Mobileye Global Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

Key Takeaways

  • Mobileye reported Q3 revenue up 18% year-over-year, an adjusted operating margin of 34%, and 59% growth in adjusted net income, though operating cash flow was temporarily impacted by strategic chip inventory build.
  • Bookings remain robust, with 2023 design wins on track to exceed the record $6.7 billion booked in 2022, including 10 OEMs representing 34% of global auto production (up from 3 OEMs/9% in early 2023) and a pipeline covering an additional 15% of production.
  • In August, Mobileye delivered its Highway Supervision “Navigate on Autopilot” software via OTA to over 100,000 ZEEKR vehicles, generating a 95% trial-to-purchase intent rate and immediate momentum toward new design wins with FAW and others.
  • In China, strong demand has led to key Supervision design wins with FAW (launch late 2024 for supervision, 2025 for chauffeur) and several Geely Group brands, setting the stage for potential rollout across joint-venture brands and significant volume upside.
  • Looking ahead, the introduction of a second-generation Supervision domain controller (transition starting late Q4/early Q1) and monetization of software subscriptions post-trial are expected to meaningfully expand Supervision gross margins in 2024, while operating expenses are projected to grow ~20–25% as new programs ramp.
AI Generated. May Contain Errors.
Earnings Conference Call
Mobileye Global Q3 2023
00:00 / 00:00

There are 13 speakers on the call.

Operator

Welcome to the Mobileye Q3 20 3 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Gove, Chief communications officer.

Operator

Thank you, sir. You may begin.

Speaker 1

Thanks, Kyle, and hello, everyone, and welcome to Mobileye's Q3 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 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.

Speaker 1

Joining us on the call today are Professor Amnon Shashua, Mobileye's CEO and President and Moran Shamesh, Mobileye's CFO. Thanks. And now I'll turn the call over to Amnon.

Speaker 2

Thanks, Dan. Hello, everyone, and thanks for joining our earnings call. 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.

Speaker 2

First, roughly 9% of our employees are currently serving in the IDF reserves, With their teammates gladly working longer hours to compensate. 2nd, 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 nor customers in Israel. Furthermore, there has been no material effect on our operations and ability to develop, test, perform business activities we'll meet our objectives as a result of the call.

Speaker 2

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.

Speaker 2

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 Q3 financial highlight is the 34% adjusted operating margin. The beat versus consensus year 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 6,700,000,000 dollars of future revenue from design wins we generated in 2022, which was by far a record year.

Speaker 2

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 mobilize 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, REM data sharing agreement.

Speaker 2

This will reflect this will result in a very meaningful expansion of the OEMs that contribute REM mapping data in the coming years, improving map refresh times and diversifying the data sources. In addition, we added our 1st Supervision Lite customer this week, a system based on a single IQ6 high chip with a reduced configuration of cameras that supports hands free limited to high base. The design win is from a large global OEM with plans to equip the systems on high volume vehicle. We also had some important supervision and chauffeur design wins in Q3. We added FAW as a customer with what is relatively near term start up production date of late 2024 for the first of many supervision vehicles and a year later with the 1st chauffeur vehicle.

Speaker 2

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 the German Minister of Transport.

Speaker 2

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 2,030. 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 secret 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 we have reached 100,000 consumers.

Speaker 2

Feedback has been outstanding, with media in China consistently noting that the Zeker 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, we used the system a couple of months before the broad rollout, 95% of them said they plan to buy the system after the 12 month trial period that Zegar 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 the takeover of 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.

Speaker 2

This pressure forces more emphasis on pragmatic factors like time to market, cost and performance as opposed to the desire to in source. This creates higher demand among OEMs for the Mobileye product, 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 serve as the final component in the flywheel. We felt the impact of this proof point immediately. The successful rollouts led directly to the FAW design win And an acceleration of progress towards potential design wins with other key prospects.

Speaker 2

What I mean by acceleration is that there is an increased urgency we are confident that we will continue to leverage 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 win process rarely moves as fast as we want, we expect that we'll have more news on supervision and chauffeur over the next 5 months. I'll put some numbers against it.

Speaker 2

Last quarter, we disclosed that we either had already booked design wins or were in advanced stages for supervision and or chauffeur design wins with 9 OEMs, representing 30% of global automotive production, that number is now 10 OEMs, representing 34% of auto production. If we go back to the beginning of 2023, that number would have been 3 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 1 U. S.

Speaker 2

OEM, 2 European we are also very encouraged that we have received meaningful interest from a next wave of OEMs that we will present 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 we have a team in September to meet with several key customers. It's not an exaggeration to say that this market is moving at light speed we're putting eyes on hands free systems on the road.

Speaker 2

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.

Speaker 2

Of the group of 10 OEMs I mentioned before, 4 are China based, Geely Group, FAW and 2 other significant automakers. We also have opportunities to expand with existing customers. The ZEAKER Mobileye collaboration has been very successful and is leading to opportunities for additional ZEAKER vehicles as well as from other brands in the Geely 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.

Speaker 2

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 the resulting platform into their JV brands as well, which will increase the volume opportunity by a factor of 5. Thank you for your time and interest in Mobileye.

Speaker 2

I'll turn the call over to Moran.

Speaker 3

Thanks, Amlan. So thank you, Amlan, 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.

Speaker 3

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 volumes 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 ZIKR001 and to a lesser extent ZIKR009, although in Q3, we also had some initial deliveries for the SmartOne and Postal 4, Supervision gross margin improved somehow as compared to Q2 due to lower overhead per unit on the higher volumes.

Speaker 3

Looking ahead, we expect 2 catalysts to drive further improvement in supervision gross margin over the course of 2024. Number 1, in collaboration with our supply chain, we are introducing the 2nd generation of the supervision domain controller, 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 modestly 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 2, as Amnon mentioned, the rollout of Navigant Pilot Software to Zekr Vehicles in August went very well. Any existing Zekr owner or a new buyer through December 31 this year, we'll get a 12 month free trial of this software.

Speaker 3

After this period, the consumer will need to choose whether to pay an incremental cost to continue to utilize the supervision feature. 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 twenty twenty four. 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 3 points versus Q3 2022. Approximately half of the lower than expected costs were again related to lower than expected payroll costs driven by depreciation on the shekel.

Speaker 3

This is a meaningful driver, of course, 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 2022 during the supply chain crisis, as of the end of Q3, we have almost reached our target of approximately 6 months of strategic inventory, cash used 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 it should be roughly similar to 2022. Turning to the guidance.

Speaker 3

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 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 the full year 2023 and apply a growth rate to that when thinking about 2024 and consider that the high volume in Q4 could lead to some hangover effect in Q1, similar to the dynamic in the Q1 of 2023. Turning to supervision. Implied Q4 volumes based on the midpoint of the guide for 2023 is approximately 37,000 units.

Speaker 3

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 call. This fine tuning of the shipment forecast is what led us to modestly adjust our 2023 revenue guidance. The consumer demand for ZIKR001 and 9 was well aligned with our shipment levels in Q3. Continuation of this plus incremental volume for new products like SmartOne, Wholesale 4 and Dicker 1 shipments to Europe supports the growth in volume from Q3 to Q4. As these new products ramp up and we add a 5th vehicle in Q1, the Volvo E M90, we are set up well for continued sequential growth in 2024.

Speaker 3

Based on our assumption for mix and volume, we expect 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 rate, we continue to expect an effective tax rate in the 12% range for the year. Thank you.

Speaker 3

And we will now take your questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Joshua Bookchhalter with TD Cowen. Please go ahead.

Speaker 4

Hey, guys. Thanks for taking my question. And most importantly, hope everyone's doing safe and your families are okay in Israel. To start, You mentioned the 10th OEM and I believe it's the first time you explicitly have called out a U. S.

Speaker 4

OEM. Can you For supervision, can you please can you confirm whether or not those are the same thing and also provide any details on the scope or timing of how that would ramp into the model? Thank you.

Speaker 2

Well, as I mentioned in the script, I believe in the next 5 months, things will play out. I would say that the percentages of returning those remaining OEMs and steel Design wins range from 99% confidence to 50% confidence depending on which OEM we are talking about. And in the next 5 months, we will I think we'll be a much we'll have much more clarity. And as I mentioned, it's Kind of a global spread from the U. S, Asia, China, it's really global, starting from just The Geely Group a year ago to now really a global span.

Speaker 1

Josh, this is Dan. Just to clarify, the incremental OEM was not the U. S. OEM. The U.

Speaker 1

S. OEM was in this group As of last quarter as well, and we continue to progress and feel good about that customer.

Speaker 4

Got it. Thank you. And then in the guidance for the full year, you kind of called out supervision as driving that very modest tick down at the midpoint for revenue. Has anything changed with how you're thinking about 2024? And can you walk us through what are the drivers of that?

Speaker 4

Was it any is it a new vehicle model? Or was it volumes That's all I want is changing things. Thank you.

Speaker 2

The new vehicle volumes for 2024 is expansion of the ZIKR001, Expansion of 9 of ZKOR. We have Polestar 4 coming out. We have smart number 1 coming out. We have the Volvo EM90 coming out. Towards the end of 2024, we have the SAW brand And there is a certain, I think, high probability that we'll have another Oh, yes.

Speaker 2

In China, that will also launch end of 2024.

Speaker 4

Got it. Thank you.

Operator

Our next question comes from Itay Michaeli with Citi. Please go ahead.

Speaker 5

Great. Thanks. Hi, everybody. Good afternoon. Just two questions for me.

Speaker 5

First, on the new wave of automakers expressing interest, can you maybe just share, 1, how many automakers are in that second wave? And 2, to what extent these automakers have existing sort of in house operations for advanced level 2 plus? And second question just on the Supervision Lite award, hoping you could share just the ASPs and expected start of production for that program. Thank you.

Speaker 2

Okay. So I'll start with the second question. The supervision light, when we are a Tier 1, it's about 60% After revenue compared to supervision, when we are at Tier 2 with a few 100 of dollars revenue. In this particular program that we won, we are a Tier 2. So we supply only the IQ6 chip just like in any Tier 2 relationship.

Speaker 2

It's a really high volume global brand. And I think it offers a new level of The intermediate premium in which the supervision capabilities would be limited only to highways, but still be very, very high hands off capability, the supervision allows you to expand way beyond the highway, arterial roads, urban roads And also be the basis for Chauffeur at a later stage. So this allows us to have an entry point To medium and low segment car brands car models and this is a very important As for your first question, the next wave is 15% of the global auto production that I mentioned, it's about 4 OEMs. And they don't have anything comparable to a supervision. And we are starting to notice that the Supervision like system is really the next premium in the coming years.

Speaker 2

I believe that eventually every carmaker would offer a supervision like product in the coming 2, 3 years.

Speaker 5

That's all very helpful. Thank you.

Operator

Our next question comes from Joseph it's Paik with UBS. Please go ahead.

Speaker 6

Thank you, everyone. I guess the first question is, I know your solution is technically powertrain agnostic, but as we're hearing about some Program delays on next generation EVs, I guess not in China where I know a lot of your wins are to date. But if there is sort of a push out, does that at all change your trajectory on supervision? Or do you think there's an opportunity Maybe add more features, whether it's cloud enabled, ADAS or whatnot to existing programs?

Speaker 2

The cloud enhanced ADAS is progressing on a separate track. We have 2 already that we mentioned last quarter, which are For $1,000,000,000 revenue till the end of the decade and we have 4 more in the pipeline ready to be signed in the next few months. So that's a separate track. Supervision, start of production, if they are delayed, it's weeks or A few months. It doesn't change materially forecast in terms of revenue for year.

Speaker 2

And as we get more design wins, our kind of weakness towards one particular program that's delayed or not becomes much, much we don't rely We're not susceptible to such delays. Obviously, when we have only 1 car OEM with the program, then we are really dependent on delays. But when we have 10 or more, then a delay here or there Should not change the revenue guidance. Okay, perfect.

Speaker 6

And then just maybe a clarification on The OEM commentary around supervision. First of all, the 9 to 10, Does that include the Supervision Lite customer? And then also, I know you provided some comparisons versus What you said earlier in the quarter or even last year, I think at CES you mentioned 6 Brands. So how does sort of the 10 OEMs compare to sort of that brand comment earlier this year?

Speaker 2

Okay. So this 10 OEMs does not include Supervision Lite. Supervision Lite is a separate trap. We have one design win for that and we are kind of working towards getting more business for that track. Supervision is a separate track, so those 10 OEMs are for Supervision.

Speaker 2

In terms of brands, it's really 10 OEMs, last time when we talked about brands, we really meant the ZEKOR001 and 9 as 2 brands of the same OEM, all others are separate OEMs. So the ones that we announced was Volkstar, smart, now we are reviewing it Volvo in China, Porsche And all the rest are separate or FAW and all the rest are separate OEMs, not brands within that group of OEMs that I just mentioned.

Speaker 1

Yes. So just to clarify just one clarifier, Joe, on that. Just to be super clear, within the 10 OEMs, We're considering GLE Group as 1 OEM, right? So we have 4 brands, 5 models, But within this metric, we're considering that one OEM. We plan to continue to update this metric on a regular basis Along the same methodology, as we move into the future and we'll try to be very consistent with kind of what we're considering in OEM.

Speaker 6

So OEM is the parent

Speaker 5

level effectively?

Speaker 1

The parent level effectively. There could be some Some parent levels have 2 different product developments, but we're trying to be consistent at the parent level within this metric.

Speaker 6

Okay. Thank you very much.

Operator

Our next question comes from Chris McNally with the floor. Please go ahead.

Speaker 7

Thanks so much. And also just wanted to echo Yes, the best for the Mobileye family. Amnon, one of the high level questions I have about the push into supervision light I think you have something like $3,500,000 plus of Enhance, just our estimate for this year. What would be the reason an OEM would continue with enhanced rather than supervision like other than the time to change over? It seems like that entire base of units should quickly change over to supervision life.

Speaker 7

But we just We'd love to hear about sort of the pro comps as you get all the increased features that really no additional cost at the program level?

Speaker 2

Well, no, there's a significant cost to the OEM between a front facing camera with or without cloud enhanced And the Supervision Lite. The Supervision Lite has about between 6 to 7 cameras feeding onto a domain controller I would buy an IQ6 chip. On the other hand, front facing camera is just a front facing camera, right? There is no domain controller. Cloud Enhance is our ability to add value to a front facing camera.

Speaker 2

So you have the front facing camera, which is very low cost And just by adding software capabilities, we can considerably enhance the feature set, the value the proposition of the front facing camera, for example, allow us to do lane keeping when you don't see any visible lanes or providing traffic light information and providing alerts against running on a red light or braking Again, they are running on a red light and so forth and so forth. So the price difference is significant between a front facing camera with or without cloud enhanced, supervision light, It is a big step in terms of cost.

Speaker 7

Maybe I'm wrong. I thought on a lot of these Gen 1 programs, there Also on the Enhance that you're on, there was also a significant amount of radar, for example. So if you have multiple radar, you could be adding 500 or 600 to the total cost Of the system to the OEM, which you may be able to remove with supervision light?

Speaker 2

Well, so Many of the front facing camera do not have a radar. It's not that every ADAS program has a front facing radar. So a lot of our front facing camera penetration is vision only. There's no radar. With the supervision light, it's the 7 cameras, including 4 of them are parking cameras, of course.

Speaker 2

Sometimes they come with radars and sometimes they do not. In this particular program that we won, there is a front facing radar.

Speaker 7

Okay. Makes sense. And that's why you'd have the limited operational design to made up of when the Gen 1 programs will only have the camera. Just the second question, for getting OEMs on the low end to sign up for supervision light, could you talk a little bit about how the system Would scale, meaning do they get to see how REM and RSS works and then it leads for them to potentially use Higher levels of supervision for more premium vehicles and just the ability for them to upgrade on those existing platforms over time to higher forms of supervision, if you could just kind of go through that sort of that escalation, that upsell that you could have

Speaker 2

Well, if an OEM buys into supervision light, they cannot upscale because supervision has more sensors, has more cameras, At the level, can was. Normally, it goes the other way around. We have an OEM that is signed into supervision In some of its models, it now has a low end model and wants to upgrade the low end model from a front facing camera to a supervision light.

Speaker 7

And just if I could follow-up, in that logic, the Supervision win, the Supervision Lite win was That was just a new OEM, right? So you didn't down sell this specific OEM. This Supervision Lite is the first supervision they're taking.

Speaker 2

Well, the Supervision Lite win is with a new OEM. The design win is with a new OEM. It's Not part of the OEMs that we mentioned before.

Operator

Perfect. Appreciate the detail. I'll follow-up answer. Our next question comes from Adam Jonas with Morgan Stanley. Please go ahead.

Speaker 8

Amnon, again, my thoughts and prayers are with you and your loved ones in the Mobileye community following the atrocities My first question is on the legacy OEMs. Many of them are dialing back there are investment plans. We continue we expect that will continue. If it does, does slower EV adoption Categorically have any impact on supervision adoption over the next few years in your mind?

Speaker 2

I think the opposite is happening. When they're dialing back investments, they're basically dialing back in source because those are very, very big investments And pushing them towards a better time to market performance and ODD scaling that Model A can provide. So our engagements with OEMs on the supervision is really all over.

Speaker 9

Yes. Just to be

Speaker 1

specific, supervision is not an EV targeted It's agnostic to Powertrain. So we don't see any impact from relative mix.

Speaker 8

Okay. That kind of brings up my second question then, Dan, is of the 10 identified, and does those also include How many of those are EV? Do any of those include architectures for ICE or hybrid?

Speaker 1

There's none of these 10 OEMs are EV only companies. And I think that we're involved with design win discussion and negotiation. I think what I would say is that we have announced design wins with GLE, with Porsche, With FAW.

Speaker 8

Okay.

Speaker 1

The other 7 are in negotiation around a variety of models Within each group. Anything to add, Amnon?

Speaker 2

Okay. No, no. It's really agnostic to the powertrain.

Speaker 8

Yes. But what I was thinking the operating system though, I'm sorry, I'm almost done here. But Powertrain, I could see agnosticism, but my understanding was that starting clean sheet with an operating system and electrical architecture did have some advantages for Creating a very invasive and important new system like the technologies you offer relative to say retrofitting an existing or kind of a fading out or runoff of an ICE architecture. But I don't know if that logic is correct.

Speaker 2

I think that the supervision system is really a closed system, where the new wins, There is a cooperation with the OEM on tuning the driving policy. As I mentioned in the last quarter, we have a new language, we call it tuning language or behavioral shaping language, which allows the OEMs to really take control of all the driving policy decisions on top of our kind of operating system of driving the policy, but it's all within our system. So whether you have an easy or new architecture or not a new architecture, there is no difference. It's really agnostic.

Speaker 8

Thanks, Anant.

Operator

Our next question comes from Shreyas Patel with Wolfe Research. Please go ahead.

Speaker 10

Hey, thanks so much for taking my question. I guess as we look out over the next In a few years, you've talked about supervision ramping up to maybe the low 200,000 unit range for next year. I think you're still targeting $1,200,000 by 2026. So that would imply A pretty big ramp in 2025 and 2026. So maybe can you talk a little bit about the visibility, how much visibility you feel like you have there in supporting that kind of ramp?

Speaker 2

Well, our visibility is getting better and better as time goes by naturally. The more design wins or close to design wins gives us a much better visibility. I would say that among all the opportunities that we have, 50% of them are going to launch in 2025 or 2025 and earlier and 50% in 2026, And we're talking about kind of an inflection point in revenue because supervision revenue per car is In order of magnitude higher than our ASP of IQ. Now pinpointing The date of that inflection point is difficult, but the 2025, 2026 timeframe, we are confident with the numbers that we gave.

Speaker 10

Okay, great. And then just to maybe clarify, so you mentioned on Supervision Light in this award that you've secured, you're playing a Tier 2 role versus a Tier 1. So can you maybe talk a little bit about what a Tier 2 role entails for you? Is it more just software versus providing the domain controller as well, is that how to think about it?

Speaker 2

The Tier 2 role means this is our classic role in almost all other non supervision programs where we provide the chip, in this case, it's the IQ 6 High and all the software around it that powers the IQOS 6 in terms of the driving functions. And our revenue It's for the chip and the software and a few 100 of dollars.

Speaker 10

Okay. Maybe just a last quick one for me. Just shifting to profitability, it looks like Q4 is tracking towards 36% for operating income at the midpoint, Which is quite strong. I think you previously talked about 20% OpEx growth for next year, But it sounds like this year it may be coming in a little bit lower. So should we still be assuming that kind of growth?

Speaker 10

Or should we assume something higher?

Speaker 2

Well, there were some things that were not in our control like the depreciation of the Israeli shekel, which is responsible for most of our operating expenses. We were still late in moving on to our new campuses, so there's also sales on operating expenses. But our plans of investments, We're not changing that. No, we have big investments to make going forward and those have not changed.

Speaker 3

I would just add to that on 2023, there's also an issue worth mentioning of the non recurring engineering Let's reduce R and D. So for more advanced development programs like supervision or HFAIR, the NRE reimbursement are much more significant than what we used to see in ADAS. Of course, to tie with mobile investments and therefore more challenging to predict. So these reimbursements for 2023 are expected to be higher than our conservative assumption At the beginning of the year. Yes.

Speaker 3

That's also part of our savings for 2023. And as for 2024, based on our current forecast for 2023, we would expect to see 20% or 25% growth in 2024. So an important factor is, of course, the design wins what we are winning supervision and so far, but assuming we win everything, we expect it to be even closer to 25% in 2024.

Speaker 2

And there was another point there was a point that I forgot to mention with the supervision light, our revenue includes also a WEM. So it's a chip, the software and WEM as well.

Speaker 10

Okay, understood. Thank you so much.

Operator

Our next question comes from Mark Delaney with Goldman Sachs. Please go ahead.

Speaker 1

Yes. Good afternoon. And let me add my support and sympathies for everything that the Mobileye family is dealing with. A question on the tech roadmap for you, Amnon. Did you think the latest GPUs and AI training technology will help Mobileye to accelerate its Product development timelines and on the topic of the tech roadmap, I'm curious what feedback you've had on your paper about how end to end neural nets may not be the best approach for autonomy?

Speaker 2

Well, our view about end to end, we put it on in that paper, and I don't think this is the forum to kind of repeat what I wrote. So It's out there in the block and we spent some thought on writing it. So I'll not add more to that. In terms of our compute infrastructure, our compute infrastructure is not GPUs. It is the IQ.

Speaker 2

It provides us Much more flexibility than GPU. It's much more cost efficient. It's much more power efficient. And this is what is driving Kind of a big value proposition to our customers that we can be very efficient in cost, performance and ODD Scaling Because we have a tapered system on chip to our needs.

Speaker 1

Got it. Thanks. And in terms of the potential for Supervision gross margins to expand, you spoke about a new domain controller and that being a meaningful driver over the course of 2024. Any more details you can share about how impact That may be to gross margins. Thanks.

Speaker 2

Our asset thought of gross margin for supervision It's aiming at 50%. We're not there yet, but this is where we're going.

Speaker 3

Yes. And yes, for supervision, I mean, as we mentioned, then gross margin we'll sense the 2 figures that I mentioned. 1 is the cost reduction for the ECU, the next generation of the ECU that's supposed to have significant impact in the beginning of 2024 as of Q2. And also again, the software bundle, that will have a more effect in the back half of twenty twenty four, but we will have a meaningful growth in gross margin for supervision in 2024 versus 2023.

Speaker 5

Thank you.

Operator

Our next question comes from Aaron Rackers with Wells Fargo. Please go ahead.

Speaker 11

Yes. Thanks for taking the question and my thoughts to the Mobileye family as well, given Your current situation. So I guess I wanted to ask about the longer term, how we should think about just the model attributes monetizing cloud enhanced data apps, obviously with the Zeekr NVP functionality across the 100,000 plus vehicles. Just Maybe walk me through how we think about that monetization, which sounds to be kind of kicking in, in the latter part of 2024. Any metrics you can help share on how we should think about that?

Speaker 2

Dan, do you want to say a few words and then I'll ask.

Speaker 1

Sorry, Aaron, could you repeat the question?

Speaker 11

Yes. Dan, I appreciate it. So I'm just I'm asking about the monetization, The effect of the ZECR vehicles, for example, taking the full license of The REM functionality, the cloud enhanced data, just how we think about that flowing into the model as we look through 2024?

Speaker 1

Yes, I think maybe I'll start and then maybe Moran can talk a little bit more. So cloud enhanced ADAS has the potential to generate recurring annual revenue from the maintenance of the map. Those volumes are still relatively Small because it was really just a couple of platforms from Volkswagen Group. Ford will be adding Ram So the volume should start to ramp pretty significantly next year. But the function of annual recurring revenue is you want to see kind of repeated years building up a cumulative number of cars and that's When it starts to make a big difference.

Speaker 1

So we'll see some effect next year of the recurring revenue, but that's It could get much more meaningful in the future years. I think that on software bundle revenue, We're really encouraged by the feedback that we're getting from consumers in China. At the end of the day, to take these The supervision functionality and pay an incremental cost from the consumer perspective, obviously, that's going to come from whether they value system or not. That's why we think that the pretrial was a really good idea because there is a lot of value in the system and it's better for people to experience that Rather than make them make the decision before they've ever experienced it. And just one thing to reiterate is, of the beta users of that 95% said that they would pay for the system.

Speaker 1

We don't think that the penetration rate is going to end up that high, but it's a really encouraging I don't know if Moran has anything else to add. And that should start to happen in the second half of next year. Moran?

Speaker 3

Yes. So Yes. So neither the volumes or recurring revenues made a material impact this year in 2023, but we see the growth trajectory on ASP, the cloud NANDs, ADAS and REM revenue we'll start to provide some modest tailwinds to ASP in 2024. And as Dan mentioned, for supervision, It's only in the maybe the back half of twenty twenty four after the trial is ended.

Speaker 2

Yes. But to be more concrete about supervision with Zika, every customer that is converted to Paying for NTP is a few 100 of dollars to mobile. That's the range.

Speaker 11

Yes, very helpful. And then I think there was a comment in your prepared remarks that I think it was in the context of also Zika and other brands within the Geely Group that You said could add significant volume in the near future. Can you help us appreciate that a little bit more? What are you kind of referring to there? It sounds like within Geely.

Speaker 2

Yes. Within Geely, it's more design wins. So we're working on more platforms Beyond the 2025 timeframe.

Speaker 10

Okay. Okay.

Speaker 11

Thank you very much.

Operator

Our next question comes from Emmanuel Rosner with Deutsche Bank. Please go ahead.

Speaker 9

Thank you very much. First of all, I would also like to express my thoughts, prayers and support To the Mobileye family in the current horrible circumstances. I wanted to ask you first on your The FAW, Wade, obviously, is truly encouraging in the new customer and then pretty start pretty soon in late 2024. Can you just frame for us again the scope of what the current win is in terms of the brand and perhaps vehicle models or timeline? And then what would be the timeline around potential expansion of it and in which direction would that relationship expand?

Speaker 2

So the relationship is on design wins of supervision starting from end of 2024. So it's the Same domain controller that is running on the ZECOR vehicles, not the IQ6, it's the IQ5. And it's a rollout for all All brands of FAW starting from end of 2024, I think more than 6 brands. Then a year later, based on IQ6 is the chauffeur. So they're going to be one of the first customers, Polestar IV is also a customer, but also on the chauffeur eyes off highway, eyes off with a chauffeur system of 3 IQ6.

Speaker 2

We'll include also one of our imaging radars. So it's not just the domain controller, but also we'll start providing also sensors. So that's the scope of the relationship.

Speaker 9

Then in your prepared remarks, you also alluded potential Attention to some of the joint venture brands. How would that play out? Who needs to take this sort of decisions? And what is the timeline for

Speaker 2

Yes. I don't know if this is a speculation. I wouldn't It's difficult to put a probability on it, but I believe that a successful rollout of supervision on FAW's own brands would be a good catalyst to start moving to the joint venture brand as well. At the moment, there is nothing concrete there.

Speaker 9

Understood. And I guess just following up quickly then, since this is launching already in late 2024, obviously helping with some of your supervision volumes next year. I understand your point on higher confidence in 2025, 2026 since this is the bulk of the launches, but still curious about your latest mark to market on what 2024 volumes could look like for supervision is a little bit more than doubling this year, Still on track, especially with the addition of FAW?

Speaker 2

Yes. I think this is a good estimate About doubling what we have in 2023, slightly more, but this is a good estimate.

Speaker 1

Yes, we feel the same as we did last quarter when we made the comment.

Speaker 9

Great to hear. Thank you.

Operator

Our next question comes Pierre Ferragu with New Street Research. Please go ahead.

Speaker 12

Hey, guys. Thanks for taking the question. So I think you made interesting comments about China in your prepared remarks. It must be like a very interesting market at the moment with you guys are ramping up SuperVision and at the same time, you have like a handful of competitors who started to pull on the market like in the hands of drivers, of consumers, kind of like In a self driving features that provide like a, I would say, similar service, With more compute and more sensors, more than just cameras. And I'd love to hear how much you've been able to assess the difference in user experience between supervision and these alternative features?

Speaker 12

And how you feel about it is at the end of the day, all these Systems competing within that like a very similar ground, are they offering very similar experiences? Do you see like significant differences emerging between Supervision and what the rest of the market has been able to put on the road so far?

Speaker 2

So there have been detailed benchmarks comparing by us, by Chile, by For the parties comparing ZIKR001 with NTP, comparing to Thanks to Neil, to Leo, to Leo, to Leo. The difference is striking in terms of measuring the meantime food intervention, All sorts of how much time it takes to go to point A to point B, the ZIKAR-one was by tens of percent faster, much less intervention rate by order of magnitude less intervention rate. Now the difference is really striking. Some of those systems, I think all of them are relying on a high definition map, the conventional high definition map, Which they already have mentioned that they cannot scale it, right? It's too expensive to scale whether Mobileye doesn't use High definition map.

Speaker 2

And those systems are much more expensive. As you mentioned, the compute, sometimes it's about 10 times more compute than what we have, many more sensors, more radars, Front facing landars and some of them they have 2 front facing landars. So I think we're very confident. We have a good value proposition in terms of performance, in terms of cost, in terms of ODD, scalability, our REM capabilities allow scalability, geographic scalability that a conventional high definition map maker I would find it very difficult to compete. Other the kind of benchmarks that have been conducted is how the vehicles behave when you approach a construction zone, when there is a block plane, so it was a very detailed benchmark.

Speaker 2

It's not just intervention rate. And really the difference is striking.

Speaker 12

Thanks. Great. And just a quick follow-up, and I'm sorry to come back to that, but I just want to make sure I get the whole thing I completely, you have your 10 OEMs of which like 3 you've announced, they represent 34% of the market. And what you say that of the 7 that are not confirmed yet, your like confidence ratio, I would say, in terms of converting them sits between 50% to 99% depending on which one we are talking about. And then you had an additional 15% of the market on which confidence is below 50%, I assume.

Speaker 12

Is that the right way to wrap all that into just one sentence?

Speaker 2

Yes, I'll say it's a range within 50% to 99%, but the 50% is only one of them. The rest is higher than 80% And one of them is 99%.

Speaker 12

Excellent. Thank you for the final clarification on that.

Speaker 1

Thank you, Pierre. Kyle, unfortunately, we've run out of time. So if you could move to close the call, please. Thanks everyone for joining us. We'll talk to you next quarter.

Speaker 1

Really appreciate the interest.

Operator

Okay, perfect. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

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