indie Semiconductor, Inc.

Good afternoon and welcome to Indy Semiconductors' first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I will now turn the call over to Ashish Gupta, Investor Relations. Mr. Gupta, please go ahead.

Thank you, Operator. Good afternoon and welcome to Indy Semiconductor's first quarter 2024 earnings call. Joining me today are Don McClimat, Indy's co-founder and CEO, and Tom Schiller, Indy's CFO and EVP of Strategy. Don will provide opening remarks and discuss business highlights, followed by Tom's review of Indy's Q1 results and Q2 outlook. Please note that we will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect our views only as of today and should not be relied upon as representative above these as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For material risks and other important factors that could affect our financial results, please review our risk factors in our annual report on Form 10-K for the fiscal year ended December 31, 2023, as well as other public reports filed with the SEC. Finally, the results and guidance discussed today are based on consolidated non-GAAP financial measures, such as non-GAAP gross margin, non-GAAP operating income loss, non-GAAP net income loss, and non-GAAP EBITDA. These metrics may exclude from its corresponding GAAP measures certain of the following items, depreciation and amortization, share-based compensation, acquisition-related expenses, inventory cost realignments, gain or loss from change in fair values, non-cash interest expense, and income tax benefits or expenses. For complete reconciliation to GAAP and the definition for the above items, please see our Q1 earnings press release, which was issued in advance of this call. It can be found on our website at www.tindysemi.com. I'll now turn the call over to Donald.

Thanks, Ashish, and welcome, everybody. Indy continues to significantly outpace our industry peer group and is capitalizing on technology deployment momentum in the auto tech market. Despite the contracting vehicle end market, we produce 29% year-over-year top-line growth to a record first quarter level, albeit slightly below our guidance. Our innovative product portfolio continues to gain design wind traction across ADAS, user experience, and electrification applications, positioning Indy to benefit from outsized growth through new program ramps in the second half of this year and over the longer-term planning horizon. In the meantime, global automotive markets are facing transitory headwinds following strong growth in 2022 and 2023. According to S&P Global, in 2022, light vehicle production was up 7% year over year and up 9% in 2023, while for 2024, production is expected to be flat to down year over year at under 90 million vehicles. This forecast reflects weaker demand stemming from persistently higher interest rates and inflationary pressures, and in turn has led to consumers opting for more economical, de-featured car models which typically carry lower semiconductor content. In particular, the EV market has been exhibiting precipitous decline in consumer demand of late. The International Energy Agency, in their 2024 Global EV Outlook, highlighted higher EV costs as one of the top consumer concerns impacting adoption in the current environment. This, coupled with reduced EV subsidies in some markets, range anxiety due to a slower-than-anticipated rollout of charging infrastructure, and some regulatory relaxation in the phase-out of combustion engines, have led to OEMs prioritizing a more affordable ICE and hybrid model in the near term, which tend to contain legacy silicon versus newer feature-rich EV vehicles. This slowdown in global vehicle sales and this shift in mix towards lower silicon content vehicles, coupled with the ongoing inventory correction of our Tier 1 customers, is pressuring the addressable market in real time. Specifically, S&P Mobility recently trimmed their 2024 growth forecast for the automotive semiconductor dollar TAM to the low single digits, a notable deceleration from the 23% posted in 2023. Nevertheless, We believe much of this short-term negativity has been overblown, given the regulatory imperatives for level 2 plus active safety, which features heavy indie content and the recurring fundamental that new functionality has always transitioned from high-end models to lower tiers since the beginning of the automotive industry. Further, our strategic growth trajectory is completely independent of the adoption of electric, hybrid, or internal combustion powertrains. Harking back to Henry Ford, He once said that if he asked customers what they really wanted, they would have asked him for a faster horse. In any event, the Indy team remains intensely focused and continues to drive relentless innovation and win exciting designs across our differentiated product portfolio. The long-term automotive megatrends, including driver safety and automation, best-in-class in-cabin user experiences and drivetrain electrification, will ultimately foster demand and substantially boost addressable silicon content. In fact, a recent McKinsey report highlighted that automotive semiconductors are expected to have the fastest 10-year growth rate across all semiconductor sectors. And given our broad array of products, underlying patent portfolio, and demonstrated scalability, Indy is uniquely positioned to capitalize on this opportunity. To that end, we are executing to a highly differentiated sensor fusion strategy to address the growing needs for ADAS solutions, leveraging key sensing technologies such as computer vision, radar, lidar, and ultrasound. This multimodal approach creates redundancy and compensates for the limitations of individual sensors, enhancing system robustness and reliability, which is ideal for challenging driving scenarios and changing environments where precision and timely response are safety critical. We believe this holistic sensor strategy at scale ensures the highest level of driver and passenger protection, and effectively meets the diverse and increasingly complex needs of ADAS implementations across the entire spectrum of use cases, from basic driver assistance features to higher levels of vehicle automation. As automakers and consumers alike demand ever higher levels of safety and functionality, SensorFusion positions Indy to be the partner of choice in delivering these increasingly sophisticated yet cost-effective solutions. Specifically, in terms of our radar initiative, I'm pleased to report that we have successfully sampled our highly integrated radar mimic and baseband solutions and are on track to commence our program ramp next year. On the computer vision front, during the quarter, we secured a major program win that will deploy our technology at Honda for blind spot detection, using both side and rear camera feeds for unprecedented visibility and safety. This will be a multi-model deployment at Honda, with first vehicles on the road with our technology as soon as next year. Additionally, we recently captured a key camera design with Vallejo, further expanding our vision-based sensing footprint across leading Tier 1 suppliers. And leveraging our image signal processor algorithms, we enabled augmented reality navigational systems within Cadillac's 2025 Escalade models, and anticipate this breakthrough technology will cascade down throughout the GM vehicle lineup over time. Again, speaking of GM, we are thrilled to share that our next-generation vision processor has been selected for their occupant monitoring system, with deployment starting in 2026. This combined with the North American OEM OMS win that we alluded to last quarter, which I can now share is with Ford, and other leading OEMs, including BMW, position Indy to seize a first mover advantage in this rapidly emerging application. This development validates Indy's best in class technology and demonstrates our relentless focus on innovation and product roadmap execution. Further, we're preparing to sample our next generation flagship SOCs, the Indy 880 family, for automotive camera applications that will usher in unprecedented features to the automotive industry. This chip can process several cameras simultaneously at ultra-low power, reducing the system bond while addressing the unmet needs of ADAS applications. At a higher level in our discussions with leading global OEMs and tier 1s, it's becoming increasingly clear that the previous one-size-fits-all central compute architecture is fast losing mindshare. The industry needs a more distributed intelligence, zonal processing-enabled approach that can efficiently scale across vehicle segments. By doing more processing at the edge and zones and intelligently fusing and partitioning sensor data, we can dramatically reduce system cost, complexity, and power consumption. S&P Mobility sees this distributed ADAS zonal processing as a $2 billion standalone silicon opportunity by 2029, and we intend to lead it. Indy is developing a new generation of distributed processing solutions that will incorporate sensor fusion to meet underserved market needs, for cost-effective and power-efficient ADAS functionality up to the level 2 plus segment. In support of this, we recently announced a minority investment in AI processing leader Expedera. We intend to integrate custom neural networking processing IP from this exciting collaboration into our future sensor fusion solutions, allowing high-performance ADAS AI processing to be driven into mass market vehicles. Scaling ADAS from feature-rich down to entry-level vehicles is an industry fundamental. and one that INDI is firmly committed to realizing. According to the United Nations, 1.19 million people die in car crashes every year around the world. That's 3,260 people per day. It's a staggering human toll, not just for the victims, but for their surviving family members. INDI is uniquely positioned to help mitigate and ultimately prevent these tragedies via our cost-effective, innovative ADAS technologies. Turning to user experience, we continue to launch new products that enable our customers to redefine the in-cabin experience. Leading automators such as Audi are leveraging interior and exterior lighting as a core pillar of their brand identity, while consumers are demanding seamless integration and charging of their personal devices. Indy is leading the way in enabling these experiences with highly integrated solutions that set the standard for performance and efficiency. This quarter, we introduced a new family of smart connectivity solutions that enable high-speed networking of displays and controllers throughout the vehicle with best-in-class signal integrity. In fact, a leading North American e-vehicle OEM is planning to ramp this technology into their mainstream platforms in 2025. At the same time, we've achieved production readiness for our highly integrated mixed signal solution that enables advanced ultrasonic intrusion detection, leveraging piezoelectric transducers at Volkswagen. In addition, we continue to capture key design wins for our wireless charging technology. During the quarter, a major Tier 1 selected us for use across multiple vehicle models with another leading OEM targeting the booming Indian market with production slated to ramp in 2025. And more recently, I'm delighted to report that we've been awarded wireless charging design wins in support of a leading North American OEM. Our innovative solutions have been winning across multiple applications within the cabin, including with the newest flagship SU7 from Xiaomi, which includes more than 10 indie chips, serving as yet another testament to our degree of innovation. In short, we continue to demonstrate tremendous design wind momentum, setting the stage for outsized growth. I'll now turn the call over to Tom for a discussion of our Q1 results and Q2 outlook.

Thanks, Donald. Revenue for the first quarter of 2024 was up 29% year-over-year to $52.4 million, though short of our guidance, as Donald outlined. Gross profit was $26.4 million, translating into a 50.3% gross margin, also below plan as a result of an unfavorable product mix. R&D was 32.6 million, while SG&A was 11 million, bringing total operating expenses to $43.6 million, slightly better than our forecast. In turn, our Q1 operating loss was $17.2 million. With net interest expense of $500,000 and excluding tax benefits, our net loss was $17.7 million, and we posted a 10-cent loss per share on a base of 186 million shares. Turning to the balance sheet, during the quarter we generated a $4.2 million working capital benefit, partially offset by $2.3 million in capital expenditures, primarily for expanded RF lab capability and radar production test tooling. Additionally, we've initiated an asset-backed revolver, adding $10 million at a relatively low-cost capital with zero dilution, and enabling us to exit the quarter with $148.2 million in total cash. For the second quarter of 2024, we expect Indy's revenue to be flat to up 5% sequentially, more than offsetting the current market softness stemming from the still ongoing industry-wide inventory rebalancing. At the same time, we are planning on gross margin expansion back to the 51 to 52% range from a richer product mix, sequentially flat expenses, and as a result, a narrower operating loss. Below the line, we anticipate $800,000 of net interest expense and no taxes. Assuming the midpoint of these ranges and with 191 million shares outstanding, we expect a $0.09 net loss per share in the current quarter. Looking ahead, based on the strength of our new product pipeline and a general market recovery as channel inventory levels normalize, we plan to return to high growth mode in the back half of this year, reaching EBITDA profitability by Q4 and to resume our industry-leading growth trajectory into 2025 and beyond. With that, I'll turn the call back to Donald for his closing comments.

Thanks, Tom. In conclusion, while we are navigating some near-term industry headwinds, Indy's strategic outlook continues to improve, driven by our continued design momentum. Our intense focus on innovation, customer service, and operational excellence is truly distinguishing us from our worthy competitors and positions us to sustainably outperform the auto tech market. With current cutting-edge solutions spanning ADAS, user experience, and electrification, Indy is at the forefront of the fastest-growing strategic megatrends reshaping the automotive industry. and we're well on our way to building the next great global semiconductor company. That concludes our prepared remarks.

Thanks, Donald. Before we move to Q&A, I want to be clear that we cannot comment on recent speculative press reports. With that, operator, let's open the call for questions.

Thank you, ladies and gentlemen. We will now conduct the question and answer session. If you have a question, please press star followed by the number one on your telephone keypad. And if you wish to cancel your request, please press star two. Please limit your time to a one main and one follow-up question only. Thank you. Your first question comes from Suji De Silva from Roth MKM. Your line is now open.

Hi, Donald. Hi, Tom. I appreciate that you guided 2Q and gave a sense that the second half is going to be a recovery. Can you talk about, Tom, how you frame visibility here, perhaps visually? pipeline or some level of kind of backlog measure. And, you know, you talk about the large programs that we're aware of, the camera and the radar programs, particular ramping in 25. What is the ramp in the second half 24 that can be a tailwind for you to help?

Sure. The way we thought about it, it's a number of singles and doubles. It's the products that we outlined that Donald walked through, a number of new product introductions. So it's not, in other words, it's not dependent upon a general market recovery That would be a tailwind for a change. But we're certainly excited about those new ramps.

Okay. And then as you look at the camera systems in particular, diving in there, the market has embedded offerings from leaders like Mobileye and so forth and Umbrella and others. I'm wondering what the differentiation for India is in that market as you seem to be gaining traction there. And maybe you can talk, Donald, about edge versus central processing in that conversation.

Certainly, that's kind of a longer conversation that we can have, Suji, but yes. I mean, our differentiation has been heavily driven by the fact that our image signal processing technology is simply the best in class, and our products are very much right-sized for the exact applications that we're winning at. So we are really getting an unfair share of our wins here just because of the technology deployment that we have. In terms of central versus distributed or central versus zone controlling, what we are seeing in the market is really that there's a softening of the expectation that everything goes central because it has become simply unmanageable in many cases, and whereas maybe a couple of years ago we might have got thrown out for suggesting something like that, now, to use a phrase I often use, we're running into open doors, and we're walking in there with our concept and OEMs and tier ones alike are saying, yes, that's what we want. And we feel really, really super good about that. And that will encompass also the fusion of not only our vision products, but also our radar products and LIDAR and ultrasound as time progresses also. So, I mean, in terms of the long term, our story is entirely intact. We're driving a lot of wins and you can see from just the number of them that came out in our prepared remarks that we really have a lot of momentum and a lot of traction. So in spite of the current bumps that we're going through, let's call it an air pocket, we're feeling good about where we are.

Okay. Thanks, Donald. Thanks, Tom. I'll pass it on.

Your next question comes from Ross Samer from Deutsche Bank. Your line is now open.

Hi, guys. Thanks for asking the question. Donald, you just talked about, or Tom, you talked about the back half ramp being company-specific, not really banking on a rebound. If we talk about the first half, in the last couple quarters you talked about some push-outs that sounded a little more company-specific, not your fault, but nonetheless a design win that just wasn't going to ramp. Is the weakness you're seeing now something that's market-wide, or is there something a little more indie-specific in 1Q and 2Q?

No, the weakness is market-wide, and Typically, I mean, if you look at our ramp last year, we incrementally grew $10 million in revenue every quarter on quarter, and that's approximately what we expect in the back half. The new ramps that we have trickle out in Q1, gain a little momentum in Q2, and gain more momentum Q3 and Q4. The early part of the year is typically where we're most susceptible to macro because we don't have offsetting ramps, which are really kicking into high gear in order to offset. So first half, very much macro. Second half, very much positively company-specific in this case.

Got it. And I guess for my follow-up, thinking a little bit longer term, if we think about next year, you rattled off a ton of design wins that will ramp in the back half of this year and then a bunch more next year, especially with the big radar one. If we put those together, how should we think about, and otherwise flats are the kind of dollars you could grow? And I know you're not going to measure each one of them individually, but the outgrowth, the supersized growth that you're referring to, give us an idea of what that means.

Well, I mean, people have gotten used to us doubling year on year, and that was really driven by wins that we had made as a private company, which turned into annual revenue run rate through 2013. 24 for us is a slow growth year and also a little bit dampened by the macro, but we'll still grow around 20% year-on-year this year. Next year should really return to supersized growth because we're beginning to actually see the design wins that were made in the early stages of us being a public company roll into the annual revenue streams, and they are significantly larger in size than the traditional wins that we had originally made when we were private, which we we rode the wave of through the first three years as a public company. So we're super excited about that because just the size is that much bigger and we got to sit at the adult table in order to win those designs. And as a result of that, we do expect to turn back to the sort of growth levels in percentage terms that we had in our first three years.

Your next question comes from Anthony Stoss from Craig Hallam. Your line is now open.

Thanks. Good afternoon, guys. Donald, I just want to follow up on your comment on 2024 revenue growth at 20%, so that would put you around 265, largely Q3, Q4 unchanged. I just wanted to confirm that that's what you're expecting.

Yep, that's right.

Okay. I'd love to hear more about your partnership on the AI front, how many interested parties there are within the auto industry right now. When do you think you can start launching some of these products currently and start booking revenue?

Well, we have products which are running artificial intelligence-based algorithms today, and we're now adding hardware accelerators to make those guys even better. We do expect that there will be some initial revenue from that towards the end of 25 and ramping in 26. And then the next wave of what we're doing here, beyond the radar and vision winds that we've talked about, which we are excited about, will take us to even the next level beyond that. We'll be beyond that in time. But these are dollar content opportunities which are ranging in the $100 range. And it's something that we are very excited about for the long-term future. There will be a huge amount of differentiation that goes not only with the hardware, but with the algorithms that we run on top of it. So it is something that we are pursuing very actively, and the market is very ripe for it. The level of interest in it is super high. Likely, we'll have the... the privilege of being able to choose who we work with on this because the interest level is high and simply we won't have the bandwidth to support the whole market in one go. So we'll pick our partners.

Perfect. Thanks a lot, Daniel. I appreciate it.

Your next question comes from Cody Acree from Benchmark. Your line is now open.

Yeah, guys, thanks for taking my questions. I guess if you can just talk about what's happened over the last 90 days. I think we've all seen from your peers, but I'd like to hear from you what's happened with your visibility over the last 90 days. You came into the quarter pretty confident that June was going to be a return to growth with March being the bottom. Can you just talk about the deterioration in that visibility?

Well, look, I mean, we've all seen the data points from large e-vehicle manufacturers, China, traditional Detroit, Stellantis, and of course our peers in the industries. It's tough out there on the main streets, and our demand did deteriorate through the quarter as we'd expected, but it's purely macro. There's nothing fundamental or company-specific. We haven't lost share. We haven't lost customers. It's just been a particularly tough reset, and You know, we under-called it a little bit. Certainly we have to hold our hands up at that point. But I think we feel confident about what we're seeing going forward now. We've tried to be as measured as we possibly can and conservative as we possibly can in our guide going forward. And really, I think I've always said we can't really control the weather, and sometimes we get struck by lightning, but that's where we are.

I guess what has happened to your bookings or your backlog over the last 90 days? How has your firm backlog looked?

Yeah, I mean, integrated over the next few quarters, it's certainly looking like it's on plan. You know, we had some relatively small movements in and out of Q1, which is, at the end of the day, these are, you know, all things being equal relatively small absolute numbers of dollars that need to move in order for us to have a slight problem. So we're seeing it picking up in the second half. We know it's picking up in the second half because of the NPIs that we're staged for in the second half. So from our perspective, we're largely on plan.

Your next question comes from John Tan Wan Teng from CJS Securities. Your line is now open.

Hi, thanks for taking my questions. I was going to ask about the scale of the design winds you landed in the quarter, if they're comparable to some of the bigger ones you've seen in the past, or are they more, you know, a moderate size?

They are very significant. They aren't in danger of taking the record for the number one spot in terms of our historical design wind size, but they are significant. They are going to drive significant annual revenue. So you can assume they're somewhere in between our world record and significantly higher than maybe our traditional singles and doubles, which have driven the revenue to date.

And John, we'll outline that in some more detail at the fall quarter when we reveal our strategic backlog update.

Okay, great. Thank you. Could you also give us an idea of how much more conservatism or confidence you have in your guidance these days, just given the last few quarters have been a little bit harder to predict? Are you adding more caution, or do you feel, you know, better about, you know, where you're going to be in the next couple quarters and years?

Yeah, I think we do feel more confident. We certainly did add more cushion to it. Our plan is to make sure that we provide the market with extreme predictability. We've had a good record to this date since we came public. We are going through a period of extreme turbulence in our particular vertical, but I think we feel pretty good about where we are going forward.

Okay, great. Thank you.

There are no further questions at this time. Donald, please proceed with your closing remarks.

Well, thanks, everybody, for joining us today. And thanks for your insightful questions. And we'll look forward to seeing you at the upcoming investor conferences.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.