI and RFQ, and we expect to see them making a decision in the next 6 to 12 months. So it basically means that a big majority of the carmakers are going to already decide on which LiDAR they are going to use already in the very, I would say, soon future. So the market is going to be very much consolidated around a very few number of suppliers. We believe this market is winner takes most kind of market.

So let's talk a little bit more about the sort of commercial traction and the pipeline, Omer. So I have to imagine, once you get the ball rolling, right, in terms of commercial sort of validation, it must make it a little bit easier to then win some subsequent awards from OEMs. But just talk us through a little bit like these first couple of awards, as an example, why did VW choose Innoviz relative to the market? And then is it true that, that sort of validation should sort of flywheel as you go to pitch the pipeline over the next 6 to 12 months or so?

For sure. And I think that many customers that we talk with today very much highlight the appreciation they have on the fact that Volkswagen, through a very long due diligence have eventually -- we've gone through a very long process of audit with the Volkswagen Group, and that's something that is very much appreciated by other customers. The fact that we were also certified as a direct supplier to the VW Group definitely adds points to the credibility and allows us to offer the same for others. Now on the reason that why Volkswagen eventually chose Innoviz out of the many others. And I can assure you that they have spent like about 2 years of -- they've probably seen any LiDAR company on the planet. I think that eventually it comes down to several points that they are trying to categorize the supplier. The first is the performance that the sensor is capable of doing. They set a very high threshold in regards to what is the needed resolution, range, field view, frame rate. Actually we saw the requirements we got initially from Audi as really an outlier in the sense they have been looking for something that was really, I would say, very hard to achieve. And in a way, they pushed us in doing many iterations of brainstorming until eventually we were able to offer them something that met what they need and actually, in a way, also exceed. So that was one part. Obviously the other part is related to the pricing. As a very big car company that is planning not only to offer this in the premium business, but also across the different brands, there was a very harsh target to what the pricing might be. Third, they were looking for a partner that was also able to offer the computer vision, the perception software. And having that Innoviz is developing this and already have, is going to launch next year, not only with our first generation LiDAR InnovizOne, but also with our perception software, that gave us many points on being able to show a product in automotive that includes also the perception software. Then, and this is something that is very, very important, the fact that we -- eventually they would only source a company like Volkswagen when it comes to sourcing a decision for a very high volume of the product, for sure, when it's a critical element that it relies on a single supplier. The supplier needs to be with very high credibility in the sense its ability to industrialize and eventually be able to ship millions of LiDARs at the right quality. And for that they usually only work with very certified Tier 1s with a lot of experience in developing and producing automotive-grade products. And because we were able to show the audit teams of Volkswagen and Audi at the time, to show them the production lines that we have today for InnovizOne that is going to serve BMW. And to show them that we design those production lines. And we manage the suppliers and have done many efforts around industrialization. And showed them how all of those lessons learned from the first program are now integrated into the new design. I think, in a way, got them to understand how much knowledge and experience Innoviz is carrying with us to the second generation. On the kickoff meeting we had several months ago, it was said very clearly by the team from -- the carrier team that we met that one of the main reasons they decided to work with Innoviz was the fact that they've seen all of the experience that we carried in order to bring to automotive grade such a very complex system. And the second is because as a direct supplier company, we can provide them the needed flexibility, the mindset of problem solving that they saw alongside the overall engagement that we've been running for the last 2 years. I don't think they've met a company that was as, I would say, responsive, problem solver and basically trying to find all of the solutions for the problems they have introduced to help them design the best LiDAR they need for their cars.

So one thing that comes to mind, Omer. I think as -- given then that sort of magnitude of public and private players in the space, I think at times, it may be difficult for investors to discern, right, for lack of a better word, who are the winner's going to be in that sector?

Why is that? I mean the last 2 designs wins in the market were for Innoviz, I really do not understand why anyone would expect that Volkswagen and the last design win awarded Innoviz, why in the world -- why for a different car company would make a different decision?

That's kind of where I was heading, right? And I mean, also you mentioned it, and I feel like anecdotally we've also heard that a significant portion of this business is sort of up for grabs over the next 6 to 12 months. So I think as you sort of talk to accounts, that are kind of thinking through ways in which to play the space. Do you envision that there'll probably be more clarity over the next 6 to 12 months in terms of evolution of partnerships and thereabout?

I always tell investors that they can decide which player they want to play in 6 months, but probably that would be less of a problem to do because it will be beyond the time that things have been decided. I mean if you want to make a smart investment and do the due diligence in order to make the investment when things are, as you said, are unclear for most people. I think there is enough evidence today in the market to try to see where the wind is blowing. In 6 months, it will probably be too late because decisions will be made. And so I think it's a good opportunity to pick your winner.

So you mentioned upfront here, Omer, that you have sort of Tier 1 status as a supplier. Can you talk a little bit about what sort of competitive differentiation that offers relative to some of the other players? And then I think just adjacent to that, we have a number of Tier 1s, traditional Tier 1s, who are going to be with us throughout the conference over the next 2 days. What's the future for Tier 1s in this space?

You want me to go in trouble. Let's start with the first question. I think that the difference is almost infinite, and I'll explain why. As I said earlier, the early adopters of this market are the German car companies. They might go with a higher risk opportunity because they are trying to innovate, they are trying to bring something that they are the first to introduce. And they usually also like to choose things that are possibly less mature so that by the time their car would be on the ground, it wouldn't be too old already. It is a very, very different situation when it comes to the other carmakers who are very risk averse and their volumes are very high. And they definitely do not want to be the one that is choosing a technology that no one else is using because they might be in a very difficult situation. And they know that any supplier that has a single customer would not survive. And therefore they would prefer to use a technology that is provided from a supplier that have already validation by other customers, preferably the German car companies that will make sure the technology would eventually meet the quality need. And as such, today, when we are competing on programs, for us to be able to be nominated, we need to be certified as a Tier 1 for them, and we are going through this process with them. The fact that we are a Tier 1 to Volkswagen doesn't mean that we are a Tier 1 to another. We need to be eventually qualified. We need to be certified. We need to be accepted and this is going through a process of audits. And today, Innoviz is going through several car companies' audits to become the direct supplier. Only beyond that, we will be registered on their system, so they can be formally awarded. And this is something that if you cannot do, then it means that you remain a Tier 2. You can say you're a Tier 1, but if you're not on the system, you are not a Tier 1. And the only way to get access to an RFI or an RFQ formally, it's done only through the systems that you are connected to, and you can only be nominated, so as a Tier 1 or through a Tier 1. So working through a Tier 1, I would say it serves its own challenges because now that we are a Tier 1, the pricing pressure is removed because we don't need to split the gross margin between us and another player. The cost of engineering is not doubled because it's only one team, it's not 2. And it's also much easier in general for us to collaborate and negotiate and understand the pain points of our customers. So I think that, in general, becoming a Tier 1 is allowing us to be very competitive because now when we offer, for example, to one car company, which is -- Volkswagen is one of the largest car companies in the world. And now that I'm competing on another car company that possibly is only 1/3 of the size of Volkswagen, which is still very big, I can already rely on very high volume that is guaranteed for me and I aggregate the volume, I can leverage on the economic of scale and be very competitive to a car company that possibly is not the size of Volkswagen. And it means that I would have a huge advantage in terms of being able to win the program and possibly even having a very nice gross margin at that point. And the question on the future of Tier 1s. So look, I think that going forward, we do really see us competing mostly with the traditional Tier 1s because of the reasons I mentioned earlier. I believe that Innoviz' superior technology and price point will allow us to continue to win in the market. The question of how will eventually the traditional Tier 1s will react to it, I would say it remains open. I mean, eventually car companies do need to rely on their suppliers, qualified suppliers, robust, financially robust, with automotive experience, knowledge in the automotive, production, industrialization. There will be a role for the Tier 1s. And of course, they need to continue to invest in innovation and working with Tier 2s. And they need to allow them to succeed in order to grow with them.

Okay. How critical is the sort of L4, L5 space to the growth outlook for the business, a.k.a., like does it matter if that doesn't come to fruition, right? Like if the future state is just advanced active safety for consumer cars, is that kind of good enough?

Look, the first application that we launched will be Level 3. And Level 3, basically it means that there is still a driver behind the wheel, only that it is not required -- he is not required to hold the wheel and look at the road. And the car would take full responsibility once going on a highway or freeway. And those vehicles are going to be equipped with the sensors, with the LiDAR sensor. And those sensors are going to be available even when the car is going to be off the highway. And will allow the car to leverage on that in order to have additional safety for those cases. And will allow it to also continue to validate the software and possibly allow the carmaker to continue to train and collect data in order to eventually possibly reach Level 5 or Level 4 earlier and at a less costly process because they can rely it on crowd sourcing. Basically what Tesla did very well is rely on the fact they can collect data. The problem was that -- is that they have a glass ceiling because the platform is not capable enough. And regardless of how much data they can collect, eventually it will not allow them to go beyond that. But carmakers that will include the LiDAR for Level 3 will. Now Level 4 has different types of applications. Next year, there is a launch of one of our customers who is launching a Level 4, which is a shuttle. And the reason that, that application is actually -- I like it very much because I think it's actually very easy to bring to maturity because eventually it's like a bus that moves, that basically circles in a certain route that you can basically test once, twice, 100 times, 500 times, nothing really changes very dramatically. In general, the difference between Level 4 and Level 5 is the random variance of used cases that you need to be prepared for. As much as you narrow down the application, it allows the carmaker to feel more confident in order to take the responsibility. Moving from Level 5 to Level 4 basically means that it is more limited. And specifically in shuttles, it's significantly more limited because you don't need to deal with ad hoc kind of routes. It's more, I would say, controlled and easier to deploy. And therefore Level 4 would go a long way and will allow to the different suppliers to continue to train, continue to get confidence and at some point will get to Level 5.

Okay. I think we've got time for 2 more. So we've talked a lot about automotive applications. So I think it would be useful just for viewers to hear how you think about the non-automotive opportunity here? And sort of how critical that is and how much of a focus that is for the management team?

Sure. So I think to answer that, I would say that Innoviz strategy was actually very different than the other LiDAR companies in this space. We are highly focused on automotive because we knew that there will be a decision window that we don't want to miss. And if we will miss it, that window will be closed for the next probably 10 years. And therefore we wanted to be as prepared as ready for that time. And I think this is what we've done. And I think that today we see the fruits of that. But once that will close, and we will have behind us several design wins for automotive. There is nothing that prevents us to be active in the nonautomotive. And the nonautomotive market is very fragmented. And the pricing sensitivity is lower, the margins are higher. And we've seen already a case where one LiDAR company entered in nonautomotive, and we're able to grow very fast on the expense of the other. And I think that we learn from that, that while we are now taking the different automotive players, nothing actually stops us from entering that market as well. And of course we want to do that after we have collected all of the, I would say, land grabbing. And I think that our products; the InnovizOne, the InnovizTwo, and we are going to introduce an Innoviz360 that is going to disrupt that sector as well. Today the 360 sensors that are offered by most of our competitors or all of our competitors are quite low in performance, even their highest-end sensors are very much behind compared to what we are going to offer with the Innoviz360. And I believe that we will be able to penetrate the nonautomotive by that.

Okay. I think last one. So we saw the Ouster, Velodyne combination announced a couple of weeks ago. Do you think that the beginning of a trend that we might see as the sort of sector consolidates? And what do you think is sort of the right kind of number of players in this space?

Eventually this automotive market, which I usually -- when I think about this problem, I understand that eventually the winners and those that will survive can only survive through and grow by winning automotive deals because those are the only opportunities with the sharpest growth in the next 5 years. There are many applications for nonautomotive. None of them are going to grow as fast as in the automotive. So definitely the winners of those -- of the market of LiDARs will be those that will win the automotive ones. And eventually, I can say in the last year, there were many discussions, even many companies have come to Innoviz and to me, asking me whether there is an interest to merge. I would say that when I'm thinking about a good enough reason for a company -- a LiDAR company to merge with another is if that adds value to the main proposition of automotive. If you cannot -- if that merger is not helpful in winning the automotive market, it's probably not very useful. And as such, I don't know which other LiDAR companies might merge for whatever reasons, whether it's to leverage on the cash or whether they are trying to remove less players in the nonautomotive. In general, I think that the only focus should be growing the business in automotive. And right now I'm not sure what mergers make sense from that point of view.

Okay. I think we're about out of time. Any sort of closing thoughts. This was a really helpful discussion, I think, for the audience. But any other closing thoughts before we wrap up?

No, I think that the main, I would say, takeaway here is that the automotive market as much as most of the launches are going to be '24, '25, '26. Maybe for some people, it looks like a long time, but for automotive, it's basically yesterday. And it means that the consolidation of the automotive market is going to happen very quickly. And the winners of that will be revealed, if not already, by that time, in the 6 months.

Awesome. Well, it was great having you today. Appreciate you joining us here.

My pleasure. Thank you very much.

Speak soon.