indie Semiconductor, Inc. Q3 FY2023 Earnings Call

Good afternoon and welcome to indie Semiconductor's Third Quarter of 2023 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I will now turn the call over to Ashish Gupta of Investor Relations. Mr. Gupta, please go ahead.

Thank you, operator. Good afternoon and welcome to indie Semiconductor's third quarter 2023 earnings call. Joining me today are Don McClymont, indie's Co-Founder and CEO; and Tom Schiller, indie's CFO and EVP of Strategy. Don will provide opening remarks and discuss business highlights, followed by Tom's review of indie's Q3 results and Q4 outlook. Please note we will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect our views only as of today and should not be relied upon as representative of our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For material risks and other important factors that could affect our financial results, please review our risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as well as other public reports filed with the SEC. Finally, the results and guidance discussed today are based on non-GAAP financial measures such as non-GAAP gross margin, non-GAAP operating income loss, non-GAAP net income loss, and non-GAAP EBITDA. These metrics may exclude from their corresponding GAAP measures certain of the following items: depreciation and amortization, share-based compensation, acquisition-related expenses, inventory cost realignments, gain or loss from change in fair values, noncash interest expense, and income tax benefits or expenses. For a complete reconciliation to GAAP and the definitions for the above items, please see our Q3 earnings press release, which was issued in advance of this call and can be found on our website at www.indiesemi.com. I'll now turn the call over to Donald.

Thank you, Ashish, and welcome everyone. I'm happy to share that indie delivered strong third quarter results despite a challenging macroeconomic environment, with growth significantly exceeding our addressable market, fueled by rising demand for our distinct Autotech Solutions. In this quarter, we reached record levels in both revenue and gross margin, achieving a top-line increase of 101% year-over-year and a 16% sequential rise to $60.5 million, while expanding our gross margin to 52.7%. Our performance outshines the automotive industry, showcasing indie's exceptional design team, diverse product portfolio, and leading customer base that includes nearly every major automotive OEM in Tier 1, alongside our scalable supply chain, supported by successful acquisition integrations. Notably, indie has been recognized as the fastest growing semiconductor company in the world among 224 peers over the past two years, according to Morgan Stanley. More importantly, indie is the only company from the 2021 IPO class expected to reach non-GAAP EBITDA breakeven this quarter. I'm also pleased to report that our strategic backlog has grown to $6.3 billion, up from $4.3 billion last year and $2.6 billion in 2021. The $2 billion increase was primarily driven by Computer Vision, bolstered by our acquisition of GEO Semiconductor earlier this year and subsequent wins with Bosch, which contributed to a leading North American OEM and Toyota. Coupled with our radar successes, the ADAS segment alone represents approximately $4.6 billion, with the remaining focus on User Experience and emerging Electrification products. These achievements position indie to surpass $1 billion in annual revenue by 2028. Our key investments are centered around ADAS, where safety features are becoming increasingly vital in the automotive sector. The AAA Foundation for Traffic Safety recently published a study projecting that current ADAS technologies could prevent around 37 million crashes, 14 million injuries, and 250,000 deaths by 2050, reflecting a 16% decrease in crashes and injuries and a 22% reduction in fatalities. We believe these estimates are not ambitious enough. Our vision is to empower automotive OEMs and Tier 1 suppliers with advanced, cost-effective safety semiconductors and software for future vehicles, aiming for the ultimate goal of an uncrashable car and ensuring safety for drivers, passengers, and pedestrians. To achieve this, we are pursuing a distinctive sensor fusion strategy that utilizes various modalities like Radar, Computer Vision, LiDAR, and Ultrasonic Solutions to gather data across different environments and ranges, allowing for a comprehensive perception of the vehicle's surroundings. This multimodal approach provides redundancy and compensates for the weaknesses of individual sensors, improving system robustness and reliability, especially in challenging driving situations where precision and quick reactions are critical. For instance, while radar effectively detects objects in a vehicle's path across different weather conditions, it has limitations in depth precision and object recognition. On the other hand, cameras excel in object recognition but perform poorly in adverse weather or lighting conditions. LiDAR offers exceptional range and depth precision, yet it can be affected by heavy rain or fog. We believe our sensor fusion strategy, as opposed to current discrete implementations, will provide significant advantages since no single technology will dominate the market due to the complexities and variabilities of driving environments. Moreover, sensor fusion can yield improved power efficiency and cost benefits by optimizing sensor configurations to meet performance needs, making these technologies viable for entry-level vehicles. We view our sensor fusion product roadmap as having immense potential. Level 3 autonomous driving, when fully realized, may require over 40 sensors and cameras. However, our business strategy does not rely solely on autonomy; we anticipate rapid global adoption of sensors and cameras to support Level 2 and Level 2++ premium vehicles, along with entry-level vehicles for young drivers. I'm also proud to share that in this quarter, we secured an initial Computer Vision win through a direct buy from a leading North American automotive OEM, with the program expected to ramp up in 2025, contributing significantly to our strategic backlog increase. Additionally, we expanded our automotive Camera Video Processor portfolio with the launch of a highly integrated system-on-chip that facilitates simultaneous viewing and sensing capabilities. As government regulators and consumers demand better performance safety features, automakers are increasingly pursuing camera-based ADAS solutions that can scale across their vehicle classes, necessitating a distributed intelligent architecture for sensing, high integration, and low power consumption to meet mass-market deployment demands. Our next-generation camera solution has been designed to address these complex requirements. According to S&P Global, shipments of automotive ECUs featuring vision-based processing are projected to leap from 232 million units in 2022 to nearly 400 million by 2027, and we aim to capture a significant share of this market. Regarding radar, I'm happy to report that we sampled our first product to our leading customer this quarter. Utilizing our acquisition of Silicon Radar, we introduced the world’s first commercially fully integrated 240 gigahertz radar front-end silicon transceiver, enhancing our portfolio of short-range, high-precision millimeter-wave radar solutions. This advancement complements the well-established 76 to 81 gigahertz radar used for long-range automotive sensing, as recent safety initiatives like the European NCAP are pushing for higher frequency radar in new vehicle dynamics and monitoring applications, including assessing and controlling air spring suspension settings and real-time road surface quality. In terms of LiDAR, we have made strides with our Surya SoC through direct OEM engagements that include system demos and collaborative exploration with a leading Japanese automaker, as well as a development contract with a prominent aerial mobility OEM. While we conservatively have not yet recorded any LiDAR wins in our strategic backlog, we anticipate significant contributions in the upcoming year based on the increasing design interest in Surya, positioning us for a leadership role as a merchant LiDAR semiconductor supplier as we scale up throughout the latter half of this decade. To expedite this process, we acquired Exalos, a Swiss photonics firm known for its high-performance semiconductor designs. Exalos's super luminescent LEDs for fiber optic gyroscope and display applications, backed by 59 global patents, enhance our laser and silicon photonics offerings. Furthermore, Exalos's semiconductor optical amplifier capabilities greatly strengthen our FMCW LiDAR product line. We look forward to keeping you updated on our progress with this innovative design team as we leverage their expertise across our vast customer base in ADAS and User Experience applications. Speaking of User Experience, we further advanced our portfolio this quarter with integrated lighting, motor control, and charging solutions at leading global automakers as they focus on creating immersive in-cabin experiences. As vehicles become extensions of personal living spaces, the need for a seamless, intuitive, and comfortable passenger environment has intensified, reflecting a shift in consumer preferences towards a holistic user experience. These developments emphasize the importance of merging technology with comfort, reducing clutter, and enhancing convenience. I'm also pleased to report continuous progress in our Advanced Lighting solutions with OEMs globally and securing a wireless charging solution win with a leading North American carmaker. Our Qi2.0 solution offers the highest level of integration available, combining MCU and Flash with features like a boost DC-DC converter and wireless charging inverter. This integration allows us to reduce the overall wireless charging system bill of materials by over 50% and achieve a PCB area reduction of approximately 50% compared to previous solutions while improving charging efficiency and reliability in line with automotive requirements. Lastly, in the electric vehicle sector, despite some contrary headlines, long-term growth trends remain strong, as evidenced by a record increase in EV sales for the 13th consecutive quarter. In Q3, total sales of battery-powered vehicles exceeded 300,000 for the first time in the U.S., with year-to-date EV sales through September surpassing 873,000, putting the market on track to exceed the 1 million mark for the first time, likely later this month. In fact, EV sales increased by 50% compared to the previous year in the U.S., with penetration rates reaching nearly 8% of new vehicle sales. According to the Wall Street Journal, the percentage of U.S. consumers considering purchasing an EV has now surpassed 50%, up from 38% in 2021. These impressive numbers highlight the growing consumer demand for sustainable transportation, supported by an expanding variety of EV models and competitive pricing strategies. The EV sector still holds tremendous potential driven by continuous technological advancements, a rapidly growing charging infrastructure, and decreasing battery costs. With indie's customer relationships spanning leading companies such as NIO, Ford, Rivian, General Motors, BMW, Mercedes, XPENG, BYD, Hyundai, Nissan, Li Auto, and Volkswagen, we are particularly well-positioned to take advantage of this ongoing market shift. I'll now hand the call over to Tom to discuss our Q3 results and outlook for Q4.

Thanks, Donald. indie delivered a solid third quarter once again exceeding our top line guidance. In fact, this represents our 10th consecutive quarter of beating or at least meeting such targets post indie's IPO. Specifically, revenue for the period was up 101% year-over-year and up 16% sequentially to $60.5 million. Gross profit was $31.8 million translating into a 52.7% gross margin, up 226 basis points year-over-year and up 50 basis points sequentially. R&D was $34.7 million and up sequentially given multiple product tape-outs while SG&A was $10.2 million reflecting extended international sales and marketing activity bringing total operating expenses to $44.9 million. In turn, our operating loss was $13 million, a further narrowing versus $15.8 million during the same period last year and $16.3 million in the second quarter of 2023 driven by higher revenue, improving gross margin, and operating expense leverage. With net interest expense of $200,000, our net loss was $13.2 million, and we posted an $0.08 loss per share on a base of 168.6 million shares in line with our guidance. Turning to the balance sheet, during the quarter, we maintained our level of working capital and invested an additional $2 million in capital expenditures primarily to expand our quality lab capabilities at our Dresden center of excellence, enabling us to exit the quarter with $160.6 million of cash and equivalents. Looking forward, given the strength of our order visibility and the new product pipeline that Donald outlined, we plan to continue to far outpace our addressable markets over the long run. More specifically for the fourth quarter of 2023, we anticipate accelerating top-line growth on the order of 112% to 127% year-over-year to $70 million to $75 million. To put our growth trajectory in better perspective, when we announced our plans to become a public company just a few years ago, we were on track to deliver $6.7 million in Q4 2020 revenue versus in excess of $70 million today, a greater than 10x top-line growth in a relatively short amount of time. But back to Q4, at the midpoint of our revenue range with 20% sequential sales growth of $72.5 million, we anticipate gross margin to expand by 50 basis points on a year-over-year basis to 52.7%. In terms of operating expenses, we are planning for $30 million in R&D, reflecting a more normalized spending level post a number of product tape-outs in Q2 and Q3 with SG&A similarly down and back to Q2's $9.5 million level. And with the addback of $1.3 million of depreciation and no material non-GAAP amortization, we plan to reach EBITDA breakeven for the first time in indie's history. Below the line, we anticipate $800,000 of net interest expense and no taxes. With 181 million shares outstanding, we expect a $0.01 net loss per share in the current quarter. Longer term, we are committed to delivering outsized top-line growth and driving to our 60% gross and 30% operating margin target model. In fact, given our bullishness, we are pleased to announce the recent completion of our warrant exchange tender offer, which effectively retired potentially 27.4 million shares, which is 7.7 million shares. In this way, we substantially reduced potential future dilution, removed the shareholder overhang, and simplified our capital structure.

Thanks, Tom. In summary, Q3 marked another quarter of record results for indie within a challenging macro environment. The surge in our strategic backlog to $6.3 billion and the overall momentum is a testament to our diverse product and IP portfolio, deepening customer relationships, our scalable supply chain, synergistic acquisitions, highly innovative roadmaps and last but not least our world-class team. The stage is now set for indie to turn the corner and enter into a new growth and profitability phase, particularly as we translate our strategic backlog into new program ramps, recurring revenue streams, and free cash flow. At a higher level, we are creating another tech powerhouse and have never been better positioned to capitalize on the $48 billion market opportunity, and most importantly, to create extraordinary shareholder value. That concludes our prepared remarks. Operator, let's open the call for questions.

Our first question comes from Suji DeSilva of ROTH MKM.

Hi, Donald. Hi, Tom. Congrats on the progress here and the breakeven you're achieving. It's a good accomplishment. So, Tom, last quarter you talked in the guidance about two OEM programs that were pushing out. Would love to get an update on those, if those are still kind of on hold or whether they've come back and maybe kind of dovetail that into whether you're seeing more push outs in this environment or if you're seeing resilient demand?

So, no update on those per se. We're still planning them in late in the first half of next year. There have been no further push outs that we can see. Our market demand is reasonably resilient in spite of everything and really no other news to report on that front.

Okay, Donald. Thanks for that information. Regarding the backlog, you mentioned its growth to $6.3 billion, which is very significant. Do you have an idea of how much of that is expected in the next 12 months to give us an understanding of the revenue forecast coverage? That's one way to consider the timeframe of the backlog.

Yes. I mean for the next 12 months, we're pretty much fully booked. I mean that's pretty much the case of the automotive industry. In terms of giving you a kind of a rule of thumb, if you look back to when we came out at the end of 2020 and we announced our strategic backlog at $2.2 billion, if you assume that you divide that by 10, it gives you a look ahead view to where the revenue should be three years plus from that. So we have the benefit of hindsight to prove that, that was true. So when we announced $2.2 billion divided by 10 is $220 million and that's approximately the revenue run rate that we'll have in 2023. So by the same rule of thumb, if you take the $6.3 billion divided by 10, that's approximately going to be the annual run rate in 2026.

Our next question comes from Ross Seymore of Deutsche Bank.

Donald, just you mentioned the challenging environment. I think we all kind of in general know what you're pointing to there. But when you mentioned no push outs and fully booked for next year, et cetera, what does a challenging environment mean to indie?

Our comments in that area are simply an acknowledgment of the overall macro environment. The main factor influencing our revenue profile is our own increase in market share and the growth of semiconductor content per vehicle. Since we came into the market in 2020, we haven't experienced a significant increase in vehicle volume since 2018. The years 2019 and the last four years have seen declines, with only the reasons behind those declines changing. We've faced various challenges, from COVID to allocation issues, a golden screw crisis, two UAW strikes, and rising macroeconomic interest rates, which we view as relatively stable. Although our trajectory hasn't received support from these factors, it hasn't been significantly hindered either. We forecasted our revenue in 2023 back in 2020, and we remain committed to the plan we established. Ultimately, for us, it’s about executing our strategy and staying focused on our objectives. The macro factors aren't particularly beneficial, but they aren't stopping our progress either.

I guess one for Tom on the margin side of things. It's great to see the year-over-year increases and you're pretty much in line with what you've guided. But you've kind of been at roughly the same level for a year despite the revenues doubling. 4Q to 4Q, I guess you're up 50 basis points. So the move from here to 60, you'll obviously take a bit more than that. So I guess one, the flatness year-over-year, what's the general cause of that? And then, much more importantly, what are the key drivers that would get you from kind of the roughly 53 up to 60?

Well, I mean, let me interject on first and take the last part of that question first. I mean really what's going to drive us to 60% is the deployment of the ADAS products, which are coming later into our revenue profile as opposed to the products that took us over the line from private to public. So at that point, the mix of these products is going to make the biggest difference. And they are significantly higher ASP, which is typically proportional to the amount of gross margin that we can demand, because the value of the product is simply high.

I would like to point out that the progress in gross margin has been quite impressive. In 2020, we generated $6.7 million in revenue with a 35% gross margin. Since then, we have steadily increased this figure to nearly 53%. As Donald noted, as our product mix continues to improve, particularly with the shift toward ADAS, which typically has a higher gross margin, we are on track to reach our 60% target.

Our next question comes from Anthony Stoss of Craig-Hallum.

Kind of a follow-up to Ross' question. Tom, where do you expect to exit 2024 in terms of gross margins? Then I had a couple of follow ups for Donald.

Sure. We haven't really guided that specifically. But just given the momentum we're seeing and the mix moving more towards the ADAS side, 55% is a reasonable expectation.

Donald, thank you for breaking out in your prepared remarks the ADAS 4.6 out of the 6.3. And I know you guys did a pretty good job of laying out $1 billion-plus win beginning late 2024. Of that 4.6, can you paint a picture how many of those customers will be live say by the end of 2025 or however you want to break it out?

Yes, almost all of them will be at least beginning to ramp by that stage. We have a few wins, which are '26 and beyond, but most of that backlog will begin to ramp in 2025.

Let me squeeze one more in. Just the North American ADAS win, what's the expected value of that one, the newest one?

We're not breaking it out specifically, but it's a pretty meaningful design win. It's with an existing customer where we have some significant volume in a similar space. I mean, you can assume as we're calling out really as our headline win that it's pretty significant part of the backlog increase.

Our next question comes from Craig Ellis of B. Riley Securities.

Yes. Thanks for taking the question and congratulations on the two company milestones, the $6.3 billion backlog and the adjusted EBITDA, profitability. So, yes, you're welcome. I wanted to follow-up on the latter, given that there's been some good attention on backlog. On profitability, is that something that you think the company can sustain as we go through 2024? Would there be anything we need to look out for with respect to a resurgence in asset costs or anything else?

For 2024, we are committed to achieving profitability for the entire year based on the momentum we currently have. While there may be some fluctuations in operating expenses, the key takeaway for us is our commitment to a full year of profitability.

Yes. To add to that, as we've discussed before, operating expenses will increase slightly in absolute dollars but will significantly decrease as a percentage of sales. This drives operational efficiency and improved profitability.

And then, going back to some of the things that are happening in the ADAS portfolio, Donald, can you talk a little bit more about some of the developments in radar over the last three months? And then I have one more after that if you'll take it.

Well, as you might recall, we announced our radar win, I guess, 18 months to almost two years ago now. And so we've been on a very intense development phase through that, which as we mentioned in the prepared remarks, now we're coming to the end of, which is a big milestone for us. In addition to that, the visibility that we have of OEMs beginning to commit more programs is only increasing as a factor of our increased confidence in our execution which is now largely behind us and what we can see happening in the market. In terms of the potential for that market additionally, all we see is more radars being deployed for more diverse functions. Again, as we mentioned in the prepared remarks, there's perhaps somewhat unexpected applications which we're seeing now for things like road quality, monitoring of air-based suspension systems where the radars are really being deployed as multifunction sensors, not only for ADAS and we expect fully that we'll participate in those markets. So, our future is so bright in that one, we need to wear our shades.

Well, very hit reference there. Thank you for that. And is it possible to quantify the customer breadth that you have in the backlog in the ADAS area? And if you can, then it'd be helpful to get that in the User Experience area as well?

Yes, I mean, I would say, over the last 12 months, we kind of filled out any remaining gaps in the customer portfolio that we had and when we called out in the prepared remarks also. I mean, we're really everywhere now. We really have some content at all OEMs and all Tier 1s. Some more significant than others, but it is very diverse. And what we're beginning to see over the last 12 months perhaps really over for the first time is that the cross-selling within a single customer for our different product lines is gathering momentum and that has kind of a multiplicative effect on how we expect our revenue profile to grow in the future. So, I mean, couldn't be happier with where we are on that actually.

In fact, to kind of quantify that, we've got 12 unique product areas, 20 Tier 1s within the backlog. And then as we've mentioned, we're selling now to virtually every car OEM in the world.

Our next question comes from Cody Acree of The Benchmark Company.

Yes, thank you for taking my questions and congratulations on the progress. Donald, could you elaborate on what constitutes your $1 billion of visibility for 2028? Any insight into what makes up that backlog would be appreciated.

Well, I mean the way our backlog is constructed. It's measured over a period of time. And of course, one of the nice things about automotive, although it takes a long time to get revenue going, it tends to last for a long time after you start. So, the run rate I called out as a benchmark around 2026, you could assume as being in the bag 2 years after that. And then the remaining part of our bridge to between there and the $1 billion in 2028 is based on a pipeline that we have in place, which is a number of multiples larger than the strategic backlog that we declare. And when we say we have visibility, that means that we've been working with somebody for a long time. I mean, some of these sales cycles are extremely long, multiple years of jumping through hoops and jumping over hurdles and displaying technical capability to get these guys on board and bought into our technology regardless of how good it may appear. They don't take much for granted in this industry. And so as a result of that, we've got a lot of visibility in our pipeline of what's likely to convert over the next couple of years, and we feel pretty bullish about that and hopefully, who knows, we can maybe even beat that a little bit.

Maybe if we can look at the UAW strike and any impact that you're seeing in your bookings or visibility?

Yes. I mean a little. I mean, we have exposure to the big 3 who have been customers of ours for many years, but we are very geographically diversified now. We have a bigger customer base in China, Europe, non-unionized companies in the United States also for that matter, or even plants that belong to the big 3 who are not in the United States. So I mean, it had an impact, but it was, for us, relatively manageable within the noise of what we manage on a regular quarterly basis. And any impact of that is now baked into the numbers that we just saw. So, we're very glad that they came to a resolution, and I hope there's no longer lasting effect of that. I don't think so. But at this point, we're not really planning anything extraordinary to mitigate.

Ladies and gentlemen, we have reached the end of a question-and-answer session. I will now hand over to Donald McClymont for closing remarks.

Thanks, everybody. See you at investor meetings and conferences over the next few weeks and see you again next quarter.

Thank you. Ladies and gentlemen, this concludes the indie Semiconductor conference call. Thank you for joining us and you may now disconnect your lines.