MicroVision, Inc. (NASDAQ:MVIS) Q3 2023 Earnings Call Transcript

MicroVision, Inc. (NASDAQ:MVIS) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good afternoon, and welcome to the MicroVision Third Quarter 2023 Financial and Operating Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Drew Markham. Please go ahead.

Drew Markham: Thank you, Matthew. I’m pleased to be joined today by our CEO, Sumit Sharma; and our CFO, Anubhav Verma. Following their prepared remarks, we will open the call to questions. Please note that some of the information you will hear in today’s discussion will include forward-looking statements, including, but not limited to, statements regarding our customer and partner engagement, product development and performance, comparisons to our competitors, market opportunity and program volume, product sales and future demand, business and strategic opportunities, projections of future operations and financial results, availability of funds, as well as statements containing words like potential, believe, expect, plan, and other similar expressions.

These statements are not guarantees of future performance. Actual results could differ materially from the future results implied or expressed in the forward-looking statements. We encourage you to review our SEC filings, including our most recently filed annual report on Form 10-K and quarterly reports on Form 10-Q. These filings describe risk factors that could cause our actual results to differ materially from those implied or expressed in our forward-looking statements. All forward-looking statements are made as of the date of this call and, except as required by law, we undertake no obligation to update this information. In addition, we will present certain financial measures on this call that will be considered non-GAAP under the SEC’s Regulation G.

For reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure, as well as for all the financial data presented on this call, please refer to the information included in our press release and in our Form 8-K dated and submitted to the SEC today, both of which can be found on our corporate Web site at ir.microvision.com under the SEC Filings tab. This conference call will be available for audio replay on the Investor Relations section of our Web site at www.microvision.com. Now, I would like to turn the call over to our CEO, Sumit Sharma. Sumit?

Sumit Sharma: Thank you, Drew, and welcome everyone to this review of our third quarter 2023 results. I’m excited to be presenting today, and will provide color on progress made on our 2023 objectives of securing multiple nominations for our LiDAR products. I will keep my update concise to allow for more time for questions today. I’m happy to report that we remain on course on our main 2023 objective of securing multiple designs wins with nominations from OEMs. We remain the only LiDAR company that offers multiple technology nodes, with highest resolutions, smallest form factor LiDAR with our MEMS-based long-range MAVIN, as well as small form factor short-range sequential flash-based MOVIA LiDAR product lines. We continue developing our revenue streams from strategic and other channels, and I’m satisfied with the progress so far.

The biggest opportunity for the company remains in strategic partnerships with automotive OEMs for our LiDAR products. Establishing a predictable level of direct sales from non-automotive customers is also very important for all LiDAR companies to be successful. I would like to start by updating you on our progress on multiple opportunities for LiDAR nominations, target launch timelines, and the magnitude of deals we’re looking at. Our teams remain engaged with multiple OEMs looking to identify their next LiDAR partner for expanded ADAS safety for their passenger vehicles and commercial trucking product lines to be nominated in 2023, and be ready for start of production as early as 2027. The combined lifetime volume of all the programs up for nomination in 2023 are for millions of units with their cumulative revenues of between $1.2 billion and $950 million over the life of production.

We believe these first nominations would have a lifetime of up to seven years, with multiple passenger vehicles models added incrementally to their fleet. These are predominantly for vehicles with internal combustion engine powertrains. Based on these engagements, we remain confident in the timeline to sustainable revenues from strategic sales opportunities. In addition to the current nomination cycle that we work diligently to close, we are starting to see additional opportunities for 2024 nominations, with a new potential list of OEMs. These new opportunities would require limited modifications for additional customers that would be covered by NREs in potential future projects. This is an important step since this allows us to establish stable product lines that will address multiple OEMs with shared core developments costs, instead of individual projects for OEMs. We remain very excited about where we are in the nomination process.

And I’ve mentioned before, after a successful OEM design win, we expect two phases for each engagement. In the first phase, we expect to customize our core technology to the specifics for the OEMs needed under the development agreement while maintaining our investments in core engineering. In the second phase, we expect to supply parts as their ADAS tier 1 with our contract manufacturing partner under a master supply agreement with the OEM. As I mentioned before, the continued strength of our balance sheet and capability to fund operations until the start of production is a requirement in all possible nominations. Management has articulated this to our investors and the broader market, as you may recall. I would like to repeat what I mentioned at our last earnings call.

I believe we are well-positioned for this item, being a publicly traded company on the NASDAQ exchange, with no debt, control over expenses, and a clear understanding of how to grow proportionally to meet the needs of multiple potential customers. We are also confident in our long-term product outlook that will continue fueling customer engagements. In our product strategy, to focus on LiDAR products, with embedded perception software is the right strategy for the LiDAR product lines. We are seeing this in our current and new engagements. With this strategy, we provide a stable hardware and software product to our potential customers with object-level interface possible at the lowest power and smallest form factor. Our embedded perception software will do the heavy lifting and enable our OEM customer software.

This will potentially offer system cost reductions to our customers, and an opportunity to reduce other sensors like radar and camera modules. I also see us making progress in establishing realistic foundations and key target customers for our direct sales. Our objective is to build a sustainable business. Unlike others in the market that are conducting direct sales at low single-digit gross margins, we are focusing on target customers in the industrial space that see value in the LiDAR product. Partnerships with low single-digit gross margins are not the right product strategy since expenses are not even covered. We see an opportunity for our industrial segment to focus on factory and warehouse automation, as well as fuel qualified safety sensors in the future.

Our focus is building sustainable and profitable revenues, while controlling our burn rate and finding a path to sustainable business as soon as possible. I want to conclude by thanking our global team for their hard work that has allowed us to be well-positioned for an incredible year ahead. We continue working hard to push across finish lines on our primary objective of securing long-term sustainable revenues. I would like to now turn the call over to Anubhav to talk about our financials. Anubhav?

Anubhav Verma: Thanks, Sumit. Before I dive into the Q3 results, let me first discuss what our first few potential RFQ wins could look like and how they might impact our financial results, especially in 2024 and soon after. We expect any near-term RFQ wins to translate into the following two revenue streams. Number one, NRE or non-recurring engineering revenue from OEM related to the customization of our sensors. This revenue would likely be payable upon us hitting agreed milestones. Number two, revenue related to the sales of LiDAR sensors as the volumes ramp up at possibly multiple locations in EU and Asia from the customers in line with their expected production schedule. Later in 2024, we would work towards potentially securing additional customers for similar products with minimal customization to achieve economies of scale.

In this case, the LiDAR sensor, once it achieves maturity and has gone through the PPAP process, we would then be scaling similar products with multiple customers. Now let’s talk about modeling the expenses. With design wins, we would expect our revenue mix to include both NRE revenue and serial production revenue from OEMs at a blended gross margin of 30% to 40%. We think all successful LiDAR companies will trend towards this blended rate as OEM volumes ramp and economies of scale begin to be achieved. We believe we are well-positioned to be a successful LiDAR business and on our way to achieve these goals. Upon reaching this point, we would plan to further improve gross margins by offering our perception software to OEM customers along with our hardware.

Now let’s talk about production. From a business model standpoint, we have always stated that partnering with an established contract manufacturing partner will be most capital efficient and importantly will be required by OEMs. As we navigate the final rounds of RFQs with OEMs, customary visits and quality audits at production facilities have been important for customer confidence. In our experience, OEMs want to see multiple manufacturing locations around the globe, including in the EU, Asia and North America. Of course, key points in our RFQ negotiations center on the allocation of liability and product warranties. In terms of operating expenses, including R&D, MicroVision has a meaningful strategic advantage when it comes to quickly and efficiently scaling up operations.

Scaling operations with multiple customer wins will not require us to add proportional headcount to our engineering teams. We do not believe that we will need to add more hardware engineers as we expect to just need more dedicated Project Managers along with quality and operations team to manage multiple relationships as we increase volumes and enjoy the resulting economies of scale. We have the ability to add such resources at OEMs preferred locations in North America and Germany. We see no need to double or triple headcount to support potential revenue growth. That said, in the event of increasing volumes, we would anticipate the need to continue to add software engineers to work alongside our dedicated hardware engineering team to advance our product roadmap.

The resulting economies of scale would be expected to add significantly more revenue with limited addition to R&D expense, thereby translating into faster growing operating profits. Our customers and potential partners appreciate MicroVision’s strong and deep IP portfolio with the industry experience, financial discipline of managing expenses, and technical knowledge, all of which are key differentiators for us. I think both Sumit and I covered strategic sales in quite a bit of detail. Let me now talk about our focus on direct sales as well, which will be over and above the strategic sales. These direct sales channels include the sale of MOVIA to non-automotive customers and MOSAIK software to automotive customers. While revenue from direct sales is not necessarily recurring, the associated revenue stream tends to have shorter sales cycle as compared to strategic sales that have longer sales cycles.

In the near term, we expect the revenue contribution from the direct sales channel to be meaningful and drive high contribution margins, especially in the initial few quarters. In fact, in this third quarter alone, we saw adjusted growth margins of 80%. While we’re expecting revenue from direct sales to have consistent growth year-over-year in the near to midterm, potential revenue from strategic sales would be significantly higher than direct sales revenue once OEM serial production volumes have ramped up. Now let’s dive into our Q3 results and discuss them in more detail. For the third quarter, we recorded revenue of a million dollars. As we have previously indicated, revenue in 2023 and for a good part of 2024 will primarily come from the sale of software and MOVIA sensors to non-automotive customers.

The majority of this third quarter, revenue is related to our MOSAIK software product and is from a leading OEM. We expect continued momentum in revenue in the fourth quarter and expect sequential growth to hit our updated 2023 revenue targets of $6.5 million to $8 million. Now this revenue is slightly below our previously announced range of $10 million to $15 million. The reduction in our revenue expectations is primarily related to direct sales with some revenue opportunities appearing to have moved into 2024. In connection with the integration with Ibeo, we have tightened our forecasting processes with some smaller legacy Ibeo customers to better estimate their sales cycle and predict revenue from the sale of hardware and software. Since these are smaller dollar opportunities, we’re beginning to have better visibility into the sales funnel as we integrate the two companies, bringing together our sales force and co-leasing them around common platforms and processes.

To further support momentum in direct sales, we also placed an order to build new MOVIA inventory with ZF Autocruise to help satisfy demand from non-automotive customers and drive revenue in 2024 and beyond. We expect this strategic investment in building our inventory to drive revenue growth in near term and beyond. Coming back to this quarter, the split of this quarter’s revenue is 80% software and about 20% hardware. The growth margin profile this quarter resembles that of a typical software business, as demonstrated by an 80% growth margin, primarily by MOSAIK. While we expect these high growth margin to continue in the following few quarters, we expect the blended growth margins to normalize as the revenue scales up and mix changes to more strategic sales including NREs. Expenses; in terms of expenses, we had approximately $24 million of R&D and SG&A, which includes $4.7 million of non-cash stock-based compensation and $2.1 million of non-cash depreciation and amortization.

For the second quarter, $20.4 million cash was used in operating activities, which included a $3.1 million payment to build up the MOVIA inventory to support the near-term momentum in direct sales. Removing these one-time items, our cash burn for the quarter is around $17 million, which is in line with previously communicated expectations. To remind our investors, we continue to show financial discipline with our cash burn being within our expectations and on a healthy trajectory. As expected, CapEx in the second quarter of 2023 was $0.5 million, in line with our expectations. Now let’s talk about our balance sheet. As of September 30, 2023, we have made most of the payments associated with the Ibeo acquisition. A liability of €2.7 million remains on our balance sheet as the final expected payment relating to this acquisition.

We expect to pay this amount to the seller later this year once we and Ibeo reconcile and agree to the amounts. Our total liquidity was $78 million as of September 30, including cash and cash equivalents. We have one of the cleanest capital structures amongst our peers. In these times of uncertainty and weaker macroeconomic conditions, MicroVision stood out and beat competitors in terms of maintaining one of the lowest cash burn rates in the industry with a highly talented age pool of engineers in both, the U.S. and Germany, and strong balance sheet. We have a $35 million ATM on file to strategically raise capital as and when needed. To date, we have only raised approximately $4 million under this facility, that leaves about $31 million available on this ATM facility.

Both these facts are indicators of financial stability to our potential customers and important attributes in the due diligence reviews conducted by OEMs as part of the RFQ processes. The ability to strategically and opportunistically raise money via ATM positions, MicroVision very favorably as compared to our peers, some of which have had to resort to structured finance transactions to raise capital at significant discounts to their stock price. We believe that with our current cash on hand and our ATM facility we’re well-situated to deliver to the OEMs. Based on our current operating plan, we anticipate that we have sufficient cash and liquidity to fund our operations through at least the end of 2024. As described earlier, with the relationship between revenue and operating expenses that we have modeled out, we expect to see reduced need for additional capital as the company grows and focuses on achieving economies of scale.

To summarize, we’re really excited about 2024, and beyond. With our first commercial wins within reach and key focus on winning nominations, we’re strongly marching towards proving to the market our value proposition as a unique well-positioned LiDAR company in large and growing automotive and non-automotive markets. With this, operator, I would now like you to open the line for questions.

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Q&A Session

Operator: Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Andres Sheppard. Your line is live.

Sumit Sharma: Let’s move to the next question, please.

Operator: Certainly. I will now turn the call back to Anubhav Verma to read questions submitted through the webcast. Thank you.

Anubhav Verma: Thank you, Matthew. I guess the first question we’re getting is why are you confident that MicroVision will secure an automotive development in Q4, 2023?

Sumit Sharma: Yes, I think that’s a good question. I think the process, everybody that would be in, right, by this time has been informed if they’re in the last phases of it, because now you’re in the middle of the commercial discussion. So, typically the process is you go through the technical engagement early, the alignment happens. It continues, right, but at some point technically you’re aligned, you have solutions, they have seen samples, they have seen simulation data, all that work is done. So, technical work, the dominant part is done. You’ve given them your binding offers, several rounds that have happened. And at this phase, getting to the final phase is when they go line item by line item, understanding the viability to the company, but also really are they getting a fair deal.

And the discussions are deep, as you can imagine, for the magnitude of the contracts we should be. And these are binding offers for those per the time. So, it’s pretty detailed. And the non-engagement, visiting factories, coming and seeing our quality processes, all these kind of things take a lot of resources for OEMs, so they are very selective of who is in the final round. There is no certification or other things on it, and then there’s lots of other terms that people are introducing, right? There’s no certification, those things are — you’re already qualified as a supplier, they do quality reviews of you, and you just get down to the money, right? How much is it going to be for NRE, what’s custom versus what’s core, what they believe is fair, what we believe is there.

So, as you get this deep you kind of know when you are in the deal, you’re negotiating the final items. So, confidence comes from that, exactly where in the process. Anubhav, do want to add something?

Anubhav Verma: Yes, and if can just add on the financial side, obviously financial due diligence is one of the key criteria that the OEMs are undergoing. And this requires building detailed financial models of how will we support them in cases of multiple RFQ wins. And I think what’s required from our side is to lay out a detailed plan of where will the resources be located and how will the production and operations team work in tandem with the engineering team to ensure that the production and the supply chains are secured and intact, because that’s something that they cannot absolutely falter on. So, just by the nature of the financial due diligence, I also feel very good about where we stand in the RFQ process with these customers.

All right, moving on to the next question, what gives MicroVision confidence that they will secure a design win as it seems like most LiDAR companies have all been saying the same thing about capturing a design win. And if previous LiDAR companies already have wins, are they better positioned to win future contracts?

Sumit Sharma: Yes, I think I’ll take this one. And that’s a good question. Yes, all the LiDAR companies are looking for viability, somebody is going to win it, and is going to win a lot, right? But let’s take a step back, and before you get into this question about where there’s some incumbents out there, how do you position yourself. Let me just make it clear, somebody recently asked me the same thing in kind of a more casual environment, and this is the answer that you have to think about. Before there was the iPhone, there was Nokia and Blackberry. Do you even hear about those companies anymore? So, the right product will always win, okay? And you don’t have to believe me of what the right product is. If you’re a consumer and you have ever bought a car, you know what the right product is.

Is it going to be low power, it’s going to not increase the cost of the car by thousands of dollars, it’s going to give you the safety, the technology blends away and makes the vehicle more secure. What we do know from all these companies saying something, so there is all these OEMs out there looking for a LiDAR solution, that LiDAR is a product that they need, so technology that they need to achieve what the goals they have, and their production starts in 2027; they will take many years to qualify. But the choices that they’re making now are going to last for a very long period of time, so they value it very deeply, all right. If the incumbents had such a big advantage, right, it’d be all done. They should just announce it, and let’s move on.

But that’s not the case. And I can clearly tell you, that is not the case, because you have technology solutions that people have out there, and they were early to market. But if you look at that as a product, it’s too big, too bulky, too expensive. I mean if people are saying that they’re going to drive up the price for customers to $1,000, and that’s often go even higher, if you know anything about OEMs, and I know a little bit about it. I can tell you that is absolutely not going to land well, okay? They’re all looking for an option where the technology can be delivered at something that’s going to go to millions of units, and that’s not going to be thousands of dollars in the vehicle, right? That level of value added takes a significant amount of compute power.

So, I’m pretty confident in what we’re saying. Clearly, it’s not just we wake and we are saying, these things are vetted, everybody in the company is involved, the Board is involved, everybody looks at it. So, we’re pretty confident in what we’re saying. And I think folks that wonder about this, if you take a step back, and it’s all playing out as you know. We’re not backing away what we’re saying. I have not seen anything come across that clearly says that decisions are getting delayed. For us, it is still on track. We have to deliver samples. If any kind of nomination happens, some of the samples have to get delivered in first-half of next year or early first-half. They have to make a decision as fast as possible because their launch timelines are not changing.

And so we have a very detailed understanding of what are the steps involved to get them and get our technology qualified. And the engagement is pretty deep. So, I feel pretty comfortable that better technology is always going win, better products are always going to win. And it has to be small-size, low-power, cost-competitive, all of these things, and a secure company that they can trust is going to be around for the seven years of the contract to deliver on what they’re about to sign. And if you think about the magnitude of the volume and the ASP, like the dollar value that I describe in today’s call, these are big numbers. These are big numbers that take some serious consideration and discussion.