Mobileye Global Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 15 speakers on the call.

Operator

Greetings, and welcome to the Mobileye Second Quarter 2023 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 Gauff, Chief Communication Officer.

Operator

Please, you may begin.

Speaker 1

Hello, everyone, and welcome to Mobileye's Q2 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.

Speaker 1

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, Mobileye's CEO and President and Moran Shemesh Rojansky, Mobileye's acting CFO. Thanks. And now I'll turn the call over to Amnon.

Speaker 2

Hello, everyone, and thanks for joining our earnings call. On the revenue side, the quarter was in line to better than our expectation. Customers were very cautious in the first half of twenty twenty three, 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 3 points higher than our original guidance back in January.

Speaker 2

The good news on the cost side is the combination of macro factors, negotiations with Customers on engineering reimbursement and result of a continual refinement of our spending plans in order to high term 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.

Speaker 2

We can now count 9 large established OEM prospects in what we consider advanced stages for products like supervision and short shorts. 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 the system and often negotiating the bundling of different products like supervision and chauffeur across various brands, legal 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 OEMs is that our product portfolio is scalable, cost efficient, Engineering, design efficient and above all displaying leading and cutting edge performance.

Speaker 2

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 a wide range of feature sets from eyes on, hands on, All the way to eyes off, hands off and lighter off. Our work with Volkswagen Group is a good example. Since 2018, all new vehicles across the group Mobileye provided ADAS and this relationship exists well into the 2030. Beginning in 2021, REM mapping functionality was added to the MED platform, leading to a relatively long fast 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 win to cascade REM across most of the entire group over time.

Speaker 2

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 the provision 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 product. An additional benefit of supervision to our OEM customers is that it creates a bridge to our consumer level eyes off a solution culture for The surround computer vision, RAM and IQ based domain controller and supervision is also the baseline for support.

Speaker 2

The difference in the systems is the addition of secondary perception system made up of radar and radar, which results in significant increase in the mean time between failure, which is obviously key to enabling eye off. In other words, Pull driver disengagement under a broad set of conditions and road types. This also forms a baseline for our mobilized 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.

Speaker 2

And Europe. The fact that Ford 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 For both consumer owned and mobility as a service solution, all based on the same proven core technology is a huge selling point to orient. 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.

Speaker 2

As an enabler for tuning, we have designed a formal high level tuning language, on top of our Dragon policy operating system. Then we have IQ Kit on top of that to offer them Bespoke's software integration within the Mobileye stack, as well as the potential to deploy non Mobileye functions such as automated parking or driving monitoring on the iQ, Thank you, saving the cost of additional ECUs. Final topic before turning it over to Moran is the continued rollout of software to ZEQUER vehicles on the road. As you all know, the full supervision capability is being delivered to ZEQUER vehicles over time to over the air upgrades. Nothing is key to this.

Speaker 2

The complexity of nothing 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 2 system for many months now. But until recently, the full point to point navigate on pilot We are very pleased that Zico recently significantly broadened the number of users with Highway Navigate on pilot and we expect the full rollout to all users within weeks.

Speaker 2

Initial feedback has been very good. Zikr'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 emergencies and heavy traffic are performing lane changes within site scores. 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 navigator pilots that ever experienced. Any negative feedback has been around some depth spot in the map, which will be rapidly built out over the following months.

Speaker 2

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 Deacrest'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 points 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.

Speaker 3

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 in Mobileye non GAAP numbers is amortization of intangible assets, which is mainly related to Indore's 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% year over year as higher ASPs did not fully offset a modest volume decline.

Speaker 3

We do believe that destocking 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 earnings call, Q1 shipments of 25,000 were significantly higher than end market volumes.

Speaker 3

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. Gross 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.

Speaker 3

Operating expenses were lower than we expected and this led to strong adjusted operating margin of 31%, up about 4 points versus Q1. The following three areas, accounting for the majority of the lower than expected costs The FX rate was approximately 4% favorable to what we had forecast for the quarter. Number 2, 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 3, We also experienced lower costs for our efforts around Mobility as a Service.

Speaker 3

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 emphasized plan to certify an IQ5 based NIO 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 NIO based platform. The benefits of the NIO based fleet, however, still exists in terms of continued testing and validation of the software. In terms of scaling production volume from the Mobileye Drive self driving system, our go to market strategy is focused on integration of the system into purpose built vehicles from vehicle builders, including Schaeffler, Horan and Volkswagen commercial vehicles.

Speaker 3

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 radars, 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 us of 2021 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 We're consistent with our view that CapEx should be roughly similar this year versus 2022.

Speaker 3

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, ZEKAR end market volumes recovered strongly in Q2, which both reduced the inventory built in Q1 and solidify the volume trajectory for the second half.

Speaker 3

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 VEKIR001 entry into Europe. Gross 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 gross margin versus Q2 level. On the adjusted operating income side, The positive update to our guidance is related to lower than expected operating expenses.

Speaker 3

Year over year growth of OpEx is now expected to be around 20 2% 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 1, To varying degree, 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 2, non recurring engineering reimbursements in the second half of the year and now expected to be higher than we had originally forecasted.

Speaker 3

In terms of tax rates, we continue to expect an effective tax rate in between the 12% 13% range for the year. Before we start the Q and 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.

Operator

Excuse me. We will now be conducting a question and answer

Speaker 1

Thanks everybody. It's Dan. And just in the interest of time, please limit yourself to one question and one follow-up, please. Thank you.

Operator

And our first question comes from Aaron Brockers with Wells Fargo.

Speaker 4

Yes. Thank you for taking the questions. I do have one question and one quick follow-up. So I think in the prepared remarks, you had Started with a comment that you now have 9 estimated OEMs engaged in terms of chauffeur and supervision. I think last quarter you talked about having 6 large OEMs kind of deployed looking out in the 2024 timeframe.

Speaker 4

So I'm just curious, can you walk So how is that a change how things have changed in terms of your pipeline of design wins on supervision?

Speaker 5

Okay. Thank you. I'll take this question. We noted in the press release that our serious engagements on supervision and chauffeur have expanded versus Are fully aligned with Mobileye that Mobileye is the right path forward in terms of technology, performance and cost, where we already are in production, executing an product program or in a funded physical concept phase. Currently, this list of OEMs represents about 30% of global volume.

Speaker 5

This is very encouraging because the vast majority of the rest of the industry remains very open to us. So for these OEM engagements, We're not competing with another company or technology. There are other complexities in the decision making process that have nothing to do with competitive landscape, Things like go to market and consumer pricing strategies, how to best align the product into the portfolio launch plan, defining roles within the program, What to do with the internal development assets? So real level 2 plus what we call eyes on, hands off And the path to Eyes Off as well is a new potentially gigantic automotive TAM with strategic implications and that make the decision making process more complex than a simple ADAS program. So working in our favor is In competitive pressure, Tesla and the China startups including ZEAKER push the envelope on hands free technology.

Speaker 5

We have noted An increase in seriousness within the OEMs over the past 1, 2 years and have seen some OEMs that appear to be far away from us On advanced technology move rapidly to align behind our approach. This is all very positive for us as a technology and cost leader. We still see high likelihood of significant design wins announcements in the second half.

Speaker 4

Yes. That's very helpful and very interesting. And then I guess on the other front, I'm just curious as we think about Zika 1, 9, you've got Polster 4. I guess it sounds like the inventory dynamic and the issues that Zeekr is trying to normalize themselves out. So as we look forward, I guess I'm trying to understand What are you embedding as far as the Zika volumes for the full year, reiterating the full year guide or what I'm trying to gauge is how How we think about the potential upside if these volumes continue to improve?

Speaker 4

Just updated views on just deaker and what you've seen as a setup into the back half of the year?

Speaker 5

I think 2023 is very solid in terms of our corrected guidance that we did last quarter. Regarding 2024, look, we provided a long term outlook for supervision volumes at CES early January. And we'll make annual updates, but we're not going to update this on an ad hoc basis. But in order to provide some more color, Everything is on track with new supervision customers that we talked about in January. We closed the Porsche design win and the expansion of the supervision platform to other And in terms of 2024, the number of vehicle models with supervision systems that has not changed.

Speaker 5

We expect to have 5 vehicles in production by Q1 China, the one thing that has changed is that our 300 ks unit outlook for next year assumed that ZEAKER 1 Would sustain its Q4 2022 demand pace in China. That was the best data point available in January. The pace in Q2 of this year for that specific vehicle was about 60,000 units lower than the Q4 2022 pace On an annualized basis. So that's consistent with what we assumed in our guidance update last quarter, but that gap is a risk to the 2024 forecast We provided January. Now I'll point out that they have already seen a significant adjustment in expectations for about half of our recovering analysts, We're projecting volume in the 220 ks range for 2024.

Speaker 4

Thank you very much.

Speaker 5

Thank you.

Operator

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

Speaker 6

Hey, team. Two road map questions, if I may. So first on the supervision rollout, and Amnon, I appreciate The 2024 update, I think that's been clear. My question is really around maybe as we think about 2025, And it's more not asking about a target, but more are you starting to get the visibility on some of these larger, more sequential programs on whether they could launch in 2025 or 2026? Or is it just too early at this point?

Speaker 6

The OEMs themselves We're still trying to determine launch timing mode. When is that sort of typical go, no go, where you would sort of have an idea Whether, 25 programs would be significant?

Speaker 5

We're probably more confident than the 2026 forecast than 2024. The business will be much more diverse in 2026 with Porsche and likely several other automakers being added, As well as significant volume outside China with Geely and other Geely related brands like Polestar. This will reduce the reliance on just a few vehicles and one region like we have now and would lead to less fluctuation in volumes. Now all the high probability potential wins that we included in our 2026 forecast still look very good in terms of booking design wins and launching over the course of 25 and early 2026. But we feel very confident in the overall trajectory of the supervision business Business slide in terms of big inflection point in volumes around the 2026 timeframe.

Speaker 5

We also see the potential for supervision platform to spread to more models within OEM customers as automakers get more bullish on the potential profit making opportunities. Now this could positively impact our midterm projections. So I think we're very confident on 2026. Things look brighter than they looked Back in

Speaker 6

January. Okay. That's great. And then the quick follow-up, always sort of a delicate one, but regarding the more aggressive talk of Full Self Driving licensing over the last 6 months. Amnon, maybe just even very generally, you could talk about the recent tone of your customer conversations with Back to full self driving specifically, either good or bad.

Speaker 6

I mean, it could honestly make some OEMs move faster to compete with their offering Or maybe some OEM discussions could slow down if they just want to take a free look and engage So any it's just such a relevant topic. Anything that you can add on that tone, if it's had any effect on the conversations that you're having Directly.

Speaker 5

I think that Tesla has mentioned several times in the past about licensing their SSD. So it's not really a new concept. It's not new to have competitive noise in the market. No. And I would say that we have lots of respect to what Tesla has accomplished with FSD.

Speaker 5

In fact, we see the rapid development as a significant positive for us That pushes the market to move faster to implement advanced solutions like supervision. Now Specific question of Tesla working with OEMs, I think there is one argument that really clarifies the matter. I would put it as performance versus cost of the system. If you look at supervision, it's an FSD like category, 11 cameras and the radar or few radars. Supervision is also REM, the high definition mapping in addition to what FSD can offer.

Speaker 5

Today, we have 120,000 Supervision enabled vehicles in China, more than 1,000 beta testers and the response in terms of comparative analysis It's very, very good. It's on par or superior to FSD that's measured by the rate of intervention and ability to handle complex maneuvers. REM is a stronger differentiation. But now let's look at the cost. The price of a supervision subsystem, including the cameras and radars, Now the ECU software, the REM is approximately somewhere in the $2,500 range.

Speaker 5

Now if Tesla matches that system price, then OEMs will be able to offer supervision or FSD at less than half the price that FSD is offered to Tesla car owners. Now this would immediately cannibalize Tesla, whose strategy appears to be to reduce gross margins on the vehicle and rely almost solely on the value of the FSD for creating growth. Now I would also mention and this bodes well with our OEM customers. Now there are 400,000 FSDs on the road since 2019 and Mobileye has already 120,000 and in approximately 2 years we'll Surpass the 1,000,000 bar and from there we'll grow much faster. There are also important differences with respect to access of data, something that Tesla has very often highlighted as an advantage.

Speaker 5

And that's another key advantage That OEMs recognize. So for example, at their March Investor Day, Tesla noted they had a video cache of 30 petabytes And we're intending to grow to 200 petabytes. Our video database is 400 petabytes. Not to mention all the data that we collect For the program, the high definition mapping, we collected almost 9,000,000,000 miles of this type of data in 2022 alone. Tesla talks about 300,000,000 miles of driven to date.

Speaker 5

So I think overall, when you look at what Tesla has accomplished it. It's a very, very big positive for us. We believe that supervision is a much more optimal solution for our customers, Both in terms of cost and performance and customization basis and all of Tesla's accomplishments Actually creates a very positive momentum to have other OEMs wanting to have this type of this category of solution in their own cars.

Operator

Our next question comes from Joshua Bouchacher with TD Cowen. Please go ahead.

Speaker 7

Hi, Thanks for taking my question and congrats on the results. I appreciate the color that you gave on the how you're thinking about supervision in 2024, in particular, On the lowered one production numbers, I was curious compared to the original expectations, how you're thinking about, I guess, the other 4 that should be meaningfully in the 24 numbers. Has there been any more, I guess, incremental handicapping to how you're thinking about those vehicles, given those are new vehicles that haven't really launched With the new technology or are your expectations for those similar to what they were 6 to 9 months ago? Thank you.

Speaker 1

Thanks, Josh. It's Dan. I'll take this one. So we feel good about the other models, right? The Zika 9, For example, is performing exactly to the expectations that Zika provided to us and that we baked into the forecast.

Speaker 1

There's another vehicle launching right now and then Polestar 4 looks to be on track to launch. So yes, we're feeling good about the Expectations and in 2023 as well, like relative to the revisions that we made last quarter, the ZECR001, the ZECR009 are performing exactly as we expected. And with some minimal volumes from the additional launches in the back We should be able to comfortably get into our guidance for that product. So we feel good about kind of How the performance is going in 2023 and everything looks solid for 2024 except for that gap

Speaker 7

Got it. Thanks, Dan. And then congrats on the VW win for the more I was hoping you could help us understand any guardrails you can give on timing and scope of this project. When should we expect this to contribute to initial AV revenues? And is this planned for the press release had Red like commercial vehicles, but is this planned and do you see a roadmap for the chauffeur type technology moving into more consumer types of vehicles?

Speaker 7

Thank you.

Speaker 5

The only reason that we have mentioned the ID Buzz is because Volkswagen and their own PRs they mentioned. The Austin vehicles shipped to Austin with our technology for test and also in Germany. It's still ongoing, all the formalities of actual design win for this, but there are already More than 30 vehicles already in testing phase at VW. And hopefully, this would

Operator

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

Speaker 8

Yes. Thank you very much for taking the questions. So maybe you could provide more details on your latest outlook on the AV opportunity with MobileyeDrive. I think you mentioned in the prepared remarks now putting less emphasis on updating new vehicles and it making more sense to ramp on purpose built Vehicles in the 2025 timeframe. Could you share a bit more on what change that led you to have that view and your confidence on purpose built platforms being ready in 2025?

Speaker 1

Sorry, Mark, you broke up a little bit.

Speaker 9

Can you repeat the question? No, no.

Speaker 1

Mark, sorry. Can you repeat the question? You broke up a little bit.

Speaker 8

Yes, of course, and yes, sorry about that. Hopefully, you can hear me a little bit better now. I was hoping for some updated And add the details on your AV plan with Mobile I Drive. I believe if I heard correctly, you're now putting less emphasis on upfitting NIO vehicles, and you mentioned, it making more sense to ramp AVs on purpose Built vehicles in the 2025 time frame. So I was hoping for a bit more color on what's changed and led you to have The new strategy and what your confidence is in having those purpose built vehicles already in the 2025 timeframe?

Speaker 5

Yes, I'll take that. So back at the CES, we mentioned that we are working with the platform builders. We mentioned Schaeffler. We mentioned Ventolor with our daughter with our total company, Olin. And we mentioned also a third company who by now they made their own press releases, which Volkswagen Commercial Vehicles on the ID Buzz.

Speaker 5

We are working also With another personal carmaker called T3, I think we announced that a while ago with Mobileye Drive 64. So the focus is on collaborating with or partnering with platform builders rather than having our own vehicle and homologating our own vehicle and then performing the entire Chain of owning vehicles, operating vehicles, customer facing Applications, we do that through partnerships. So that is the new focus that we announced back at the CES. And then everything is on track, including what you saw in the press a few weeks ago by Volkswagen on actual testing of ID buses equipped with our technology.

Speaker 8

Okay. That's helpful. Thanks. And I was hoping you could also share a little bit more of an update on the progress you're making developing your Radar and LiDAR sensors as I believe they could be helpful in supporting your opportunity with both the chauffeur offering as well as Mobile iDrive. Thank you.

Speaker 5

So the imaging radars, we are on track for end of 2024 SOP. We are Already been interacting, engaging with a Tier 1 partner to work together On offering the radar to the market and it's on track for end of 2024. The FMCW ladder Is on track for 2nd generation Laddars around 2027, 2028 timeframe, Where we feel that 1st generation autonomous vehicles would be served with time of flight, the LASDARs and 2nd generation with the FMCW.

Operator

Our next Question comes from Churyum Patel with Wolfe Research. Please go ahead.

Speaker 9

Hey, thanks so much for taking my question. Maybe just first, just thinking about the how to think about the revenue or potential margin upside That you could see from Zika as they're now unlocking some of these more advanced features. And is that something that we would be seeing more Into 2024 potentially? Or could we see some of that even in the back half of this year? [SPEAKER MARTIN

Speaker 10

PEREZ DE SOLAY:]

Speaker 5

I think that We'll see in 2024 because the NOP feature powered by REM is for the first 6 months is going to be offered for free to all the SEGO customers and then we'll start seeing revenue based On a certain traction, we will see revenue. And so that should kick in, in 2024. So we're talking about 100 of dollars per vehicle potential in 2024.

Speaker 9

Okay, understood. And then, I'm not sure if this is relevant, so feel free to discuss to dismiss if I'm off base on this. But Does the current political situation in Israel have any implications for you from a business perspective?

Speaker 5

It's creating distress. It's creating personal distress. And I think also most of Mobileye, if not all of Mobileye employees are kind of Experiencing this kind of distress. But now when you look at the Mobileye employees, they are all professionals. We haven't seen any effect on efficiency and productivity in the past few months.

Speaker 5

We're not manufacturing anything in Israel. Israel is not a source of revenue for Mobileye. So we don't see any material impact or the

Speaker 9

Okay. And just maybe just a quick modeling one. How to think about the benefit of the engineering reimbursements that you mentioned in the second half? And what's driving that increase? Is it from the DRiV business or is it also from supervision or the base ADAS?

Speaker 9

Thanks.

Speaker 11

Yes. So it's basically coming from base ADAS. So we

Speaker 12

have in our programs, we have NRE reimbursement

Speaker 11

For most of our programs and sometimes these are things we cannot expect at the beginning of the year. So we might get Additional benefits on this reimbursement, but it mainly relates to ADAS, ADAS reimbursement for this year for 2023.

Speaker 1

Yes. And I

Speaker 9

think that there

Speaker 1

was one smaller item related to Mobile iDrive that we're expecting now as well.

Operator

Our next question comes from George Giancaricos with Canaccord Genuity. Please go ahead.

Speaker 13

Hi, everyone. Thanks for taking my question. So you characterized a couple of times in the script about not seeing Competition and many of the discussions you're having with OEMs. I'm wondering if you could just kind of take a step back and help us understand Your view of the competitive landscape, not relative to Tesla, I think Steve, but more to some of the other internal OEM Some of the point solutions in the marketplace and how you see the market evolving over the next 12, 24, 36 months. Thank you.

Speaker 5

Thank you. While talking about competitive landscape of the category of supervision and going upwards to Eindhoft, The competition comes from the majority of the competition comes from in house development of OEMs. And we have seen in the past Year or so, some form of awakening of OEMs that went through this process of building an in house solution For a supervision like type of product or even trying to do an eyes off product, They tend to be somewhere between 4 to 6 times more expensive than our solution and performance wise, we don't see advantage. And they also come to the conclusion that it will it may satisfy a very, very slim In terms of the medium segment vehicles, and this brings OEMs back to us to talk about the supervision. We have A large number of STIRIS engagements with OEM that in the past were very bullish on talking only about in house development.

Speaker 5

And we are now around the table talking with them about the supervision products and beyond, beyond the supervision. So that's the majority of the competitive landscape. It's not the likes of NVIDIA and Qualcomm. They are offering the tools for in house development of OEMs. So the competitors are the OEMs themselves.

Speaker 5

And as I said before, we see a certain Wave of awakening from that effect.

Speaker 1

Yes. And George, just to follow-up With one point, what we said specifically was that OEMs that represent about 30% of global volume We're in these serious engagements where essentially these OEMs have aligned behind our approach and are telling us there's not That there is we have no competition there. The rest of the industry is still in this So I don't want to make the comment that we don't have any competition. Like Amnon said, it's mostly coming from internal efforts. But with these 30%, that was what The comment was really reflecting.

Speaker 13

Thank you. And just as a follow-up, you talked about this awakening. Is there one particular element of what you bring to the table that's causing that? Is it the REM mapping or assesses or anything that you can point to that's more important Then the other component pieces. Thanks.

Speaker 13

I'll point you to kind of the competitive landscape in China, for example. You have Xpeng, you have The

Speaker 5

e auto, you have the neo, they have products on the road. And we look at their products, they have Many more sensors than in supervision, all of them have the front facing LIDARs, some of them have multiple front facing LIDARs. They have much more compute, Sometimes somewhere between 10 to 20 times more compute than we have. Very, very expensive products. And when we start doing benchmarking, We are superior in terms of performance in almost every aspect.

Speaker 5

And This gets exposed to other OEMs. Once we started putting vehicles on the road with our technology where people can test, OEMs can test, now also the public can start testing. The difference is becoming visible and it's all about cost versus performance, Right. Even if they have the same performance as the supervision, but they cost 4 times more, then it's not competitive. So I think this is becoming visible now that things are really in production.

Speaker 1

I think that that's exactly right. It's that fact of being in production, being able to demo the systems over thousands of miles Because the REM MAFs are now existing across U. S. And Europe, it's the actual cost of the system because it's in production, it's no longer a projected cost. It's really an actual cost.

Speaker 1

And then it's this pressure from other automakers moving fast Like Tesla and some of the Chinese OEMs that Amnon's referred to as well. These are all kind of areas where we think is driving this awakening. Next question please, Priscilla.

Operator

Our next question comes from Ittai Mizkali with Citi. Please go ahead.

Speaker 10

Great. Thanks. Hi, everybody. Just a first question going back to the engagements with the 9 large automakers. What can you talk about just the reception thus far as the IQ kit as well as the driving policy behavior model.

Speaker 10

And then secondly, roughly when do you expect these automakers To make their sourcing decisions, is it partially this year, next year or maybe mostly this year?

Speaker 5

We believe that the sourcing decisions will take a number of months. So somewhere this year, beginning of next year, Q1 next year, this is kind of the timeframe that we are seeing. In terms of working together, QKIDS and the behavior shaping language that we have built, where as we move forward, we're adding more and more capabilities For allowing OEM to really have hands on onto our system. We're gradually creating this as a platform. The behavior shaping language is really something very powerful.

Speaker 5

It allows the OEM to write actual code, kind of XML files That described in great details, lots of aspects of the driving policy that they wish to have, and it's all running on top of our driving policy. So you don't need to write the operating system in order to innovate and write code on top of it. So as we move forward, we're adding more and more innovations That allow OEMs to have serious hands on on top of our platform. And this has a very, very good reception.

Speaker 10

That's very helpful. As a quick follow-up, I was hoping you could touch upon the 2nd generation of the REM maps. I think you're developing or maybe launching In terms of what that does to the journey from eyes on to eyes off and maybe when you expect that to roll out?

Speaker 5

The Grand Maps is a continuous development. It's not that there is a 1st generation or second generation. Our focus now is expansion in China and also activating the remaps in Europe and the U. S, but China is the first priority because this is where the production vehicles are now being deployed. And we are adding more and more automations to the REM maps.

Speaker 5

This is necessary in China because In order to comply with the Chinese regulations, foreign entity cannot even view the data. So It makes us more efficient and much, much better in order to comply with those regulations. So this is our first priority. And as we move forward with the Porsche program and additional programs that will come in the 2025, 2026, Also, post or coming out outside of China later in 2024, the priority will start shifting So it's Europe and the U. S.

Speaker 5

To make the REMAX there productized for deployment.

Speaker 10

That's very helpful. Thank you.

Operator

Our next question comes from Ananda Baruah with Loop Capital Markets. Please go ahead.

Speaker 12

Hey, thanks guys. Appreciate you taking the questions. 2 quick ones. Is there any way To provide context about how we should anticipate the interplay between the mix that you talked about kind of Heading into 2024 and the various OpEx dynamics, you mentioned some cost savings. You also mentioned some costs coming on.

Speaker 12

How those things played against the gross margin OpEx dynamic as we head into 2024? And then I have a quick follow-up after that. Thanks.

Speaker 5

Okay. So I'll pass the cost saving and all of that to Morvan, our acting CFO.

Speaker 11

So yes, as for the office growth, so what we said in the past, that 20 23 will be higher than our historical level. So in terms of percentage growth of operating expenses, And we believe that the 2024 will be returning to our historical levels of between 15% 20%. So 2022 was almost 35% growth, and our original expectation for 2023 was around 30%. Despite the good news on 2023 OpEx, We still believe that 2024 will be close to 20% growth than 30%. So the OpEx growth would be the fact that we are the base If decreasing, we're still not going to increase the expectation for 2024.

Speaker 12

Very helpful. And then the quick follow-up is, you had actually mentioned, I believe, this might be more of a clarification, that Tier 1 OEM Inventory destocking has had some impact in demand. And you had talked about a time frame over which it will normalize. Can you just clarify

Speaker 1

Talking about supervision inventory or IQ?

Speaker 5

No, I think IQ.

Speaker 12

Yes, the IQ. You're talking about

Speaker 1

the strategic inventory. Got it. Okay. Sorry.

Speaker 11

Yes. Yes. So yes, actually, we've seen that This for the Q2 and also the Q1, the fluctuation between the quarters It was pretty big and we see the second half is much more robust than the first half. So This is we think it's a result of our customers coming into the beginning of the year with higher levels of inventory, maybe resulting from increasing the price increase at the beginning of 2023. Now we see schedule stabilizing in terms of IQ.

Speaker 11

So if for the beginning of the year, we had requests for Shipt of volumes from Q2 to Q3 or Q3 to Q4, we are no longer seeing that. So it's pretty stabilized. We think that the last 2 years have been very bumpy in terms of the Supply chain crisis and production volume, but of course, it's not the same as we enter this year and that's why we see the volume increase and inventory issue, We think played a role more in the first half of the year.

Speaker 5

Yes. I think I'll add a bit. In terms of there are two types of inventory, Right. Inventory that our customers have piled up in terms of IQs And that is being and that as Moran said, it has stabilized, right? We don't see any request to push Volumes from quarter to quarter.

Speaker 5

Then there is our own inventory that we build 6 months ahead of IQ chips Just to make sure that if another crisis knocks on our door, we'll be prepared And that inventory has been completed. And that affected kind of cost because we had to buy more IGU chips than We normally have in order to build our inventory and that I think we have completed or it's going to be completed till the end of the year.

Speaker 11

Yes, till the end of the year.

Operator

Our next question comes from Ben Levy with Barclays. Please go ahead.

Speaker 12

Hi. Good afternoon to you. Thank you for taking the questions. Just first, a clarification on Some of the volume commentary that you received as far as it relates to sequential improvements, Maybe you could just clarify again just what the cadence of volume should be over the next couple of quarters as far as it relates to supervision. Thank you.

Speaker 1

Thanks, Dan. Yes, just to Being up more than 10% versus Q2 levels and then Q4 levels being more than 25% above Q3. 3. We should also see some average selling price increases because of supervision becoming a bigger part of the mix, and that was really not part of the And about the volumes, I just really wanted to kind of support that volume Expectations volume orders from our customers have been very solid and point to much higher volumes in the second half of the year.

Speaker 12

Great. Thank you. And then, wanted to just follow-up on the conversation specifically on Chauffeur. So it sounds like A Master is maybe more of a focus on dedicated platforms, less retrofitting, more partnership, etcetera. Shofur, maybe you can give us some sense.

Speaker 12

I know that was part of the engagement conversation That you mentioned. But how significant is your spend on Schoferr right now? What is the interest in Schoferr? Are your customers are seeing this as sort of an evolution of supervision, so it's very aligned with the supervision spend or is this a separate stream and it's something that Maybe the timing is getting pushed out a bit more and that's playing into the OpEx commentary.

Speaker 5

It's very aligned with the supervision. You can think of it as kind of an incremental addition to supervision. Supervision is mostly camera based. There are some radars as An option, for example, in the ZCor 1, there is a front facing radar. In the Porsche program, there's also surround the radar.

Speaker 5

And when you go to eyes of the chauffeur, you're adding some landars as well in order to create more redundancy And great and a bit more compute instead of 2 IQ6 that we have in the Porsche program, it's 3 IQ6. So it's really incremental. The heavy lifting is not so much on the development, it's on the validation, Because you need to prove that you are multifold times better than human statistics, crash statistics, And that creates an effort of validation. This is something that we're working together with the OEMs. We're creating hardware in the loop farms of thousands of ECUs for each program.

Speaker 5

For example, for the SB62, for the The 3 for the DR64, each one has a hardware in the loop farm of many, many thousands of ECUs in order to run through thousands of hours of data per night. And this is ongoing and part of our budget, part of our OpEx growth. It's It's not something that we did not anticipate or would come as a surprise. In terms of OEM traction, we're in serious engagement with a number of OEMs. I believe that at least 2 of them will be able to close the field.

Speaker 12

Great. Thank you.

Operator

Our next question

Speaker 1

Priscilla, We can only take one more question.

Operator

Okay. Our next question comes from Aidan Jonas with Morgan Stanley. Please go ahead.

Speaker 14

Hi. Thanks, everybody. Amnon, what are your thoughts on the advantages or disadvantages of using Custom silicon versus GPU such as an NVIDIA A100 for vision neural net training, curious what Mobileye's strategy is regarding custom versus GPU and is there any effort to move towards a custom system in a vertically integrated way the way some of your competitors are?

Speaker 5

Our system is perfectly integrated. We have an IQ chip, but instead of GPUs, we have our own accelerator families. Yes, 5 different families of accelerators and that's what makes our chip very efficient. If you look at the supervision, the 2 IQ5 chips now on 1, on paper, the total tops is 30 something compared to that's 1 tenth of the tops on paper of the competing solution and you don't see any advantage in terms of performance for the competing system. So we have highly efficient solution and the advantage of a highly efficient solution is cost, Power consumption, size of the ECU, whether you need to how do you need to call it, power is very important when I'm talking about an So our approach, which is not a general purpose chip like the A100, It is really customized to the type of workloads that we need in order to power Both computer vision and driving policy has great advantages of efficiency.

Speaker 14

Thanks. I'll leave that. I'll hold a follow-up. Thanks.

Speaker 1

Thank you so much. And thanks everyone for joining the earnings call. We will talk to you next quarter. Thank you.

Speaker 14

He didn't understand my question.

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Earnings Conference Call
Mobileye Global Q2 2023
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