Mobileye Global Inc.

Hello, everyone, and welcome to Mobilize First Quarter 2024 Earnings Conference Call for the period ending March 30, 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, Mobilize CEO and President, and Mehran Shamesh, Mobilize CFO. Also joining today for the Q&A session is Nimrod Nehushtan, Mobilize Executive Vice President of Business Development and Strategy. Thanks, and now I'll turn the call over to Amnon.

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 am 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 in 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 ADAS, our sustained success in this business has always been about providing incremental safety features to meet the constantly expanding regulatory and ratings 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 and cloud-enhanced ADAS, generating 26 million units of future projected volume across many OEMs and all key geographic regions. Design wind activity, so you shouldn't analyze this number, but we believe this should address any open question on whether the excess inventory indicated some weakening of our position and opportunities for continued growth. It did not. We believe a key driver of this elevated design wind volume was the start of production of our next generation high-volume ADAS chip, the IQ6 Low. This system on chip packs 4.4x the processing power of its predecessor, the IQ4, into half the packaging size and supports many incremental safety and convenience features that are aligned with the global regulatory and NCAP 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 in development, but 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, which 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 Mobileye 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 any 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, Mobila 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'll 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, RIM, 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 IQ6 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 a 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 mean time 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 boosts 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 on 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 mobilized strength to introduce far-reaching intelligent 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.

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 with 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 euro near decline in the key metrics was almost exclusively isolated to IQ volumes, which were impacted by the inventory correction. During the quarter, we delivered 3.5 million IQ chips. In addition to these new shipments, our customers used a significant amount of IQ 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, essentially counting for substantially all of 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 did 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 fluctuation in revenue. Beyond the volume decline, we also saw some modest decline in IQ, 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 expectations. This was due to timing. We continued 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 slightly lower. Supervision 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 100 percent of our volume will be with the new low-cost domain control. On an overall blended gross margin basis, the lower than normal percentage was related to the fact that supervision was around 20 percent of revenue in Q1, compared to an average of 6 percent in 2023 calendar year. While supervision volumes grew year-over-year, The mix of supervision was exaggerated by the temporary reduction in IQ volumes in the quarter, which will return to a 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 our balance sheet inventory rose sequentially. This has nothing to do with inventory at the Team 1 customers. Our balance sheet inventory rose modestly due to low shipments in the quarter and the need to maintain somehow steady purchasing of IQ chips 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 always 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 own analysis and information from our customers, we expect that inventory at our Q1 customers will be back around normal levels by the end of Q2. Please note, that we may not continue to give as much specification on quarterly unit volume outlooks, but given the unusual cadence of this year, we think it 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 25th. From a volume perspective, we are assuming 31 to 33 million IQ shipments and 175,000 to 195,000 supervision in shipments in 2024. On the IQ side, the midpoint of our guidance implies around 21 million units in the back half. This is supported by regularly updated indications from our customers, which have been quite stable over the last couple of months. And it also appears to be reflecting on the true level of demand in the back half of 2024, based on our own analysis of OEM production forecasts. If we isolate every rate system price for the single-cheap IQ 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 impact 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 or cloud-enhanced ADAS and other advanced programs are providing an offset, but we do not view this tailwind as very material in 2024. as cloud and ADAS volume 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. The increasing 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 Zigger 001, which caused a significant uptick in demand. Number two, incremental scaling of Zigger 001 volumes in Europe. Number three, an additional version of the Zigger 009 with enhanced features. Number four, the start of postal for deliveries in Europe and U.S. in the second half. and number five, continued ramping of smart number one and 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, 68% range for the remainder of the year based on current expectation for the mix of supervision and IQ revenue We continue to expect adjusted operating expenses to grow approximately 25% on a year-over-year basis, and we execute on our advanced product portfolio in preparation for substantial numbers of supervision chauffeur and drive product launches in upcoming years. And we continue to believe that our operating expenses in the near and 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.