Mobileye Global Inc. (NASDAQ:MBLY) Q1 2024 Earnings Call Transcript

Mobileye Global Inc. (NASDAQ:MBLY) Q1 2024 Earnings Call Transcript April 25, 2024

Mobileye Global Inc. misses on earnings expectations. Reported EPS is $-0.07 EPS, expectations were $-0.06. Mobileye Global Inc. 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’s First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Galves, Chief Communications Officer. Please, you may begin.

Dan Galves: Thanks Maria. Hello everyone and welcome to Mobileye’s first quarter 2024 earnings conference call for the period ending March 30th, 2024. 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 as always 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: Hello everyone and thanks for joining our earnings call. From a revenue and income perspective, Q1 was fully aligned with the outlook we provided in January, and I’m pleased that the inventory consumption is tracking as we expected. Based on information from our Tier 1 customers and our own analysis, we believe that 70% to 75% of excess inventory was consumed in Q1 this year. Adjusting for that as well as some level of inventory growth in Q1 of last year, our volume growth, the core ADAS would have been mid-single-digits, which is very solid performance in the current environment. In terms of business development and executing on our strategy, we continue to make meaningful progress across our portfolio. This starts with our eyes on hands-on ADAS business and extends throughout our advanced product portfolio, including SuperVision, Chauffeur, and Drive.

Starting with eyes on hands-on systems or what we generally refer to as base and cloud-enhanced data. Our [indiscernible] of this business has always been about providing incremental safety features to meet the constantly expanding regulatory and rating requirements, while leveraging scale and purpose-built hardware to maintain a consistent overall cost to the automaker. In Q1, we had our best-ever design win quarter for base on cloud-enhanced ADAS, generating 26 million units of future projected volume across many OEMs and all key geographic regions. Design win activity — so you shouldn’t annualize this number, but we believe this should address any open questions on whether the excess inventory indicated some weakening of our position and opportunities for continued growth.

It did not. We believe the key driver of this elevated design win volume was the start of production of our next-generation high-volume ADAS chip, the EyeQ6L. This system on chip tax 4.4x the processing power of its predecessor, the EyeQ4 into half the packaging side and supports many incremental safety and convenience features that are aligned with the global regulatory and EnCap safety rating roadmap for the next many years to come. And this was accomplished without any material price increase to our customer or cost increase to Mobileye. Turning to Mobileye’s advanced product portfolio, we see three waves of future growth. Initially, eyes-on, hands-free navigation, on-pilot through supervision. This system is in production now with more than 200,000 systems on the road and has customer wins that imply significant scaling over the next few years.

Progressing towards eyes-off, we have chauffeur for consumer-owned vehicles and drive for network-deployed driverless vehicles. Each are still development that have serious production wins that will begin to scale in 2026. From a revenue per unit perspective, we believe these products can accelerate our growth in a meaningful manner. For example, our future projected revenue from design wins in 2023 was $7.4 billion. Approximately 40% of this future projected revenue was accounted for by supervision and 20% by chauffeur. Yet those products combined accounted for only 4% of the future volume. Over the last 12 months, we have observed an increasing consensus among automakers that eyes-on, hands-free across a broad operational domain is a must-have feature to be competitive over the rest of the decade and beyond.

What’s new since the start of the year is that we have seen a diffusion of this interest from primarily premium brands to more mainstream brands. We have also seen additional prospects reach out to mobilize due to challenges with their current direction, whether that was fully in-house development or collaboration with our competitors. We now have design wins or in advanced discussions with 14 OEMs representing 46% of the industry production as compared to 11 OEMs representing 37% of industry production at the end of 2023. We continue to make steady progress with more mature prospects. We have been working with since mid to late 2023 and see the likelihood of converting a number of these during the second half of 2024. In the aggregate, Mobileye is now bidding on RFQs representing a multiple of the approximately $4.5 billion of pipeline revenue generated in 2023 from supervision and chauffeur design wins.

There are several reasons for this significant expansion in interest and I will elaborate on five driving factors. Number one, the public announcement by Volkswagen Group for their alignment with our supervision, chauffeur and drive products was very important, both in terms of a large global OEM moving forward on these product categories with conviction and an endorsement of our capability and ability to execute. As expected, the announcement led to incremental traction with other OEMs. Number two, we believe that Mobileye has significant and somewhat unique advantages in delivering an optimal balance of performance and cost. Our SoC cost is a fraction of competing high-end SoCs and very importantly, our SoC comes with the full software stack validated for production readiness with a proven record of quality.

Moreover, REM enables geographic scalability at very low cost. Overall, our eyes on hands-off performance is best in class, despite running on low-cost silicon and requiring many fewer sensors than competition. Number three, as EyeQ6 High approaches production in mid-2025, we are now able to utilize late-stage SoC and ECU samples in testing. The software stack built to run on these next-generation ECUs includes state-of-the-art, novel artificial intelligence systems, including end-to-end perception and end-to-end actuation, running in parallel for purpose of redundancy to the networks powering our current generation of supervision. Our target for the camera-based subsystem for perception is 1,000 hours of driving on highway roads without intervention and our testing show that we are on the right path of achieving those targets.

I would mention that those meantime between intervention targets are expected to be industry-leading at quite a large gap. We believe that – number four, we believe that SuperVision provides a validated bridge to a true eyes-off system across a wide domain, which is seen by many OEMs as a true value driver long-term. But the performance requirements for eyes-off are really underappreciated by the public and also by certain OEMs who are throwing everything they have at an eyes-on system with seemingly no clear plan on how to boost meantime between failure from one safety intervention every few hours to one every hundreds of thousands of hours. Mobileye on the other hand has a unique methodology and offering, including crowdsourced mapping that boost perception of performance, boost perception performance, redundant perception layers, a market-leading imaging radar to support our True Redundancy concept, RSS and purpose-built efficient-compute.

These areas of vertical integration experience in our view are considerable assets. Number five, we have already seen an initial positive impact from Tesla’s decision to double down FSD and Robotaxi, which adds to the desire for other OEMs to have competitive offerings, but also is seen as an area where our legacy customers can utilize Mobileye’s strength to introduce far-reaching intelligence-driving systems. Overall, I’m very pleased with the progress of our technology and business building with OEMs. I look forward to more updates through the year and 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 Q1 results, they were closely aligned with the Q1 outlook we provided back in January. I’ll provide a brief summary and then get into a bit more detail. The severe year-on-year decline in the key metrics was almost exclusively isolated to EyeQ volumes, which were impacted by the inventory correction. During the quarter, we delivered 3.5 million EyeQs. In addition to these new shipments, our customers use a significant EyeQ inventory to satisfy the demand for our products during the quarter.

The approximately 4.6 million units year-over-year decline, which converted at our high gross margin, especially accounting for substantially all the reduction in gross profit. Our cost is nearly all variable. The fixed component is very minimal. The balance of the year-over-year decline in operating income was driven by some growth in operating expenses, but this was relatively minor. And our operating expenses do not flex with revenue, as R&D spending is correlated with the execution of our advanced product strategy and is not impacted by short-term fluctuations in revenue. Behind the volume decline, we also saw some modest decline in EyeQ ASP and gross margin related to mix. SuperVision was pretty strong in the quarter. We delivered 39,000 units compared to 25,000 units in the year ago period.

This was above expectation that this was due to timing. We continue to see the first half deliveries totaling around 70,000 units, in line with our initial expectations, but with Q1 slightly higher than expected, Q2 is slightly lower. So far we see gross margin improved somehow in Q1, both sequentially and year-over-year. The more meaningful increase into the low 40 range is expected in Q2 as close to 1% of our volume will be with the new low-cost domain control. On the overall blended gross margin basis, the lower than normal percentage was related to the fact that supervision was around 20% of revenue in Q1 compared to an average of 6% in 2023 calendar year. While supervision volumes grew year-over-year, the mix of supervision was exaggerated by the temporary reduction in EyeQ volume in the quarter, which will return to more normalized level in Q2 and even more so in the back half.

Despite the operating loss, operating cash flow was modestly positive in the quarter. One item to note here is that our balance sheet inventory rose sequentially. This has nothing to do with inventory at the Tier 1 customers. Our balance sheet inventory rose modestly due to lower shipment in the quarter and the need to maintain somehow steady purchasing of EyeQ chip over the course of the year. By the end of 2024, we would expect our balance sheet inventory to be consistent with the 2023 year end figure. Looking ahead, we believe that the inventory consumption process is on track. At this point, the vast majority of Q2 volume is based on binding purchase orders from our customers. There is quite some level of uncertainty regarding timing of late quarter shipments, but we are comfortable in projecting approximately 7.4 million units, up more than 100% as compared to Q1.

Based on our in analysis and information from our customers, we expect that the inventory at our Tier 1 customers will be back around normal orders by end of Q2. Please note that we may not continue to give as much specification on quarterly unit volume outlook, but given the unusual cadence of this year we feel is worthwhile. We expect gross margin to move higher to around 67% and for operating expenses to continue to grow steadily on a sequential basis. Overall, our revenue and adjusted operating income expectation for Q2 are well aligned with the current analyst consensus. In terms of the full year guidance, it is unchanged from the outlook we provided on January 25. From a volume perspective, we are assuming 31 million to 33 million EyeQ shipments and 175,000 to 195,000 supervision in shipments in 2024.

On the EyeQ side, the midpoint of our guidance implies around 21 million units in the back half. This is supported by regularly updated indication from our customers, which have been quite stable over the last couple of months. And it also appears to be reflective of the true level of demand in the back half of 2024 based on our own analysis of OEM production forecast. If we isolate average system price for the single-chip EyeQ business, we expect it to be down slightly in 2024 on a year-over-year basis, consistent with our view in January. The modest weakening in vehicle mix that impacts us somehow in 2023 is expected to continue in 2024. This is compared to a very rich mix we saw in 2021 and 2022 due to overall automotive industry production constraints.

Higher-priced chips for cloud enhanced ADAS and other advanced programs are providing an offer, but we do not view this tailwind as very materially in 2024. As [indiscernible] volumes are still not a meaningful portion of the total and the base of vehicles paying us annual REM-related license payments continue to build. On the supervision side, these volumes can be more difficult to precisely predict given that we are currently on five models that are all in the EV space, which has been in a period of volatility. Increase in volumes in the second half of 2024 versus the first half of 2024, is supported by several factors, including: number one, the recent mid-cycle refresh of ZEEKR 001, which caused a significant uptick in demand; number two, incremental scaling of Zeekr 001volumes in Europe; number three, an additional version of the Zeekr 009 with enhanced features; number four, we start, of course, our four deliveries in Europe and US in the second half; and number five, continued ramping of Smart number one in Volvo EM90 volumes.

On a total company basis, we expect average system price to rise to approximately $55 in 2024 from $53 in 2023 based on SuperVision growth. We expect gross margin in the range of 67% to 68% range for the remainder of the year based on current expectations for the mix of SuperVision in EyeQ revenue. We continue to expect adjusted operating expenses to grow approximately 25% on a year-over-year basis as we execute on our advanced product portfolio in preparation for substantial numbers of SuperVision and drive product launches in upcoming years. And we continue to believe that our operating expenses in the near or long-term should be structurally lower than we expected as of a year ago, and that OpEx percentage growth in 2025 and beyond should be significantly lower than in 2024.

Lastly, in terms of tax rate, we continue to assume a non-GAAP effective tax rate of 15% and 17% for 2024 in comparison to 11% in 2023. Thank you, and we will now take your 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] Our first question comes from James Picariello with BNP Paribas. Please proceed with your question.

James Picariello: Good morning, everybody, or good evening, good afternoon. So just on the gross margin guide. So was it declared that it’s 67% to 68% as the range through the remainder of the year? Or was that a full year number for gross margins?

Moran Shemesh: Yeah. This is for the remainder of the year. I believe, I also mentioned the full year that approximately 67%. But this quarter, of course, was lowered to mix of SuperVision. As I mentioned, SuperVision was 20%. So it’s not a representative gross margin.

James Picariello: Right, right. Yeah. So my follow-on question, can you just confirm the — and apologies if I missed it, the SuperVision shipment number in the first quarter? And then can you just walk through for OpEx, what drives the somewhat material step up through the remainder of the year on the OpEx side to get to the 25% year-over-year OpEx growth? Thanks.

Moran Shemesh: Yeah. So in the first quarter, we delivered 39,000 units. And I also said, we are expected to deliver 70,000 for the first half for SuperVision units, and the rest of the year, again, on track with our guidance. As for the OpEx, so the main bucket for increase is headcount, so headcount to support our activities, our design wins and new advanced programs that approximately $100 million of headcount growth and some compensational inflation. The other element is R&D related to headcount, again to support the advanced programs from EyeQ 6 EyeQ 7, Lidar. Lidar is also the software related to design new programs, building the hardware. So, all these R&Ds around maybe $80 million or $90 million, but offset with some higher NRE reimbursement mainly related to our new programs and also related to drive offset some of this amount.

We also have approximately $20 million or $30 million as a result of occupancy, the new campus and other sites, including depreciation. So, these are the main drivers for cost increase in our OpEx increase in 2024.

Operator: Our next question comes from Joshua Buchalter with TD Cowen & Company. Please proceed with your question.

Joshua Buchalter: Hey, guys. Thank you for taking my question. For my first one, any more details you can provide on the 14 advanced engagements and in particular, the incremental three that you added in the quarter, whether by geographic mix, drivetrain and most — perhaps most importantly, any updates on timelines to conversion for the advanced engagements? Thank you.

Amnon Shashua: I’ll take this. So, in general, we have been making steady progress with our activities, as mentioned, and the increase comes from a mix of geographies, European, American and also in Asia. The progress we’re making is in three fronts: on commercial front, technical fronts and also in the legal firms in order to make sure that all aspects related to these agreements are addressed, and we continue to expect to make — to get the convergence within the second half of the year. And I just want to maybe to refer to the Volkswagen partnership, which took us between year and year and a half to conclude, we do see shorter time frames in the existing engagements, but — so, I still think that second half of the year will be a good point in time to start to see more conversions there.

Joshua Buchalter: Thank you for that. And for my follow-up, I just wanted to ask about EyeQ6L. Obviously, some good initial design win metrics there. Can you maybe spend a minute or two talking about what are the features that customers can use on the 6L and also, how are you able to, I guess, extract incremental ASP from the part? Because I assume — you mentioned the ASP doesn’t change all that much. I guess I was a bit surprised given you’re moving from 28-nanometer to 7-nanometer on that chip. So that should allow for a good amount of performance uplift. So, I’d just be curious to hear about some more details on the engagements there in core ADAS as EyeQ6L begins a more meaningful part of the mix over time. Thank you.

Amnon Shashua: Okay. The ASP is driven by the functional bundle and not the process node of the chip. The bundles are increasing due to regulatory expansion and also incorporating expansion. Many of these programs also programs that we win also include cloud enhanced. So right now, the programs that we won in Q1 have a similar ASP to the existing generation, but we do see a drive towards higher bundles, which would increase the ASP. But the big ASP jump comes from the advanced product portfolio, the supervision so and entry. Any ASP increase in base does is really incremental. And just one follow-up…

Operator: Our next question — go ahead.

Amnon Shashua: Sorry, just make one follow-up to that, just to reinforce, is kind of historically, each generation, the goal is really to provide incremental features that allow the OEMs to meet regulatory and cap requirements without changing the price. So this has really been kind of our strategy over time. Obviously, the higher performance gives you the potential for increased bundles, which can drive higher ASP. But in general, what we’re trying to do is kind of keep pricing and keep cost the same for each successive generation or provide incremental features.

Operator: Our next question comes from Shreyas Patil with Wolfe Research. Please proceed with your question.

Shreyas Patil: Hey. Thanks so much for taking the question. Maybe just firstly, as we think about supervision profitability, I think you’re indicating a low 40% gross margin by the second quarter, I believe — and the long-term target is closer to 50%. So how should we think about the progression towards that long-term target over the next few quarters or even beyond?

Amnon Shashua: No, we are on track of increasing the gross margin. We have a second-generation domain controller, which is now in production and on the road. And in few months will completely replace the Generation 1 of domain controller, and that increases gross margin considerably. And the future products with IQ6 are also designed with the gross margin approaching our target of 50%. So we are converging.

Shreyas Patil: Okay. And then maybe this is a bit of a longer-term question. But I’m curious how you think about some of the trends that we see in markets like China, for example, with some of the automakers seemingly willing to invest and deploy quite expensive systems but to kind of own the data or trying to develop the software in-house. I know you’ve talked before about the challenges those automakers will have in terms of scaling outside of China. Do you see — I guess, I’m curious if you see that as a risk inside China if more automakers are willing to pursue those approaches, albeit at a more expensive cost to what supervision can deliver. And do you see potentially automakers in other regions working on internal systems as well in a similar way? Thanks.

Amnon Shashua: Our view also historically is that competition is good because it creates more demand for those high-end solutions. In-house development in China exists. We work hand-in-hand with those OEMs. So they have some car models are in-house development, some car models are mobilized equipped. But automotive you see out there are eyes-on systems. Now with eyes-on systems, what wins at the end of the day is cost versus performance. No one will pay higher cost for the same performance. Mobileye’s SuperVision system is about 50% of the cost of competing systems. Some of those systems have three ADAS, we have a SuperVision without ADAS. It’s not necessarily to have the ADAS our SuperVision system. So when you look at sympotically, it is for an eyes-on system, it is cost needs to move performance and not first performance and then cost.

And we have a great advantage there. Another advantage we have in China is our rapid expansion of REM. This allows to enable hands-free driving also in urban settings. We are going to launch in, I think, next month or in the next six weeks, the first urban drive in Shanghai, which is going to be deployed on all the 200,000 vehicles that are currently on the road. And this is going to be really industry-leading experience, and then we can expand throughout China quite quickly. And this is something that if you don’t have this outsourced technology to do that, it’s very, very difficult to scale high definition maps over across urban areas. And then come the next generation, which is eye-off and none of our competitors have a concrete plan on how to get to an eye off system, Mobileye is the only company — only supplier that has eyes-off the production programs and not only one multiple production programs, especially with a leading company like Audi, which also generates volume, not only credibility.

So I think putting everything together, the kind of competition we see in China is not a risk. We see this as an advantage because it puts pressure on other OEMs also outside of China to deploy these kind of advanced systems. The in-house development outside of China, we see that declining considerably. Many OEMs that made the announcement of in-house developments have taken a step back. And we are starting to have a serious on — adopting a SuperVision and so forth.

Dan Galves: If I may follow up, I think what’s important for us in this dynamics in China is that it’s an evidence that when OEMs seek for differentiation, autonomy is kind of the most important aspect for them to invest in to ensure that they have a competitive product. Some OEMs lean towards in-house development with expensive systems and investing in significant capital, it still says that they believe that autonomy will be the key differentiator in the future for them. And this was recently supported also by statements that Tesla made in their earnings call earlier this week that this is going to be kind of the next big thing for OEMs who seek to kind of escape from the price challenges that today — are kind of ruling the world in China.

So we see this as a very important development because it solidifies our long-term perspective. And most OEMs, we expect will lead towards competitive products with short time to market with competitive cost and with the best-in-class performance. And that — now that they need to compete within the next couple of years. And we believe we have the product to best suit this need at this point in time. So this is — this is what stands behind the increase in the amount of engagements we’ve had in the last quarter

Shreyas Patil: Thanks.

Operator: Our next question comes from Tom Narayan with RBC. Please proceed with your question.

Tom Narayan: Yes. Thanks for taking the questions. The first one is kind of high level. You mentioned the Tesla announcement this week or recent weeks seems to be a pivot towards more on the robotaxi front. Certainly, FSD is a big driver of that, the Vision 12. But I guess the question is, it seems like from talking to them, there’s a reluctance to engage in this Level 2+. But for some reason, how there’s this movement towards potentially Level 4 as a proof-of-concept, when a consumer sees the Level 4 that they believe in it more see the robotaxis on the road, maybe then it’s a halo effect in autonomy in general. I guess the question is — do you think — do you agree with them that maybe that the robotaxi the Level 4 side of things isn’t some far distant thing. Maybe this has pulled forward a little bit, and it’s a proof-of-concept that could potentially be a catalyst for Level 2+? Or do you view these two things as completely separate animals?

Amnon Shashua: Well, just FSD is Level 2+. They call it now FSD supervised that this is Level 2+. We’re all in or of Tesla accelerating the robotaxi plants, but we have also robotaxi in production with Volkswagen of the ID. Buzz coming out in 2026. So any uplift in the demand for robotaxi is also an uplift for us. Now whether they could introduce robotaxi using only cameras, we are kind of skeptical, but no, we don’t know what they’re going to introduce. If you just say robotaxi with additional active sensors, not only camera. We believe that eyes-off systems rather than calling this robotaxi, let’s call it eyes-off systems, because I of means that you can drive autonomously on selected type of roads, not necessarily on every type of road.

It’s still a great value. Eyes-off systems, which is our show product line has a great value proposition. And we also believe that in time, it will even overtake the Level 2+ in terms of volume, but we see that something for the next decade in terms of the volume ramp. Supervision is this decade and eyes-off would be in terms of scaling and overtaking Level 2+, we see that as something for the next decade. But we’ll be very happy to be proven wrong and to have this accelerated.

Tom Narayan: Okay. And my quick follow-up. The 14 OEMs you’re talking to, obviously, five of them you’ve already won, and there’s three new ones. There’s obviously — there’s supervision, the regular supervision where you’ve won, and there’s obviously the kind of more light version of supervision. Just curious if — of those 14 OEMs you’re talking to outside of the ones you’ve already won. The majority of those, the regular kind of supervision or are those different kind of varieties, kind of a supervision light product? How do you think about that on that distribution?

Amnon Shashua: Well, first of all, the answer is it’s a mix between supervision safer and supervision light. And it’s kind of a very balanced mix, I would say. What we see is that OEMs are trying to build their vehicle lines such that some of the vehicle lines will have a full supervision also for both. And then maybe the bulk of the volumes will have instead of just the front camera will have a SuperVision light type of system, which has five cameras and five radars or six cameras and five radars, but still offers very advanced functions compared to the base data we have today, which will improve their competitiveness in the low-cost cars. We’ll offer new SuperVision to consumers, but at controllable costs. And this kind of lives like in parallel to the SuperVision or Chauffeur, which will be for other car lights.