Mobileye Global Inc.

Hello and welcome to Mobileye's first quarter 2023 earnings conference call for the periods ending April 1st, 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, Mobilized CEO and President, and Anat Heller, Mobilized CFO. Thanks, and now I'll turn the call over to Amnon.

Hello, everyone, and thank you for joining our earnings call. I'm going to focus my comments on three areas. I'll briefly discuss the quarter we just completed, expand on the business development progress on our advanced portfolio, and then address and adjust to our full year guidance. In what is still a volatile macro environment, our business performed well in Q1. Revenue was up 16% year over year against an industry production backdrop of around 6% year over year growth. IQ-related revenue was up 11% year over year and the 25,000 supervision units we delivered more than doubled of a low base. Our existing price continues to rise up 6% year over year to $54. Operating income of $124 million was a bit higher than we expected and cash flow continues to be very robust. We generated over $170 million of operating cash flow and capital expenditure were $26 million. And that will provide more details on this quarter. On the new business side, the opportunities in front of us are very large across all product lines. At a high level, the pipeline of opportunities we're pursuing in 2023 is already higher than the $6.7 billion of projected future business we generated from design wins in 2022. And we are expecting more opportunities to present themselves as the year progresses. Significantly more than half of the revenue opportunity we're pursuing is for our advanced products like cloud-enhanced driving assist, supervision, and chauffeur, which carry much higher content per vehicle than our base driving assist products. On cloud-enhanced ADAS, where we add the REM map features to a basic front-facing camera system, we have one customer in production today and a second that will launch this year. Volumes are still relatively low, but are expected to ramp up quickly as the technology is offered on more and more cars as new vehicles launch. We see very positive signs in this business based on the following. First, each of the two customers so far have recently decided to offer cloud-enhanced ADAS on a bigger percentage of their vehicle portfolio, adding new platforms incremental to the original plan. Euro NCAP has added cloud-based safety services to the criteria for 2026 safety ratings. This indicates regulatory support for the types of safety features that high-definition, rapidly refreshing maps can provide, and we believe we have a major competitive advantage in that area. Third, the economics of the business will drive higher average system prices. We generate higher upfront pricing on the system on-chip, And the recurring software revenue, which is very high margin, is expected to generate at least double the upfront revenue and represent more than $1 billion of potential revenue from just these two OEMs through 2030. Moving on to supervision, we have a large number of serious discussions ongoing, as well as development activities. Regarding the premium European OEM we mentioned on our January call, Funding from the OEM for serious production development work began earlier in Q1, and the formal nomination and contract signing is now down to formalities. Additional brands of this group are expected to adopt supervision as a carryover technology on shared platforms. We're also engaged in a concept development phase, including funding from the customer with a US-based OEM that is expected to conclude with a design win in the second half of this year. Supervision's combination of high performance and reasonable cost is gaining traction across the globe, including emerging markets. We see promising opportunities for design wins with several OEMs based in China and India. There is a large pipeline of interest with OEMs beyond the ones I just mentioned. We believe that continued over-the-air software delivery of features to Zeker, announcements of design wins, and near-term expansion of supervision into Europe with ZKR001 and Polestar 4 will lead to continued momentum. On Chauffeur, we're in the midst of concept development and testing phases with two global OEMs for the Chauffeur product line. These should be concluded by late summer and early fourth quarter 2023, respectively, likely followed by announcement of design wins. Finally, on our Mobileye Drive self-driving system platform, we continue to expect to generate first-day revenue in this business in 2023. More importantly, we are focused on putting the pieces together to scale this business starting in 2025. This requires purpose-built platforms that are pre-engineered to integrate our full-stack self-driving system and can be validated and homologated for volume deployment. Previously announced activities with Holon and Schaeffler are continuing. And we have added a third platform builder from a leading European supplier of light commercial vehicles. We have already upfitted 30 of their vehicles with our system to be used for validation and testing activities in Europe and in Israel, and we'll have more details to share soon. Turning to the outlook, we're reducing our revenue and adjusted operating income guidance for the full year by 6.5% at the midpoint. This is purely related to lower supervision expectations in China. Most of our anticipated supervision volumes in 2023 come from a single model from our initial OEM customer for supervision. This naturally introduces volatility in our projections during the early stages of deployment for this particular product. In comparison to our broader business, which is diversified over about 50 OEMs and hundreds of models across all geographies. We saw the upside of this in 2022, where volumes ended much higher than expectations and overall supervision revenue drove 11 points of total company revenue growth on less than 0.5% of the volume. We're seeing the downside of this customer concentration volatility now, but we are confident it has no impact on the potential for this business to be transformative as it scales over the next several years and bridges to even higher value systems like Chauffeur and Drive. Even after the reduction, we still expect volume growth for supervision this year, and we're fully focused on our clear path to product and regional diversification, which will reduce volatility over time. As far as diversification, the second vehicle, the Zeekr 009, launched during the first quarter and will ramp up over the course of the year. We have three more vehicles launching from other Geely-related brands in the second half of 2023 and early 2024. This includes the recently announced Polestar 4, which will launch in China in Q4 and globally in the first half of 2024. Finally, Zeker 001, the first supervision vehicle that launched in November 2021, will enter Europe later this year. Specifically to the Polestar Win, this is more important than simply another car on the road with supervision. This is a customer that moves quickly. By the end of 2023, they plan to have launched three compelling electric vehicles in only a bit more than two years. Polestar 4 will be the first supervision-equipped vehicle to sell in all three major regions, which we expect will result in further traction with other OEMs. And finally, this is a really conquest win, as their first two vehicles used an internal OEM-developed Level 2 Plus system on a processor from one of our main competitors. Overall, we feel great about the business as we look to the balance of 2023 and beyond. I now turn it over to Anat to go through the results and outlook in more detail.

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 mobilized 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, revenue was up 16% year-over-year with both IQ and supervision volumes, modestly better than expected. Gross margins were as expected. As we noted last quarter, the reduction in Q1 versus Q4 is related to the pricing pass-through of the cost increase on the IQ chip that took place at the beginning of 2023. The dynamic here is that we are passing this cost increase through to our tier one customers without any margin. This keeps gross profit per unit the same, but dilutes the percentage margin. Operating expenses were up 26% year over year in line with our expectations for approximately 30% growth for the full year. In terms of cash flow, there was nothing unusual to report. We did build some inventory of IQ chips, which is consistent with our desire to rebuild the buffer that we had to draw down during the supply chain crisis. And capital expenditures in the quarter was consistent with our view that CapEx should be roughly similar this year versus 2022. Turning to 2023 guidance, in terms of IQ-related volume and revenue, Our expectations at the midpoint are the same, but we have tightened the range a bit on the low and high end. As you are probably all aware, general auto volumes have been a bit better than expected in North America and Europe, but worse than expected in China. Our core IT business is very diverse and balanced by region. Therefore, the outlook is consistent with where we expect it to be for this year. We still believe our forecasts are supported by only about 1% global production growth and 4 to 5 points of ADAS adoption growth. Very reasonable assumptions. In terms of quarterly cadence, based on the latest indications from Tier 1s, we have seen some movements of volumes out of Q2 and into the second half of the year. We expect Q2 IQ volumes to be flat to up modestly versus Q1. Regarding supervision, as Amnon noted, we are reducing annual volumes, which is the driver of the lower 2023 revenue and operating income guidance. Our original guidance was based on supervision volumes that were a conservative view of the purchase orders we had from our main customer. And that forecast was consistent with the Q4 run rate plus volume from the additional launches that Amnon mentioned earlier. But due to a number of headwinds in China that have led to significant reductions in market EV volumes compared to Q4 run rates, including with Zika, we are reducing expectations to levels consistent with current market dynamics. In terms of cadence, sellout volumes in Q1, which were somewhat lower than shipment, have left some supervision inventory in the system. So we are assuming lower volume in Q2 versus Q1. Second half volume expectations for supervision is about two-thirds of the full year, with Mobileye, our customers, and the supply chain all aligned behind this forecast. A couple additional points on guidance. For Q2, we expect revenue to be down slightly from Q1, as the sequentially lower supervision volumes more than offset modest growth in IQ sequentially. We still see average system price up in 2023 versus 2022, but lower than expected supervision volumes will make the increase more modest than originally expected. We are still assuming operating expenses are up about 30% year over year in 2023. We expect OPEX to grow sequentially over the course of the year, but for the uptick in Q2 to be fairly modest with larger increases for Q3 and Q4. R&D expenses growth is elevated this year, with meaningful investments happening to prepare for productization and ramp-up of our many next-generation products. We are investing in many areas, supervision and chauffeur launch and integration teams, the sixth and seventh generation of IQ, pre-production samples of imaging radar and FMCW LiDAR components, and finally, several facilities around the world to support headcount growth. We continue to believe that OPEX growth will come down closer to historical levels of 20% growth in 2024. That should enable us to begin generating substantial operating leverage as the core business continues to grow and our advanced products become a more meaningful portion of revenue. Thank you, and we will now take your questions.