Earnings Call Transcript - MBLY Q2 2024

Operator, Operator

Greetings, and welcome to the Mobileye 2Q '24 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Galves. Thank you, Mr. Galves. You may begin.

Dan Galves, Host

Thanks, Kat. Hello, everyone, and welcome to Mobileye's second quarter 2024 earnings conference call for the period ending June 29, 2024. Please note that today's discussion contains forward-looking statements based on the business environment as we currently see it. Such statements involve risks and uncertainties. Please refer to the accompanying press release, which includes additional information on the specific factors that could cause actual results to differ materially. Additionally, on this call, we will refer to both GAAP and non-GAAP figures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. Joining us on the call today, as usual, are Professor Amnon Shashua, Mobileye's CEO and President; Moran Shemesh, Mobileye's CFO. Also joining today for the Q and A session is Nimrod Nehushtan, Mobileye's Executive VP of Business Development and Strategy. Thanks. And now I'll turn the call over to Amnon.

Amnon Shashua, CEO

Hello, everyone, and thanks for joining the earnings call. Starting with the results, both Q2 and the first half were closely aligned with our outlook provided back in January. EyeQ volumes in Q2 more than doubled versus Q1. And based on various sources of information we have reviewed, we believe inventory levels are back to normal with potential some residual in China. SuperVision volumes were also aligned with our original outlook, with 70,000 units for the first half of the year. All in all, revenue for Q2 stands at $439 million, which is an 84% growth over Q1 and a 3% decrease year-over-year. Adjusted operating margin also recovered significantly to 18% compared to minus 27% in Q1. More details on the results of the quarter will be covered by Moran. As we look forward to the second half of the year, we face near-term volume challenges stemming from market dynamics almost exclusively related to China. This has led to a reduction of customers' outlook in both ADAS and SuperVision. On ADAS, we faced three unexpected factors. Number one, global production forecasts have weakened, which has disproportionately impacted our core customers due primarily to continued share losses in China. Number two, we have seen a decline in orders for the second half of 2024 from Chinese OEMs compared to what these customers were indicating as of our last update. Number three, the delay of a high-volume ADAS launch outside of China is also a meaningful headwind, although smaller than the first two. Turning to SuperVision, despite higher conviction on a reinforced competitive position for Mobileye in China in the mid- and long-term, we're seeing short-term volume headwinds. Second half volumes are expected to be lower than our forecast back in January due primarily to increased U.S. and European tariffs on Chinese-produced vehicles. We also have reduced our expectations for volumes in China itself due to uncertainties around market dynamics and reduced forecasts from our customers. Overall, we see the current dynamics almost entirely isolated to China, where the market is undergoing a reshuffle process and is adapting to several macro developments. We believe our long-term position in China is strong among major Chinese OEMs with diverse product portfolios and aspirations for global expansion, as illustrated by our press releases announced today. We expect key positives with this new development will be as follows: acceleration of SuperVision enhancements and adaptation to the Chinese market through DXP, Zeekr to adopt an EyeQ6-based version of SuperVision for the next generation of Zeekr 001 and additional models domestically and globally, and paving a path for Robotaxi collaboration. Ultimately, Mobileye's long-term growth outlook hinges on our prospects to lead the path of next-generation ADAS and solve autonomy while offering a spectrum of product variants appealing to the broadest audience of car makers possible. As a final topic, I'll highlight some important details of how the EyeQ6 platform represents a leap forward towards these goals and helps position us as the only company in the world that can support all four consumer vehicle categories and Robotaxis as well. As the global OEMs are emerging from a major replanning process, combustion engines versus EV, China versus non-China, buy versus build for autonomy, we are seeing increased clarity on future ADAS and AV segmentation around four distinct categories. Number one, emerging market ADAS as the future growth driver for the 25 million or so vehicles sold today that don't have any ADAS. These systems will require lower price for less functionality, yet with high performance, which is where we excel. Number two, developed market ADAS. Recent guidance on future regulations continue to push the envelope on performance, which is a significant positive for us. It's a key factor in the success of EyeQ6 Lite, which has already been nominated for 50 million units of future business, is involved in many current RFQs and is progressing towards design wins across all major customers. Number three, mid-trim surround ADAS. This is a brand new growth driver that fits in between regular ADAS and SuperVision for mass market segments. The OEMs have two goals here. First, enable price competitive hands-off on highway function as the next standard. Second, to prepare for the increased safety requirements that will not be satisfied with the traditional front-facing camera alone. Number four is premium full-surround ADAS/AV, SuperVision and Chauffeur category, where OEMs continue to pursue aspirational technology to deliver hands-free driving across all road types and maintain a path to eyes-off where OEMs see huge value for consumers. We view the emergence of category three as extremely important as a driver of significant medium-term ASP growth within mass market segments. And the RFQ volumes are very high. We are currently already responding to four RFQs representing over 19 million future units supported with a single EyeQ6 High with pricing that is approximately four times our current ASP and with similar gross margins to the company average. To put this value into context, the life revenue value of these RFQs from just four OEMs is already about double the value of all the combined ADAS RFQs we're currently pursuing with more than 70 OEMs. On SuperVision and Chauffeur specifically, we have made substantial progress across many predevelopment engagements and we believe we are on track for major design wins by year-end 2024, with a strong pipeline of more to come in 2025. We currently have advanced product wins or are in advanced discussions with 14 OEMs, representing approximately 52% of industry production. Within that number, two of the OEMs are currently only pursuing surround ADAS category, I mentioned above, and two are pursuing both SuperVision and Chauffeur and surround ADAS. We're also seeing accelerated interest in our drive platform, which serves the mobility as a service market. The Volkswagen commercial vehicle program is progressing nicely. Zeekr is looking to develop with us in this area. And there is an additional major OEM from Japan, where we continue to progress through pre-award testing activities. We believe that we are at the inflection point of becoming the clear market leader in these initiatives, both technologically and commercially. And we want to use this opportunity to shed some more light on our recent progress, especially one of our most groundbreaking initiatives, Mobileye Brain6. Brain6 has been at the heart of our EyeQ6 product line since we began that development several years ago and represents a significant leap forward in autonomous driving technology. This compound AI backbone is not just an incremental improvement; it's a transformative development designed to address the complexities and demands of autonomy at scale. Let's dive into what makes Brain6 truly exceptional. First is performance. Brain6 is powered by a sophisticated combination of state-of-the-art generative AI networks. These networks, each with a specialized focus, work in concert to tackle the inherent challenges of autonomous driving, such as the long tail issues and input bias generalization error trade-off. By leveraging this multifaceted approach, Brain6 ensures the level of performance and robustness that is unparalleled. During Q2, we began online testing of the EyeQ6 platform at scale as well as data-driven offline simulations. We now have a line of sight to a vision-only system, which we believe will be at least two orders of magnitude better than anything else available in the market today, deployed in all markets. Moreover, EyeQ6 products are designed for flywheel product improvement by continuously aggregating feedback from the fleet and improving the product. Cost efficiency is another critical point. We understand that the path to widespread adoption of autonomous driving technology hinges on cost-effectiveness. The system has been meticulously designed to operate efficiently with a cost-effective inference computer. This synergy between Brain6 and our EyeQ6 platform not only drives down costs but also maximizes value for our partners and customers. Brain6 enables our customers to offer eyes-off products at 50% of the MSRP, compared to Tesla FSD 12, and hands-off at 25% of the MSRP. Modularity is one of the most exciting aspects of Brain6. This design allows for the seamless creation of derivative products, including separate perception layers and adaptation to various sensor configurations. Our modular approach is intended to ensure that Brain6 can be customized to meet the diverse needs and preferences of OEMs, offering them unparalleled flexibility and adaptability. Moreover, it opens up new business models in tangential areas such as infotainment and driver experience, which we will discuss more on our upcoming investor day later in the year. Finally, controllability is paramount in the realm of autonomous driving. The Brain6 architecture incorporates robust guardrails and checkpoints, allowing for precise oversight and control of the system. This design not only imposes clear dos and don'ts, but also provides transparency in decision-making processes, thereby enhancing trust and reliability in our solution. In our view, what sets Brain6 apart from the competition is its integration with Mobileye's unique assets, namely REM crowdsourced mapping and our extensive data lake. While EyeQ5 products use REM explicitly as a map, in EyeQ6, Brain6 leverages insights from our REM global database, which includes data from over 6 million vehicles amassing tens of millions of miles daily. This crowdsourced mapping not only teaches Brain6 how to interpret road conditions everywhere but also provides invaluable driving behavior insights. Furthermore, Brain6 is backed by hundreds of petabytes of data collected through years of collaboration with OEMs around the world. This deep reservoir of real-world data is intended to ensure that Brain6 is not only advanced in its current capabilities but will continuously evolve to meet challenges and scenarios in autonomous driving with uniform performance everywhere on the planet. In summary, in the past six months, we managed to successfully advance Mobileye's position as the leading technology provider across four growth categories as evidenced by one, being the only company with design wins across all four segment categories mentioned above; and secondly, a significant increase in the amount of business engagement towards nomination. We view Brain6 and EyeQ6 system-on-chip as a technology linchpin that enables us to efficiently execute and deliver products across all four segments, providing ultimate versatility to our customers and synergies from delivering across all segments from the same technology backbone. As evident, we are on track to deliver production hardware in vehicle prototypes and SuperVision, Chauffeur, and Drive in our production program with the Volkswagen Group by the end of the year, in parallel, while at the same time leveraging the synergetic architecture of our EyeQ6 product family. We're excited about the potential of Brain6 and will provide more details and demonstrations at our Capital Markets Day planned for December this year. I now turn the call over to Moran.

Moran Shemesh, CFO

Thank you, Amnon, and thanks for joining the call everyone. Before I begin, please be aware that all my comments on profitability will refer to non-GAAP measurement. The primary exclusion in Mobileye's non-GAAP numbers is amortization of intangible assets, which is mainly related to Intel's acquisition of Mobileye in 2017. We also exclude stock-based compensation. Starting with Q2 results, they were closely aligned with the Q2 outlook we provided back in January. EyeQ volumes more than doubled versus Q1 as we projected. Our Tier 1 partners digested most of the excess inventory in Q1, resulting in significantly higher volumes in Q2. As of the end of Q2, we believe inventory levels at our customers are almost fully back to normal, based on customer discussions and inventory reporting from larger Tier 1, our analysis of supply and demand, and the large increase in volume in Q2. SuperVision volumes were 31,000 in Q2 as expected. As compared to Q1, gross margin recovered significantly based on three factors. Number one, higher single-chip EyeQ revenue as a percentage of the total as inventory normalized. Number two, normalization of regional mix within EyeQ, as most of the excess inventory at our Tier 1 customers was in North America and Europe where prices and margins tend to be higher than in China. Number three, SuperVision gross margin rose to slightly above 40% due to conversion to the next-generation main controller, which is lower cost. Adjusted operating margin also recovered significantly to 18% versus minus 27% in Q1 due to gross profit conversion and higher revenue, partially offset by substantially higher operating expenses. On a year-over-year basis, operating margin remains well below Q2 2023 due to approximately $40 million higher operating expenses across a similar revenue base. Before moving to guidance, I'll make an overarching statement on operating expenses. It's important to note that our R&D expenses and sales and marketing are primarily related to technology development, promotion, and program execution of our EyeQ6-based hardware platform and Brain6 software support advanced solutions like surround data SuperVision, Chauffeur, and Drive. All evident points to significant scaling of these products starting in mid-2026, with the EyeQ6-based programs growing with many other customers beyond that. We must continue to execute now on the core technology platform in general and customer programs specifically. Therefore, our operating expenses will not flex based on changes to current revenue levels. However, after the accelerated pace of development over the last several years, we do expect the trajectory of OpEx growth to slow down, which will enable significant operating leverage as the advanced products begin to scale. In particular, I see the rise of the new surround data segment as important to operating leverage, as it adds strong content per vehicle growth driver in addition to SuperVision and Chauffeur. Turning to updated guidance. At the midpoint, we are reducing the outlook for both full year 2024 revenue and adjusted operating income. The adjustments are almost exclusively volume-related for the reasons that Amnon outlined. Our EyeQ volume guidance is reduced to $28 million to $29 million from $31 million to $33 million previously. And SuperVision volumes are reduced to 110,000 to 130,000 as compared to 175,000 to 195,000 previously. In terms of proportion, the lower EyeQ volume, offset by some ASP improvements, accounts for approximately 70% of the lower revenue expectation with SuperVision accounting for the remainder. A bit more detail on our volume expectation. At the midpoint, EyeQ volumes are expected to total about $17.5 million in the second half of 2024, with a little below 50% of that expected in Q3. SuperVision volumes are expected to total approximately 50,000 in the back half, with a little above 50% expected in Q3. The higher level in Q3 versus Q4 reflects uncertainties and conservatism related to market dynamics in China and with respect to tariffs. In terms of adjusted operating expenses, we've looked at everything we consider discretionary and reduced our full year forecast by about $20 million. We now expect year-over-year growth of approximately 23% as compared to our prior outlook of 25% growth. With respect to operating cash flow, the $70 million we generated in the first half was higher than adjusted net income. We expect this dynamic to continue in the second half. Lastly, in terms of tax rate, we assume a non-GAAP effective tax rate of between 17% and 19% for 2024 in comparison to our prior expectation of 15% to 17%. We have some tax items that do not adjust based on pretax profit levels. So, the tax rate for 2024 is being mathematically pushed up due to the reduced profit outlook. Thank you. And we will now take your questions.

Operator, Operator

At this time, we are limiting participants to one question and one follow-up question. One moment please while we poll for questions. Our first question comes from Ananda Baruah from Loop Capital Markets.

Ananda Baruah, Analyst

Yes, I guess I can do one and a follow-up here. So just with regards to the China dynamics, could you provide me context on the degree to which lower-level Chinese competition you're seeing also? And is that having any sort of impact? And if it is, what's the thought process around that? And then I have a follow-up as well.

Nimrod Nehushtan, Executive VP of Business Development and Strategy

Okay. Thank you. I think the Chinese automotive market is very volatile. The dynamics are currently different from global markets at large. For one, the balance between cost and performance trade-off is skewed mainly due to a lack of testing governance for clear and testable KPIs of base ADAS functions like AEB. This is opposite to the ongoing trend in the U.S. and Europe, where we see a considerable sustained expansion of ADAS safety requirements, such as the GSR mandate in Europe, FMVSS 127 in the U.S., new criteria for Euro NCAP ratings in 2026, 2028, all of which serve as tailwinds for increased content, multi-camera requirements, and a higher performance bar— which is where Mobileye shines. We believe that our stable ground in China in the near term is primarily among major Chinese OEMs with global sales and with important partnerships. On top of that, I think that we see current volatility as short-lived. Eventually, we believe regulatory governance will follow the trends we see in the global markets. So our focus is to prepare the groundwork for when the market will stabilize. This includes further localization of our technologies in China by establishing strong collaborations with local industry players like the partnership we announced this morning with Zeekr. This would enable us to build long-lasting infrastructure in China to promote our solutions for China and to support our global OEM customers that are selling cars with our solutions into China. In addition, we're also preparing an entry-level EyeQ chip for emerging markets with just the right compute for the most basic ADAS requirements. So I think, all in all, this volatility is short-lived. And we're increasing investment in China because it is also very important for our other customers, Western customers selling into China. And we'll introduce lower cost solutions down the road, likely around the beginning of 2026.

Ananda Baruah, Analyst

That's super helpful. And you actually touched on what my follow-up was going to be, just the context this morning that we should be aware of around the Zeekr collaboration that was announced. We've read the press release, but would just love to get your additional context on the structural importance of that announcement.

Amnon Shashua, CEO

Next question please.

George Gianarikas, Analyst

So maybe if you could please just give us a timeline ramp for some of the RFQs that you discussed about the third emerging segment. When do you suspect that could start hitting the P&L and maybe we could see some win announcements?

Nimrod Nehushtan, Executive VP of Business Development and Strategy

Thanks, George. So maybe just to recap this category. So what we have seen in the past couple of quarters is the development of a new category in the passenger vehicle segment. Traditionally, OEMs have been looking for solutions for three different categories: entry is for low-cost solutions that kind of have regulation-certified non-performance; premium is high-end functionality like hands-off everywhere or eyes-off on highways. Recently, there is a push for a new generation for the mid-trim. This is the high volume but still affordable prices segment. Now there are two driving forces for this category development. Number one is the push from OEMs that want to simplify architecture while consolidating and improving their cost structure in the car, but still offer a new generation of comfort features in ADAS. The second driving force is the pull from regulation. So seeing the latest roadmap from NCAP really drives the industry to add more sensors and more sophisticated software to meet the highest safety ratings and global standards. Now these two driving forces, in combination with the latest technology we've been able to demonstrate to automakers, have opened the door, and in a very short amount of time, we've been able to generate RFQs from four carmakers only in the process of one or two quarters. These are a few targets for the end of '26 or 2027 SOPs. So the ramp-up will most likely start in the second half of '26 and early 2027. As mentioned by Amnon earlier, the volumes of these RFQs are significant, and combined with the tailwind in the ASP, the revenue potential is significantly higher than our existing entry-level ADAS today. It's also important to say that the OEMs are considering this as an expansion of the entry-level as opposed to a derivative of the SuperVision segment. So these are living side-by-side with SuperVision and Chauffeur and not instead of SuperVision and Chauffeur. In fact, at least two of the RFQs we have are with customers who are, in parallel, continuing to work with us on SuperVision as well. So we consider this to be an expansion of our entry-level as opposed to cannibalizing potentially from SuperVision, which is a very important development for us.

George Gianarikas, Analyst

And maybe as a follow-up, you mentioned in the press release that you have significant wins to announce for SuperVision and Chauffeur in the second half of this year. I'm curious as to what the appetite is from particularly Western OEMs to adopt advanced autonomy solutions given what appear to be somewhat subdued take rates from Tesla's FSD offering so far?

Nimrod Nehushtan, Executive VP of Business Development and Strategy

Yes. So as we mentioned at the beginning of this call, we continue to make progress across all of our business development activities with OEMs. This includes OEMs from all markets practically. The driving forces for them are evident today: the next big differentiator will be intelligent driving. This is evident in China where some of the most innovative Chinese OEMs are continuing to make progress and invest more in better and more advanced intelligent driving offerings, and also in Tesla as well. Now, I think OEMs understand that two to three years from now, performance will continue to improve. If they can get to the right price point—which is what Mobileye can offer—they can provide this function to consumers at a very attractive price point with a reliable, high level of performance, which will then achieve a high take rate as opposed to having maybe suboptimal performance at a high price, which is often the case today. Even though you might have some data on Tesla's take rates today, there is a realization that in two to three years from now—where OEMs would like to launch these systems—as performance continues to improve and as the reliability and prices can decrease, Mobileye offers a unique value proposition that will lead to high consumer demand.

Amnon Shashua, CEO

I'll also add to what Nimrod said. To be an effective player, we need to have our technology on the road—not just in development and testing. This is one of the big advantages of Mobileye. We are the only Western supplier that has this category of SuperVision in China, which allows us to gain valuable experience. This experience will translate into the global markets. It requires time; you cannot just sit in the lab and develop algorithms and expect everything will be perfect on day one when launching a system. The fact that we have Mobileye's SuperVision technology on the road allows us to gather extensive experience, benefiting all future advancements.

Nimrod Nehushtan, Executive VP of Business Development and Strategy

I just want to add one last comment to this question. To support this with evidence, just by observing the number of engagements we have today compared to a year ago, there is clear in-progress development toward these technologies—not just in quantity, but also in the types of OEMs we are working with. We are now engaged with incumbents among the top 10 in vehicle production, not just niche OEM start-ups. So these pragmatic incumbents recognize the platform importance of intelligent driving and are increasingly approaching us and investing a lot of resources into pursuing the nomination process for these systems.

Dan Galves, Host

Thank you, George. Next question, please.

Antoine Chkaiban, Analyst

So yes, I believe you lowered your SuperVision 2024 shipments projections by 70,000 at the midpoint. So could you maybe provide some more color on how that splits between the various customers impacted by the tariffs? And how this lower 2024 baseline will impact the ramp-up of SuperVision systems in '25, '26, maybe by telling us what proportion of the systems that you expected to ship in those years are impacted by the tariffs? And I have a follow-up.

Amnon Shashua, CEO

Look, our ability to make accurate forecasts for SuperVision is being challenged by the volatility in China. Some of our platforms like Polestar 4 and Zeekr 001 are being exported to global markets, but the ramp-up is taking longer than we initially forecasted, partly due to the recently imposed tariffs in the U.S. and Europe. Additionally, we anticipate that down the road, our SuperVision solution on Zeekr models may not necessarily be standard. Although no indication of that is baked into the forecast from Zeekr, we still believe that taking this conservative approach would be prudent. So we believe that this volatility is short-lived but will likely persist into 2025 until we see more SuperVision models launched in global markets. This volatility is influenced primarily by two factors: one, we have a limited number of models with SuperVision, and two, the Chinese automotive market is incredibly volatile. This is why we took a conservative approach, setting our guidance to reflect our worst-case view for 2024.

Antoine Chkaiban, Analyst

So maybe on the 14 OEMs that you're working with, I believe the number was the same last quarter. Can you maybe update us on the likelihood of conversion with those 14 OEMs? How has that changed over the last 90 days?

Nimrod Nehushtan, Executive VP of Business Development and Strategy

Yes. So I think what we have— in all of these programs, we continue to make progress and move in the right direction toward nomination. As we mentioned in previous calls, the process of nominating this system is relatively complicated and involves many different activities such as technical evaluations, building prototypes, testing, reviewing architectural changes needed by OEMs, etc. In addition, the commercial aspects must be negotiated, and the investment required to build this program must be agreed upon. Especially for incumbent OEMs that have dozens or even hundreds of different vehicle models, this inserts additional complexity into their planning. Thus, it's natural that the nomination process can take months or even years. However, we believe that once these selections are made, they will provide stability for years to come as technology providers.

Operator, Operator

Our next question comes from Joe Spak from UBS.

Unidentified Analyst, Analyst

Hi, this is Gabriel on for Joe. So I think you just mentioned that the SuperVision RFQs are incremental to the base business, so customers are not choosing this over SuperVision. But again, the 14 OEM number hasn't changed from the prior quarter, and now two of those 14 are only saying SuperVision Lite. So did those two OEMs drop off and were replaced by the two new SuperVision Lite wins? Or was the last 14 OEMs inclusive of these two as well?

Nimrod Nehushtan, Executive VP of Business Development and Strategy

So the last 14 was inclusive of these two. And it's more of a—we're now defining this category more explicitly and precisely, and we wanted to also align the number that we're disclosing to be consistent with this definition.

Amnon Shashua, CEO

And we don't call it SuperVision Lite.

Unidentified Analyst, Analyst

Okay. And just a follow-up on the Zeekr question. What does this accelerated integration of your technology entail exactly? What's the time frame for getting on these vehicles? And I know you mentioned earlier your confidence to win further business with domestic Chinese OEMs. But are you still seeing a large focus on in-house developments within that region?

Amnon Shashua, CEO

First, as a background, launching SuperVision with Zeekr in China was really a critical step for us because it was a proof point for global OEMs to see our capability, which was a key factor in winning, for example, the Volkswagen Group deal and led to many other current development engagements. So we are continuing to double down on investments in China because it's crucial to have a global solution. It's not just about the Chinese market. We have a global solution. As the only Western supplier of a system in this category, this says a lot about the challenges of operating in China. We believe that bolstering our relationship with Zeekr and the Geely Group as a whole will benefit both parties. It allows us to standardize REM and will help localize our solution to comply with challenging Chinese data regulations. We also announced our targeting joint activity on Robotaxi technology, which will help us expand the number of vehicles sending us data. This is a win for both upgrading our SuperVision solution and optimizing it for China while enhancing our global offering as well. For instance, when we gauge metrics like the meantime between critical events during our testing, the experience shows that we have much better results in the U.S. due to robust REM coverage. In China, as our maps are still being localized, the situation is different. If we can localize our solution effectively, we can create a system that will be unparalleled, especially with the EyeQ6 technology in place.

Operator, Operator

Our next question comes from Aaron Rakers from Wells Fargo.

Unidentified Analyst, Analyst

This is Jake for Aaron. I was wondering if you could talk about the progress you're making on the SuperVision domain controller and just maybe the trajectory of the gross margin uplift you're expecting to see from that?

Amnon Shashua, CEO

So we have considerably reduced the cost of our main controller with the EyeQ5 chip. The goal has always been to reach a 50% gross margin on the entire solution, and we are close to it. Currently, we stand around 44%. There's room for further optimization. The EyeQ6 system we are building now for the Volkswagen Group and all the engagements with other nominations will not be more expensive and will be highly optimized. I think that achieving a 50% to 55% gross margin on Tier 1 positions is very attainable.

Unidentified Analyst, Analyst

Great. And then maybe just going back to the traditional ADAS business. Have you seen any change in adoption rates for lower-level ADAS over the last few quarters, especially at Chinese OEMs?

Amnon Shashua, CEO

Yes, indeed. And this is what we reported. In the second half, we see a decline in terms of shipments. This could come from multiple sources. One of them is residual inventory that we don’t have 100% visibility on, and some could be from market share loss where we are getting desourced for local solutions instead of ours. As I mentioned in the opening, the cost performance optimization is significantly skewed in China due to the lack of testing governance, which is the opposite of what is happening in the West. Today, systems that have a five-star rating in 2026 or 2027 will require more sensors and computing power to maintain that standard. The expectation is that they will align with the global markets, which will rebalance the cost optimization trade-off and allow us to regain market share. The bolstering of localization we’re doing with Zeekr will certainly help our ADAS as well. We also recently announced a cloud-enhanced ADAS program with Chery in China, which could increment our position in ADAS in the midterm. We’re also planning to release lower-cost chips dedicated to emerging markets. The volatility we’re experiencing right now is real, but it is expected to be short-lived.

Nimrod Nehushtan, Executive VP of Business Development and Strategy

I just want to add that globally, the take rates for ADAS have shown a positive development; there is a growing consumer pull in markets with historically low adoption rates. Areas like South Africa and India, as well as some Asian countries, are really ramping up in terms of ADAS adoption rates. These regions today account for about 25 to 30 million vehicles per year that lack any ADAS. We see this number continuing to drop, and ADAS adoption rates will continue to increase, positioning us well to benefit from that growth. In developed markets like Europe and the United States, we see almost 100% adoption due to ongoing regulatory trends that demand added content and heightened requirements.

Amnon Shashua, CEO

And there's another aspect I failed to mention regarding the China ADAS situation. Our legacy Western customers are losing some share in China, which also affects our chip shipment volumes there. This market share loss impacts our operations as well. Then, regarding our non-Chinese OEMs, more than half of them have remained unaffected; the reductions we've seen are focused on specific OEMs aligned with market trends.

Operator, Operator

Our next question comes from Adam Jonas from Morgan Stanley.

Adam Jonas, Analyst

Mobileye's CapEx investments are kind of running at around $100 million a year right now. Some of your competitors in autonomy are investing many billions a year, particularly in compute. I'm wondering, do the developments in AI and machine learning recently change how much capital Mobileye feels it needs to allocate towards compute? For example, developments like Brain6; does that change the quantum of CapEx investment needs at Mobileye in a material way that you'd like to communicate today?

Amnon Shashua, CEO

Well, yes, indeed. It's not in the billions of dollars. I don't think we need those billions. But definitely, we're spending close to $100 million annually on cloud compute—just to be transparent. However, in the past six months, we have been investing more on-prem, particularly with H100 and A100 nodes, which is a significant investment. We are investing based on our needs; we are not going to be a cloud provider. We're investing in what we require for generative AI models. Ultimately, they fit into limited capacity chips regardless of their computational strength, which influences network sizes. Our old technology, EyeQ5, has shown much better testing metrics compared to current offerings; with generative AI components via EyeQ6 and Brain6, we expect two orders of magnitude improvements.

Adam Jonas, Analyst

Two orders of magnitude—that's incredible. Mobileye is at the forefront of computer vision and AI with decades of experience. There are obvious dual-use military applications for these technologies, especially with autonomous weapon systems gaining momentum due to the developments driven by your company. Targeting objects may be easier than avoiding objects, one could argue. Given the U.S. has banned NVIDIA and others from selling leading-edge chips into China, do you see a risk of similar restrictions on types of technology you provide China? Being a controlled U.S. entity, is that a foolish line of reasoning?

Amnon Shashua, CEO

No, it's not a foolish question at all. Let’s put things in context. An NVIDIA chip operates at about 250 TOPS, tera operations per second, while our EyeQ6 operates at 50 to 60. We aren’t discussing the same league in terms of high-performance computing. Therefore, I don’t think there is any necessity for bans on our chips since they don’t fall into the category of high-performance computing based on the metrics you consider for such classifications. Our strength lies in embedding software and hardware together. We can address autonomy challenges without needing brute-force operations, placing us outside the short list of chips that the U.S. could consider banning.

Operator, Operator

Our next question comes from Steven Fox from Fox Advisors.

Steven Fox, Analyst

I think I had a little bit more of a here-and-now type of question, which is about the multinationals that are losing share in China. It seems like it's becoming a risk factor for the business and could affect your relative wins. Can you isolate this a little bit more? How concerned should we be about it—not just for how you adjust the numbers this year, but beyond? If that trend continues, how can you counterbalance that?

Nimrod Nehushtan, Executive VP of Business Development and Strategy

Yes. It is a trend that we're closely monitoring alongside other indicators. It is essential to note that our position in China comprises our footing in joint ventures with Western brands as well as our collaborations with local Chinese OEMs. Our work with these local manufacturers continues to remain stable, especially with those larger major players who have global needs and seek consistent solutions. We still maintain robust relationships with certain Chinese OEMs. Regarding the challengers among Western companies, they are also fully aware and working diligently to improve competitiveness. Currently, we do not perceive any trend indicating this risk could further worsen compared to the current conditions. Our goal is to enhance our presence in China, as I disclosed today in the press release, to ensure that our products are competitive enough for all parties involved—both local and Western OEMs.

Steven Fox, Analyst

That's helpful. Could you provide a sense of the percentage tied to Western OEMs being built in China among your new wins, allowing us to gauge that risk for the future?

Nimrod Nehushtan, Executive VP of Business Development and Strategy

Yes, we don’t have specific numbers from our customers regarding this data. Additionally, the OEMs often do not know themselves how many vehicles they'll sell in China or globally since it may vary. However, you are aware of our customer base, and their shares of the market are public knowledge; you can derive these figures based on existing information.

Operator, Operator

Our next question comes from Lu Misiosio from Daiwa.

Unidentified Analyst, Analyst

I have one financial question and one strategic visionary one. Can you paint a picture for what 2025 looks like? You've commented on 2026, but there are many questions about ongoing push-outs. Could you share your thoughts on how the situation will improve in 2025 and 2026, as well as into 2027?

Amnon Shashua, CEO

Regarding 2025, we cannot say much now because our planning process is only beginning. However, we believe that the volatility experienced in China will persist during next year. We expect that inventory levels will normalize, leading to recovery of all the shipments we lost this year. The shipments we lost will likely appear next year, and we are closely monitoring the ramp-up of SuperVision platforms. We will be able to offer more insight closer to the end of the year for the 2025 outlook. The situation in 2026 and 2027 will be significantly different as we see Western OEMs and Chinese OEMs launching SuperVision products in global markets. We foresee 2026 as a major turning point with substantial ramp-up in SuperVision sales compared to 2025. In 2027, we expect further expansion of programs started in 2026, awaiting nominations we have confidence in achieving over the next few months.

Unidentified Analyst, Analyst

Okay. And then perhaps digging deeper into the adjusted operating margin cut on a full-year basis stated in the press release, could you help us understand where the primary impacts are coming from? Is it gross margin suffering the most, while OpEx remains steady? Or is OpEx also on the rise?

Moran Shemesh, CFO

Yes. I think that for Q2, I mentioned earlier that we had similar revenue year-over-year but larger operating expenses, which was the significant driver for the overall operating margin reduction. Our estimations on gross margin have remained consistent with our expectations from the beginning of the year. Thus, the operating margin issues arise from reductions in revenue rather than a change in gross margin. While we’ve trimmed our full-year forecast for operating expenses by approximately $20 million, the revenue cut had a greater impact on operating margin. I would add that for 2025, the trajectory of OpEx growth is expected to decline, which will help balance revenue numbers.

Amnon Shashua, CEO

Yes. Our operating expenses saw a significant increase in 2024 due to our expansion, many programs won, and investments to meet the upcoming technology launches, expected in 2026. Therefore, we do not foresee substantial OpEx increases in 2025 as we have the resources we need to progress effectively moving forward.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the floor back over to Dan Galves for closing comments.

Dan Galves, Host

Thanks, Kat, and thanks to the executive team and all the audience for participating in this call. We'll talk to you next quarter. Thank you.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.