Ford Motor Company (F) Earnings Call Transcript & Summary

All right. Good morning, everyone. For those that don't know me, I'm Andrew Percoco, I cover autos here at Morgan Stanley. Very excited for our next conversation with Mike l Aragon, President of Integrated Services at Ford. So, thank you for joining us this morning.

Thanks so much for having us back at Conference here . Appreciate it.

Before we get this get started, just a quick disclosure here. So please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. All right. So maybe just to kick us off, you're 18 months into the job at Ford, your career, you've been merging hardware and services and software across various other end markets. Maybe just discuss what you've learned and what you think the market might not be appreciating in terms of the opportunity at Ford when it comes to services and software?

Yes, when I came to Ford, there was -- as I was going through the interview process, especially somebody not from automotive brand new, mostly from the tech space. One of the things that we didn't -- I didn't see a lot of chatter about was Ford Pro and the fact that we have incredible hardware through Super Duties and transit bands that our commercial customers love. But this growing software platform on top of it where we're getting a lot better at taking vehicle signals, prognostics and then closing the loop with physical service, which really adds a lot of value to our customers. So that was one sort of area that I just felt was underappreciated. And what was exciting to me about that was that's a problem that travels pretty well to the retail side of the business. And so a lot of room to grow as we expand it from just mostly a commercial-focused initiative to more -- bringing that sort of same thinking and product development to the retail side of the business as well.

And what surprised you the most? Is it the opportunity for Ford on the Ford Pro side? Is it Blue Cruise as it relates to autonomy, like as you really dug into the weeds of everything Ford has built, like what surprised you the most as you've really started to do your work over the last few months?

Honestly, the thing that surprised me the most, again, because I was an outsider coming in, and a lot of my tech friends are like, "Oh, you're going to auto, and there's a perception that is a 120-year-old company, where the company is going especially with all of the competitive threats and sort of the macro economic threats. The thing that surprised me, the pleasant surprise, was the focus and dedication on transforming our company. We're a 120-year-old company. And so -- and it starts at the top with Jim. I'm sure you've got to know Jim a little bit. But what you see is what you get with him. He's all in on a transformation of Ford because he sees us as this is our ripe opportunity to set us up for the next 120 years. And so it was a pleasant surprise that the company at the top gets it, and it permeates down into the leadership team. And so all of my peers on the leadership team completely bought in. So I would say pleasant surprise just because I was hoping to do that, and that's the organization I wanted to be a part of. But we're doing it. And again, we're doing it with a pretty intense focus.

Yes, that's great. And when you think about executing the the growth in this business? I think you had disclosed 1.6 million paid subscribers growing at a very healthy clip. How should we think about the true addressable market as it relates to adding these services both on the Pro side of the business, but also on the retail side of the business? And how quickly can you actually increase that subscriber base? Is there a hardware integration that needs to happen? Just maybe talk through the addressable market and what it takes ?

So I want to start with that 1.6 million subscribers because a lot of other OEMs look at it a little bit differently. That $1.6 million is just customers who choose to subscribe after they purchase the vehicle. There are other ways to look at it. You can look at included with duration as part of that, you can look at trials as part of that. I know some of our counterparts in this space, look at it that way, nothing wrong with either option. We just want to look at early signals in terms of product market fit. And so we see that as a signal. If the customer has chosen to do this, it's not bundled pretty good sign of product market fit. So that's why it's an important metric for us. It's kind of a -- because we have so many products, it's a little bit of a tough question to answer, but I will give you a subset of that answer with a specific, so with BlueCres. We have 1.5 million vehicles at evidence that are part of the installed base. And of that, we have 530,000 customers who subscribe to us, and that's growing at about 40% year-over-year. Of that 530,000, 200,000 are part of that cohort. I was just talking about the people who subscribed after the fact, and that's growing at 170% year-over-year. And so what you're seeing or what we're happy about is that indicator, early leading indicators that product market fit is really starting to take on, especially as Blue Cruise continues to get better with new features regularly every year. The way I think about the -- to answer your larger question, the broader opportunity, our job is to do a few things. One is to grow integrated services. And so that you'll see that number continue to grow. But if we do our jobs taking all the vehicle health signals, looking at our customer behavior, solving real problems for them on the parts and service side, you're going to see us pull in more of that aftermarket back to Ford, right? A lot of that escapes -- a lot of OEMs have this problem or a lot of that aftermarket escapes to individual shops or some of these larger companies out there that do that. And so we want to pull that in. But then the third component is if we do those first things really well, integrated services as indispensable and then pulling in more of the aftermarket, that next vehicle is going to be a Ford vehicle. And so we've earned their loyalty. And if we do those 3 things well, I think the total addressable market as from integrated services contribution, it's going to be a force multiplier for Ford.

And so it sounds like the attach rates are pretty healthy on some of these services I guess for the people that don't decide to after the trial period, move to the subscription, whether it's Blue Cruise or any of the other services that you offer, what's the reason if you have any maybe view or insight into like the usage -- are they just not using it during the trial period and therefore, they're electing not to buy it? Are they just mostly driving kind of commuting point A to point B, where they're not really using it much?

It really depends. It depends on the cohort. What -- general patterns of what we see maybe you're really rural and you're just not near any Blue Cruise zones. So there's just not a lot of opportunity. That's one cohort, and that makes sense for you got -- we serve a lot of farms in sort of very remote locations. So sometimes that's the case. Other times, yes, you're in cities and you've got short commutes and so that not on the highways that often. So, there's a variety of reasons and then sometimes it's cost, especially given where the economy is for some segments of our customers. So it's a little bit of a mix of all of those reasons.

And when you think about I think the interesting thing about software is that as long as you have the hardware on the vehicle maybe at some point down the road might decide, okay, the technology has gotten good enough. I want to turn it on and really experience that. How do you think about democratizing the hardware across vehicles? There's an added cost associated with that. You can either say, okay, customer, a, you have to pay for that, if you want it or you could say, we Ford will bear that cost upfront, knowing that we'll have an opportunity down the road to benefit from that as customers decide to turn on that subscription. So how do you think about that internally in terms of what the process is?

Right now, especially in this environment, it's really important for us to be -- meet our customers where they are in the journey. And we know a lot of -- there's a lot -- a larger cohort of our customers affordability, that's the #1 factor. And so when we think about some of this hardware, especially the more expensive hardware, we need to keep it affordable in the lower level trims. And so we don't try to standard -- we don't standardize. We don't try to push that because we want to make them where they are in that journey. On the middle and higher level trims, we see a lot higher propensity or willingness to purchase. And so that's where we try to standardize our software, especially BlueCruise. We also do look at the vehicle trims. And so I have a good example Ford Fathom is launching. It's a sub-$30,000 vehicle. It's considered affordable. But the cohort of customers that we're seeing there are going to be very tech forward, younger just have a lot of expectations. In addition, we are dealing here we have some competition who are a little bit more bare bones. And so we see ourselves in a really good advantage spot here where we are going to make that available to every single vehicle. One, because of the customer seems like they're the ones that would want it. And two, because it distinguishes us against from products that are -- don't have quite the number of features that we believe we're going to be able to pack into that Ford Fathom for under $30,000.

Yes, a really interesting dynamic in terms of the strategies that OEMs are taking in terms of layering that hardware in versus making it more of a bundled package. And I guess when you think about it, you mentioned the Fathom as being a vehicle where it's going to be standardized as you think about the broader integrated services opportunity, whether it's an F-150 or a make a retail kind of focused vehicle. How do those services -- what's the opportunity? How does it differ across those vehicle types? Just maybe elaborate.

Yes, yes. So in the near term, the experience is going to be different between our EVs and our F-150s, and that's actually a good thing for the business. And the reason why is because with UE, which is Fathom launching next year, we're launching a couple of things that are homegrown. One is our electrical architecture that's homegrown. So traditionally, we had used multiple suppliers for components like IVI and ADAS and audio. And now we're going to consolidate that into our homegrown platform, single compute platform. So that's great. And what's great for the customer from their perspective, what they're going to get a lot more frequent OTAs, a lot more features in general, because it's easier for us to do this instead of having to coordinate across a bunch of disparate organizations and then it's going to feel a lot more cohesive because we're able to think about it as an ecosystem and tie those various components together, a lot easier than it is if you have multiple partners doing it. So customer experience is going to be great. But the thing for Ford and for customers is because we're building this in-house, margin is going to be a lot better. It's a lot more economical for both of us. And so the experience is going to feel -- the margins just improve on that one. I think One of the things I'm also excited about is this new electrical architecture will be on 90% of our vehicle fleet by 2030.

And you mentioned building that in-house versus outsourcing some of that technology. We're going to get into that in a little bit more detail shortly, but I want to ask a little bit about the BlueCruise functionality. I think there's -- at least from our perspective, a very big focus on personal autonomy right now. Obviously, everything that Kessel has been doing, is it related to FSD. So when you think about the functionality as where it is today, how do you see that road map progressing over the next, call it, 2 or 3 years, whether it's point to point, eyes off? Like what are the key milestones that you've really tasked the team at hitting over the next few year?

Yes, to give you -- to just establish a little bit of baseline where we are today, even in the 1.5 years that I've been here, it's a product that I would characterize as have gone from good to great. Our recent upgrade is that the vehicles now do auto lane change, and so it's the vehicle making decisions for our customers and just making the right even more seamless. We just announced this week that we're doing Blue Cruise with towing and our F-150 line up in 2027. So that's another additive feature that's important for, especially that cohort of customers. And so we're going to keep evolving this product based on the cases of our customers. But one thing that will signal a little bit how we're thinking about this, and this goes back to our in-house ADAS and our in-house electrical architecture. But we recently did a partnership with Apple Maps. As you know, Apple Maps has spent a lot of time and resource, making that product a lot better over the past couple of years. And they were really willing to work with us on integrating their reps more deeply into our ADAS systems. And so from a customer's perspective, what they're going to be -- they're going to feel is a mapping function that's more deeply integrated into ADAS. It's going to have a lot of better road visibility because you're not just relying on sensors that are looking right ahead of you. You've got now that the Maps data that's going to be able to signal where they're charges, where there are bends in the road, where the -- where are actually the off-ramp is happening. And so it's going to feel a lot more integrated and seamless to the customer. And so that's -- I can't disclose everything that we're doing today because we are going to talk about a lot of this over the next year before Fathom comes out. But that experience is going to feel just a lot more cohesive and is one thing especially as we think about those integration points with partners like Apple.

And when you think about the milestones or the progress in terms of increasing that functionality, how many of it needs to be done on a software-defined architecture like what you're doing with Fathom versus the existing architectures? I'm just curious if there's a tech ceiling for the existing platforms, if it's not on EV as it relates to autonomy? And do you eventually have to transition everything?

Well, this specific example is going to be on 90% of our fleet, which includes gas hybrid and then electrical vehicles. So the way we've architected it will be flexible across multi drivetrains.

Okay, that's an interesting approach because I feel like we do hear a lot of times that you it has to be native?

It depends on yes, there are some ways that you build it that have to be native the way we built this particular ADAS system, it will be able to be -- it will port to other drivetrains.

Super interesting -- and as you think about the other offerings, like what's the most monetizable in the near term? I think we focus a lot on BlueCruise, but I know there's a lot of other things that you work on. So what are you most excited about from a monetization?

This goes back to One of the reasons why I was telling you I was excited about coming to Ford and just the whole hardware software service loop with Pro. I think there's a huge opportunity for us to continue to build that and expand that capability. So if you think about we have hardware, we have my software platform. And now we have a whole distributed fiscal network where we can actually solve real problems, real physical problems for our customers. And so the way I would think about it is the example of Ford Pro Intelligence, where we're selling a $10 subscription for telematics, that software is going to be able to tell us and our customers, "Hey, you've got a break issue that's coming up." Flag it to you, schedule that breaks and service part, make sure that, that part is available at the dealer and then fix it for them. And so what you've effectively done is you've taken a $10 ARPU product per month and turned it into hundreds of dollars of aftermarket sales and service opportunities. And if you think about all the opportunities in different ways you can do that. Again, this is another opportunity for us to really grow monetization. You won't see it necessarily in integrated services, but I actually don't care. What I care about is the LTV of the Ford ecosystem gets better, and that's where you'll see those types of wins.

And you mentioned there a little bit the unit economics is obviously powerful when you think about the total ecosystem. But maybe help us frame how the unit economics vary across offerings, whether it's BlueCruise, Ford Pro services and really what you see as like the pricing power of some of these offerings as they continue to improve in their functionality over time?

Yes. I can't give you, Andrew, too many details about the profiles of some of the unit economics. But what I can tell you is that our margins are very healthy. They are very much in line with what you would expect in a SaaS business. Contribution margins are over 50%. And our ARPU for both a blended Pro plus retail is $14 a month. And so our job is to keep those margins up and delivering products so that our customers are sticky with us, which then drives the LTV of the product over time. And so that's the sort of the playbook that we're operating under.

And when you think about the ARPU trends over time, like what you -- what are customers willing to pay for? And what do you think is just becoming a more standardized just expectation when going and buying a vehicle? And how do you expect that to evolve over the next 3 to 5 years?