Good afternoon, and welcome to the MicroVision Second 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.

Thank you. 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 product development and performance, comparisons to our competitors, market opportunity, 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, plans, 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?

Thank you, Drew, and welcome, everyone, to this review of our second quarter 2023 results. We're very pleased with the accomplishments of our team during the second quarter towards and annual and multiyear goals. I'm happy to report that the strategic changes we initiated in Q1, the completion of our acquisition and planned integration, proceed smoothly. With our combined global team and expanded LiDAR and software portfolio, we could address the needs of our OEM customers with a wider range of solutions. I would like to elaborate on this a bit later. We continue developing our revenue streams for strategic and other channels, and I am very happy with the progress we've made so far. The biggest opportunity for the company remains in strategic partnerships with automotive OEMs for our LiDAR products. First, I would like to start by updating you on our progress on RFIs and RFQs. We remain engaged in multiple RFQs with multiple OEMs that are expected to be nominated in 2023. We are the only LiDAR company that offers multiple technology nodes, from highest resolution, smallest form-factor, long-range LiDAR in our MEMS-based MAVIN, as well as a small form-factor short-range sequential flash-based MOVIA LiDAR product lines. Our teams remain engaged with multiple OEMs who are 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. The combined lifetime volume of all the programs up for nomination in 2023 are for millions of units. This, of course, is the most exciting part. We have the right products that are targeted to supply ADAS safety for higher-volume passenger vehicles and commercial trucking. We remain very excited about where we are in the nomination process. In case of a program win, we expect two…

Thanks, Sumit. I'm really pleased with the progress we have made in the first-half of 2023. I'm proud of the company we are building in MicroVision, especially with the integration of our teams in the U.S. and Germany. Our acquisition has positioned MicroVision to become one of the most experienced and technologically-advanced LiDAR hardware and software companies in the market, with over 50 years of combined operating history and 735 patents. Let me talk in detail about our progress on RFQs on the technical front. Well, let me discuss some of the key financial items that the OEMs are looking for in their due diligence on perspective LiDAR suppliers. In particular, it is important for suppliers like MicroVision to show strength in the following two areas: number one, sustainable existing cash burn, allowing a longer financial runway; number two, ability to scale up operations to handle multiple high volume RFQs, both in terms of dedicated engineering resources and production capabilities. On point number one, MicroVision continues to demonstrate one of the lowest cash burns out there. Our publicly-disclosed operating history shows that MicroVision has been consistently disciplined about deploying capital for growth. Point number two, MicroVision has the strategic advantage when it comes to quickly and efficiently scaling up operations, as we consider multiple RFQ wins we have the ability to add dedicated engineering resources at the customer's preferred locations in either North America or Germany. In addition to the maturity of our technology and superior technical specs, the above advantages are also positioning us well with these RFQs. Our customers and potential partners, including contract manufactures appreciate MicroVision's strong and deep IP portfolio, and our industry experience, financial discipline, and technical know-how, all of which are key differentiators for us. We are thankful to our shareholders for supporting us…

Thank you. At this time, we are conducting a question-and-and session. [Operator Instructions] Our first question does come from Andres Sheppard with Cantor Fitzgerald.

This is Anand on for Andres. Congrats on the quarter, and thanks for taking our questions. I've got a few here, and I just wanted to start with the recent reported revenue drop to $300 million. I just wanted to check to see how confident you are in reaching the midpoint of guidance, so about $12.5 million, that you just reaffirmed your range of $10 million to $15 million? And how do you guys expect the revenue to be spread out in the back-half of the year, between 3Q and 4Q?

Thanks, Anand. So, yes, I think as I had mentioned in my remarks, we expect that the third quarter, the revenue momentum to pick up. This was primarily because some of our customers pushed out their deliveries, which we're expecting to happen in the third and the fourth quarter this year. And primarily the growth is going to come from the sale of MOVIA. And to that end, we have invested in building up the inventory, as I mentioned in my remarks, that ZF Autocruise, where we have placed an order to stack up the inventory that we can use to satisfy the demand in the second-half of this year. Besides that, I expect the momentum in the sale of MOSAIK as well as to some of our automotive customers where we are in the process of installing and implementing that software in their ecosystems for that work. So, I do feel good that we should -- we are confident about hitting the guidance in this year based on these factors. And lastly, we had invested in bringing on some talented industry veterans, and especially in the Detroit area, who have background in both in automotive as well as non-automotive customers, to accelerate the momentum and get the shorter sales cycle, which is again the MOVIA and the MOSAIK product to help us hit the revenue targets that we have announced for this year.

Got you. Thanks, Anubhav, that's helpful. And I just wanted to switch gears to the gross margin, and wanted to see what the driver was behind the drop in gross margins? And how do you expect margins to progress over the rest of the year?

Yes, so gross margin drop was primarily due to economies of scale, obviously as we sort of put more revenue through the funnel, we expect the gross margins to be again what we had described earlier. And we expect to hit the target of over 30% gross margins in this year because, again, the margins are primarily coming from the sale of software and hardware, from that standpoint. So yes, so we do expect to hit our numbers from a gross margin standpoint.

Got it, sweet. And just to switch gears a little bit, I know you talked about this a little bit with OEMs. I wonder if you could give us an update on discussions you're having with an OEM or when you might be able to expect your first partnership with an OEM or how you would potentially expect NREs to eventually materialize.

I'll take that one. I think as I've clearly stated, right, I think we stay on track for 2023. I think -- not just us, I think it's -- everybody that's in the mix of it will tell you the same exact thing. It's pretty clear that they want the nominations to be done this year because want to get going. They have a very specific timeline for delivery and SOP. So, I stay pretty confident that the nominations would be 2023 as the OEMs have -- and these different OEMs have indicated.

Got you.

And after that, of course, think about, right, we have a core technology done, but every week think about a consumer vehicle versus even a trucking application, you have to customize. And so the core technology is the same, but they need some level of customization on the software side or the hardware side or the thermals. So, there is that whole customization part of it, but it's not a full-blown development, right, the core technology is the same. The reason they're picking somebody who is ahead is when they look at the silicon part of it or they look at the technology development part of it, where is your level of maturity, and they don't want to change that core part, but they want to customize what they need. A lot of it is in software, true. And a lot of it in the NRE is going to come from validation, verification has to be done for their scenarios, right, so we have to give them a validated product. And of course, they can do their own validation with themselves or with a third party. But on top of that is like there's always some customization on the mechanicals, right, so how do you mount it, which side of the connector, what connector do they want, some other customization on the inside, on the thermal side of it because of that, right. But I would not quantify this as something that starts new development. Some of our investors that I've know for a long time, when they think about customization they may think about what we did for Microsoft and what we did for Sony, those were full-blown development programs, right. That's not it. We've already funded the core development to a certain point; the NREs will cover the customization for each individual. And as you can imagine, a production line has to be put into place for whatever they want. And you can't have a single customized line -- a single like that's going to make low-volume high-mix, it's not going to make one part for one, one part for the other because each and every one of these product lines and RFQs we're talking about has pretty high volumes, so you're going to need multiple lines done also in parallel. So, for all that work to happen in the timelines that they have, they clearly understand, they dove deep into it with our team, thousands of hours have already been spent by our team on this, I can assure you that. They have a very good understanding of how that has to be executed and what the timelines are. So, that's why I feel pretty comfortable, and the NREs are going to be some magnitude, but it's clearly not going to cover all our development, because it is our core technology and we intend to not license it away or give the IP away to anybody.

Got you.

Anubhav, I don't know if you have something to add to this?

No, I think you covered it all, Sumit.

Thanks, guys, that's very helpful. I've just got one last strategy question. So, I was wondering if you guys have plans for expansion in the non-automotive market with Ibeo if OEM revenues take longer than expected to materialize. And if that were the case, what segments would you be focusing on and how would you view the trucking market for this purpose, like automated trucking?

I think if you think about the trucking market, let's make a distinction. And I want -- and this is a pretty important one. There are actually two trucking markets. One, of course, is there are trucking OEMs, that they operate -- I mean they have low volume, they don't have millions of units per year or millions or units of outlook, right? Pretty substantial volumes there, right, but they operate just like an OEM. They go through an RFI, RFQ, they have very strict requirements. That's one piece of business, right? That will always -- that's something, of course, people have neglected so far, right, and so that in play always, I'm pretty excited about that actually, more safety coming to 18-wheelers all over the world, that's great. Then I think what you're referring to is there's other trucking applications or companies all over United States, and Europe, and even in Asia that buy sensors, and they're developing their core product, which is a software product, right? So, if you think about it, there is two trucking partnerships there. Certainly there's the direct sales part, that's where our team comes in, we can sell there, we can sell sensors, we can sign deals, you deliver hundreds of thousands of parts to them, there's a schedule to that. Whereas when you go on the other side, now you start looking at like hundreds of thousands of parts because, in any kind of trucking application, you are going to have multiple LiDAR. I think in our deck we talk about -- we show a simulation with real LiDAR data that was collected to show what coverage you can get around, and how many sensors that would take. For a typical trucking application, it could be depending on some configurations, it could…

Got you, thanks, that's very helpful. That's all I've got. Thanks again for taking our questions, and congrats again on the quarter, looking forward to the ramp this year, and I'll pass it on.

Thank you for your time.

Thanks, Anand.

Thank you for those questions. I will now turn the call back over to Anubhav Verma to read questions submitted through the webcast.

Thanks, Mike. So, I think one question that we're getting is, can you talk to us about the product portfolio and how it helps MicroVision as a whole, and the strategic rationale behind the product portfolio, and how does it differentiate us as compared to the peers?

Yes, this a good question. And I think that we talked a little bit about it, in April, but I'm probably going to put fewer accents on it. All right, so everything that we've been talking about at MicroVision, and others talking about is really about the long-range LiDAR. It is a big deal, it is really big. It is going to be a big winner, right? So, yes, that's important. But if you think from an OEM standpoint, they're trying to deliver not just a long-range LiDAR in your car, they're trying to deliver a product, level 3, level 2, level 4, whatever level they want to go to, they want to deliver a product with certain amount of safety. I think the MOVIA product and the MAVIN product, if you think about having two LiDAR products that are not exactly the same technology node, there's two different technology nodes. It's a huge advantage we have that nobody else has. We get into more RFQs and RFIs, in my opinion, because we have multiple technologies, right? In some cases, even if they had made a choice for a long-range LiDAR that may or may not be working out, and we're promoting our LiDAR, just in this year, I've been very excited about what we were able to achieve with our team. That same promotion, we started showing them the MOVIA product, and we started getting traction. So, this is great because they have multiple needs, and there's very few people out there that can actually provide all the LiDARs that they would need at a certain price point, at a certain certainty of technology. So, an important thing if you think about the LiDAR product only, as a standalone, it's -- like we're the one-stop-shop for all the LiDAR…

Thanks, Sumit. And the second question is also similar on these lines, I think you mentioned talking about the AI chip, so, can you elaborate what's the difference between that and MicroVision strategy? And related question is, have you completed the analog and digital ASICs for MicroVision?

As we said before, the analog -- that's easy one, I will answer that first, the analog and digital ASIC, the analog ASIC has been started, the digital ASICs no plans are started. I think the ASIC, when you say the word complete, I think you may meaning that do we have the production math done, and those chips in, that's not done yet, but that is part of it, like, this is where we are and we have started those chips, and our intention is to finish up the MAVIN. On the MOVIA side, of course they already existed. So, that's not more mature. Then I think the question is about -- let me get that right, what is it, the AI chip, I think I could not understand it actually. Can you repeat your question, please?

In your remarks, you had mentioned the AI chip, the competition it's using versus what the MicroVision's value proposition is?

Yes, I think this goes back down to how we do perception, how we think about perception, system cost is very important to OEMs. They can do prototypes and they can do like demos and they can computers all over the place, but at the end of the day if you are going to put it into millions of cars, all of us know, it's a very, very cost competitive environment with high technology, the cost competitiveness has to be demonstrated. What's fascinating and amazing about our perception is, think about them as like more classical algorithms that have been developed, okay? And they have been validated through certain scenarios. These are more powerful actually. These are equations, think about them as like more algorithms like equations, you know, they're pretty straightforward in that sense, but it takes a lot of elegance to get to a point where you understand the scene and what's happening in it, where you can predict what will happen, and you can do object level interface much easier. AI is like a nice thing. I mean I have Adobe Pro, and I can do genitive AI in our Photoshop, I mean it's all over the place, right? But if you think about OEMs, you can't just put AI in the middle of everything there. It's kind of really well-controlled. I can say with the greatest confidence when we talk about perception it goes a lot further, because they realize how it's been executed. It is not something like really, really, it's a feature that is going to be delivered to a specification, to a system requirement document, it could be traced, it is not -- nobody knows in the Blackbox how it does what it does, they know exactly how it's going to work. And they are going to trust it. So, I'm not a big believer that these AI core boxes that people are delivering, right, things that in video and QUALCOMM already do, that's not the best user shareholder resources to develop, right? We have some things to develop. We have done really well in Hamburg to begin with. Really the main reason why I was very, very interested in Ibeo acquisition, I think that we're in great place, and the evidence of that is, I mean I don't know how else to answer this, the evidence is based on the means that I have been part of, or the things that I have seen so far from OEMs. So, I feel pretty comfortable where we are. I can't really comment on what strategy others are deploying and where they got that information. All I can tell you is everything that I have reviewed and I have talked to everybody within the company, I don't see anything where perception is going to be some AI box. So, that's just our experience. And we are talking to multiple OEMs and multiple RFQs, so --

Thanks so much. Can you give us a little more color on the financial due diligence by the OEMs, and how should investors be thinking about these risks? I think let me take that. So, I think the first thing is I think perhaps OEMs have learned their lessons from the past, and I think that's why they're conducting a lot more extensive due diligence this time on suppliers. And this involve some extensive modeling to fully model how the business and the revenue streams will evolve in the case of multiple links over the next several years. They want to fully understand how will the company be supporting these programs, and that includes modeling headcount projection by geography. And I think if you recall, I had mentioned based on OEM's needs their dedicated resources might be placed in the North America or in Germany. So, modeling that is what we are right now in the face-off. And obviously the cash requirements from a fee sample into production, maintaining their silicon inventory, which remain the key critical point of how will this all happen in the next three years. And obviously I think what Sumit described was the non-automotive revenue and the NRE, which is going to support the cash flows from this. So, this is all what's going into the modeling. And in the back-end, this is how we are moving towards going from lowering the cost of capital from equity, moving all the way to fixed income base capital based on the income streams that will be generated, and the receivable that will be part of the balance sheet, which would ultimately make MicroVision a more traditional company with the lower cost of weighted average cost of capital is what the OEMs are looking for a model of how this will all happen in the case of multiple RFQ wins in the next three years. So, this is what the financial due diligence entails with our customers, as well as our partners, so this is not just OEMs, our partners are also evaluating us as we are modeling this out and helpful them prove out why we are better positioned to evolve from where the company stand today in two, three years from now from a cost of capital standpoint.

The next question is, is MicroVision pursuing consolidation M&A opportunities as some of the weaker LiDAR players filter? Let me take that question as well, Sumit, if you don't mind. Not at this moment, at this moment we are laser-focused on our organic targets of multiple RFQ wins, and building the business around that. But look, if some things come along that are strategic and that accelerate our path to get there, how will consider that, right? But yes, so if I were to answer this question on a short, long answer short, at this point, we are laser-focused on our organic targets for the company.

With this, I think we are bumping up against our time. Thank you again for everybody joining on our second quarter call. We looking forward to speaking with you again, and post you with the company updates on our third quarter call next quarter. Thank you so much.

Thank you everyone.

Thank you. This concludes today's conference. All parties may disconnect, and have a great day.