Aptiv PLC (APTV) Earnings Call Transcript & Summary

Understood. And moving to like the automotive, just the ADAS software side, you said bulk of the 2026 Gen 6 ADAS bookings carry both your hardware and software and that several OEMs who attempt to like broad-based in-house software have come back to suppliers. Could you shed some light on where that trend is strongest by either region or any customer categories?

Yes. I'm not sure I could break it down by region. I should start with -- listen, our strategy in our business is how do we enable our customers to do what they want and what they need. So we very much have an open architected approach. We build platforms. So we try to sell full system solutions. They're designed to be more cost effective, but they're also designed to be flexible. Some customers don't want a full system solution. They want a part of a solution. The byproduct of developing full system solutions is, in our view, each part or each component, whether it's hardware or software, tends to be optimized. So we're very focused on performance and cost. Customers are under pressure. We understand that. We want to give them cost-effective sort of solutions. We have customers who buy the full platform solution from the advanced compute to the sensor suite to our full software stack, including the RTOS or middleware. And that's the case in China. It's the case in Europe. It's the case [indiscernible]. We have others who buy parts, and it may be the bulk of our hardware and software suite, but there's a part of the software stack that they want to do. Maybe there are certain features that they want integrated into the -- in their solution. And we have customers that we do that for. We have other customers who -- they have invested in developing internal capabilities, and they're looking at an optimized sensor suite. So it may be the camera solution, the radar solution, could be the sensor fusion as a part of that. So that's what we try to bring. As it relates to OEMs that make decisions and reverse course, I think it's natural given content growth in the car, especially as it relates to software that our customers have an interest in controlling more of that. I think that's natural. I think it's a natural. And given the size of that space, there's an opportunity for them to do that. Some have done that reasonably successfully. Some have had a very difficult time doing it. And you've read about them in the newspaper. Again, we're here to enable. Our view is just given the size of our business across regions, across OEMs, across platforms that intuitively, we should be delivering more higher performing, more cost-effective solutions than anyone developing things internally. Sometimes our OEM customers, though make decisions that are different from what we -- and again, we're there to enable them in their decision-making, whatever decision they made. And if they stub their toe, we're here to support them in whatever way we can. And I would say, typically ask that question across virtually all the OEMs that we're delivering solutions to in our Intelligent Systems business, we're selling more software today than we did a year ago or 2 years ago. Part of that is more software is going into the car. Part of that is our customers are looking for ways to enhance an existing system without having to go through the old model in our industry, which was rip and replace. And that's what we're trying to drive and what we're trying to enable.

And within that stack, are there like 1 or 2 areas where the OEMs are looking to control more? Is it more on the perception planning side? Is it more on the middleware side? Is there -- does that change the economics for you if they're focused on one particular area?

It really varies. I don't see a lot who are, for example, focused on developing -- they have to have their own middleware when we think about what middleware actually enables and the strategic requirement from an OEM standpoint. I think you see some OEMs now as you look at large language models, as you look at AI, are there certain things that they could be doing or should be doing as it relates to those sorts of new developments. So I would say that would tend to be whether it's internal or it's with external partners, as you think about applications like using end-to-end or developing end-to-end ADAS systems using AI and large language models. Some are doing that. Some are doing that with partners. We're developing our own end-to-end solution that our view is will be more cost effective. I think when you look at that market today, it's maybe 10% of the total ADAS market as an example. It's a very costly portion of the overall market. So for us right now, in terms of near-term monetization, it's less of a priority, but it's important to have the capability. It's important also for us to work with those OEMs so that we validate our perception system, whether it's vision or it's radar, our camera systems, our sensor fusion because you think of those sorts of systems, there -- given cost, they're 2 to 3x the number of perception devices, cameras, radars, things like that. So it's an incremental content opportunity for us. And it's a mix of hardware as well as software.

Understood. That's clear. Maybe I'll just pause for a second there to see if anyone in the audience has any questions. I think there's one there. We just use the mic.

So just on the M&A front and what you're kind of seeing or not seeing, how does the landscape look some deals to perhaps grow the non-auto side. And I think you made it pretty clear on the last call that, obviously, capital allocation will go to buy back the stock if you don't see anything. But just curious on kind of how you're thinking about that and what the landscape looks like.

Yes. Listen, as people know, historically, we've been active M&A-wise. Listen, there's a recognition of where our multiple sits today and our view of the fact that our stock is significantly undervalued. Our focus is on repurchasing stock. As we communicated on our earnings call, effectively 100% of free cash flow, a little less will be used to repurchase stock this year. We made a commitment on a go-forward basis to at least deploy 50% of free cash flow to repurchasing stock. So I would say that's the biggest priority from a capital -- just the M&A funnel by virtue of how we've operated historically, we have visibility to a lot that's out there. And that's -- but our priority at this point in time doesn't sit in the M&A area.

Great. Any other questions? Maybe just a last point on the ADAS side. Can you talk us through your relationship with NVIDIA? We get this question a lot. Are they a partner? Are they a competitor? I mean they're doing their own thing around the architectures and the software side of things. Just curious like how that relationship -- where do you see that?

Yes. Can I -- I want to go back and just respond also just to the question, if I can. I promise I'll answer the question. Listen, we do have a small funnel of very small transactions. If you read our Q, we announced we acquired a company in the interconnect space, which is our priority, has been our priority from an M&A standpoint. Purchase price was roughly GBP 20 million. So it augmented our product portfolio. I would call that less M&A. It's basically -- you could argue from an organic standpoint, it's just accelerating the build-out of our product portfolio. So I think you could see us very small -- see us continue to do very small deals like that. So NVIDIA, we partner with NVIDIA across multiple markets on the industrial side. So we have a great relationship there. We're working with them on the automotive side as well. Again, our -- I guess you can -- in certain aspects, you could consider them other areas we compete, but there are also areas where they enable -- we enable plus. And we want to enable our customers to do through an NVIDIA solution, if that's through a wave sort of solution, those are places that we have relationships and players that we're working with.

Understood. Moving to the non-auto side, just following up on that question. You have these robotics partnerships that you've announced. One of them is converted to a commercial award. And in drones, you have booked your first award worth $500 million of lifetime revenue. Can you walk us through how the $300 million annualized revenue ambition builds from here? What's the content per unit and just volume assumptions that are underneath those targets?

Yes. So -- we -- on our earnings call, we talked about 2 recent commercial awards, one on the robotics side, one on the drone side and a view that based on our commercial awards to date, based on those areas where we're close to commercial awards and outlook that a few years out from where we sit today, we should have roughly $300 million in those 2. What we're selling in those markets is basically a slight augmentation of our existing product portfolio. So it's high-speed cable assemblies and interconnects -- it's perception systems, so camera or radar solutions is advanced compute. And that's consistent in the robotics space and the drone space. Application is different. The technology is somewhat different, but that is the area that we're selling. Our focus on the drone side is on attritable drones. So average price of a attritable drone is, call it, $50,000, maybe $60,000. Content per unit is about $5,000, so significant content. And that's in the areas that we play. Content per unit in the robotics space is actually very similar. Robotics space, we're focused on AMRs principally. We're doing work in our close to commercial agreements with a couple of the players in the humanoid space. We think that's an opportunity. We just think from a volume standpoint, that's further out in terms of developing some of the technology required to make those really useful tools. On the drone side, that's an area where when you think about ADAS, autonomy, when you think about perception systems compute, when you think about our natural skill set in terms of industrializing solution and driving down costs of bills of material, is what we do every day in our traditional market. And then on top of it, we run a -- we have a global supply chain with global visibility that's regionally executed. Given the customers in that particular space, certainty of supply, where products come from, a fairly nascent industry where focus to date has been more on development of the technology and producing the product versus how do you optimize and industrialize. We bring a lot of incremental value in addition to the underlying technology. We're working with several players in that space. So I'd say the biggest near-term revenue opportunity, given there isn't a big population of players will be there. I'm confident of that. The opportunities are both Europe and U.S.-based. And again, it's a mix of our perception systems and our advanced compute.

Got it. And just one more on non-auto, just energy storage and data center, $50 million today. You've described it as ramping up much faster than automotive, obviously, a smaller base over the next 3 years. Could you walk us through where you win against some of the incumbents in the space? How should we think about the capital intensity of ramping that up?

In those particular spaces, so on the energy storage side, we've had relationships with a large U.S. OEM that's global from -- and is one of the leading EV manufacturers on the energy storage area for quite some time. So -- and that has been, by and large, taking our interconnect product portfolio, high-voltage interconnect product portfolio, and that's the content that we add. So the place that we sit is really on power, right? It's where our strongest capabilities are. So we have those learnings. Over the last year, we've been very focused on how do we take our capabilities and how do we explore opportunities outside of what our OEMs are -- automotive OEMs are doing with respect to some of their more recent initiatives. So we're working with them, but how do we go beyond and how are we dealing with the infrastructure players, the data center players, others. And we've gained, again, a lot of traction. It's by and large with our existing product portfolio, some modifications. So it's not investment in machinery and equipment. It's not investment in additional capacity. It's really investment in slightly different go-to-market experience and capabilities, some marketing activities. So it's a fairly low capital way of diversifying our revenues in markets that are higher margin, driving incremental revenue and incremental growth opportunities.

Got it. Maybe we have a minute left. Just wanted to follow up on the portfolio question earlier. I felt like the commentary in your deck this time was a little more deliberate in terms of potential portfolio pruning opportunities. I'm curious if there's been a change in thinking there? And like how should we think about how the portfolio evolves?

Yes. I don't think -- it wasn't intended to be a change in thinking. Listen, we've done over the last roughly decade, we've done 2 spins, I think, 3 divestitures. So we're actively always trying to evaluate where the market is, where we sit and where growth opportunities are. And just I would call it a reminder in light of where market dynamics are that that's something that we continue to do, that we continue to do and continue to focus on, hey, where are the areas that we can work to drive value creation. We're having challenges right now as it relates to market and market mix. We view it as a big opportunity to buy back stock, which is the question about capital allocation. That's where our focus is, certainly in the near term and then commitments in terms of our view over the medium term. And we'll continue to look at the portfolio and how do we continue to strengthen in automotive outside of automotive based on the asset base that we have. And to the extent we can do some very small bolt-on acquisitions to bring into the mix to accelerate or build out our product areas and areas where we have existing business, those are things that we'll...

Great. That's all the time we have. So thanks, Kevin.

Thanks.

Thanks, everyone, for listening.