Rivian Automotive, Inc. / DE Q4 FY2025 Earnings Call

Good afternoon, and thank you for joining us for Rivian's Fourth Quarter and Full Year 2025 Earnings Call. Today, I'm joined by RJ Scaringe, our CEO and Founder; Claire McDonough, our Chief Financial Officer; and Javier Varela, our Chief Operations Officer. Before we begin, matters discussed on this call, including comments and responses to questions, reflect management's views as of today. We will also be making statements related to our business, operations and financial performance that may be considered forward-looking statements under federal securities law. Such statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are described in our SEC filings and the shareholder letter we filed with the SEC. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of historical non-GAAP to GAAP financial measures is provided in our shareholder letter. Just before the earnings call, we published and filed our shareholder letter, which includes an overview of our progress over the recent months. I encourage you to read it for additional details around some of the items we will cover on today's call. Following our prepared remarks, we will be taking questions from sell-side analysts. In the interest of keeping the call to 1 hour, we would ask these analysts to limit any follow-on questions to one. With that, I'll turn the call over to RJ.

Thanks, Chip. Good afternoon, everyone, and thanks for joining us for today's call. 2025 was a year focused on execution at Rivian as we laid the foundations for scaling our business. Our team progressed the development of our technology road map in R2, while simultaneously driving continued improvement in our customer experience and our path to profitability. In founding Rivian, I wanted to demonstrate how a clean sheet technology-focused vehicle could eliminate long accepted compromises and provide consumers choice. Our goal with the launch of our R1 products was to establish the Rivian brand by delivering a combination of efficiency, on-road performance, off-road capability, functional utility and product refinement that simply didn't exist in the market. The first vehicles established Rivian as a brand that enables people to do the things they love, enable adventure as well as transcend different segments, form factors, use cases and geographies. In the fourth quarter of 2025, the R1S was the best-selling premium electric vehicle priced above $70,000 in California, New York, New Jersey, Oregon, Virginia and Washington, D.C. And it was the best-selling SUV EV or non-EV, over $70,000 in the state of California. Now I'm excited that we are months away from starting customer deliveries of R2, our first mass market vehicle. One of the things that's often overlooked around EVs is that there is a surprising lack of high-quality choices at prices around or below $50,000 for a new vehicle in the United States; there are only a few compelling EV choices as compared to hundreds of internal combustion or hybrid options that have a wide range of form factors and design aesthetics. From the lens of the customer, if you want to buy a midsized SUV with robust technology, autonomous capabilities and a reasonable price point, you've really only got one choice, and it's been that way for a long time. This is a reflection of a market that's being underserved. We believe R2 is going to change that. R2 is an extension of the experience we delivered in R1 with design elements and performance to inspire adventure, but in a smaller form factor and, importantly, at an attractive lower price point. Launch Edition R2 variants will be well equipped with a dual motor all-wheel drive setup that provides more than 650 horsepower and over 300 miles of range. In mid-January, I was thrilled to drive our first R2 manufacturing validation build off the production line in our factory in Illinois. As you've seen from the extremely positive media reviews of our preproduction vehicles over the last few days, R2 is an exceptional vehicle, and I believe it will be a game changer for our customers, our company and the industry. One reviewer said, the R2 is an exceptional vehicle, quite possibly the best all-around electric vehicle I've ever driven. We look forward to getting investors and more media in R2 for demo drives so they can experience the capabilities of the vehicle. We plan to provide additional product, pricing and lineup details on March 12. Turning to our AI and Autonomy Day, it was great to see so many of our stakeholders at our offices in Palo Alto this past December. We were excited to showcase our innovation across our vertically integrated hardware, software and autonomy teams and unveil RAP1. Developing our own chip was driven by the need for velocity, performance and cost efficiency and is a key development of our autonomy platform. Near the end of last year, we released universal hands-free, which expanded our advanced assisted driving capabilities for Gen 2 customers to more than 3.5 million miles of roads across North America. Since its release, customer utilization of our autonomy features has doubled. Rivian is also making significant progress in making software and AI core to everything we do from the way we design, develop, manufacture and service our cars to the way our customers interact with their vehicle. This is enabled by the Rivian Unified Intelligence, a common AI foundation that understands our products and operations as one continuous system and personalizes the experience for our customers. It also defines how applications will integrate in our vehicles in the future. We were excited to demo the Rivian Assistant at AI and Autonomy Day and expect to launch this feature early this year. Finally, we continue to see the extensibility of our electrical hardware and software platform with the work happening in our joint venture with Volkswagen Group. I'm very pleased that we have delivered vehicles for winter testing for multiple Volkswagen Group brands, 13 months after the formation of the joint venture. In closing, 2025 was a foundational year for scaling Rivian, and I could not be more excited for the year ahead. I believe 2026 will be an inflection point for our business. As an American automotive technology company that develops and manufactures incredible electric vehicles, we believe that the future of the automotive industry will be fully electric, autonomous and AI defined. I've never been more confident in the opportunity ahead for Rivian than I am today. I firmly believe Rivian's technology, along with our direct-to-customer ownership experience, positions our company to build a category-defining brand with a strong mass market product portfolio for the U.S. and global markets. With that, I'll pass the call over to Claire to discuss our financial results.

Thanks, RJ, and good afternoon, everyone. As RJ discussed, we believe 2026 will be an important year as we scale our business. Launching R2 will extend our brand to the mass market, and we expect R2 will drive meaningful automotive segment growth and profitability over time. Now before I dive into the quarter, there are a few key financial metrics that I'd like to highlight for 2025. First, on a full year-over-year basis, we delivered nearly $5,500 of improvement in average sales price due to the introduction of our second-generation R1 quad models, a higher mix of R1 units and increased base prices for the 2026 model year. Second, on a full year-over-year basis, we achieved an approximately $9,500 improvement in automotive cost of goods sold per unit due to material cost reductions and operational efficiencies. Finally, the improvement in unit economics in our Automotive segment, when combined with our strong software and services performance, resulted in greater than $1.3 billion of improvement in full year gross profit, making 2025 our first full year of positive gross profit. Additionally, our gross profit performance, coupled with our focus on cost management, enabled our adjusted EBITDA for 2025 to be at the favorable end of our guidance. All of these metrics represent our continued progress in the operational efficiency and profitability of our business, which sets a strong foundation for 2026 and beyond. We expect the gross profit per unit for R1 and the commercial vans to be further enhanced as we ramp up production and deliveries of R2, coupled with the gross profit contribution of R2 over time. Turning to the results of the fourth quarter, our consolidated revenues were approximately $1.3 billion. Consolidated gross profit was $120 million, and our gross profit margin was 9%. Gross profit included $108 million of depreciation and $26 million of stock-based compensation expense. Adjusted EBITDA losses for the fourth quarter were negative $465 million, a $137 million improvement from Q3 2025 due to higher gross profit and lower operating expenses. Now looking at our Automotive segment. During the fourth quarter, we produced 10,974 vehicles and delivered 9,745 vehicles from our manufacturing facility in Normal, Illinois. This was the primary driver of the $839 million of automotive revenue. Automotive gross profit for the fourth quarter was negative $59 million, a $71 million improvement from Q3 2025 due to a higher mix of commercial vans, which resulted in the lowest cost of goods sold per unit in our history. Our Software and Services segment reported another strong quarter with $447 million of revenue and $179 million of gross profit. Approximately 60% of software and services revenue was attributable to our joint venture with Volkswagen Group. We also experienced strong growth from our marketing and vehicle repair and maintenance. Looking at our balance sheet, we ended the year with approximately $6.1 billion of cash, cash equivalents and short-term investments. In 2026, we expect to receive an additional $2 billion of capital as part of our joint venture with the Volkswagen Group. $1 billion is an investment subject to the successful completion of winter testing, which RJ discussed earlier and $1 billion is nonrecourse debt, which we expect to receive in October. Finally, for our 2026 guidance, we expect to deliver between 62,000 and 67,000 total vehicles across R1, R2 and our commercial vans. We expect total deliveries of approximately 9,000 to 11,000 per quarter in the first half of 2026. We plan to start production of the R2 launch variant with a single shift and expect to add a second shift towards the end of the year. While we believe our gross profit will increase year-over-year, we expect the complexity of a new vehicle launch to negatively impact our automotive gross profit in the second and third quarters before becoming a benefit to our overall operations in the fourth quarter as we ramp production and deliveries. As a reminder, we believe this is a transition year for the Automotive segment's profitability. Delivering a strong exit rate for R2 production and deliveries will be a key focus for our team. For 2026, we expect an adjusted EBITDA loss of between $2.1 billion and $1.8 billion. Our adjusted EBITDA guidance also includes a step-up in R&D spend as we accelerate investments in our autonomy road map and look to deliver LiDAR, our first RAP1 chips and limited point-to-point functionality for our customers by the end of the year. We believe autonomy will be a key fundamental long-term differentiator for our business. We also plan on the continued growth of our SG&A, driven by the expansion of our service and sales footprint as we scale with R2. Finally, for 2026, we expect capital expenditures of $1.95 billion to $2.05 billion related to finalizing construction and tooling for R2 and normal, kicking off vertical construction for our greenfield plant in Georgia and the continued build-out of our sales, service and charging infrastructure. In closing, thank you again to the team for delivering a great 2025. As we look forward to 2026, we remain steadfast in our belief that R2 and our technology road map will be truly transformative for our growth and profitability. I'd like to turn the call back over to the operator to open the line for Q&A.

Our first question comes from Emmanuel Rosner with Wolfe Research.

My first question is on the cadence, that Claire, you just highlighted with the 9,000 to 11,000 units per quarter in the first half and then obviously, 62,000 to 67,000 on a full year basis. Is that 10,000 per quarter or so, is that your expectation for R1 plus EDV for this year in 2026? And then the upside in the second half would be essentially delivering the R2?

Thanks, Emmanuel. As you think about the cadence, as RJ articulated in his prepared remarks, we expect first deliveries to begin for R2 in the second quarter. Like any ramp, the number of deliveries will be rather small as you think about the Q2 impact of R2 contribution to the 9,000 to 11,000 units per quarter that we anticipate in the first half of the year. And then as we get into the second half of the year, we expect to see the continuation of the ramp of R2, coupled with the ongoing deliveries of our commercial van as well as R1. So on a full year basis, you can think about the R1 commercial van being roughly in line with our 2025 total volumes.

Okay. And then another one on the cadence side, but more from a financial point of view, I think in the past, you had targeted, I think, by the fourth quarter of this year, some level of profitability on R2 to sort of demonstrate essentially the potential. Is that still the expectation for this year?

Yes. As I mentioned, we expect 2026 will be a transformational year for our automotive gross profit, and we anticipate that both R2 will contribute significantly.

Our next question comes from Dan Levy with Barclays.

First, I wanted to start with just a question on the R2 volume assumptions, which you just talked about a moment ago. As you're going into the launch, do you have a feel for what the aggregate demand is? And maybe you could just talk to the question of your confidence on people wanting to take delivery of R2 before the new ADAS platform or hardware is put into the vehicle? How much of a current the lack of that new hardware will be on deliveries?

Dan, thanks for the question. With regards to R2, I've had a chance to spend a lot of time in it over the last several months and really over the last month or so, driving our validation vehicles that are produced in our plant off of our manufacturing validation build. And the vehicle is just absolutely incredible. It's the combination of features, the packaging, the vehicle dynamics, the steering wheel, we're incredibly bullish on. And as I talked about a lot in the past, we ultimately think the market is really hungry for some choice in this segment. As I said in my opening remarks, just the lack of choice that exists in and around this $50,000 price point has led to very high market share concentration of one vehicle. And so this is the first time there's going to be a real alternative. And this is important for folks that are in internal combustion vehicles today, midsized SUVs and looking for something that fits their form factor needs, their aesthetic needs, their packaging needs. And so we're very, very focused on putting this together. And with that said, we have a lot of confidence in the overall demand; of course, that's why we leaned so much into the program and leaned so much into what we're about to launch.

And just the issue of the ADAS platform, people taking it before the new hardware comes in?

Yes. With new technology, especially for our business where we are heavily focused on developing it, there is always something new on the horizon. Many customers are eagerly awaiting a great midsize SUV. We have a substantial backlog of demand, and during the short time we will be launching an upgraded version of our Gen 2 autonomy stack before the Gen 3 stack arrives, we do not anticipate this being a significant issue. Customers can choose to wait for the Gen 3 stack or enjoy the vehicles that will be available in the near term.

Okay. Great. As a follow-up, I wanted to ask about partnership or licensing deals with other automakers. And maybe you could just give us a sense of the tone or tenor of discussions on licensing the network architecture to others. And you said at your Autonomy Day that one of the opportunities on your in-house processor was not only that it could be used for your vehicles, but you could also sell this to others. It's a better, what you said, bang for buck. So I know it's early days, that still isn't out and the initial units of that process are going to need to be for you. But what types of discussions are you having with automakers on potentially selling that or licensing that to them?

So as I said in the opening remarks, we've had in the first 13 months of establishing a joint venture with Volkswagen, we've tested on multiple VW Group products. And I think the true demonstration and existence proof, if you will, of the scalability of our technology in terms of being able to work across multiple form factors, different price points, different brands and importantly, be productized into a platform that can go across a large existing OEM. This relationship is really important for that. And so that's our focus. But of course, we have relationships with a broad spectrum of other manufacturers. And I've said this in the past, but I deeply believe that over the course of the next several years, every manufacturer has to make the decision as to whether or not to get to a software vehicle or they're going to develop it themselves, secure it from a third source of which we will be the only demonstrated example of having scaled this technology outside of our own products or accept that without the technology, you will lose market share. And so we're quite bullish on the potential for this technology platform, and we see it as really an important part of our portfolio going forward.

Ladies and gentlemen, we are experiencing some technical difficulties. Please hold on, and we will continue the Q&A shortly. Thank you. Our next question comes from Ben Kallo with Baird.

Congrats on all the progress so far. Maybe first, can we talk about just the VW relationship and there was an uptick in revenue from that. And just if you give us a sense of how that progresses and the potential to expand the relationship or how we should think about it growing? And then the second question is just around Georgia, the DOE loan guarantee, how you're looking at that and maybe just liquidity in general as you start working on that.

Thanks, Ben. I mentioned some of this in my earlier response, but I appreciate your patience with the technical issues. To reiterate, our relationship with Volkswagen is advancing well. It has been 13 months since our joint venture commenced, and we have begun winter testing on various Volkswagen Group products. We are aiming for the first launch of those vehicles in 2027, and our collaboration has been very strong. Last week, we had a productive session with a wide range of the Volkswagen Group leadership team. It is encouraging to see our technology being utilized not just in vehicles similar in price to Rivian's offerings, but across a broad spectrum of price points and forms. This underscores the scalability of our technology. We will continue our efforts to deliver multiple products for the Volkswagen Group, which also opens up opportunities with other manufacturers.

And then to put some of the financials behind the software and services outlook as a whole, we anticipate seeing that we'll approach about 60% year-over-year growth in our software and services business, and it will be a significant driver of our gross profit outlook as well with margins that we expect to be in the mid-30% area as a whole. Then as your second question, which was on the capital road map, as I mentioned in my prepared remarks, we ended 2025 with $6.1 billion of cash, cash equivalents and short-term investments. We expect that we'll receive another $2 billion from Volkswagen Group throughout the course of 2026. There's still roughly another $0.5 billion payment associated with the original joint venture transaction as well that will happen, we anticipate in 2027. And then as it pertains to our broader capital road map, we'll continue to remain opportunistic as well on that front. On the DOE loan question, similar to what we've shared in the past, we certainly share the President's desire to bring jobs back to the United States. We're excited to keep up our work on creating new American manufacturing jobs. We'll be adding approximately 2,000 new jobs at our Normal, Illinois plant for the ramp-up of R2, an additional 7,500 jobs at our future Georgia plant as well. And similar to the comments RJ just made, Rivian is working to help drive innovation and technology leadership in the U.S. automotive industry for consumers and also associated with our joint venture with Volkswagen Group, enabling this technology for the industry as a whole.

Our next question comes from George Gianarikas with CG.

As it relates to your guidance for vehicle sales this year, to the extent you see a strong conversion in your backlog for the R2, could you see upside to that? Or are there certain production bottlenecks that you'll have to work through towards the end of the year?

Thanks, George. We have focused extensively on the process of ramping up vehicle production, both in our discussions here and internally. We're committed to ensuring a smooth production launch and ramp-up. While we often view the plant as the main bottleneck, it's important to remember that many other suppliers provide essential components for Rivian, which play a crucial role in this process. We're dedicated to managing and planning our supply base for ramping. Essentially, the pace of our ramp is dictated by our slowest component. As previously mentioned, we're starting with a single shift, transitioning to a second shift by the end of the year, and introducing a third shift in 2027. This strategy is carefully planned to ensure our ramp is consistent and evenly distributed across our supply chain. As you noted, we have a significant demand backlog that we are addressing and growing excitement surrounding the R2 vehicle. We anticipate continued expansion as reviews and exposure increase. It's important to highlight that feedback from recent preproduction reviews has been overwhelmingly positive. We are fully aware of this sentiment, and we are diligently coordinating our ramp-up and output growth with our suppliers.

And maybe as a follow-up, as you sort of crystallized your selling prices and your cost structure for the R2, can you just maybe speak to the guidance you gave at your Analyst Day last year about reaching EBITDA positivity in 2027 and your long-term vision around having 25%-ish gross margins and high teens EBITDA margins?

Thank you, George. As mentioned in our comments, we believe that 2026 will mark a transition year for the automotive gross profit segment. Our primary goal for the normal plant is to increase production and deliveries to about 4,000 units per week. Although significant execution from the team is needed to achieve this, we believe that if we are successful, the company will be positioned well to meet our adjusted EBITDA targets. Looking at the bigger picture, we see a 20% gross profit target for our automotive segment. Furthermore, considering the overall impact of software and services, there are various outcomes or licensing agreements that could enable gross profit to exceed the 25% target we aim for in the long term.

Our next question comes from Joseph Spak with UBS.

Just a couple of questions. Claire, I know you said the second shift starts in the back half. Does the guidance contemplate like exiting the year at a full 2-shift rate for the R2? I just want to sort of understand how we should think about a jumping off point for '27.

Sure. As you can imagine, Joe, we'll be in the process of ramping up the second shift. So as you think about the exit rate of 2026, we won't yet be at full production across 2 shifts. We'll be getting there as we continue to progress all of our operational efficiencies and get the team ready to ramp up throughout the course of 2027.

And then I guess, RJ or Claire, just you mentioned more details on March 12. I'm assuming that's also when reservation holders will be invited to configure. But is there any update you could give us on that order book? And then on the pricing side, one of the things we've seen, again, not Rivian specific just to the industry and the world really is the cost side between metals and memory. So curious to sort of wonder how you're thinking about that impacting either your pricing for the vehicle or whether that's contemplated in the EBITDA guidance for the year?

Yes. On March 12, we will provide a comprehensive overview of the product portfolio for R2, which will include the launch configuration. This configuration features a dual motor performance variant with a premium trim. We will detail the various combinations of trim, powertrain performance, and battery size on that date. Additionally, customers will be able to start configuring their vehicles, enabling us to prepare for deliveries later in Q2. It's important to consider the overall demand profile for the vehicle; we've invested significant time into understanding the desired combinations, informed by numerous discussions and insights into the most popular trims and configurations from R1. We are eager to present this information as a complete picture rather than in fragments. Beyond the launch configuration, we will discuss the rest of the configurations in detail in about a month.

And then Joe, our adjusted EBITDA guidance does contemplate some of the increases that we've seen in raw material costs and the current supply chain backdrop as well.

Our next question comes from Mark Delaney with Goldman Sachs.

I was hoping to speak more about automotive COGS. Maybe you can help us better understand what led to the reduction in cost per vehicle, both sequentially as well as year-over-year. And then as you look forward, clearly, you just alluded to some of the supply chain challenges around DRAM and other input costs that are embedded into your guidance. But where do you ultimately think the R2 cost can get to? And is the 50% reduction in the BOM cost compared to R1 still the right level to think about?

For the fourth quarter, we achieved a cost of goods sold per unit of $92,000, reflecting a $4,000 improvement compared to the third quarter. A significant factor in this was the increased proportion of commercial vans sold in the fourth quarter. Additionally, we experienced ongoing operational efficiencies in our operations, contributing to the lower costs per unit. Year-over-year, the primary driving force behind the improvement was the decline in our material costs, which was influenced by our transition to fully Gen 2 vehicles. We also observed a notable reduction in the costs of various raw materials, particularly lithium prices, which played a crucial role in the decrease in COGS per unit when combined with the efficiencies we implemented throughout the year. Looking ahead to the R2, a key aspect is the benefits we've started to see from our joint sourcing initiatives for low-voltage electronics, which are essential for the R2 vehicle. This has been instrumental in helping to improve the material cost trajectory for the R2. Furthermore, as we approach production at the Georgia plant, we anticipate additional opportunities for synergies and efficiencies as we begin sourcing for future vehicle volumes that will share the midsized platform's fundamentals. Another important point is that we expect a reduction in tariffs per unit, as we did not fully benefit from the Section 232 offsets during the fourth quarter. We anticipate further tariff relief as we move forward, which will also benefit the R2 in the future.

My other question was on EDV, and I understand probably flattish volumes there for 2026 based on your comments earlier on the call, but you did speak to a plan for some additional variants, including one with more range for Amazon. So maybe help us better understand when to expect that new product for the commercial segment and what that might mean for van deliveries and the broader commercial opportunity going forward?

We do expect some growth in our EDV demand in 2026. And as you called out, there's an all-wheel drive version of the van and a larger battery pack variant as well. And both of those are to help unlock specific use cases within the Amazon network. We're working really closely with Amazon in defining the requirements of those and excited to get those launched. And the relationship with Amazon continues to be very positive. And certainly, the EDV continues to perform extremely well.

Our next question comes from Christopher Pierce with Needham.

As you discuss the addition of a second and then a third shift, could you explain the process of hiring for these positions in the usual area? I'm unsure whether we should view this as a challenge or if it's already underway. Do you have these workers in place and simply reassign them between shifts? Any details you can provide would be appreciated.

Yes. Chris, thank you for your question. The hiring process is in place, is proceeding according to plan. We have enough candidates. At the beginning, it was even spontaneous candidates that wanted to work for us. So we are good from that end. There's part of the team that will populate the R2 line that is coming from the existing flows, but it's an important part as well that is hired from outside. We have reinforced our training programs. We have even before hiring the people pre-hiring activity just to let them know what is working in the lines and what they should expect there. And so far, we are very happy with the response of the talent pool and the people pool that we have seen there. So...

Perfect. I want to understand your recent reviews. You're preparing to introduce the first trim along with other trims within a month, with initial deliveries expected in the second quarter. I'm curious about the timing. It reminds me of how Apple launches products like the iPhone or iPad with immediate availability. What factors influence the spacing of your launches? Is there a psychological aspect to it, or does it primarily depend on production capabilities and timing? I'd like to hear more about how you plan the launch cadence.

Well, thanks, Chris. One of the amazing things about the R2 program is there's an enormous backlog, but that does create a challenge for us with making sure essentially how do we select who receives our vehicles first and having a processor on that. And so opening up the reservation or opening up the configuration process allows us to start taking this demand backlog and organizing around when we make deliveries and who gets the vehicles first. It's not as if you could like press a button and instantly have thousands and thousands of vehicles available. So we start producing, we are ramping production, but the demand will outpace our ability to produce. And so that process allows us to organize in a thoughtful way and learning a lot from some of the past launches we've had, how do we prioritize and how do we sequence deliveries to our broad base of customers.

Our next question comes from Itay Michaeli with TD Cowen.

I wanted to actually ask on the universal hands-free. Curious how initial feedback has been since December, how we should think about feature improvements and OTA updates this year? And maybe what you're also assuming for paid subscriptions this year?

We're really excited to discuss this. This is a major initiative within the business, focusing on autonomy and AI. Think of our Universal Lands Free as the first step in a series of enhancements that will broaden its capabilities. Universal Lands Free has increased the number of miles where you can drive with your hands off the wheel but eyes on the road to about 3.5 million miles, essentially covering any road with marked lanes. Later this year, we will enable the vehicle to drive from point to point, allowing you to input an address and have the vehicle navigate there. The subsequent steps will guide us towards what we consider personal Level 4 autonomy. In between point-to-point and personal Level 4, we will introduce hands-off, eyes-off capabilities, enabling you to look away from the road and engage in other activities, starting on highways and then expanding beyond. Following that, we will launch our first Level 4 applications within a geofence area, gradually expanding over time. We firmly believe that through the rest of this decade, we will witness autonomy evolve from a nice feature with hands-off capabilities to fully hands-off and eyes-off operation. Ultimately, Level 4 autonomy will allow vehicles to operate entirely independently, even driving without passengers. This innovation will significantly transform the customer experience and play a crucial role in purchase decisions. It will also lead to substantial changes in how we envision our business model and influence consumer preferences for vehicles.

That's very helpful. As a quick follow-up on the financials, any sense of how we should think about working capital flows this year, particularly as you go through the initial R2 ramp?

Sure. We will see working capital be an outflow of cash for us over the course of 2026. And that in part is driven by the buildup of our inventory balance associated with the launch of R2.

Our next question comes from Andrew Percoco with Morgan Stanley.

I actually just want to come back, RJ, to what you just said on autonomy really driving the value proposition and driving experience over the next few years. And I guess I'm just curious, like can you share your thoughts around whether or not there will be a retrofit opportunity for existing or new R2 customers that don't have Gen 3 with LiDAR and existing R1 customers? And any thoughts of when you'll introduce LiDAR onto R1 production?

We're not planning or contemplating any retrofit for our vehicles. There will continue to be updates for our Gen 2 vehicles, including the R1 and our upcoming R2 vehicles. However, hardware upgrades are not on the agenda. The upgrades we previously discussed during our autonomy and AI Day will be implemented on vehicles in early 2027, and we are very excited about those developments. The capabilities and the demonstration we showcased at our Autonomy AI Day, which was a point-to-point demo, were performed on a Gen 2 R1 vehicle. This demo will be available on any Gen 2 R1 vehicle as well as the R2 vehicles we will be launching.

Got it. Okay. Is the plan to achieve eyes off point-to-point with Gen 2, or will that require Gen 3?

I think the important thing to keep in mind on our upgraded architecture, which is, as I said, coming in '27, is that has a few really important purposes. One, of course, is it raises the ceiling on what's possible. So it grows the opportunity to add even more capability beyond point-to-point, but it also serves as an even more enhanced part of our data flywheel where we have enhanced cameras, a higher level of inference in vehicle, but importantly, we add a LiDAR, as you referenced, which turns essentially every vehicle into part of our ground truth fleet, which is really helpful for training our end-to-end model. And so the way that the model continues to improve is we're benefiting from the thousands and thousands of drivers that are on the road and the vehicles that are on the road, pulling interesting and unique events back off the vehicles and allowing us to feed that into the overall training loop that we have for what we call our large driving model.

Got it. Okay. And just one quick clarification. When you say Gen 3 will be available early 2027, will that include R1? Or is that just still R2?

This is for R2.

Our next question comes from Yan Dong with Deutsche Bank.

My first question is on the relationship with VW as it matures. I was wondering if the topic of how to best utilize vehicle data come up. And more asking this in the context of VW naturally having a much larger fleet and Rivian being able to potentially benefit from getting access to that data for training. So just curious your thoughts on that topic.

The Volkswagen fleet and what ultimately we're delivering to Volkswagen from a technology platform doesn't include our autonomy platform. So it's our embedded software platform, our topology of ECUs, including our zonal architecture, but it doesn't include our self-driving architecture.

Got it. And then maybe just on the RAP1 chip. Curious to hear your maybe longer-term inspirations for that. Is this something you think that will be limited to Rivian? Or do you envision maybe this being used by some of your partners or other OEMs and whether it could be potentially applied to nonautomotive products?

I'll answer it broadly. Our self-driving and autonomy efforts are a major focus for the business and represent the largest area of capital investment in R&D. Looking ahead to the next few years, we believe that as we continue to show progress and work towards achieving Level 4 capabilities, this platform will have applications beyond Rivian. We foresee a future where we can monetize this in several ways, including increasing market share and vehicle sales, exploring new business models for transportation consumption, and providing technology to other manufacturers. Specifically regarding our RAP1 processor and its future variants, we see potential for vision-based robotics applications well beyond vehicles. While the vehicle serves as an excellent near-term vision-based robot, our new company, Mind Robotics, also showcases a great customer application and use case for our RAP1 processor.

Our last question comes from Tobias Beith with Rothschild & Co. Redburn.

May I ask what Rivian's management's latest thoughts are on captive battery cell manufacturing and assembly are considering the recent development in the price of lithium salts. I know that this activity was contemplated at one point at your forthcoming plant in Stanton Springs.

Well, thanks, Toby. We've found great working partnerships with our battery cell suppliers and have taken a very active role in securing and sourcing some of the upstream precursor materials. So you called out lithium. That's a really great example of an area that we, from a sourcing point of view, spend a lot of time on. But being able to work with these key battery partners and leverage the investments they've made in production capacity and in their own cell construction and cell design has been really helpful for us in terms of efficiently deploying capital.

Our last question comes from James Picariello with BNP Paribas.

Can you hear me?

Yes, James. We can hear you.

Great. I'm interested in your thoughts on R1's potential to attract more demand now that one of your major competitors will be discontinuing its two high-end models next quarter. This means there are about 20,000 annual units available in the U.S. It seems like the R1 could be a perfect fit for many of those customers. What are your thoughts?

Yes. The Tesla Model X, which is expected to stop production next quarter, is a significant product in terms of electrification and was one of the first larger-scale offerings to demonstrate the excitement of electric vehicles. With its departure from the market, along with the Model X, there is a potential opportunity. I've discussed the lack of choice in the context of R2, and this also applies to R1. Currently, our R1S, as I mentioned earlier, is a highly successful product in the premium price category. It is the best-selling premium SUV, whether electric or not, in California, and it also ranks as the best-selling premium electric SUV in the U.S., as well as the best-selling premium electric vehicle across various states. Consequently, with even fewer choices in that price category, this presents an opportunity for us. More broadly, the overall lack of options, particularly in the price range of R2, represents a significant chance for us to capture market share while offering something truly exciting to customers.

Yes, makes a lot of sense. My follow-up, just for the strong gross profit contribution slated for this year, can you help dimension at all what the expected contribution might look like from VW as we think about that 60% year-over-year growth?

Sure. As you think about the Software and Services segment, roughly half of our revenue comes from revenue streams associated with our joint venture with Volkswagen Group, and we expect that to largely remain true as we look ahead to 2026 as well. And it is a more disproportionate share of the overall gross profit dollars that we earn out of the Software and Services segment as a whole.

This concludes the Q&A section of the call. I would now like to turn the call back to RJ Scaringe for closing remarks.

Thank you all for joining the call. We apologize for the technical difficulties we experienced at the beginning. We are very excited about R2. I've had the opportunity to spend considerable time with the car in different scenarios, whether taking my kids to sports events or loading it with gear. It truly embodies the Rivian brand and captures much of what makes R1 unique, but at a starting price of $45, it will be accessible to a wider range of customers. As we look ahead to the next few months, our company is highly focused on ramping up the launch of this vehicle, along with continuing the development of our technology. This includes both our software advancements and our work on autonomy. Thank you again for joining us, and we look forward to many people experiencing the R2 firsthand.