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Mobileye's (MBLY) CEO Ziv Aviram on Q2 2016 Results - Earnings Call Transcript

Mobileye (NYSE:MBLY)

Q2 2016 Earnings Conference Call

July 26, 2016 08:00 ET

Executives

Dan Galves - Chief Communication Officer

Ziv Aviram - Co Founder, President and Chief Executive Officer

Amnon Shashua - Co Founder, Chief Technology Officer and Chairman

Ofer Maharshak - Senior Vice President and Chief Financial Officer

Analysts

Rod Lache - Deutsche Bank

Itay Michaeli - Citi

Brian Johnson - Barclays

Brian Drab - William Blair

David Leiker - Baird

Chris McNally - Evercore ISI

Emmanuel Rosner - CLSA

Joseph Spak - RBC Capital Markets

Tavis McCourt - Raymond James

Rich Kwas - Wells Fargo

Samik Chatterjee - JPMorgan

Saul Rubin - Haitong Securities

Alex Potter - Piper Jaffray

Operator

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Mobileye Fiscal Q2 2016 Earnings Call. [Operator Instructions] Thank you. Mr. Dan Galves, you may begin your conference.

Dan Galves

Thanks, Melissa. Good morning, everyone and welcome to Mobileye’s second quarter 2016 earnings call. I am Dan Galves, Chief Communications Officer. And with me on the call is Ziv Aviram, Co-Founder, President and CEO; Professor Amnon Shashua, Co-Founder, CTO; and Ofer Maharshak, CFO and Senior Vice President.

This morning, we filed our 6-K with the SEC that includes the earnings press release and summary financial tables. These are also available on our IR website at ir.mobileye.com. Following our remarks, we will open the call for questions.

I would like to remind everyone that certain statements will be made during today’s conference call that are forward-looking within the meaning of the United States federal securities laws. Changes in business, competitive, technological, regulatory and other factors, including changes in the general economy could cause Mobileye’s actual results to differ materially from those expressed or implied by the forward-looking statements made today. Our historical results are not necessarily indicative of future performance. In addition, we will make reference to certain non-GAAP financial measures, including non-GAAP net income. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in this morning’s second quarter earnings press release. For more detailed information about the factors and other risks that may impact our business as well as the non-GAAP financial measures, please review the paragraphs in this morning’s press release that are entitled Forward-Looking Statements and Non-GAAP Financial Measures.

And now, it’s my pleasure to turn the call over to Ziv.

Ziv Aviram

Thank you, Dan. I would like to thank everyone for joining us on the call today. We had a successful second quarter both in securing and promoting the evolving ADAS business as well as making substantial progress towards cementing Mobileye’s long-term autonomous driving position. I will provide some key highlights for the second quarter and recent developments.

On the ADAS side, we have been awarded new programs, established new Tier 1 partnerships and launched new EyeQ3 programs with OEMs. And specifically, we have been awarded new programs at Volvo with Autoliv as a Tier 1 that includes a mono-based solution for Euro NCAP 2020 compliance and trifocal solutions for the Volvo Drive Me project. Both programs will run on EyeQ4. We won a high volume program that Fiat Chrysler program that launches in late 2017 with Delphi as the Tier 1. We won business with a new domestic Chinese OEM, Southeast Motors. This is our third domestic Chinese OEM following SAIC and First Auto Works. We signed a contract to have Mobis join our list of Tier 1 partners. We won additional programs with First Auto Works of China.

As for new EyeQ3 launches, the initial stage of Nissan ProPILOT product was recently launched with ZF TRW as a Tier 1. The product supports a wide spectrum of mono-camera based functions, including the first camera-only Adaptive Cruise Control and auto-steering on EyeQ3. In addition to the full spectrum of crash avoidance technologies that are compliant with Euro NCAP 2016. ProPILOT will grow to include hybrid lane changing in 2018 and autonomous features in an urban setting in 2020. The Mazda 3 was launched with a camera-only EyeQ3, running the full spectrum of Euro NCAP crash avoidance compliant functions. This is the first Mazda vehicle to ever include an EyeQ3 chip.

Our aftermarket business exceeded expectation this quarter. And beyond strong profit generation, there were two good examples of how this business can be deployed in strategic ways that demonstrate the benefit of vehicle intelligence systems. Columbus, Ohio was named winner of the U.S. Smart City Challenge. We will now deploy our STiR Plus product on their transit system, as well as work with them to build a data management system to track a variety of data then can be used to make urban planning safer and more efficient. Secondly, the recently completed successful pilot program with the Highway Ministry of Transportation in China. Over 30 million kilometers, our technology led the 25% plus deduction in crashes and new crashes. We believe this should lead to incremental programs in China.

With that, I will turn the call over to Amnon who will discuss long-term development around autonomous driving.

Amnon Shashua

Thank you, Ziv. Moving to autonomous driving, the second quarter highlights include on July 1, Mobileye, BMW and Intel announced a program to put level 3 and level 4 autonomous vehicles in volume production on the road by 2021 using the full capabilities of EyeQ5. We believe this represents a turning point in the auto industry, both in terms of a clear commitment to volume production of level 4 autonomy, but also the start of a paradigm shift where partnerships among OEMs, Mobileye and additional players emerge in order to tackle together as equal partners the ambitious challenge of putting a safe level 4 autonomous vehicle on the road.

In this program, Mobileye’s full suite of computer vision algorithms, including sensing from a 360 degrees camera coverage, driving policy and REM technology come together as an integrated solution in order to provide the vehicle intelligence in addition to joint development between Mobileye and BMW and other key functions such as sensor fusion. This is also our first EyeQ5 award.

On REM technology, we are in the final stages of signing our first definitive contract with Volkswagen. Based on our discussions, we believe that REM can provide dynamic mapping services that become a valued layer within navigational mapping products. The principles that we will agree with Volkswagen should form a universal framework that will be applicable to and form the basis of our arrangements with other OEMs. Discussions with map providers, TomTom and HERE, also have been promising. We believe that by the end of the year, REM technology will be adopted by 4, 5 incremental OEM partners and that we will be able to share the business model principles publicly.

Finally, I have few words to say about our relationship with Tesla. Mobileye’s work with Tesla will not extend beyond EyeQ3. We continue to support and maintain the current Tesla Autopilot product plans. This includes the significant upgrade of several functions that affect both our ability to respond to crash avoidance and to optimize auto-steering in the near-term without any hardware updates. Nevertheless, in our view, moving forward, more advanced autonomy is a paradigm shift both in terms of function complexity and the need to ensure an extremely high level of safety. There is much at stake here to Mobileye’s reputation and to the industry at large. Mobileye believes that achieving this objective requires partnerships that go beyond the typical OEM supplier relationship, such as our recently announced collaboration with BMW and Intel. Mobileye will continue to pursue similar such relationships.

With that, I will turn the call over to Ofer, who will go over the financials in more detail.

Ofer Maharshak

Thank you, Amnon. I will now walk you through our financial performance for the second quarter of 2016 that we released earlier today and then provide our guidance for the remainder of 2016. Note that I will be discussing non-GAAP numbers, which exclude the impact of share based compensation, net of applicable tax effects.

This quarter consistent with the recent SEC guidance, we have added to our non-GAAP number the effect of tax as it relates to share based compensation. Our non-GAAP numbers exclude the impact of share based compensation in the applicable P&L line and the tax effect associated with it in the income tax line. In our earnings press release and summary financial tables, we also adjusted the non-GAAP presentation for all presented reporting periods to show the tax effect of share based compensation. Overall, we had strong quarter with revenue and margins exceeding our expectations and cash flow continued to run at robust levels.

During the second quarter of 2016 total revenue was $83.5 million, an increase of 58% versus the prior year period and 11% sequentially. OEM segment’s revenue increased 47% on a year-over-year basis to $64.4 million. The growth was primarily the result of additional volume coming from launches during the second half of 2015, the addition of new models to previously launched programs, as well as the launch of our technology with Mazda. Aftermarket revenue contributed the remaining $19.1 million of total revenue in the quarter and represented 23% of total revenue. Aftermarket revenue increased 108% on a year-over-year basis. On sequential basis, aftermarket revenue increased 39%. As noted on the Q1 call, we had seen an up-tick in volume late in the quarter and this continued throughout Q2.

Drilling down further into some of the drivers of Q2 revenue, EyeQ chip volume increased 45% year-over-year to 1.409 million EyeQ units and grew 7% sequentially. Our OEM ASP for the second quarter was $44.05 compared to $43.07 during the same period last year and $44.02 in Q1 of 2016. The increase in ASP this quarter is related to the mix of deliveries, which reflect a higher portion of pedestrians autonomous emergency braking. ASP depends upon the complexity of features and fluctuate among quarters, we continue to expect ASPs for ADAS products to modestly trend up over time as the mix of deliveries shifts from legacy programs to the more advanced bundles of more recently awarded programs.

Turning to profitability, during the second quarter gross margin increased to 75.6% from 74.3% in the second quarter of 2015 and from 75.3% in the first quarter of 2016. This increase, despite the unfavorable mix between OEM and aftermarket is both the result of increased ASP as I just mentioned, but also improved margins in the aftermarket due to economies of scale, as well as some successful initiatives to reduce direct costs. Total GAAP and non-GAAP operating expenses increased 47.7% and 43% respectively, compared to second quarter of 2015. The year-over-year increase reflects continued investment into research and development to support a variety of new initiatives, such as REM and advanced algorithms for higher levels of autonomous driving.

As a percentage of revenue, GAAP operating expenses declined to 39% from 42% and non-GAAP operating expenses declined to 22% from 26% in the same quarter last year, representing good leverage on our revenue growth. Sequentially, total GAAP operating expenses are relatively the same, while non-GAAP operating expenses decreased 7%. In this quarter, there was approximately $1.4 million increase in reimbursement of a portion of our R&D expenses that are attributable to specific development programs that we won in the past and are in process ahead of future launch. Such reimbursement is shown as a reduction of the R&D expenses.

Excluding these reimbursements, GAAP and non-GAAP gross R&D increased compared to the first quarter of 2016. GAAP net income increased 75.9% to $26.9 million from $15.3 million in the second quarter of 2015. Excluding share based compensation net of tax at the amount of $14.4 million and $8.3 million for this quarter and the same quarter last year respectively, non-GAAP net income came to $41.2 million, representing 49.4% of revenues compared to $23.6 million and 44.7% in the same quarter in 2015. The increase in our profit margins is the result of our highly leverageable business model where the expense base is R&D intense and not directly tied to revenue growth. This results in the potential for high incremental margins, which was the case this quarter also compared to last quarter. Our tax expense down to $4.2 million or a non-GAAP effective tax rate of 9.3% this quarter, this is roughly in line with our forward expectation of approximately 10%.

Turning to the balance sheet and cash flow, as of June 30, we had $543 million in cash and marketable securities, up from $510 million at the end of Q1 2016. During the second quarter, we generated $37.8 million of from operating activities and $33 million as non-GAAP free cash flow. This compares to $23.6 million and $22.8 million respectively, in the second quarter of 2015. Non-GAAP free cash flow represents cash flow from operating activities minus capital expenditures at the amount of $4.8 million for the second quarter of 2016 and $0.8 million for the second quarter of 2015. Our non-GAAP free cash flow generation reflects one of the strengths of our highly scalable business model. Just to reiterate, quarterly cash flow can vary due to the timing of working capital requirements and capital expenditures requirements, although our annual trends continued to be strong.

I would like now to finish with some thoughts regarding our financial outlook for the full year 2016. We are raising our total 2016 revenue guidance range to be between $344 million and $350 million from the prior $336 million to $340 million, representing 44% year-over-year growth at the midpoint. The increase is fully explained by the higher than expected aftermarket volume that began late in Q1 and that we now see as sustainable. As a result, we expect aftermarket to represent approximately 20% of total revenue for the full year. As a reminder, we view and manage our business on an annual basis as our quarterly results can fluctuate due to the timing of orders and the timing of the introduction of new vehicle models containing our products. However, according to current information, we expect...


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