Mobileye Global Inc. (NASDAQ:MBLY) Q4 2023 Earnings Call Transcript

Mobileye Global Inc. (NASDAQ:MBLY) Q4 2023 Earnings Call Transcript January 25, 2024

Mobileye Global Inc. beats earnings expectations. Reported EPS is $0.28, expectations were $0.27. MBLY isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Mobileye Q4 ‘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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Galves. Thank you, Mr. Galves. You may begin.

Dan Galves: Thanks, Kat. Hello, everyone, and welcome to Mobileye’s fourth quarter 2023 earnings conference call for the period ending December 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 Moran Shemesh, Mobileye’s CFO.

Also joining today for the Q&A session is Nimrod Nehushtan, Mobileye’s Executive Vice President of Strategy and Business Development. Thanks, and now I’ll turn the call over to Amnon.

Amnon Shashua: Thanks, Dan. Hello, everyone, and thanks for joining our earnings call. Starting with our results in Q4, they were in line with the press release we provided on January 4th and with the prior guide, so no surprises here. At a high level, Q4 was a strong quarter in terms of revenue growth of 13% and adjusted operating income growth of 14%. We are pleased with the sequential growth and SuperVision volumes and we expect to see continued excellent growth in that product in 2024. I’d also call attention to our operating expenses, which were significantly lower than what we expected in 2023, much of which relates to transitory issues, but also some of which captures efficiencies that should benefit our cost structure over the long term.

Looking ahead, the guidance we provided today is unchanged from the outlook we provided in early January. The inventory correction that is impacting the first half of the year has been well publicized. While we did not learn of this build up until late in the year, we believe we have our arms around this issue and the clear out plan. We have implemented additional processes to more closely monitor shipments versus demand. And we believe we have good visibility into how to put this behind us and get back to normalized revenue in the back half of 2024. Moran will provide some additional cover. Switching gears, as we close out 2023 and come out of CES, it’s a good time to remind you of our high level strategy and assess the progress made. Our strategy is very simple.

Our products were in about 40% of auto production in 2023 and the higher percentage of vehicles would aid us. We can continue to grow that in the coming years as a bigger and bigger percentage of cars are equipped with some level of driving assist technology. But the more important growth driver is average revenue per vehicle, driven by our advanced portfolio products. SuperVision, Chauffeur and Drive would generate much higher average system prices than our core ADAS products. Events and progress in 2023 gave us more confidence than ever that a very large market for these advanced products is developing, and that our technology and business model makes us best positioned to enable and win in that market. On the industry segment itself, we see three clear distinct value propositions that we expect will drive consumer demand and turn into a very — into a new, very large automotive TAM.

Number one is a meaningful improvement in safety, related to the surround cameras that are a must on the next generation of eyes-on, hands-free, Level 2 plus systems like our SuperVision platform. It is underappreciated that in addition to the convenience of hands-free driving, the 360 degree perception can support a step change in safety. Current single camera systems don’t support the many evasive maneuvers that can limit accidents, like merging into an open lane to avoid a rear-end collision or avoid vehicles running red lights. Number two is the higher productivity for the car owner. Eyes-off systems like Chauffeur can offer valuable time back to the car owner. If the operational design domain is only 80% to 90% of the time, this is seen as very high value by automakers.

Number three is turning vehicles into highly utilized resources. This corresponds to our fully autonomous Drive product. We’ll be able to offer self-driving systems for lower than the annual cost of a driver. This unlocks an ability for our customers to generate revenue at a much lower operating cost per mile and with no need to pay or find drivers. We believe these value propositions align perfectly with our advanced product portfolio. And there was much evidence in 2023 to support our view that those products are the highest performing, most scalable and lowest cost available options in the market. At a high level, all the industry trends were in our direction. The pace of innovation really picked up in China and the pressure on OEM capital efficiency rose.

These both are pushing global OEMs to focus more on [programmatic] (ph) issues like time to market, cost and performance, exactly where Mobileye has advantages. At the same time, we launched the ZEEKR SuperVision software to high praise which was significant proof point. Finally we recently brought to our customers a collaboration framework called DXP that enables the automaker to control the driving experience of a SuperVision or Chauffeur based system. Finding sweet spot that enables the OEMs to control the look and feel of the system but rely on our core technologies for all the objective and safety critical aspects is already paying dividends with customers. On a more specific basis, we announced the value of our 2023 design wins at CES two weeks ago.

Future projected revenue was $7 billion for the second year in a row. This compares to our 2023 revenue of $2 billion. Implied ASP of these agreements was $122 in 2023, $105 in 2022. This compares to ASP for 2021 design wins of $65 and ASP of our actual revenue in 2023 of $53. The volume associated with the design wins the last two years is $60 million plus compared to mid-$30 million today. Beyond the design wins, 2023 was an important year for execution, customer acquisition and expansion of OEMs in the opportunity set. Our SuperVision system is now on more than 190,000 vehicles. We delivered the full highway software in August and it’s providing to be a highly capable system — it’s proving to be a highly capable system and we have expanded design domain to 22 cities from only two back in September.

We believe that proving ourselves in what is the most challenging environment for Mobileye, given data restrictions, proves our global scale and that’s unique selling point that is underappreciated. We were awarded SuperVision design wins with Porsche, FAW, Mahindra and a major western OEM over the course of 2023. The number of models included in all our design wins are now projected at 30 models as compared to nine models at the beginning of 2023. Our portfolio strategy where SuperVision serves as a bridge to Chauffeur is being proven out as Polestar, FAW and a multi-brand major western OEM, all awarded production programs on the Chauffeur platform during 2023. We diversified the business significantly during 2023 from mostly Chinese OEMs and mostly electric vehicles to a diverse set of OEMs, price points, and powertrain types.

The most important catalyst was the landmark design win to bring our entire product set to a major western OEM. It’s the first global OEM to align behind our complete portfolio, especially mirroring their future intelligent driving product development plan to our portfolio. It more than doubles the number of vehicle models in the pipeline and spans across all markets and powertrain types. And the endorsement of this automaker will be high value in terms of closing additional deals. We were successful in moving many OEMs into our business development funnel as the high-level trends I described earlier increased the sense of urgency in the marketplace and the confidence in our solutions. We now have design wins or are in advanced discussions with 11 OEMs representing 37% of industry production as compared to three OEMs representing 9% of industry production as of the start of 2023.

In summary, we know of no other competitor in the ADAS-AV space with a similar breadth of design wins that has actual navigate on-pilot systems in production and has production programs for eyes-off systems with multiple automakers. Overall, as we have shared previously, we do not expect 2024 financial results to be where we want them to be, given the inventory correction. But we expect to leverage all the groundwork laid in 2022 and 2023 to take a leap forward in terms of visibility toward the next leg of our growth story. I’ll now turn the call over to Moran.

Moran Shemesh: 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 in Mobileye’s non-GAAP numbers is amortization of intangible assets, which is mainly related to Intel’s acquisition of Mobileye in 2017. We also exclude stock-based compensation. Starting with Q4 results, we had another very good quarter with revenue up 13% year-over-year, adjusted operating income up 14%, and adjusted operating margin at 39%. SuperVision volumes were 38,000 units in Q4, up from 29,000 in Q3. The 67,000 units we did in the second half was significantly higher than 35,000 in the first half. Operating expenses were again meaningfully below expectations, about $30 million this quarter.

There were two main areas, each about the same magnitude. Favorable expenses were lower due to favorable ethics and due to some reimbursement for employees on military reserve duty. The other factor was higher than expected engineering reimbursement for pre-designed win activities with certain OEMs. Over the course of 2023, our operating margin rose from 27% to 39% on sequentially higher revenue and consistent operating expenses. Obviously, this is a backward-looking, but it should give investors some sense of the operating leverage possible once more meaningful SuperVision and Chauffeur volumes start to drive revenue significantly higher. On a cashflow basis, we generated almost $400 million of operating cashflow in fiscal year 2023. And it’s important to note that we invested around $200 million in rebuilding the safety buffer of EyeQ chips on our own balance sheet.

We expect to maintain a consistent level of balance sheet inventory in 2024. Capital expenditure were just below $100 million for the year, in line with our prior comments. Looking ahead, you are all aware that as part of the process of setting order schedules for Q1 and the remainder of 2024, we learned that there is 6 million to 7 million units of excess inventory of EyeQ chips at our customers. We understand that much of this excess inventory reflects decisions by Tier 1 customers to build inventory in the basic ADAS category due to supply chain constraints and a desire to avoid part shortages in 2021 and 2022, as well as lower than expected production in certain OEMs during 2023. The inventory situation is related to the base ADAS business only, as SuperVision inventory is at normal level.

As we noted in our January 4th press release and 8-K, we expect Q1 revenue to be down approximately 50% to around $230 million. We expect EyeQ volume to be around $3.4 million units in Q1. We expect SuperVision in the low 30,000 unit range, reflecting normal seasonality in China. Given the unusually low EyeQ volume, SuperVision will be a larger portion of revenues in Q1, which will result in gross margin in the mid-60 range. Extracting our operating expenses, which will likely be a bit higher than the recent $200 million run rate, the outlook for Q1 adjusted operating income is for a loss of $65 million to $80 million. But we see revenue and volume snapping back fairly quickly and believe we have very good visibility on this. Due to the nature of our business, all of this inventory is for specific OEMs and production of specific vehicle platforms.

The process to clear the inventory is simply to stop shipping chips for specific vehicles and have our customer use the existing inventory to satisfy demand. There is no uncertainty regarding who the customers are, there is no alternative product that can be used, and there is no discounting or other economic action needed to clear the inventory. As we compare our prospective shipment with vehicle production schedule, we believe approximately 5 million units can be cleared in Q1 and the vast majority of the remainder in Q2. In terms of our full year guidance, it is unchanged from the preliminary outlook we provided in January 4th, and our visibility has improved over the last several weeks. From a volume perspective, we are assuming 31 million to 32 million EyeQ shipments and 175,000 to 195,000 SuperVision shipments in 2024.

We expect the cadence of EyeQs assuming the midpoint of the guidance to be around [$3.4 million] (ph) in Q1, an increase of at least 100% in Q2 versus Q1, and then the balance of unit shipments in the second half of the year. We believe that this cadence, based on our analysis and discussions with customers, should result in a vast majority of excess on the inventory to be cleared by the middle of 2024. We expect average system price to increase in 2024 as compared to 2023 due to an increase of SuperVision as a percentage of total revenue. In terms of gross margin, we look at it on a product by product basis. On the ADAS side, we expect a slight down tick in growth margin this year for two reasons. One, as you know, the cost of EyeQ chips from our supplier went up at the beginning of 2023.

We passed that along to our customers. However, there were a decent number of units in 2023 where we generated revenue at 2023 prices, but used [cheaper chips] (ph) in 2022 costs. That’s a minor headwind this year. We are also assuming some continued normalization of production mix after a very rich mix during the supply chain crisis. We expect these two headwinds to be partially offset by higher cloud-enhanced ADAS volume and REM recurring revenue. Regarding SuperVision, the optimized domain controller is now in production. This comes at a meaningfully lower cost and we are sharing a portion of that with our customers. ASP will be down a bit compared to last year but we expect gross margin to be up meaningfully to low 40% as of Q2 2024 as compared to low to mid 30% in 2023.

In addition, we would expect some level of software licensing revenue to begin making an impact in Q4 of this year once the ZEEKR free trials are over. Any consumer that chooses to pay for the SuperVision-based feature after the free trial will drive incremental revenue and profit for Mobileye. With respect to operating expenses, we are assuming 20% increase over the final 2023 number on an adjusted basis, excluding amortization of intangible asset and stock-based compensation. The OpEx bears a bit more discussion. Our forecast for 2024 is unchanged from what we projected several months ago and not too far above our original forecast for 2023. Much of the lower cost in 2023 related to more transitory things like foreign exchange and delayed moving to our new campus, good news on some engineering reimbursement and reimbursement of certain payroll costs for employees on military reserves.

But some of it is structural. Certain adjustment to the way we collaborate with OEMs, including [ASP] (ph), means that SuperVision and Chauffeur programs can scale more efficiently than we originally envisioned. The refinement of our mobility-as-a-service strategy to focus on supplying the self-driving system leads to structurally lower costs, but we don’t believe a reduction in the opportunity. Bottom line is that we do believe our operating expenses in the near and long term should be structurally lower than we expected as of a year ago. We continue to believe that OpEx percentage growth in 2025 and beyond should be significantly lower than in 2024. Lastly, in terms of tax rates, we are assuming a non-GAAP effective tax rate of between 15% and 17% for 2024 in comparison to 11% in 2023.

Thank you and we will now take your questions.

Dan Galves: Thank you, Moran. Kat, if you could compile the Q&A queue, please analysts if you could limit your questions to one main question and one follow-up. Thank you.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Mark Delaney from Goldman Sachs. Please proceed.

Mark Delaney: Yes, good morning and thanks very much for taking the question. I was hoping to start with an update on the engagements with the OEMs with some of your more advanced solutions like SuperVision and Chauffeur. I think as of the 3Q call, you said you were either booked or in advanced discussions with 10 OEMs. I think, Amnon, you said today that’s now at 11, and then I believe there’s another four OEMs where there was more preliminary discussions underway. Can you give any more color on how those discussions are going, your general sense of progress? And were any OEMs maybe deciding to go another direction, or do you still feel like you’re well positioned with that set of customers?

Amnon Shashua: Well, SV and Chauffeur are complex systems. So early adopters, they need a lengthy due diligence process. For example, before winning SuperVision on Porsche, we underwent thousands of miles of public road rides in Europe and in the US with a due diligence that took almost a year. But now we are facing the effects of, I would call this the law of innovation of diffusion, which means that more OEMs buy into SuperVision and Chauffeur, the shorter their due diligence phase. So after winning the big western OEM, I believe that due diligence phase is getting much shorter. And we foresee a number of design wins, both in western and in China during 2024. And I believe that the announcement of those design wins would be in the second half of the year.

Mark Delaney: That’s helpful. One of the things I was hoping for an update on was the DXP platform. It was a big part of your speech and presentation at CES this year. I imagine you met with a number of current and potential customers at CES. Maybe you can share more around how impactful DXP is and the receptivity of auto OEMs to DXP? And maybe touch a little bit on how DXP is different from EyeQ Kit? Thank you.

Amnon Shashua: I think that the DXP really solves the problem of how the OEM can own the driving experience in a very efficient manner. So previously before DXP, OEMs would come to us and say, look, we want to take your two EyeQ 6 chips, add another microprocessor, a strong microprocessor that would cost hundreds of dollars and will write our driving policy code on that microprocessor. Or they would come and say that writing our code on your EyeQ 6 chip would create all sorts of clashes because our code and your code, fighting on resources, so we prefer to put it on a separate chip. Now this means that the cost of the system is higher and the economical scalability is very, very important. With DXP, they do not need to add any additional microprocessor.

They do not need to write code on our EyeQ 6 chip. They write code on the MCU, and they write high-level code, and they use our infrastructure for writing their driving policy. So it reduces — it does two things, it reduces the bill of materials of the system because you don’t need to add another chip and it allows Mobileye to scale much faster because all the code written on the EyeQ 6 chip is more or less the same for all the platforms. All the differences are in the MCU. Maybe Nimrod wants to add something.

Nimrod Nehushtan: If I may add, we had the opportunity during CES to present this concept to multiple OEMs in dozens of meetings and the reception was very compelling in the sense that although OEMs now have more focus on pragmatic considerations like cost, performance, and time to market, this does not come at the expense of owning the user experience and being able to influence and craft their own kind of user experience for their customer base. And what’s really missing in industry to find the sweet spot in between the best performance cost in time to market solution and full flexibility in crafting a unique user experience. And this is where DXP comes in and it is really perceived as a driving operating system by OEMs, which is kind of simplifying the task for OEMs who are now interested in offering new driving experiences in this new generation of driver assist and autonomous driving products.

Dan Galves: Thank you. Next question, please.

Operator: Our next question comes from Emmanuel Rosner from Deutsche Bank. Please proceed.

Emmanuel Rosner: Thank you very much. My first question is around the chip destocking situation that you flagged a few weeks or so ago. Can you maybe just go back over how you became aware of it? How do you get confidence around the magnitude of the issue and the timing of it being resolved in line with what you reiterated today, please?

Amnon Shashua: I think, Moran?

Moran Shemesh: Yeah, so as I mentioned in the script, so the inventory buildup issue started actually three years ago, [in mid] (ph) COVID period when global production went down dramatically and the industry was all about the desire to secure production and to go after every chip. That was also the atmosphere for us with the suppliers and also from the sense of urgency that we got from our customers. That of course, we believe, led to some stocking, billing activity. In addition, with related to your question, in 2022 and 2023, actually the ordering process changed. So we needed to make full year commitment to our chief supplier. So we asked our customers to do the same and make full year commitment for this year in both 2022 and 2023, which led to less ability from their side to adjust purchases to demand as they did it pre-COVID period.