Ford Motor Company (F) Earnings Call Transcript & Summary

Okay. Great. Thank you, everybody, for joining. My name is Mark Delaney, and I have the pleasure of covering forward Ford for Goldman Sachs. I'm very pleased to have with me again this year, Mike Aragon. He is the President of Integrated Services. Thanks for joining us.

Yes. Thanks for having us back. Appreciate it.

Well, as many of you know, Ford is one of the leading auto companies globally, about $190 billion of annual revenue. Ford's auto business reports in 3 segments: Ford Blue, which is the segment for consumer, ICE and hybrid vehicles; Ford Model E, which is Ford's consumer EV products business; and then Ford Pro, which is the company's business for commercial and government customers across powertrains. Mike, of course, leads the integrated services effort.

So wanted to start there. And Mike, you've been in that role for about a year. How has the software and digital services strategy evolved over that time? And what have you learned that has shaped the strategy?

Yes. So I would say that there's two big shifts in terms of how we've been thinking about our digital products across Ford. And the first shift was really around moving from a collection of individual products to more of a connected system. When I got to Ford, the way we had structured our go-to-market and our product teams is we all focused on specific products to go to market. BlueCruise had a team, FPI, Ford Pro Intelligence had a team. And that made a lot of sense at the time because these products are obviously very different from each other, and we wanted to build a ton of momentum to get there. But there were a couple of things that I was pretty excited about when I got to Ford a year ago that just from -- coming from the consumer product side that where real tells for potential success. One was an installed base of active customers that was growing. That was great. An app that was gaining a lot of usage on a daily basis, not just for simple features, but customers were using it more and more as a daily habit, which is a benefit. And then we were getting a lot better with vehicle health data and being able to take those learnings and apply it to help our customers' experiences get better over time. So I felt by not looking at it more as a cohesive system, we were leaving a lot of value on the table for our customers. And so that's the first step is connecting those dots for our customers so that the product feels like it's getting better for them over time. And then it feels like 1 cohesive thing. The second shift leans into one of Jim Farley's tics edicts around no boring vehicles. For us, that means building no boring digital products as well. And the philosophy that we brought in when we think about this is we look at customer behaviors and how they use our products. And there are 4 main pillars of how our customers interact with the Ford ecosystem that would be hardware and software together. And that's build, thrill, adventure and elevate. And just to give you a sense of what that means in plain English. A couple of months ago, I was out in the middle of nowhere. I was in [ court site ], Arizona, doing a [ gemba ], which is just being with our customers and learning about the processes and how they use our services. And was there with F-150 Raptor enthusiasts and Bronco enthusiasts. And the conversation wasn't around hardware or software specifically. It was around using our mapping application [ Onex ] so that we can trail map and connect with friends and make sure that we are flagging potential issues in the trail. It was about the importance of connectivity, especially out in the middle of nowhere for this adventure cohort that we were talking to. And then it's also about how we were using Pro Power on board and using it for all the equipment that we had with us on the site. And so for us, it's not about generic products. It's really about building a software layer on top of the vehicles that our customers already love and that they do amazing things, and it's making that feel like it's 1 system.

Very interesting. Well, you talked about a recurring flywheel for this business. Can you talk more about Ford's flywheel for those that may not be familiar?

Yes. So for us, the flywheels composed of 4 components: It's scale, activate, engage and monetize. And there's a lot of different definitions the company uses for flywheels. For us, it just means a series of actions that you can take that should compound over time. And so it starts with scale, and that's scaling the amazing hardware base of 14 million vehicles that are connected and customers are using on a daily basis. And so it's about making sure that we have the right hardware, digital hardware to enable digital solutions like BlueCruise or connectivity. And we're making sure that it's for the right customers at the right time. The second piece of that is activation. One of the important elements that we've seen in our data is that you've got to leverage that opportunity when the customer is at the dealer to get them activated into the service, get them on the app because that app is becoming a much stronger conduit for us to be able to connect hardware, software and then the service platform through our dealers. It's about getting them the education that they need to know that they've got all of these great digital products and to use them because we know that early usage leads to a lot longer -- a lot higher engagement, which is the third part of the flywheel engagement. And so the philosophy we have with that is we want to make sure that we are delivering indispensable experiences. We're upgrading a lot over time. OTA is becoming a much more important part of what we do and focus for us because we want the products to feel fresh to our customers and to engage them. And we focus a lot on engagement because my team is focused mostly on leading metrics. And we see engagement as a leading metric into the future. If we just focused on subscriptions, that's more of a rearview looking thing. It's great because it generates revenue, but the mentality that we have is, let's focus on leading metrics, and we focus on those right leading metrics, it's going to lead to the outputs like revenue and subscriptions that we want. And so I think we talked a little bit about this last year, but you know that I spent a little bit of time at Amazon. I was at Twitch. We were an important part of the Amazon ecosystem. And the reason why I'm bringing that up is just because at Amazon, we knew with mathematical certainty that if you were a shopper and your shopping has started to taper off and you were only using the 2-day shipping, that you were probably going to churn out. But if you were a shopper, you're using that entitlement, but you were also using your Twitch entitlement to get Fortnite Loop for your kids or you're watching movies on Amazon Prime, that you tended to be a lot stickier. And then on top of that, you spent a lot more money LTV went up. And we're starting to see -- it's early innings, but we're starting to see a similar behavior and pattern at Ford. You don't use BlueCruise early on, high likelihood of turning out. Use it early and often, you don't. And if you start to use other parts of our ecosystem, you become more sticky. And so we've really focused on how do we make this feel engaging and driving that across our platform. And then the last piece is monetization. The monetization piece is important for us. We -- obviously, the more we learn about our drivers' behaviors, the vehicle health data, maybe we can upsell you to digital products that you don't have. But another important element of this is from the integrated services perspective, the indirect revenue that we can drive as well. So if we can take a vehicle health alert, translate that to service, that's revenue for FCSD, our customer service division, which is great. But it's about driving that lifetime value for Ford and building the economics from there.

Anything in particular that you guys look at when you are trying to assess that early engagement? Is it usage of these features, app downloads? What are your...

Yes, we look at how quickly time to a specific action, so time to your first BlueCruise engagement, time to your first connectivity engagement. And what we're trying to do is figure out what are all the bottlenecks in that, what are all the complications, how much friction is in the process. Because again, if we can get you to that thing as quickly as possible, then we know that we've at least got you engaged on the product that you've purchased, and then hopefully, that leads to longer-term engagement over time. But it's time to whatever product that you've subscribed to. And we're trying to always make it as seamless and take out as many unnecessary steps as possible.

You said when you were at Amazon, if people only use free shipping, they're at risk of dropping out. I mean, they're similar.

If you're shopping tapered off. Yes.

And similar you're seeing with Ford is like oh, if they're using 2 digital services, they're sticky.

You don't get engaged. They got BlueCruise, and we just didn't do a great job at the dealer side. People tend to forget about it. It's fresh. You've got all these other great bells and whistles in your vehicle. And it's just not there. It's not interesting to them. So we -- but we can see a correlation between really, really good training at the dealership side, early activation and usage and then engagement that leads to a much stickier customer.

Okay. Traditional auto OEMs historically struggled to create large software and digital services businesses. Maybe help us understand why you think Ford's strategy will be effective?

Yes. I agree with the premise that we've struggled with that. And I think maybe 1 of the root causes at least from my perspective, is that we have treated it like a separate add-on or an accessory rather than 1 ecosystem that should all work together more seamlessly. For us, the mindset that we bring into this is we have this, again, 14 million vehicle installed base that if you're any other consumer product company with a customer that keeps this thing for a long time, uses it almost every day. That's a huge asset. So why aren't we building on top of that? And the 3 things that we build on top of that are indispensable experiences. So BlueCruise has got to feel like it's continuously getting better. Since I've been there, we've moved up several -- had several upgrades to BlueCruise. That's gone from a good feature to now a really great feature with auto lane change. We spend a lot of time again on the app, which might not sound like the most exciting thing to do, but what the app has enabled us to do is connect that hardware experience with the software experience with the dealer experience to make it feel like one. And then the last piece is, let's lean in more in terms of all the great vehicle and driver behavior health data that we've got so that we can flag issues, anticipate issues and solve real problems for our customers. Because 1 of the strengths that we see, Mark, is if we can close that hardware, software service loop, that's going to drive a lot of benefit for us, but also for our customers.

Are there differences in your approach to building this business in the U.S. compared to internationally?

What I would -- yes, what I would say -- our general philosophy for product management, digital product management is we build global. We want to scale for global, but we execute our go-to-market locally. And part of the reason why we do that is because in Europe and Asia, there's regulatory differences. The vehicle mix is very different. The driver usage behavior is very different. So you can't copy exact, the U.S. or North America strategy there. But we try to build our products to be as scalable and global as possible. That's number one. I would also say that just to give you a sense of the business, because we are driven by installed base and our installed base is strong in North America, our business tends to gravitate towards that as well. But what I can tell you is that our most mature business internationally is Ford Pro Intelligence. And the reason why is if you think about the customer problem, what are we trying to solve? We're trying to make sure that the fleets are -- there's uptime, right? We want to guarantee uptime, total cost of ownership is really important. Our fleet customers want their drivers to be safe and the people around them to be safe. Those problems travel really well. It doesn't matter if you're here or if you're in Asia, like those are problems that customers have across the board. And so that 1 has been the most, I would say, mature of the integrated services portfolio internationally.

Very helpful. Maybe we can dig more into the opportunity with autonomy. I think the company said BlueCruise equipped vehicles on the road increased 70% to 80% year-on-year in 2025 to about 1.2 million globally. Maybe help us understand out of the 1.6 million total subscribers the company talked about as of last quarter is coming from those BlueCruise users?

Yes. So let me start with the installed base. So the installed base was 1.2 million, as you said last year. It's now grown to 1.5 million as of right now. So it's continuing to grow. The 1.6 million customers -- and I'll just be clear because different OEMs report this differently -- that is just customers who are paying after the purchase. So these are not included with duration. These are not free trials. This is -- we've decided to pull out our credit card for a retail customer. If you're a Pro customer, you're paying for it after the vehicle purchase. So we have 200,000 BlueCruise customers out of that 1.6 million after paid subscribers. An interesting point about that 200,000 is that's grown 170% year-over-year. And we like that number and we track that number. And part of the reason why we look at the 1.6 number differently than other OEMs is because that's a good signal of as we think it's 1 good signal of product market fit. Meaning you're deciding to purchase this product after the fact, look, that's a pretty good sign that just bundling into the vehicle may not have as much meaning, but this is a good, clear signal on product market fit, which is why we look at it that way. And that 200,000 BlueCruise number is out of a total customer base, BlueCruise subscriber base of 530,000. That 530 has grown 40% year-over-year. So hopefully, that gives you a big picture of autonomy and how all the numbers work together.

And that 530 would include people who buy...

Yes, it doesn't include no trials. I know other OEMs kind of bundle the whole thing. That is just customers who are paying either through your credit card after the purchase or it's included with the duration of the vehicle.

Makes sense. We're hearing a lot more about how important this feature is to vehicle purchasing decisions. Some of the OEMs in the industry have now started to say that this is the main reason they think they're seeing people choose to buy their cars, or maybe not. Can you tell us more around what Ford is seeing? Are there certain digital features that consumers are saying, this is why I bought from Ford or maybe I didn't buy from Ford?

We're seeing similar behavior. I think the stat I just gave you on BlueCruise growing at 170% year-over-year is a pretty good indicator that, that's a purchase -- a powerful purchase decision for the retail customer. On the Pro side, I've seen, in my little over a year here, an evolution in the conversations that we're having with customers, and it shifted from tell me about the cargo bed size, tell me about the towing capacity, horsepower, those are all still really important. And it's that plus, help me understand what the fleet management software portal looks like. Because you're so deeply embedded in the vehicle with data, tell me about the controls that we're going to be able to have that no software-only company is going to be able to do. It's those -- and tell me about total uptime that we can drive. It's those types of questions that are important. And so the -- on the Pro side and retail side, what we're seeing is that hardware is going to continue to get people in door. They love the Ford brand. This is what they want. That's great. but software is becoming a much more important factor in actually closing the deal and maybe tipping the scales depending on how we do it.

It just speaks to your approach around offering the products as a compliance solution rather than a disparate offerings either as digital services like specifically or even kind of at the point of sale. How are you working with the dealers to kind of drive those software sales? I mean, it sounds like they're the ones having some of these conversations rather than -- coming from...

We spend a lot more time with the dealers than I ever thought in a good way. They are starting to see it. When I first got to Ford, there's a little bit of skepticism. I mean this is a new muscle. It wasn't a ton of money in the grand scheme of Ford, right, for them. But that -- the spiffs that we've been paying out, the money they've been being able to earn because of our growth, it's become a much more important part of the business, and they're very excited about it. And so we work with them in multiple ways. We try to figure out how do we motivate the salesperson to do the right thing. We've built technical tools. We have this -- not to get too technical, but we have a digital delivery day tool that is a component or a companion for the salespeople so they can go through the checklist and make sure that you're touching off all the key points of what the customer is subscribing to. But now that our app is becoming even more valuable to our customers, there's a lot of education tools we can build right into there. And so we want to hit them in multiple spots. The dealer is important because there's a trust factor that's been built up with the salesperson. But we have this app that's growing in terms of daily usage with a lot of people that we have another opportunity to sort of 2 bites at the pie, right, to get that right education with them. But it is about motivation. It's about the coaching. We are starting to scale a lot of our education tools for them. And so the dealers have been a very important part of our journey.

As the included purchases of some of these features roll off, maybe as autonomy, something on the Pro side and it comes time to kind of drive that follow-on subscription, that 1.6 million number we were talking about, is that something that comes from Ford? Or is that coming from the dealers?

Well, good question. Right now, it's mostly coming from Ford, but we want it to be a team effort, right? If you're -- and this is the reason why we spend a lot of time on the unsexy back-end stuff like connecting the dots between our data and the dealer data because we think we can do a great job doing capturing that customer. But if you're going in for an oil change and you flagged in the dealer tool that you're up for -- your BlueCruise is up for renewal, Mark, would you like an offer here and extend that? We want to make sure that we have that -- they have that capability as well. So we see it as a team effort because they are building that trust relationship with the customer, and so we want to make sure that we give them the tools to do that.

Very helpful. Maybe talk about Pro. I mean, subscribers there grew about 20% to over 900,000 last quarter. What are some of the key applications underpinning the 900,000 that you're seeing really lead to that adoption?

Yes. So we have 4 main underpinnings, starting with data services. So think of data services as raw data that we feed to our partners through an API. They can put it in their own systems, they can do whatever they want with it. Then the next level is telematics. And that's the raw data plus insight, so vehicle health data, how the driver -- driving behavior. And think of that more as insights or a dashboard into kind of what's happening. Then we have fleet management. And this is a portal where we enable our customers to manage their fleet, manage their drivers. It's a bit more robust of an offer to help them manage the overall fleet. And then we have managed maintenance, which is us going in and proactively finding potential issues through our telematics data, scheduling it for them, actually bringing out the mobile units to help fix the problem. So it's -- if you think about our customers, that's not their core competence or core competence is probably plumbing or homebuilding or whatever that is, but that is our core competence. So it takes a pain point off of their plate and allows us to kind of do what we do best, which is let's manage this fleet and keep it up and make sure that they're able to drive revenue from it.