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

Good morning. This is Rob Moffatt, Vice President of Corporate Development and Investor Relations at Innoviz. And I want to welcome you to our earnings conference call. Joining us today are Omer Keilaf, Chief Executive Officer; and Eldar Cegla, Chief Financial Officer. Following their opening remarks, we will open the call to 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, I would like to remind you that our discussion today will include forward-looking statements that are subject to risks and uncertainties relating to future events and the future financial performance of Innoviz. Actual results could differ materially from those anticipated in the forward-looking statements. Forward-looking statements made today speak only to our expectations as of today, and we undertake no obligation to publicly update or revise them. For a discussion of some 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 9, 2023. I will now turn the call over to Omer. Please go ahead.

Thank you, Rob, and good morning, everyone, and thank you for joining us. I'm excited to provide an update on the focus we've been making at Innoviz. This has been another fast-moving quarter with new programs, new partnerships, new product opportunities and our steady march towards 2023 production of BMW and the shuttle program. Let's start over with what I believe is the biggest development, our new light commercial vehicle program. Last quarter, we told you that we were in the late-stage discussions with one of our major existing customers for a new program. And today, we are announcing that we have delivered on that promise. This program is for a Level 4 light commercial vehicle and more specifically, a commercial van that will include 3 to 4 LiDARs per vehicle. And perhaps what is most exciting here is that the expected program is on a very accelerated time line. Due to the speed at which this program is moving, we are beginning our activity based on an agreed framework while working on the final requirements and commercial terms. This program is moving quickly, targeting a mid-decade SOP with test vehicles on the road already this year, which you will be able to see. This means that this program can contribute nicely to the revenues in the back half of 2023, with sample shipments ramping and attractive levels of NRE expected to come on sooner than they typically do. The reason this program is moving so quickly is because we are displacing a development-stage competitor. This is a new milestone for Innoviz as a company, and I believe it is a very important indicator of the quality of our technology and the benefits of 905-nanometer solutions where we believe we are delivering. Another aspect of this deal that is very important is the autonomous compute platform provider that we will be working with. This is our second program with this OEM, and it is the second compute platform partner that we are integrating with for this automaker. This helps to expand our compute platform exposure and shows our flexibility to integrate with all of the major leading platform players. Ultimately, we believe that working with a top autonomy platform partner should enable a faster time to market, accelerate the customer evaluation process and ease the overall customer decision process. And I believe it could help open doors to additional wins as they continue to work together going forward. And while we're on the topic of complete platforms, we have an update on another major compute platform partner and that involves our work with NVIDIA. Investors often hear us speak about the top 3 autonomy platform players and why we think it is important to not only work with all 3 of them, but to eventually have vehicles on the road with each of them. Based on development this quarter, we think we are one step closer to making that happen. We are in discussion with NVIDIA about being integrated into series production programs leveraging the Hyperion platform. These conversations span multiple major OEMs that could introduce RFI and RFQ activity that ultimately would be incremental to the NVIDIA-based programs that are already in our pipeline. In order to help investors understand why this is such an important development, let me explain how OEM typically makes their decision around autonomy platform vendors. Conversations with OEMs historically had progressed in one of 2 ways. Sometimes, they run their compute platform and LiDAR supplier sourcing in parallel, making each of the decisions independently. And sometimes, they will start by picking the compute platform first and then build the sensor suite around it. These scenarios like the second situations already being integrated with the compute platform on another program can significantly reduce the time and cost that it takes for additional automated to deploy the same system. You essentially become an off-the-shelf solution, significantly reducing the risk for a new OEM to choose you as their LiDAR supplier. Our goal here is to become embedded on all major compute platforms as quickly as possible. We view this as potentially meaningful structural advantage, and we are making excellent progress on this front every quarter. And while we are discussing software, I'm excited to share some details on the new products that we are quoting in conjunction with an advanced discussion with a leading global OEM. During our evaluation process with this OEM, they were highly impressed with the capabilities that our LiDAR and perception software brings to the table. As a result, they expanded the scope of the RFQ to include what could be the first industry first-ever LiDAR-based Minimum Risk Maneuver or MRM system. First, let me give a little color of what an MRM does. The MRM system is software that sits on a dedicated compute box within a vehicle and operates as a backup system. In the event of a complication with the primary system, the MRM could take over control of the vehicle, offering a transition period for the driver to retake control of the vehicle and to offer the ability to safely pull the vehicle to the side of the road, if the driver does not retain control within a specific time frame. MRM systems are not new. They've been around for several years. But historically, they have been camera-based. We believe that operating a LiDAR-based system offers many key structural advantages of our time on assistance, including the true 3D image along with reduced risk in low light and extreme sun situation as well as environmental considerations like rain or snow. Successfully building out this product category would be a natural extension of the success we have already demonstrated in perception software and will help us move further up the stack potentially offering additional incremental opportunities down the road. The benefits of having a larger software offering are clear. First, they can build upon and further expand the value that our LiDAR hardware technology brings to the table. And the second, the gross margin profile on software is much higher than hardware. And in the end markets like automotive, where you have more than 90 million units of volume per year, we can generate meaningful leverage and strong returns on invested capital. As part of this program, we are quoting in a bundle that includes the LiDAR, the perception software, the compute box and the MRM software. And we are starting to explore this product with additional OEMs. This could offer us incremental revenue that we believe would be positive to the gross margin profile. Next, I want to give a quick update on our largest customer, Volkswagen. There have been several industry headlines lately regarding changes in the internal software company, CARIAD, and we are happy to say that we continue to work towards the mid-decade SOP for our existing series production. I'm also happy to announce that we continue to explore new ways to grow our relationship with the company. And we are working with both Volkswagen and CARIAD on additional programs, including several that are advanced stages of discussion. We are also working with other compute platform partners to build a wide array of LiDAR integration options that would give the OEM an almost modular approach to LiDAR deployment that could allow integration into multiple platforms and sub-variants. The key point here is that we are making good progress with Volkswagen, and because of that progress, we believe we have additional opportunities for growth with them. As a reminder, the long-term strategy of our business is to gain an initial foothold with major OEMs with one platform and then over time earn the right to be their LiDAR vendor for every additional future program they decide to deploy LiDAR on in the coming years. Given the amount of ongoing momentum we are seeing with our existing customers like Volkswagen, we believe we are well along the path to proving this important milestone of our business, and we look forward to continued growth with all of our existing customers. Our goal here is to further build upon our industry-leading $6.9 billion forward-looking order book, which will be updated on our fourth quarter 2023 earnings call. Coming into the quarter, we had 4 series production awards, BMW, VW, the shuttle program and the Asian EV-focused OEM. 2 of those awards, BMW and shuttle program are on target to SOP in the back half of this year. The Asian EV-focused OEM is targeting a late-2024 to 2025 SOP and our current Volkswagen award is targeting a mid-decade SOP. The new light vehicle program we announced today is targeting a similar mid-decade time line. While we have delivered on several major milestones this quarter, the progress we've seen in our pipeline during the last quarter is at least equally exciting, if not more so. We had a record number of programs move from an RFI to the RFQ process in this quarter, with roughly half of the pipeline now at the RFQ stage, which is the first in the company's history we are now working on more than 5 RFQs in parallel. Between the progress we've already announced and the 10 to 15 in the RFI and RFQ pipeline, we've either have already won business or are actively quoting new awards with 8 out of the top 10 global automakers. Let that sink in for a minute. 8 of the top 10 largest carmakers in the world are in our pipeline and are actively making a sourcing decision for our LiDAR. We ultimately believe that it's likely going to be winner-takes-most market. The technology is safety-critical, there are very high levels of tech differentiation and the player that wins the most business is ultimately going to have the scale and cost leadership advantages is likely going to be difficult to match. Given the fact that most of these programs will be on the road for 8 to 10 years, we believe that a major portion of the industry's market share is going to be determined in the next 12 to 18 months. Looking at our customer programs, you can already see some solid evidence that the pace of programs activity is accelerating. After winning BMW in 2018, it took us over 3 years to win our next production award. From there, it took us a full year to announce the next one. In the past year, we've already announced 2 production awards, along with today's new program. And looking forward, we think there are 3 to 5 programs that have the potential to make a decision before the end of the year. I believe this time line shows some solid evidence that the pace of LiDAR decision making is likely accelerating. We feel very confident about how we are positioned in the process, and we hope that we will have much more to share in the coming quarters, and this outlook is embedded in our 2023 targets. As you can see, we are now targeting 1 to 3 additional programs with existing customers. Since we have announced new program today, and we have a line of sight into potentially 2 to 3 more decisions with existing customers before the end of the year, we are raising our guidance from 1 to 2 programs to 1 to 3. And on the new customer front, we are still targeting 2 series production awards with new customers. We have a few RFQs that we believe can advance into final commercial negotiations in mid-summer, and I'm hoping we will have something to share by late summer to early fall. And in terms of financial targets, we are introducing a very important new metric, cash collection from customers, which we target to be $20 million to $30 million this year. This is a metric we consider to be even more important than the reported revenue because we started to collect large amounts of NREs that are not always counted as revenues. $20 million to $30 million this year. The purpose of this new metric is to more accurately communicate the powerful contribution of analysts to our financial picture and to encourage investors to take NREs into considerations along with revenue. Let's pause for a moment and make sure everyone understand what an NRE is, because it's critical to our cash flow and the funding strategy of the business. Most investors we speak with understand our income profile once a vehicle is in production, but they often do not understand the drivers of revenue in the 2 to 3 years before production starts. During that period of time, we have 3 sources of income and cash, sample unit shipments, non-automotive shipments and NREs. Sample unit shipments are important because they carry much higher gross margins than production pricing. For instance, sample units typically stay in the $5000 to $15,000 range compared to automotive production ASPs, which is under $1000 and can eventually approach $500 per unit at extreme volumes. These sample units are not priced on gross margins, they are priced to recover fixed cost like R&D investments. And for each customer program we can bring in from our pipeline, we could typically sell several hundred units per year during the pre-production phase of their program. This could potentially translate into millions of dollars per year for each award and potentially tens of millions of dollars per year across multiple awards. Here, we are also starting to ship units into the non-automotive market. This effort began in late 2022 and is starting to ramp up as we go through 2023. As you can see, ASPs for non-automotive sales are basically in-line with sample unit sales, ranging from $5,000 to $15,000. So here too you have the potential for a very high gross margin that can help absorb your fixed costs. While our efforts in non-automotive are still in the early stages, we think this is a market that could be in the tens of thousands of units per year for us in the next few years, and the addition of the Innoviz360 is expected to be a meaningful catalyst here. And then you have NREs. NREs stands for non-recurring engineering. Basically, it's a phrase of wide range of services that we provide to customer that center mostly around engineering of the product as it works towards SOP. At a very high level, I would encourage you to think of NREs essentially as services revenues. The communication challenge that we have, however, is that they cannot always be recognized as revenues, depending on their accounting treatment. Sometimes, they can be recognized as revenue and sometimes they have to be recognized as a contra-item to an expense, such as R&D, and you don't always know upfront how you will be able to classify them, since it can often depend on terms and milestones that require input from the customer. I won't go into all the factors that play into the accounting details. What's important here is that whether it's classified as revenue or contra-expense, it doesn't really matter. Either way, it's a cash payment made by the customer and received by us, and it's a critical part of our funding strategy. Last quarter, we looked across 10 to 15 programs that are in our pipeline, and we calculated a total amount of NRE that we are quoting to those customers. And the number is in the range of $150 million to $250 million, with most programs falling into the $10 million to $50 million range depending on their size. Yes, there are programs that could contribute as much as $40 million to $50 million each. So, here too, we have the potential to bring in tens of millions of dollars per year if we can convert several of the programs from our pipeline. One last important point here is that NREs are usually only available to Tier 1s. Typically the total pool of NRE is allocated to the Tier 1, and if anything is allocated to the Tier 2, it is a tiny amount at best. This was a key part of our decision to invest the time and effort to become a Tier 1, so we could collect NREs as part of our funding strategy in a meaningful way. We have been getting an increasing number of questions lately on our funding strategy, and my response to it is the most important step in funding our business is growth. We have a tremendous amount of opportunity in our pipeline and each deal we win has the potential to bring in tens of millions of dollars of NREs and sample shipments. Both of these items offer high gross profit flow-through and we are specifically intended to help absorb fixed costs. We don't assume that we can win every single program, but if we can continue to show the momentum that we have demonstrated lately, and continue to bring in several programs per year, then these things will start to build up upon themselves, with the potential for each of these automotive sample units, non-automotive sales and NREs offering the potential to contribute tens of millions of dollars each to structurally lower our burn rate, extend our cash runway and bring us one step closer to breakeven. With that, I'll turn it over to Eldar to go over the financials.

Thank you, Omer, and good morning, everybody. Starting with cash. We ended Q1 2023 with approximately $156.5 million in cash, short-term restricted cash and marketable securities on the balance sheet. Our largely matured cost structure and our operating cash outlays remained mostly stable during the quarter and were in line with our 2023 budget. Moving to the income statement revenues in Q1 2023 came in at $1 million compared to Q1 2022 revenues of $1.8 million. Revenue were impacted by our pivot towards SOP with BMW and the shuttle program, which will weigh on the first half of the year before revenues begin to grow in the back half of the year. The biggest factor involved here is the lower sales price as we transition from selling LiDAR sample units to selling just the components to Magna, who is the Tier 1 for the BMW program. As we think about revenues cadence for the year, we expect the second quarter to look largely similar to the first quarter and for the same reasons. Looking to the back half of the year, we expect revenues to step up modestly in the third quarter and then step up to a large extent in the fourth quarter with tailwinds from improving production volumes, growing InnovizTwo volumes, revenue-based NREs and increased sample shipments to new programs. Moving forward down to the income statement. On the cost side, operating expenses for Q1 2023 were $33.3 million, an increase from $31.1 million in Q1 2022. Q1 2023 operating expenses included $5.2 million of share-based compensation compared to $4.7 million in Q1 2022. The increase in quarterly operating expenses compared to last year Q1 operating expenses was primarily due to the higher R&D expenses mainly on InnovizTwo costs, a general increase in head count, associated share-based compensation expenses and facility costs. Research and development expenses for Q1 2023 were $26.1 million, an increase from $22.8 million in Q1 2022. The quarter included $3.5 million attributable to share-based compensation compared to $2.7 million in Q1 2022. In conclusion, 2023 is an important year of growth for Innoviz. We are launching our first series production vehicles, ramping our InnovizTwo volumes, expanding in the non-automotive market and diligently going after all of the programs in our robust pipeline. We expect to finish the year on a very strong note with lots of momentum heading into 2024. And with that, I will turn the call back to Omer. Thank you.

Thanks, Eldar. You've heard us talk a lot about existing customers today, including Volkswagen. So I wanted to take the opportunity to offer a reminder for my upcoming fireside chat with Gero Kempf, the head of ADAS over at Audi. Usually it's Gero asking me all the questions, but this time I will get to turn the table around and ask him about Audi's autonomy strategy and some of the lessons he learned along the way during his years of experience in the field. I'll probably also fit in one or 2 questions on what led Audi to choose Innoviz as its Tier 1 LiDAR supplier. Investors should be able to stream along at the website on this slide. Before turning the call over to Q&A I wanted to offer a few final remarks. We covered a lot of ground today and shared a lot of positive news, so I just wanted to offer a quick recap of everything that was said. We announced a new light commercial vehicle program that is on an advanced time line and is expected to already begin contributing financially in 2023. As a part of that process, we are displacing a development-stage competitor and we believe we can do it again in the future. We also talked about being integrated into a second compute platform with this OEM customer and we said that working with this compute platform player can lead to additional opportunities for growth going forward, including with other OEMs. And we also talked about our discussions with another top 3 compute platform player, which is NVIDIA, exploring a deeper integration with the Hyperion platform that could bring further programs into our pipeline in addition to the ones that are already working on an NVIDIA base. On the RFQ front, our pipeline is the biggest it has ever been and even more importantly we have a record number of programs in the RFQ stage with more than 5 programs running in parallel, and we believe that there could be as many as 3 to 5 decisions by the end of the year. And for one of those programs in the RFQ process, we disclosed that we are actively quoting a new MRM product that can increase our revenue and profit per vehicle through a bundled system, while allowing us to move further up the software stack. And we are starting to explore offering this bundle to additional OEMs. And after updating our 2023 targets to include a solid outlook for cash collection from customers, we outlined how strong growth could serve as the primary building block of our long-term funding strategy. I am incredibly proud of the progress the team has made this quarter. I know it can be exhausting working at a company where things are moving this fast. And we know that things are only going to get busier with more than 5 RFQs running in parallel with customers all around the world. There is a lot of travel and time away from the family, a lot of late nights and early mornings. So, I just wanted to finish by saying thank you for everyone on the team for your contribution this quarter and going forward. We have a lot to be proud of, with more to come soon. Let's keep up the momentum. With that, I will turn the call over to the operator to take us into Q&A. Thank you.

[Operator Instructions] Our first question today comes from the line of Mark Delaney from Goldman Sachs.

Yes. Omer, you spoke about integrating with a major compute platform for the new commercial vehicle program and also about being in discussions with NVIDIA for its Hyperion platform. Can you speak more on what work needs to be done in order to be successful with those integrations ?and then the time frame that you expect to be integrated with Qualcomm, Mobileye and NVIDIA?

Yes, sure. So on the light commercial vehicle, we already kicked off the activity. So we're already -- there are 2 deployments or there are 2 fleets that are going to be equipped with our LiDARs this year, some of them in the next month or two and another one later in the year. So the work has already started. So this is going to be several years of work, eventual SOPs in the middle of the decade, but we're already started to work. With NVIDIA, the discussion is around several programs that are still in an RFQ stage. And basically following the RFQ process, we hope that we will be able to win this contract.

Okay. That's helpful. And then Innoviz has a goal of series production awards with 2 new customers this year, I believe. How many shots on goal do you have specifically with new customers this year so we can get a sense of the win rate you're expecting? And maybe you can comment a bit more on your confidence on being successful with these awards in 2023 with the 2 new customers.

Sure. So we talked about having more than 5 RFQs in parallel right now. Only -- and we said that there are additional 1 to 2 programs that are with existing customers. So you can get a sense -- we said more than 5. So you get a sense of how many programs are with new customers. And I believe that we're in a very good position. Generally, I think that what Innoviz is offering today is very, I would say, very attractive. Beyond the fact that the product is great, pricing, et cetera, I think the fact that we are already awarded with several programs today is giving us a huge advantage. In talking with these customers, you can see that those are not the first customer who made a decision for a LiDAR sourcing. The fact that they can rely on us having already customers that are going to make sure that we'll be on time and working with very credible customers like Volkswagen is giving them a lot of confidence. So I believe that with the great product that we offer, the price points that we offer, the automotive experience that we have, guaranteed volume from customers is giving us a huge advantage. So I would say that I'm confident that we will be able to get to those [ crystal ] new awards.

Our next question comes from the line of Jared Maymon from Berenberg.

Obviously, congratulations. By the way, 8 of the top 10 global OEMs is very meaningful. That's pretty exciting. Obviously, exciting for you because even if one of those is one that could be dozens of millions or hundreds of millions of revenue in the out years. So pretty exciting stuff. And then also obviously shows that kind of motivation of OEMs to design in LiDAR. First question I had, I know there was a large silicon platform provider that recently announced an expansion of their supply and development agreement with Volkswagen for Level 2+ and Level 3 vehicles. And that same platform provider has been kind of increasingly discussing the need for radar and LiDAR subsystems in recent years. It sounds like that award is for a vision-only system, but that same providers is in talks with, it sounds like all of their customers for that system to eventually add LiDAR and radar subsystems. So just curious if you can tell us about your work with that platform provider and then how meaningful it could be if they partner with Innoviz for that redundant system that they're creating.

Sure. So what I can say as we said during our talk earlier, the discussions with Volkswagen regarding expansion on additional platforms is also with additional compute platforms. And basically, any program that will go with the LiDAR will be with Innoviz LiDAR. And that means that if the decision to kick off a program based on a Mobileye platform or that -- silicon, sorry, silicon company, that will be with Innoviz and we will work with them together. Of course -- sorry, just to add, of course, it will have a nice impact on additional opportunities that they are part of, if that will be the case.

Correct. Right. Yes. And obviously, a lot of opportunities that they're kind of a part of there. So that's great to hear. And then just on the light commercial vehicle award this morning. So curious if there's any kind of read across here for potential expansion into passenger light vehicles with that OEM. And it sounds like that's the case, both on this kind of commercial vehicle award and potentially on passenger light vehicle awards, you could be displacing kind of a key competitor. So I guess also just curious, anything you could share on that OEM strategy with LiDAR, for example? Is this an OEM that's similar to Nissan, where they're hoping to install LiDAR on all of their vehicles by 2030 or something like that?

If you allow me maybe before I answer that, maybe just to comment on why we're not mentioning the name of the customer. And generally speaking, when we're in discussion with the different OEMs, the topic of marketing following nomination is something that we decided not to have as part of the negotiation, which we learned that's becoming, I would say, annoying to the customer. That specific customer told us from the beginning that they expect that the marketing element would not be even raised during the process. They told us that some other companies talk with their marketing team more than they talk with them. And they asked us not to push for that at this point. And we want to respect it. I mean we want to act as a traditional -- as a Tier 1 in this manner and they expect us to act in that manner. Since this is a program that you actually see on the road in a few months, then we didn't see a good reason to push for it. And for sure, not to add friction in the process in order to make things move faster. But as we did last year, when we announced on our VW Group eventually without naming them and following that, we did. So that would be possible in the following months. To your question about whether this OEM has experience with LIDARs and also with passenger vehicle. It's an expansion that this is an existing customer that is using our LiDARS already on other platforms that is using for passenger vehicle.

Got it. Okay. Loud and clear. And then one more for me, if I can. Just on the MRM software, obviously, that's pretty exciting. You guys have a big software team. It sounds like this is maybe one of the things that they've been working on. Just curious on an ASP basis, is this kind of single digits or low double digits? Or could it be more meaningful? And then just clarifying, is this kind of a drive policy or application level, anything you could tell us there?

Well, I think it's still early to kind of name the pricing we give to it. I mean we're still quoting it. But I think it's a very interesting direction where the market is going, understanding that they see the LiDAR is the more resilient sensor in order to provide the backup for compute box that will eventually drive the vehicle for safety and needs to make a decision on which sensor it wants to rely on. The fact that our sensor has the ability to see very clearly in the different weather conditions and light conditions, and with the ability to see landmarks, et cetera, I think it's a very interesting, I would say, development that we're seeing. We hope that, that will be successful and that will become a product that we'll be able to offer to others. But in terms of pricing, I rather not mention it right now.

[Operator Instructions] Our next question comes from the line of Samik Chatterjee, JPMorgan.

Hope you can hear me. Congrats on the win you announced this morning. I guess a question on that. Maybe if you can help us size the sort of impact that has on the order book? I know you're waiting to sort of frame up the parameters around it, but any sort of ballpark numbers of how it impacts your overall order book, the magnitude of the win you're expecting there? And you mentioned 3 to 4 LiDARs per vehicle is the opportunity. Are you really thinking about sort of all of them being a similar sort of spec InnovizTwo? Or it's a more sort of diverse opportunity where you have InnovizTwo and Innoviz360 sort of all on the same vehicle? How are you thinking about that? And I have a follow-up.

Yes. Sure. So we didn't yet communicate on the volume of the program, but it is only based on InnovizTwo. So there's 3 to 4 LiDARs per vehicle. And I wish at this point, not to disclose additional figures until things maybe will be also shared with the customer because also that's something that we want to be a bit more cautious with in respect to the customer. We said that we will update our order book by the end of the year. So we don't need to talk specifically on every program and its size. Having that it does reflect a lot of information that our customers not necessarily want us to disclose.

Okay. Got it. And a quick one for Eldar here. The difference between the NRE bookings and the cash collection guidance is, maybe just explain the difference there? And does it expand as your sort of -- does the gap between cash collection and NRE bookings expand as your NRE expands over time? Is there any sort of thing to keep in mind there?

So the NRE is a very important factor in our business, and it's meaningful to our cash flows. So when we talk about NRE booking, usually when we approach a program, we quote for a few tens of millions of dollars of NRE typically, and this is for the first quarter development part, the first 2, 3 years of the program as of the win. Then we have the collection. The collection is done over the period of the development process. So the collection is being done. So if we book $30 million and it goes over 3 years, it may be collected $10 million every year, just as an example. But it's very meaningful and incremental, each program adds additional collection opportunities for each year. So it's aggregating.