Mobileye Global Inc.

Hello, everyone, and welcome to Mobileye's second quarter 2023 earnings conference call for the period ending July 1, 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 Mehran Shemesh Rozhansky, Mobilized Acting CFO. Thanks, and now I'll turn the call over to Amnon.

Hello, everyone, and thanks for joining our earnings calls. On the revenue side, the quarter was in line to better than our expectations. Customers were very cautious in the first half of 2023, which led to below normal growth, but we have seen the production schedule solidify for the second half of the year, where we expect to grow 16% year-over-year on much higher volumes than the first half. Profitability was better than expected, with adjusted operating margin of 31%, up 4 points versus Q1. At the midpoint of our updated guidance, adjusted operating margin for 2023 is 29.5%, nearly three points higher than our original guidance back in January. The good news on the cost side is a combination of macro factors, negotiations with customers on engineering reimbursement, and results of a continual refinement of our spending plans in order to heighten efficiency and optimize returns. Importantly, despite the lower base of operating expenses in 2023, we still see OPEX growth rates in future years moderating to more normal levels compared to 2022 and the 30% growth we originally planned for 2023. This should support good operating leverage over time. Turning to business development for our advanced product portfolio, we continue to move more and more OEMs towards the design win phase. we can now count nine large established OEM prospects in what we consider advanced stages for products like supervision and shortfall. In most cases, we are not competing against anyone. The process is about physical testing to convince the OEM of the performance and the design domain of the system, establishing what role the OEM will have in customizing the system, and often negotiating the bundling of different products like supervision and shortfall across various brands, vehicle segments, and launch dates. Beyond our history of execution and our ability to prove the capability in physical testing across long distances, multiple road types and conditions, what appeals to the OEM is that our product portfolio is scalable, cost-efficient, engineering design-efficient, and above all, displaying leading and cutting-edge performance. In terms of scalability, the core technologies of computer vision and extremely efficient IQ processing platform boosted by REM mapping, forms the baseline for solutions that are relevant across all vehicle price points and the wide range of feature sets from eyes-on, hands-on, all the way to eyes-off, hands-off, and driver-off. Our work with Volkswagen Group is a good example. Since 2018, all new vehicles across the group have used Mobilite-provided ADA, and this relationship exists well into the 2030s. Beginning in 2021, RAM mapping functionality was added to the NED platform, leading to a relatively low-cost way to provide class-leading lane-centering capability among many other functions, and providing an early opportunity for the OEM to generate recurring subscription revenue. The success of this product, which we call Cloud-Enhanced ADAS, led to a recent design going to cascade RAM across most of the entire group over time. Next, we have the supervision design win with Porsche. Porsche shares common platforms with other premium brands of the Volkswagen Group. While not formalized yet, we expect supervision to be adopted by the other premium brands to increase economies of scale. In fact, Audi and Bentley executives are already on record expressing excitement to bring supervision to their products. An additional benefit of supervision to our OEM customers is that it creates a bridge to our consumer-level eyes-off solution called Chauffeur. The surround computer vision, RAM, and IQ-based domain controller and supervision is also the baseline for Chauffeur. The difference in the systems is the addition of secondary perception systems made up of radar and radar, which results in significant increase in the meantime between failure, which is obviously key to enabling eyes-off. In other words, full driver disengagement under a broad set of conditions and road types. This also forms the baseline for our mobilized drive mobility as a service solution. On this front, there has been recent news on our delivery of multiple self-driving systems which have been integrated into Volkswagen's ID Buzz for testing by Volkswagen commercial vehicles in both the U.S. and Europe. The fact that Volkswagen has recently demonstrated these vehicles with analysts and media after only several months of us working together is a testament to how evolved this technology already is. The ability to provide efficient and high-probability products across all vehicle price points, from both consumer-owned and mobility-as-a-service solutions, all based on the same proven cause technology, is a huge selling point to OEMs. As is the increased flexibility of our technology, we provide tools to OEMs to both tune the system and also develop and deploy their own software in order to differentiate and to enable true ownership of their systems. For example, with the Porsche supervision program, our software team is providing about 600 tunable parameters that Porsche engineers can adjust to create a unique customer experience. As an enabler for tuning, we have designed a formal high-level tuning language, which we call driving policy behavior shaping, that allows one to describe the desired driving policy as if one writes code on top of our driving policy operating system. Then we have IQ kits on top of that to offer them bespoke software integration within the mobilized stack, as well as the potential to deploy non-mobilized functions, such as automated parking or driving monitoring on the IQ, saving the cost of additional ECU. Final topic, before turning it over to Moran, is the continued rollout of software to Zico vehicles on the road. As you all know, the full supervision capability is being delivered to Zico vehicles over time through over-the-air updates. Mapping is key to this. The complexity of mapping in China means that data collection must be done through Chinese partners. And as a result, data collection started much later in China than North America and Europe. The map coverage in China is behind those other regions, but it's quickly built. All vehicle vehicles have had a very sophisticated highway system for many months now. But until recently, the full point-to-point navigate on pilot functionality was only available to a fairly small number of beta users. We are very pleased that Zika recently significantly broadened the number of users with highway navigate on pilot, and we expect a full rollout to all users within a week. Initial feedback has been very good. Zika's system is performing much better than other NLP systems in terms of ability to complete maneuvers without takeover in many difficult situations, like construction areas, highway margins, and heavy traffic, and performing lane changes within tight curves. influencers and media have also heightened highlighted the strength of the system versus competitors focusing on the assertive human-like performance of the car several calling it the most efficient and capable navigate on pilots that ever experienced any negative feedback has been around some dead spots in the map which will be rapidly built out over the following months the eyes on hands-free market is much more developed in china than other regions, and it's a significant proof point to other OEM customers that ZCert's system is outperforming. This supports the feedback we have gotten from other OEMs that have performed benchmark tests of their own in a test environment, but proof point from actual production vehicles driven by non-engineers is obviously much more powerful. I now turn it over to Moran to go over the technical, to go over the financial results and guidance 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 Mobileye non-GAAP numbers is amortization of intangible assets, which is mainly related to Indus' acquisition of Mobileye in 2017. We also exclude stock-based compensation. Starting with Q2, overall revenue was down about 1% year-over-year. With core IQ revenue also down 1% over the year and higher ASPs, we've not fully offset a modest volume decline. We do believe that this stocking of inventory at our Q1 customers impacted the growth rate in both Q1 and more sharply in Q2. Looking ahead to the second half, our guidance implies that we will be back to meaningfully outperforming industry production volumes. Supervision shipments were 10,000 units in the quarter. This was exactly as expected. As we noted, on the April earning call, Q1 shipments of 25,000 were significantly higher than end market volumes. The intent in Q2 was to fully reduce that inventory build from Q1. The strong recovery in Zikr end market volumes and our intentionally low shipments accomplished this goal. Growth margins were in line with our expectations. On a sequential basis, IQ margin was stable. The approximate one point increase in Q2 as compared to Q1 was simply due to supervision revenue being a smaller mix of overall revenue. Operating expenses were lower than we expected and this led to strong adjusted operating margin of 31% up about four points versus Q1. The following three areas accounting for the majority of the lower than expected cost in the quarter are number one, On the payroll side, depreciation of the Israeli shekel led to payroll savings in US dollar terms. The FX rate was approximately 4% favorable to what we had forecast for the quarter. Number two, the move into our new Jerusalem campus was delayed from May until the fall of 2023. The higher facility expenses from the new campus will now begin later in the year than we expected. Number three, We also experienced lower costs for our efforts around mobility as a service. We are constantly reviewing our activities to ensure that our product rollout is as efficient as possible. In the case of mobility as a service, we have the emphasize plan to certify an IQ5-based NEO fleet of vehicles for our customers in the near term. The costs simply weren't justified relative to the volumes that were possible on the NEO-based platform. The benefits of the NEO-based fleet, however, still exist in terms of continued testing and validation of the software. In terms of scaling production volume from the mobilized self-driving system, our go-to-market strategy is focused on integration of the system into purpose-built vehicles from vehicle builders, including Schaeffler, Holland, and Volkswagen commercial vehicles. We expect these vehicle platforms to begin serial production in 2025, which also coincides with volume production of our IQ6-based compute platform and our software-defined imaging radar, each important for scaling the mobility as a service business. In terms of cash flow, we continue to rebuild our strategic inventory of IQ chips, which have been largely consumed over the course of 2021 and 2022 during the supply chain crisis. Our ability to satisfy demand during recent years, partially by consuming our inventory buffer, was a big positive. Rebuilding of the inventory is a very important activity so that we will be prepared in case of any potential disruption in the future. Capital expenditure in the quarter were consistent with our view that CapEx should be roughly similar this year versus 2022. Turning to the guidance. Revenue is tracking in line with our prior guidance, which we are reaffirming today, both for the core IQ business and supervision. On IQ, schedules have become more solid over the last couple of months, and customer requests to move volume around have largely ceased. Customer orders support a steep ramp of expected volume in the second half, with Q3 up over 10% versus Q2, and Q4 up more than 20% versus Q3 levels. On supervision, Zikr end market volumes recovered strongly in Q2, which both reduced the inventory built in Q1 and solidified the volume trajectory for the second half. We continue to expect full year shipment consistent with our prior guidance. Q4 will be higher than Q3. given the new vehicle launches and the ZQ-001 entry into Europe. Growth margin for individual product lines are stable. We expect supervision revenue mix to be higher in Q3 and Q4 versus Q2, which will drive some reduction in overall growth margin versus Q2 levels. On the adjusted operating income side, the positive update to our guidance is related to lower than expected operating expenses. Year-over-year growth of OPEX is now expected to be around 22% to 23% versus our prior indication of 30% growth. Nearly half of the reduction already occurred in Q2. The rest of the reduction is primarily coming from the following two areas. Number one, to varying degrees, the areas of lower cost in Q2 like payroll, facilities, and mobility as a service are generating some saving in the second half of the year as well. Number two, non-recurring engineering reimbursements in the second half of the year are now expected to be higher than we had originally forecasted. In terms of tax rate, we continue to expect an effective tax rate in between the 12% and 13% range for the year. Before we start the Q&A session, I'd like to thank Anat Heller for being an amazing mentor to me and for her continued support as an advisor to the finance team and management. I'd also like to thank our entire finance team for their professional and tirelessly work since we've become a public company.