Mobileye Global Inc.

Hello, everyone, and welcome to Mobilize Third Quarter 2023 Earnings Conference Call for the period ending September 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, Mobilized CEO and President, and Moran Shamesh, Mobilized CFO. Thanks, and now I'll turn the call over to Amnon.

Thanks, Dan. Hello, everyone, and thanks for joining our earnings calls. Before going through our business commentary, I'll make a few comments about the situation in Israel. Israel is now at war. The current effects on Mobileye are twofold. First, roughly 9% of our employees are currently serving in the IDF reserves, with their teammates gladly working longer hours to compensate. Second, we are allowing more flexibility to work from home. I see no material impact on our operations. Mobileye does not have any production facilities in Israel, no customers in Israel. Furthermore, there has been no material effect on our operations and ability to develop, test, perform business activities, or meet our objectives as a result of the war. Okay, turning to our results in Q3. Moran will provide more detail, but at a high level, Q3 was another excellent quarter. On a year-over-year basis, we grew the top line 18%, Adjusted operating income grew 27%, and adjusted net income grew 59%. Operating cash flow on a year-to-date basis has been impacted by investments to rebuild our strategic inventory of IQ chips, which we had used to maintain steady supply during the chip crisis. If you adjust for that investment in inventory, which is now largely complete, operating cash flow has also grown very strongly so far in 2022. Another third quarter financial highlight is the 34% adjusted operating margin. The beat versus consensus here was driven primarily by costs, some of which was related to macro factors like currency and some related to planned cost efficiency initiatives. Turning to our product portfolio, our bookings so far in 2023 put us on track to outperform the $6.7 billion of future revenue from design wins we generated in 2022, which was by far a record year. We'll have more details on that at CES in January. We're having a tremendous amount of success with our IQ6-based product portfolio. The diverse platform supports everything from basic ADAS to supervision, to chauffeur, to mobilized drive, and we're excited to launch the first IQ6-based ADAS program in early 2024. consistent with the timeline we laid out several years ago. While supervision continues to be a major focus, I would note that we continue to add a very high number of basic and cloud-enhanced ADAS programs. On the cloud-enhanced side, these deals are at significantly higher prices than current ADAS and typically include REM data sharing agreements. This will reflect This will result in a very meaningful expansion of the OEMs that contribute to REM mapping data in the coming years, improving map refresh times and diversifying the data sources. In addition, we added our first supervision light customer this week, a system based on a single IQ6 high chip with a reduced configuration of cameras that supports hands-free limited-to-highways. The design win is from a large global OEM with plans to equip the systems on high-volume vehicles. We also had some important supervision and chauffeur design wins in Q3. We added FAW as a customer with what is relatively near-term startup production date of late 2024 for the first of many supervision vehicles, and a year later with the first chauffeur vehicles. More on that in a minute. We also added a chauffeur program with Polestar for SOP in late 2025. On the Mobileye Drive, mobility as a service side, the various key components towards scale are progressing on schedule, including our software stack, the IQ6 high-based compute engine, and the imaging radar. Our vehicle platform partners are also making progress. Recently, our strategic partner, Volkswagen Commercial Vehicles, as well as Holland, demonstrated our technology in their vehicles in Hamburg for the German Minister of Transport. The event indicated strong support to deploy this technology to improve transportation efficiency with the goal to put up to 10,000 autonomous shuttles on the roads of Hamburg by 2030. But what I believe was the most important development in Q3 was the delivery of highway supervision software through an over-the-air update to more than 100,000 Zeker vehicle owners in late August, with Navigate on Autopilot feature providing hands-off navigation from point A to point B. This was an extremely critical proof point in front of our OEM customers. It's one thing to demonstrate technology on a fleet of test vehicles. It is a completely different level of product validation to deliver an eyes-on, hands-free system to 100,000 consumers. Feedback has been outstanding. with media in China consistently noting that the Zika system outperforms strong competition despite significantly lower sensor content and a fraction of the compute power. Out of the more than 1,000 beta users who used the system a couple of months before the broad rollout, 95% of them said they planned to buy the system after the 12-month trial period that Zika is offering. I can't emphasize enough that this over-the-air update amplified a flywheel dynamic that's been developing for the last year or so. The industry has noticed a higher pace of innovation and a significant growth in demand in China for systems that take over more and more of the driving. This creates higher pressure among all OEMs to develop competitive hands-free systems to generate value from software, but also not to fall behind. This pressure forces more emphasis on pragmatic factors like time to market, cost, and performance, as opposed to the desire to insource. This creates higher demand among OEMs for the Mobileye products, which offer clear advantages in time to market, cost, and performance. Deploying the software in more than 100,000 consumer vehicles and receiving many accolades in the world's most competitive market clarified our ability to deliver and serves as the final component in the flywheel. We felt the impact of this proof point immediately. The successful rollout led directly to the FAW design win and an acceleration of progress towards potential design wins with other key prospects. What I mean by acceleration is that there is an increased urgency to converge towards production programs. This is reflected as more clarity from customers on next steps. For example, clear deliverables, timelines, and approval processes. While the design wind process rarely moves as fast as we want, we expect that we'll have more news on supervision and chauffeur over the next five months. I'll put some numbers against it. Last quarter, we disclosed that we either had already booked design winds or were in advanced stages for supervision and or chauffeur design winds with nine OEMs representing 30% of global automotive production. That number is now 10 OEMs representing 34% of auto productions. If we go back to the beginning of 2023, that number would have been three OEMs representing 9% of the industry. This group does not include any low-volume brands or early-stage startups, and it's broad geographically. It's one U.S. OEM, two European OEMs, four Chinese OEMs, and three Asian OEMs. We're also very encouraged that we have received meaningful interest from a next wave of OEMs that represent an incremental 15% of global auto production. While not at the point that we would call these advanced stages, the initial work looks very promising. Before turning it over to Moran, I'll close with a few words about China and FAW. I traveled to China with our executive team in September to meet with several key customers. It's not an exaggeration to say that this market is moving at light speed towards putting eyes-on, hands-free systems on the road. Premium ADAS is a huge selling point in marketing materials, The media is extremely knowledgeable about the technology and consumers demand it. There is so much traffic congestion in China and consumers are tired of battling it on their own. They want cars to battle the traffic for them. I can see the potential for 15, 20, 25% of cars sold in this market to have supervision-like capability a few years from now. So it's very important for us to win there and we are winning. Of the group of 10 OEMs I mentioned before, four are China-based. Gili Group, FAW, and two other significant automakers. We also have opportunities to expand with existing customers. The Zecor Mobileye collaboration has been very successful and is leading to opportunities for additional Zecor vehicles, as well as from other brands in the Gili Group. This could add significant volume in the near future. And the FAW relationship is key for us. A government-owned automaker choosing a non-China partner in this highly strategic technology area is a next level validation in front of other China OEMs. It's also a very broad program. FAW is going all in on supervision. Their standalone car brands have a very robust product cadence starting in late 2024, and every vehicle model launch from that time on will include supervision. There is also ambition to sell to sell the resulting platform into their JD brands as well, which would increase the volume opportunity by a factor of five. Thank you for your time and interest in Mobileye. I'll turn the call over to Moran.

Thanks, Amnon. 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 of 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 Q3 results, we had an excellent quarter with revenue up 18% and adjusted operating income up 27% year-over-year. Overall IQ and supervision volume increased about 16%, with the remainder of the growth related to higher IQ ASPs and some initial small mobility as a service revenue that was related to self-driving systems shipped to customers for installation on test vehicles. Supervision shipments were 29,000 units in the quarter, which was in line with expectations. These units were primarily for Zikr 001 and, to a lesser extent, Zikr 009, although in Q3 we also had some initial deliveries for the smart one and postal four, supervision gross margin improved somehow as compared to Q2 due to lower overhead per unit on the higher volume. Looking ahead, we expect two catalysts to drive further improvement in supervision gross margin over the course of 2024. Number one, in collaboration with our supply chain, we are introducing the second generation of the supervision domain control, which we expect will result in meaningful cost savings. We plan to begin the transition to this new controller in late Q4 and into early Q1. We will share the savings with our customer by moderately lowering average selling prices, but the net result is expected to be an improvement to gross margin beginning in Q2 and more meaningfully in Q2 of 2024. Number two, as Amnon mentioned, the rollout of Navigate on Pilot software to Zikr vehicles in August went very well. Any existing Zikr owner or a new buyer through December 31st this year will get a 12-month free trial of this software. After this period, the consumer will need to choose whether to pay an incremental cost to continue to utilize the supervision features. We will receive meaningful software revenue for any consumer that chooses to keep the software. This should lead to an incremental boost of supervision gross margin in the back half of 2024. Turning to operating expenses, they were again lower than expected in Q3, which combined with the strong revenue growth led to a robust adjusted operating margin of 34%, up about three points versus Q3 2022. Approximately half of the lower than expected costs were again related to lower than expected payroll costs driven by depreciation of the checkoff. This is a meaningful driver of cost for us due to payroll and related expenses being the majority of our operating expenses and the significant majority of our employees being in Israel. Payroll expenses were actually slightly lower in Q3 as compared to Q2 despite higher headcount. The remainder of the lower than expected costs primarily related to timing of certain expenditures or general efficiencies we achieved. In terms of cash flow, We had a strong quarter compared to Q2, but continued to invest a significant amount in rebuilding our strategic inventory of IQ chips, which was largely consumed in 2021 and 2022 during the supply chain crisis. As of the end of Q3, we have almost reached our target of approximately six months of strategic inventory, so cash use for restocking should be significantly lower in the next few quarters. When adjusting for cash consumed by inventory year-to-date in 2023, our operating cash flow conversion as a percentage of adjusted net income remains very high. Capital expenditures in the quarter were consistent with our unchanged view that capex for the 2023 calendar year should be roughly similar to 2022. Turning to the guidance, as we look ahead to Q4, IQ volumes are tracking in line with our prior guidance. At the midpoint of our guidance, IQ volumes are expected to be a bit more than 20% above Q3 level, with ASP down a bit sequentially due to a mix. I would just note that this implies a record level of quarterly IQ volume, and importantly, should not be used as a starting point for estimated 2024 volume. We'd encourage you to look at a full year 2023 and apply a growth rate to that when thinking about 2024 and consider that the high volume in Q4 would lead to some hangover effect in Q1, similar to the dynamic in the first quarter of 2023. Turning to supervision, implied Q4 volumes based on the midpoint of the guide for 2023 is approximately 37,000 units. This should bring us to around 102,000 units for the full year of 2023, which is towards the low end of the 100,000 to $115,000 we incorporated in our guidance at the time of our April earnings. This fine-tuning of the shipment forecast is what led us to modestly adjust our 2023 revenue guidance. The consumer demand for Zikr 001 and 009 was well aligned with our shipment levels in Q3. Continuation of this plus incremental volume for new products like Smart One Poster 4 and Dicker 001 shipments to Europe supports the growth in volume from Q3 to Q4. As these new products ramp up and we add a fifth vehicle in Q1, the Volvo EM90, we are set up well for continued sequential growth in 2024. Based on our assumption for mix and volume, we accept Q4 gross margin to be consistent with Q3. We expect operating expenses for full year 2023 to be about 13% on a year-over-year basis. In 2024, we'd expect operating expenses to grow at a higher rate, assuming some normalization in the relative value of the Israeli currency, as well as the ramp up of project spending related to expected new supervision and shofar programs. Lastly, in terms of tax rates, we continue to expect an effective tax rate in the 12% range for the year.