Mobileye Global Inc. (NASDAQ:MBLY) Q3 2023 Earnings Call Transcript

Mobileye Global Inc. (NASDAQ:MBLY) Q3 2023 Earnings Call Transcript October 26, 2023

Mobileye Global Inc. beats earnings expectations. Reported EPS is $0.22, expectations were $0.17.

Operator: Greetings, and welcome to the Mobileye Q3 ’23 Earnings Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Galves, Chief Communications Officer. Thank you, sir. You may begin.

Dan Galves: Thanks, Kyle, and hello, everyone, and welcome to Mobileye’s Third Quarter 2023 Earnings Conference Call for the period ending September 30, 2023. Please note that today’s discussion contains forward-looking statements based on the business environment as we currently see it. Such statements involve risks and uncertainties. Please refer to the accompanying press release, which includes additional information on the specific factors that could cause actual results to differ materially. Additionally, on this call, we will refer to both GAAP and non-GAAP figures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. Joining us on the call today are Professor Amnon Shashua, Mobileye’s CEO and President; and Lauren Shamash, Mobileye’s CFO. Thanks, and now I’ll turn the call over to Amnon.

Bespoke software code running on a computer terminal, displaying the complex nature of the software-as-a-service platform.

Amnon Shashua: Thanks, Dan. Hello, everyone, and thanks for joining our earnings call. Before going through our business commentary, I’ll make a few comments about the situation in Israel. Israel is now at war. The current effect on Mobileye are twofold. First, roughly 9% of our employees are currently serving in the ID of reserves with their teammates gladly working longer hours to compensate. Second, we are allowing more flexibility to work from home. I see no material impact on our operations. Mobileye does not have any production facilities in Israel, now customers in Israel. Furthermore, there has been no material effect on our operations and ability to develop, test, perform business activities or meet our objectives as a result of the war.

Okay. Turning to our results in Q3. Moran will provide more detail, but at a high level, Q3 was another excellent quarter. On a year-over-year basis, we grew the top line 18% adjusted operating income grew 27% and adjusted net income grew 59%. Operating cash flow on a year-to-date basis have been impacted by investments to rebuild our strategic inventory of EyeQ chips, which we had used to maintain steady supply during the chip crisis. If you adjust for that investment in inventory, which is now largely complete. Operating cash flow has also grown very strongly so far in 2022. Another third quarter financial highlights is the 34% adjusted operating margin. The beat versus consensus here was driven primarily by costs, some of which was related to macro factors by currency and some related to planned cost efficiency initiatives.

Turning to our product portfolio, our bookings so far in 2023 put us on track to outperform the $6.7 billion of future revenue from design wins we generated in 2022, which was by far a record year. We’ll have more details on that at TS in January. We’re having a tremendous amount of success with our EyeQ kit-based product portfolio. The diverse platform supports everything from basic ADAS to SuperVision, to chauffer, to mobilized drive, and we’re excited to launch the first EyeQ kit ADAS program in early 2024, consistent with the time line we laid out several years ago. While SuperVision continues to be a major focus, I would note that we continue to add a very high number of basic and cloud-enhanced ADAS programs. On the cloud enhanced side, these deals are at significantly higher prices than current ADAS and typically include REM, REM data sharing agreement.

This will reflect — this would result in a very meaningful expansion of the OEMs that contributes rem-mapping data in the coming years, improving mac-refresh times and diversifying the data sources. In addition, we added our first SuperVision light customers this week, a system based on a single IQ-6Hichip with a reduced configuration of cameras that supports hands-free limited to hybrids. The design win is from a large global OEM with plans to equip the systems on high-volume vehicles. We also had some important SuperVision and chauffer design wins in Q3 we added FAW as a customer with what is relatively near-term start-up production date of late 2024 for the first of many SuperVision vehicles and a year later with the first chauffer vehicle.

More on that in a minute. We also added a chauffeur program with Pollstar for SOP in late 2025. The Mobilized drive Mobility as a Service side the various key components towards scale are progressing on schedule, including our software stack, the IQ6 high-based compute engine and the imaging radar. Our vehicle platform partners are also making progress. Recently, our strategic partner, Volkswagen Commercial Vehicles as well as Hollow demonstrated our technology in their vehicles in Hamburg for the German Minister of Transport, the test indicated strong support to deploy this technology to improve transportation efficiency with the goal to put up to 10,000 autonomous shuttles on the road of Hamburg by 2030. But what I believe was the most important development in Q3 was the delivery of highway SuperVision software to an over-the-air update to more than 100,000 weaker vehicle owners in late August, with Navigate on Autopilot feature providing handoff navigation from point A to point B.

This was an extremely critical proof point in front of our OEM customers. It’s one thing to demonstrate technology on a fleet of test vehicles. It is a completely different level of product validation to deliver an eye on hands-free system to 100,000 consumers. Feedback has been outstanding, with media in China consistently noting that the ZEEKR system outperformed strong competition despite significantly lower sensor content and a fraction of the compute level. Out of the more than 1,000 beta users who use the system a couple of months before the broad rollout, 95% of them said they plan to buy the system after the 12-month trial period that ZEEKR is offered. I can’t emphasize enough that this over-the-air update amplified a flywheel dynamic that’s been developing for the last year or so.

The industry has noticed a higher pace of innovation and a significant growth in demand in China for systems that take over more and more of the driving. This creates higher pressure among all OEMs to develop competitive hands-free systems. To generate value from software but also not to fall behind. This pressure forces more emphasis on pragmatic factors like time to market, cost and performance as opposed to the desire to in-source this creates higher demand demo OEMs for the Mobileye product, which offer clear advantages in time-to-market cost and performance. Deploying the software in more than 100,000 consumer vehicles and receiving many accolades in the world’s most competitive market, clarified our ability to deliver and serve as the final component in the flywheel.

We felt the impact of this proof point immediately. The successful rollout led directly to the FAW design win and an acceleration of progress towards potential design wins with other key prospects. What I mean by acceleration is that there is an increased urgency to converge towards production programs. This is reflected as more clarity from customers on next steps, for example, the clear deliverables, time line and approval processes. While the design win process rarely moves as fast as we want, we expect that we’ll have more news on SuperVision and chaffeur over the next 5 months. I’ll put some numbers against it. Last quarter, we disclosed that we either have already booked design wins or were in advanced stages for SuperVision and or chauffeur design wins with 9 OEMs representing 30% of global automotive production.

That number is now 10 OEMs, representing 34% of auto production. If we go back to the beginning of 2023, that number would have been 3 OEMs representing 9% of the industry. This group does not include any low-volume brands or early-stage start-ups and it’s growth geographically. It’s one U.S. OEM, 2 European OEMs, 4 Chinese OEMs and 3 agents OEM’s We’re also very encouraged that we have received meaningful interest from the next wave of OEMs that represent an incremental 15% of global auto production. While not at the point that we would call these advanced stages, the initial work looks very promising. Before turning it over to Moran, I’ll close with a few words about China and FAW. I traveled to China with our executive team in September to meet with several key customers.

It’s not an exaggeration to say that this market is moving at light speed towards putting eyes on hands-free systems on the road. Premium ADAS is a huge selling point in marketing materials, the media is extremely knowledgeable about the technology and consumers demand it. There is so much traffic congestion in China, and consumers are tired of battling it on their own. They want cars to battle the traffic for them. I can see the potential for 15%, 20%, 25% of cars sold in this market to have supervision like capability a few years from now. So it’s very important for us to win there, and we are winning. Of the group of 10 OEMs I mentioned before, four are China-based Gili Group, FAW and 2 other significant automakers. We also have opportunities to expand with existing customers.

The Zeekr Mobileye collaboration has been very successful and is leading to opportunities for additional Zeekr vehicles as well as from other brands in the Jelly Group. This could add significant volume in the near future. And the FAW relationship is key for us. A government-owned automaker, choosing a non-China partner in this highly strategic technology area is the next level validation in front of other China OEMs. It’s also a very broad program. FW is going all in on supervision. The stand-alone car brands have a very robust product cadence starting in late 2024 and every vehicle model launched from that time on will include supervision. There is also ambition to sell the resulting platform into their JV brands as well, which would increase the volume opportunity by a factor of 5.

Thank you for your time and interest in Mobileye. I will turn the call over to Moran.

Moran Shemesh Rojansky: Thanks, Amnon. So thank you, Amnon, and thanks for joining the call, everyone. Before I begin, please be aware that all my comments on profitability will refer to non-GAAP measurements. The primary exclusion of mobilized non-GAAP numbers is amortization of intangible assets, which is mainly related to into acquisition of Mobileye in 2017. We also exclude stock-based compensation, starting with Q3 results. We had an excellent quarter with revenue up 18% and adjusted operating income up 27% year-over-year. Overall, IQ and division volumes increased about 16% and with the remainder of the growth related to higher IQ ASPs and some initial small mobility as a service revenue that was related to self-driving systems shipped to customers for installation on test vehicles.

Supervision shipments were 29,000 units in the quarter, which was in line with expectations. These units were primarily for Zeekr 001 and, to a lesser extent, Zeekr 009. Although in Q3, we also had some initial deliveries for the SmarTone and Postal 4, supervision gross margin improved somehow as compared to Q2 due to lower overhead per unit on the higher volume. Looking ahead, we expect 2 catalysts to drive further improvement in supervision gross margin over the course of 2024. Number one, in collaboration with our supply chain, we are introducing the second generation of the supervision domain controller, which we expect will result in meaningful cost savings. We plan to begin the transition to this new controller in late Q4 and into early Q1.

We will share the savings with our customers by modestly lowering average selling prices but the net result is expected to be an improvement to gross margin beginning in Q2 and more meaningfully in Q2 of 2024. Number two, as Amnon mentioned, the rollout of navigation pilot software to Zeekr vehicles in August very well, any existing Zeekr owner or a new buyer through December 31 this year, we’ll get a 12-month free trial of this offer. After this period, the consumer will need to choose whether to pay an incremental cost to continue to utilize the supervision feature. We will receive meaningful software revenue for any consumer that chooses to keep the software. This should lead to an incremental boost of supervision gross margin in the back half of 2024.

Turning to operating expenses. They were again lower than expected in Q3, which combined with the strong revenue growth led to a robust adjusted operating margin of 34%, up about 3 points versus Q3 2022. Approximately half of the lower-than-expected costs were again related to lower-than-expected payroll costs driven by depreciation on the shekel. This is a meaningful driver of cost for us due to payroll and related expenses being the majority of our operating expenses and the significant majority of our employees being in Israel. Payroll expenses were actually slightly lower in Q3 than compared to Q2 despite higher head count. The remainder of the lower-than-expected costs primarily related to timing of certain expenditures over general efficiencies we achieve.

In terms of cash flow, we had a strong quarter compared to Q2, but continue to invest a significant amount in rebuilding our strategic inventory of IQ chips which was largely consumed in 2021 and 2022 during the supply chain crisis. As of the end of Q3, we have almost reached our target of approximately 6 months of strategic inventory so cash used for restocking should be significantly lower in the next few quarters. When adjusting for cash consumable inventory year-to-date, in 2023, our operating cash flow conversion as a percentage of adjusted net income remains very high. Capital expenditures in the quarter were consistent with our unchanged view. This CapEx for the 2023 calendar year should be roughly similar to 2022. Turning to the guidance.

As we look ahead to Q4, IQ volumes are tracking in line with our prior guidance. At the midpoint of our guidance, IQ volumes are expected to be a bit more than 20% above Q3 levels with ASP down a bit sequentially due to a mix. I would just note this implies a record level of quarterly IQ volume and importantly, should not be used and the starting point for estimated 2024 volume within core due to full year 2023 and apply a growth rate to that when thinking about 2024 and consider that the high volume would lead to some hangover effect in Q1, similar to the dynamic in the first quarter of 2023. Turning to supervision. Imply Q4 volumes based on the midpoint of the guide for 2023 is approximately 37,000 units. This should bring us to around 102,000 units for the full year of 2023.

Which is towards the low end of the 100,000 to 115,000 we incorporated in our guidance at the time of our April earnings call. This fine-tuning of the shipment forecast is what led us to modestly adjust our 2023 revenue guidance. The consumer demand for Zeekr 001 and 009 was well aligned with our shipment levels in Q3. Continuation of this plus incremental volume for new products like SmarTone Poster 4 Zeekr 001 shipments to Europe support the growth in volume from Q3 to Q4. As these new products ramp up and we had a fixed vehicle in Q1, the Volvo M190, we are set up well for continued sequential growth in 2024. Based on our assumption for mix and volume, we accept Q4 gross margin to be consistent with Q3. We expect operating expenses for full year 2023 to be about 13% on a year-over-year basis.

In 2024, we expect operating expenses to grow at a higher rate, assuming some normalization in the relative value of the Israel literacy as well as the ramp-up of project spending related to expected new supervision and so far program. Lastly in terms of tax rate, we continue to expect an effective tax rate in the 12% range for the year. Thank you, and we will now take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Joshua Buchalter with TD Cowen. Please go ahead.

Joshua Buchalter : Hey, guys. Thanks for taking my question and most importantly, I hope everyone is doing safe and your families are okay in Israel. To start, you mentioned the 10th OEM, and I believe it’s the first time you explicitly have called out a U.S. OEM. Can you — for supervision, can you please — can you confirm whether or not those are the same thing and also provide any details on the scope or timing of how that would wrap into the model. Thank you.

Amnon Shashua: Well, that’s as I mentioned in the script, I believe in the next 5 months, things will play out. I would say that the percentages of turning those remaining OEMs into design wins range from 99% confidence to 50% confidence depending on which OEM we’re talking about. And in the next 5 months, we will — I think we’ll be a much — we’ll have much more clarity. And as I mentioned, it’s kind of a global spread from the U.S., Asia, China, it’s really global. Starting from just the Gilly Group a year ago to now really a global spend.

Dan Galves: Josh, this is Dan. Just to clarify, the incremental OEM was not the U.S. OEM. The U.S. OEM was in this group as of last quarter as well, and we continue to progress and feel good about that customer.

Q – Josh Buchalter: Got it. And then in the guidance for the full year, you kind of called out SuperVision that’s driving the very modest tick down at the midpoint for revenue. Has anything changed with how you’re thinking about 2024? And can you walk us through what are the drivers of that? What — is there a new vehicle model, or was it volumes at the 001 that’s changing things? Thank you

Amnon Shashua: The new vehicle volumes for 2024 is expansion of the ZEEKR 001, expansion of 0.9 of ZEEKR. We have post-F coming out we have smart #1 coming out. We have the Volvo EM 90 coming out towards the end of 2024, we have the SAW brand coming out. And there is a certain, I think, high probability that we’ll have another OEM in China that will also launch end of 2024.

Q – Josh Buchalter: Got it. Thank you.

Operator: Our next question comes from Itay Michaeli with Citi. Please go ahead.

Q – Itay Michaeli: Great. Thanks. Hi, everybody, good afternoon. Just 2 questions for me. First, on the new wave of automakers expressing interest, can you maybe just share one, how many automakers are in that second wave? And two, to what extent these automakers have existing sort of in-house operations for advanced Level 2 plus and a second question, just on the SuperVision Light award. Hoping you could share just the ASPs and expected start of production for that program. Thank you.

Amnon Shashua: Okay. So I’ll start with the second question. The SuperVision Light when we are a Tier 1, it’s about 60% of the revenue compared to SuperVision. When we are a Tier 2 with a few hundreds of dollars revenue. In this particular program that we won; we are in Tier 2. So, we supply only the EyeQ 6 chip just like in any Tier 2 relationship. It’s a really high-volume global brand. And I think it offers a new level of kind of the intermediate premium in which the SuperVision capabilities would be limited only to highway, but still the very, very high hand-off capabilities. The SuperVision allows you to expand way beyond the highway arterial roads, urban roads and also be the basis for Chauffeur at a later stage. So, this allows us to have an entry point to medium and low segment car brands, car models and this is a very important win.

As for your first question, the next wave is 15% of the global auto production that I mentioned, it’s about 4 OEMs. And they don’t have anything comparable to a SuperVision. And they’re starting to notice that the SuperVision like system is really the next premium in the coming years. I believe that eventually, every carmaker would offer a SuperVision like product in the coming 2, 3 years.

Q – Itay Michaeli: That’s very helpful. Thank you.

Operator: Our next question comes from Joseph Spak with UBS. Please go ahead.

Q – Joseph Spak: Thank you, everyone. The first question is I know your solution is technically powertrain agnostic. But as we’re hearing about some program delays on next-generation EVs. I guess not in China, where I know a lot of your wins are today. But if there is sort of a pushout, does that at all change your trajectory on SuperVision, or do you think there’s an opportunity to maybe add more features, whether it’s cloud-enabled ADAS or whatnot to existing programs?

Amnon Shashua: Cloud-enhanced ADAS is progressing on a separate track we have 2 already that we mentioned last quarter, which are responsible for $1 billion revenue till the end of the decade, and we have 4 more in the pipeline ready to be signed in the next few months. So that’s a separate track. SuperVision, start of production. If there are delays, it’s weeks or a few months. It doesn’t change materially forecast in terms of the revenue per year. And as we get more design wins, our kind of weakness towards one particular program that’s delayed or not becomes much, much –we don’t rely we’re not susceptible to such a delay. Obviously, when we have only one car OEM with a program, then we are really dependent on delays. But when we have 10 or more than a delay here or there should not change the revenue guide.

Q – Joseph Spak: Okay. Perfect. And then just maybe a clarification on the OEM commentary around SuperVision. First of all, the $9 million to $10 million does that include the SuperVision light customer? And then also, I know you provided some comparisons versus what you said earlier in the quarter or even last year. I think at CES, you mentioned 6 brands. So how does that sort of the 10 OEMs compared to sort of that brand comment earlier this year?

Amnon Shashua: Okay. So, the 10 OEMs does not include SuperVision light. SuperVision light is a separate track. We have one, at the time, win for that, and we are kind of working towards getting more business for that one. SuperVision is a separate truck. So those 10 OEMs are for SuperVision. In terms of brands, it’s really 10 OEMs. Last time when we talked about brands, we really met ZEEKR-001 and 009 as 2 brands of the same OEM. All others are separate OEMs. And so the ones that we announced was Polestar, smart. Now we are revealing at Volvo in China, Porsche and all the rest are separate SAW or others are separate OEMs, not brands within that group of OEMs that I just mentioned.

A – Dan Galves: Just to clarify. Just one clarifier, Joe, on that. Just to be super clear, within the 10 OEMs, we’re considering Geely Group as one OEM, right? So, we have 4 brands, 5 models. But within this metric, we’re considering that one OEM. We plan to continue to update this metric on a regular basis. along the same methodology as we move into the future, and we’ll try to be very consistent with kind of what we’re considering an OEM.

Q – Joseph Spak: So OEM is the parent level effectively?

A – Dan Galves: The parent level effectively. There could be some parent levels have 2 different product developments, but we’re trying to be consistent at the parent level within this metric.

Q – Joseph Spak: Okay. Thank you very much.

Operator: Our next question comes from Chris McNally with Evercore. Please go ahead.

Chris McNally : Thanks so much. And also, I just wanted to echo the best for the Mobileye family. Amnon one of the high-level questions I have about the push into SuperVision light is, I think you have something like 3.5 million plus of ENHANZE just RStfor this year. What would be the reason an OEM would continue with ENHANZE rather than SuperVision light other than the time to change over, it seems like that entire base of units should quickly change over to SuperVision life. But we just would love to hear about sort of the Pro/con because you get all the increased features that really no additional cost at the program level.