Mobileye Global Inc. (MBLY) Earnings Call Transcript & Summary

Okay. Thanks, everybody. We're going to get started with our next presentation from Mobileye. Dan Galves, Chief Communications Officer. I'm Adam Jonas for those that don't know me. I run Morgan Stanley's global auto and shared mobility team. And we had the privilege of covering Mobileye in the first iteration as a public company, before it got bought by Intel and then of course, since the IPO, the second iteration, a much more exciting time. This really is, in my opinion, it's a strategically important company in a strategically important sector of computer vision, which I think has relevance, not just in auto, but in anything with a camera that makes decisions, whether that box moves or doesn't move, no debt, positive free cash flow, dominant share in ADAS. Dan, thanks for spending some time with us.

We don't stay dominant.

Okay. Don't say…

Leading.

Don't say dominant, that's not a good word at a tech conference, don't say dominant. Although 70% market share, well, you can come to your own conclusion on front-facing camera.

Dan, any messages just at the top here for the investment community?

Yes. No, thanks, Adam. It's great to be here. It's great to be working with you again. I was also part of the first iteration of Mobileye and then took a break while we were inside Intel and now really happy to be back for the last couple of years. So most of you know the basics around Mobileye. For many years, we've had a leading position, software and hardware that supports driving assist safety systems. This business is very profitable. And this kind of core business is able to fund the approximately 80% of our R&D that's related to advanced products that are still low in volume and leaves a lot of free cash flow beyond that. Some of these advanced products like SuperVision are already in production and represented about 6% of our revenue last year on 0.2% of the volume. The power of these solutions is that they carry selling prices that are 20 to 60x higher than our current high-volume products. And this has been showing up in the annual bookings that we report. For example, in each of the last 2 years, we've been awarded design wins from automakers that project to around 60 million units of future volume. We actually shipped [ $37 million ] in 2023 and these design wins have the last 2 years, projected to around $7 billion of future revenue in each year. Our actual revenue in 2023 was $2 billion. So you can see the growth potential of the business in these bookings numbers. The potential for success of these advanced products has been the main focus of investors since we've been public again. The confidence level of the market can move up and down based on the pace of design wins based on other macro factors. And clearly, we're at a bit of a low point right now. But nothing has changed in our view that the market for hands-free products will develop into a very large new TAM that OEMs are bullish on this market and we have the right technology, the right cost and the right OEM relationships to take a leading position. In addition to that dynamic, the excess inventory issue that we became aware of very late in 2023 is causing a significant temporary reduction in our volumes. That's also very much in focus for investors right now. This issue, which caused us to guide well below consensus for 2024, has hurt our credibility and it's a very high priority across the company to regain this through execution and taking steps to ensure it won't happen again. I'd like to take the opportunity to explain a bit more of what happened and then give an update on where we stand. We ship product into 300 to 400 vehicle models globally. Those are produced by 30-plus OEMs, but all of this product is sold through 5 or 6 Tier 1s auto suppliers. Over time, we came to over-rely on the Tier 1s to balance their orders versus end-user demand, and they've done a very good job for 10-plus years because we never had any type of kind of excess inventory buildup in the past. During the supply chain crisis, the dynamic changed. And some of these customers began to stockpile chips to make sure that they had some buffer in case our supply became tight. The good news is that we do have the ability to analyze shipments versus vehicle production as each chip that we ship is coded to a specific vehicle platform, and we know how many units of each vehicle platform have been produced in a certain period. We actually do have very good visibility as it's not like we're shipping to distributors for different end markets who are in charge of finding demand or finding volume. We know what OEM and cars each chip is going to and projections of how many of those cars will be produced in any given period is generally pretty accurate. We've changed our internal process to do this shipment to demand matching analysis on a regular cadence, both on a look back and a look-forward basis as well as other internal process changes to prevent any reoccurrence. I'm not going to comment broadly on Q1 or the full year outlook as we'll provide a broad update when we report Q1 earnings in late April. But given the understandable focus on the pace of EyeQ volumes and excess inventory digestion, I can provide a brief update on that. On our Q4 call, we said that we expected Q1 EyeQ volumes to be approximately 3.4 million units, and that we would see an increase of at least 100% in Q2 versus Q1. And at that point, the vast majority of the excess inventory would be cleared out. Based on our current view, which includes a significant number of customer commitments we've received for Q2, we believe we are on track to meet that outlook and those statements and that we continue to expect volumes to get back to normalized levels in the second half of the year. Thanks.

Thank you. I hope you could put the phone away now.

Yes.

That was a lot. And answered a couple of my questions. I was going to ask what steps have you taken to make sure this doesn't happen again? Because it does seem like there were some changes in internal processes. I don't know if you want to elaborate on exactly what was -- what changes were made. But how much of it also reflects just that the customers that you're selling into are getting information from OEMs that are frankly in a chaotic environment where they might have blinked or bet on their own ability to bring forward software-defined and electric vehicles as like sockets, if you will, for your systems and then that just got totally torn apart. So I don't know how you -- maybe tell [indiscernible] within your control that [indiscernible] versus the reality of your -- of the industry that you sell into?

So I think we can separate the question into kind of core ADAS products and SuperVision as well as kind of near term and long term. So I think for the core ADAS products, there's no kind of overexposure to EVs really or anything else. In fact, we're probably underexposed because we don't have business with Tesla. And obviously, I think in the near term, you have better visibility on what's going to be produced. You have very good visibility on what has been produced, which makes the fact that this happens, so frustrating because we could have seen it, right? And I think I kind of explained that and internal processes besides like doing a much more regular kind of view of shipments versus production is something that is fairly easy to do. We just weren't doing enough of it. And I think also changes within kind of the finance department to kind of spread the finance through the organization to ensure that they're kind of hearing the same things that sales or R&D or hearing as well, it gives us a better ability to forecast and now that we're a public company. I think in the long term, obviously, things -- you have less visibility on kind of what specific vehicles are going to be produced next year and the year after. And so I think we can -- if you want to talk more about SuperVision exposure.

Sure. Well... let's move to SuperVision. And I appreciate the update on the EyeQ system-on-a-chip update that you're reiterating the guide for before.

Yes.

Without -- [ with being true to you ], you don't want to break new information, but I didn't know if you were also on track for -- could you reiterate on [ trackness ], if you will, of the SuperVision side...

So I think SuperVision today is more exposed to EVs, because that's who the customers are, right? The customers where -- that we are in production with now are ZEEKR, which is a startup EV maker majority owned by Geely in China. They're a pure EV company. Polestar is our other kind of notable customer that's in production this year. They're a pure EV company.

Also Geely.

Yes, also owned primarily by Geely. So I think so far so good on the year. I think our forecast of our guidance of 175,000 to 195,000 units is significant growth over the full year last year, but it's not very significant growth over the fourth quarter run rate. We have additional Polestar was kind of very low, not even material in Q4. That product is now being delivered in China. We believe they're on track to start delivering to customers July, August in Europe and the U.S. So that should be incremental volume. There's a smart vehicle. So ZEEKR, I think their January, February were up like 18% year-over-year on a combined basis against low comps, but tracking really well. And they just came out with a refreshed version of the ZEEKR 001 that significantly higher range, significantly better charging times. And what we're hearing is that, that's generated a lot of really good kind of preorder activity that refreshed vehicle and probably held down February sales because of people kind of knew what was coming.

So SuperVision has been mostly a China story up to now or entirely in terms of vehicles and production. What's taking the Western guys so long to get over the [ hump ]? I suspect if we had this conversation about the wins in your pipeline a year ago, you would have anticipated there would have been a bit higher cadence of announcements and/or moving forward. Is it -- what's the issue?

I think the last year was actually a very kind of positive year in terms of business development for these advanced products. We got a big win with FAW that looks like they're -- every new car they produce under the Hongqi brand, which is like a 350,000 unit a year brand is going to have SuperVision starting Q4 this year. So that should generate a lot of significant growth in 2025, but China only, although they have ambitions for export. The [ Western OE ] that we haven't specifically named yet that we announced in early January was a huge win for us, something that we've worked on for 15 months, 17 additional models to have SuperVision and Chauffeur over time starting in early 2026. The majority of the models are actually internal combustion model. So it's kind of very well balanced between EV and ICE. And it really shows an automaker that's looking to kind of align their kind of future technology in this field with our product portfolio. I think that there was -- the other thing that was positive in '23 is we started the year with, I would say, 3 kind of good prospects, including Geely. We talked about Volkswagen Group. We talked about Ford. I think that over the course of the year, that list of what we would call advanced discussions grew from 3 to 11. We haven't been able to kind of close a deal with Ford yet, and we're still uncertain about that. But the remainder of those prospects really came about in 2023 and are moving fairly fast. So 15 months for the Western OE to close. I think we expect a little bit shorter time period for some of these others, but some of the discussions only began around midyear last year.

Dan, is China EV domination positive or negative for Mobileye?

Yes, it's a good question. So I think that beyond kind of advantages that the Chinese OEMs have in EV costs and kind of access to supply and things like that. There are also companies that are extremely bullish on the types of products that we are looking to develop, right, are developing. So last year in China, there were over 700,000 units produced with let's call it FSD [ like futures], right, get in the car, put in the address you're going and the car should be able to take care of 90% plus of that driving on our own automatic lane changes, kind of understanding where the exit is positioning you for that. Those 700,000 units were by 4 automakers; ZEEKR, Li Auto, XPeng and NIO. And that kind of consumer demand and kind of the amount of press and the amount of attention this product set is getting accelerated the development and the desire by other Chinese OEMs. It also -- those Chinese OEMs are clearly looking to export and enter Europe in the near term. So this created the fact that this market started to develop in China in 2023 created a sense of urgency on the part of Western OEMs. And by Western, I'm talking about non-Chinese, right? So I think that, that sense of urgency is something important for us because the OEMs are by adopting a SuperVision type of technology, you're adding a couple of thousand dollars of cost to the car. So you want to have a value prop for that. The value prop can be competing like keeping up. It can also be safety-related, it can be convenience-related. And so we feel like that sense of urgency was never really -- we always thought Tesla would be the one to kind of push that sense of urgency. I think in some ways, the OEMs sort of discounted a bit kind of the power of FSD. But the Chinese, it seems like that's really kind of driven sense of urgency.

So from my discussions with OEMs and also investors, the perception, if not the reality, is that within the China EV market, there's BYD and then there's everybody else. What is BYD's solution that you're observing and your intelligence is bringing you? How is BYD approaching Level 1, Level 2, Level 2 Plus ADAS? And what opportunities could that bring for Mobileye?

Yes. So I think that it's not necessarily specific to BYD, but Chinese OEMs do not want single source for anything. It's really part of the DNA. And even in the ADAS business, like most of our kind of main non-Chinese customers were 90% plus of their ADAS business, if not 100%. In China, it's a mix. With BYD, we're maybe 30% to 40% of their ADAS business with SAIC, maybe at 60% with [ Chery, it's like 80% or 90% ] with [indiscernible], right? And so this kind of dual sourcing kind of principle is also present in hands-free systems where the Chinese customers that we're close to are all developing software internally as well as looking for supplied solutions, right? And I think that the advantage of the supplied solution from somebody like Mobileye is the cost is lower. The probability of success is probably higher. We're already in production. The time to market is very clear. And kind of the ability to certify outside of China is also much higher, right? So I think that this is as well as a path to eyes-off because the internally developed systems, they're based on data from China only, right? So they don't really work outside of China. So I feel like we have very good prospects to penetrate into more Chinese OEMs over the course of this year. But we're also going to be -- have internal competition between us and the internally developed system like is happening with ZEEKR. And we welcome that, really. It keeps us pushing forward fast.

Yes. Let's talk about that a little bit. For my discussions with you in the past, you've acknowledged China ADAS competition is good. It's improving all the time, but not quite up yet for Western export market standards that could be debated, can that be debated. And I'm curious, what is it about? Is it because if it's not up to standard, let's say, in the eyes of a regulator or Western OEM, is it because of the tech or national security concern. And again, how does -- what's mobilizes value proposition? Is it more on the tech side for certification? Or is it this trusted, let's say, geopolitical buffer, if you will?

Yes. So I think Horizon Robotics is our main competitor on ADAS systems, kind of basic ADAS systems in China. So their pitch is basically 80% of the price for 80% of the performance, right? When we benchmark the actual performance, which we've done…

It should be [ 20% of the price for 80% of the performance ].

It's probably 80% of the price for 40% or 50% of the performance.

Okay.

But they have a good position in kind of low end. There's been a lot of lower-priced Chinese cars over the last few years that have gone from 0 ADAS to some ADAS. And it's a bit of a check-the-box thing. And so this is where they're having some success. Again, it's not like they're taking business from us. It's a business that really nobody had because it was -- they didn't have ADAS on these cars. I think that the Chinese OEMs recognize that this kind of 40%, 50% of the performance would never meet standards outside of China. And I think in a more general point, it's like good enough in this area is not really good enough. And we just -- there was news out last week about a recall of a front-facing camera system where one of our kind of core customers had given a small program to not a Chinese, but a Western competitor, and now there's a false breaking recall.

I believe it was Qualcomm, but we don't need to.

So I think that this is pretty clear to the automakers that you need high-level performance...

No, not Qualcomm. By the way... Sorry, it was Veoneer excuse me, just for the record, just for the record, the Veoneer. Sorry, continue.

Correct. Yes. And I mean, I think it's just a better example of that. It's maybe you save a little bit or maybe you feel better because you have a second source, but if it's going to cause a recall, then kind of all bets are off.

Okay. Dan, we've had this debate, and I want to open it up. I'm going to kind of prompt the audience now. Please think of a couple of questions, take some pressure off me. It's always -- you're going to ask better questions than me anyway. And we've got 20 minutes left here. But Dan, I want to go into the EV debate. We've had this debate for a couple of years now. We're going to have it right now, a mini version of it right now.

Let's go.

EVs are slowing. Is this good or bad for Mobileye?

I don't think it's good or bad. I think that there's nothing -- yes, I think it's an important point. There's nothing about SuperVision. There's nothing about our products that work better in an EV versus an internal combustion. Now to go beyond that, I think that what we -- so I think OTA is kind of the critical point here, over-the-air updates, right? If you -- we could certainly put a SuperVision product in a car that doesn't have OTA, but it wouldn't make a lot of sense because this is the kind of thing where the car has a specific driving style, driving experience. The car -- the system is going to want to expand the road types, the type of situations it can handle over time, and you don't want to put that system into a car and then not have the ability to execute those improvements while the car is on the road. Now, I think that OTA is something that doesn't require a complete tear down of the electrical architecture of a vehicle. It requires a modem. It requires cybersecurity. It requires a process from the OEM. It requires good wiring and kind of communication protocols and the development of vehicle architectures, whether it's EV or ICE, OTA is in the plan. There's already a lot of cars that have OTA that are ICE cars.

Let me kind of interject here. I get what you're saying in theory. In theory, there's no reason why a mechanical thermal car, a thermal classic, as I like to say, which might be on this last 1 or 2 generations couldn't be rearchitected for OTA and a software and the software-defined vehicle architecture that could again be a socket for SuperVision. But I -- correct me if I'm wrong, as of March 2024, there are currently no full self-driving and/or SuperVision equivalent vehicles on offer that our internal combustion. They are 100% EV. Am I wrong? Today?

I think that that's right -- it's certainly right from our perspective.

So when I'm going with this is -- having covered legacy car companies for 3 decades and seeing the enormous pain that they've been facing with software on even basic software from a clean sheet approach. For the mechanical steering with the precision the precision Dan required to do turn-by-turn navigation on public roads. And that's just is this -- tell me how does it happen?

I don't think that, that's the perspective of our customers that a teardown is required, right? I mean I think you have new architectures that are coming, like the [ Western OE ], like I said, more than half of these 17 models are ICE cars because they have a new architecture that's targeted for ICE cars. Will the software beyond -- and we kind of control the software of our system. And I think that there's not a need for major changes to kind of the steering systems and things like this. But I will say that these types of new technologies or OEMs want to put these new types of technologies on cars that they need to work, right, that they need to sell. And I think over the last few years, kind of the highest profile products in the portfolio of automakers have been EVs, right, because they need them to work. They want them to be -- to stand out in the marketplace.

And this also reflects the type of buyer that they would have, someone that might -- I mean, you can do your own surveys, but my wife doesn't care at all about full self-driving. She doesn't -- she really doesn't -- maybe on the highway, keeping a safe distance in front, that's fine, but the whole version 12 Tesla, she couldn't care less. Others, maybe the type of genre of customer, maybe Morgan Stanley clients that would be in the market for a really advanced EV could be geeky enough to really want this and appreciate the value [indiscernible] some psychographic overlap as well on a marginal buyer. Does that...

I think that, that's something that's changing too, where we don't want this to be like a [ Tech Gizmo product ] like we don't want this -- that to be kind of the value prop of SuperVision. No, the value prop of SuperVision is it's cool. And if you have an hour commute on the highway, you don't have to do anything. And I think that there's a lot of evidence that you would get to work more refreshed, less fatigued.

No question about it.

But I think putting the high-resolution cameras on the side of the car, and you can see this with Tesla, they benefited hugely from this. If you're going through an intersection and somebody is about to run a red light and [ T-bone you ], if you don't have high resolution cameras on the side, nothing is going to give the car the confidence to stop short and not enter the intersection. When you add those high-resolution cameras, that is very viable. There's also other -- many other invasive maneuvers. And we and our customers need to do a better job of kind of highlighting the safety benefit.

I want to go to the audience, so just one more quick one for me. Our robotaxi is dead to the sure looks like they are. I was talking to -- so Apple canceled the program, the stock went up. GM, you can read about what's going on there. But the stock seems to go up when GM pulls back on crews. But I was talking to a client yesterday saying, Waymo seems to be expanding. I'm like, the expansion comes before the pause. What's your perspective on this?

So I think investors don't like business models that have no certainty around kind of the path to first revenue, right? And I think when you focus all your efforts on a car with no steering wheel and no pedals, you have nothing until you can, with confidence.

Nothing into everything...

[ Our colleague will ] remove the driver, right, until you have regulatory approval, until you have consumer trust, like you have nothing. And so this is why Mobileye never put our eggs in that basket, right, where we always kind of tailored our technology to be able to generate revenue before you can go to that extreme part of the spectrum.

Bob, I know you're a huge robotaxi [ volt ]. Any questions in the audience for Dan? All right, one over here.

Can you talk a bit about the margin structure?

Sir, please, could you repeat the...

The margin structure...

Margin structure.

Yes, both... Thanks. Now it's working. Both gross and operating rights growth has continued to [ trend a port ] nicely. But of course, you've taken a hit on operating margin.

Yes.

Does it mean anything for sort of the longer-term margin trajectory? And where would you think operating margins to pan out in the long term?

Yes. So during our time inside Intel, this was a time to really kind of ramp up the development of these new solutions. And it led to a significant increase in R&D expense, really none of that incremental R&D expense was associated with the kind of the core ADAS business, but it was in anticipation of the hands-free market developing and us having a full spectrum of solutions there. So I think that our -- we've said that our operating expenses will grow 25% this year from a level last year that was much lower than we expected it to be for a variety of reasons. And then we believe the operating expenses beyond that, the growth pattern will be much lower than that, and we'll start to see a lot of operating leverage. So over time, what we've been public about is we expect to have 40% plus operating margins. We haven't put a time frame on that, but I think that, that's -- we feel highly confident in that type of number.

Another one from the audience? I want to ask a technology question. Tesla their approach, and I'm oversimplifying it is huge amounts of emphasis on compute in the data center, the learning computer, whether it's the billions they're spending on NVIDIA GPU clusters and then their own internal custom ASIC efforts to get more compute, no HD maps and their claim that version 12 does no longer does auto labeling. Mobileye uses HD maps, says that labeling is critical... Who's right or... Is it more complicated?

I think our team has a very pragmatic approach. For example, with the HD maps, if you can preload information about how did the last 10 humans traverse this intersection? What was the exact drivable path? What was the kind of the common average speed? Where did they stop out of stop sign. So clearly, maybe there's a solid line there, but you can't see around the corner, so the common person kind of moves up, so they can see around the corner. If you could preload all that information about the world into a car, it would take a lot of pressure off the real-time sensing. And we have the capability to do that because we have tens of millions of cars on the road with our cameras inside. Now the reality is we have 3 million cars collecting data today, but that's around 50 million kilometers per day of data. So we have a map that covers 90% of the U.S. and Europe, and it's growing very quickly in China.

I think with that math, you would collect as much data in a week or maybe a couple of weeks as Apple has maybe in the history of [ their program ].

For sure. Right. Now this is not full video data, right? These are -- because it needs to be very light bandwidth to keep communication costs down and to be able to send over sell. But it's -- we see it as a huge advantage for us, and it's something that's important to incorporate into the overall architecture of because in reality, what you're trying to do is you're trying to build a very accurate model of the environment around the car, and then you make decisions based on that. So I think the mapping is critical for us. Another area we differ from Tesla is we -- we feel like maybe there's one day where kind of cameras only could get to the accuracy levels to support eyes-off, full disengagement, but we don't have a great sense of when that time would be. So if you can have 2 independent perception systems, both capable of driving the vehicle, that gives you real redundancy within the system, and that's part of the path from SuperVision to Chauffeur. In terms of kind of the end-to-end AI question, I think our view has always been we need to incorporate the latest techniques in AI into our architecture, but there's no need to like over-rotate and completely tear up what you've done because we have a lot of solved problems, like vehicle detection, it can always get better, but essentially, it's a solved problem. We have 250 petabytes of video data that's been used over the years to train these systems. We have redundancy within the computer vision. So the deep neural network that we use may not have seen some weird agricultural vehicle along the side of the road, you don't want the system to see nothing. So we have a geometric modeling module within vehicle detection. That's essentially anything with mass that's elevated off the road is an object to be avoided. So I think that there's -- we were very careful to never say never, but we feel like kind of end-to-end AI techniques are a great way to get to kind of a comfortable well-performing system that works 95% of the time, but 95% of the time is not going to be good enough if you ever want to get to kind of a system where the driver can disengage.

And I've asked on a slightly different topic here on tech. I've asked on this before. I'll ask you again. And my understanding is that you don't really rely on NVIDIA. Or you're not buying as many GPU clusters as you can or otherwise renting them to train a neural network. Why is that -- could that change? Is there a reason -- explain to the audience why that's not necessary for you, when so many other companies collecting monumental amount of vision and other ambient data do rely on such technologies.

So I think like [ 1/3 to 50% ] of our CapEx is buying NVIDIA clusters for our kind of on-prem data [ 1/3 to 50% ]. Now that's -- it's a very small number compared to what others are talking about.

Dollar terms, yes.

And then we have -- we spend that type of dollar on off-prem on cloud data services. And this is kind of what we use to for kind of training processing power. I think that we're not talking about the completely training the system through pure neural network training. I think like I said before, we've got a lot of solved problems. So we can -- if we're having trouble with some type of object or some type of shape, we can query our database, which is, I think, last maybe 7 or 8x higher than what Tesla has in terms of full video. We can search that database, find examples of what we're having trouble with and kind of train the system using specific video, not just like all of the world's video.

All right. Just kind of wrapping up here. You're a former sell-side analyst. So I'm not asking you necessarily to play that role right now, but what are -- in your opinion, what are investors missing or mismodeling about Mobileye? And how do you value -- how would you value this company?

Yes. I think at this point, nothing is being mismodeled, right? I think everybody is going to have -- I think for the next few years, we feel quite comfortable with where consensus is, and consensus has come down a lot, right? And now we feel very achievable. I think that the way I would value it is by sizing what this market could become. And I think by the end of the decade, the numbers I kind of hear maybe 10% of cars produced are eyes-on and 10% eyes-off. And put an ASP or content per vehicle on that number and then make a judgment on what our share will be. And then you have to kind of probability weight that 2030 number. And I think the numbers can get extremely large, but I think that, that probability factor is based on is the market going to develop? And does Mobileye have the right technology. And I think that those are questions and I'm very willing to talk through with people one-on-one. But there's not 100% clarity.

I appreciate that. Well, Dan, I was supposed to be -- I was originally planning on being in Jerusalem this week. And I was going to be visiting with Amnon as well, but you're being here and being generous with your time. I postponed that one. So we will get to Jerusalem. We will come back. It's going to happen this year.

That's awesome.

And I do appreciate you spending time with us. And I know you're heading there next week.

Next week... Yes. Thanks a lot, Adam.

Thank you so much.

Yes, thanks everybody.