Q2 2023 indie Semiconductor Inc Earnings Call

Participants

Donald McClymont; Co-Founder, CEO & Director; indie Semiconductor, Inc.

Thomas S. Schiller; CFO, Executive VP of Strategy & Secretary; indie Semiconductor, Inc.

Unidentified Company Representative

Anthony Joseph Stoss; Partner & Senior Research Analyst; Craig-Hallum Capital Group LLC, Research Division

Cody Grant Acree; Senior Equity Analyst; The Benchmark Company, LLC, Research Division

Craig Andrew Ellis; Senior MD, Director of Research and Senior Semiconductor & Capital Equipment Analyst; B. Riley Securities, Inc., Research Division

Ross Clark Seymore; MD; Deutsche Bank AG, Research Division

Suji Desilva; MD & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division

Presentation

Operator

Good afternoon, and welcome to indie Semiconductor's Second Quarter 2023 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded.
I will now turn the call over to [Ashish Gupta], Investor Relations. Mr. [Gupta], please go ahead.

Unidentified Company Representative

Thank you, operator. Good afternoon, and welcome to indie Semiconductor's Second 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 Q2 results and Q3 outlook.
Please note that we'll 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. For a complete reconciliation to GAAP, please see our Q2 earnings press release which position in events of this call and can be found on our website at www.indisemi.com.
I'll now turn the call over to Donald.

Donald McClymont

Thanks, Ashish, and welcome, everybody. I am delighted to report that indie once again exceeded our top line and gross margin guidance and delivered another quarter of record performance, a testament to both the increasing demand for our innovative Autotech solutions and our unwavering commitment to achieving operational excellence.
Our demonstrable outperformance against automotive industry peers continues to be fueled by indie's deep product portfolio and design win pipeline, backed by over 400 patents and applications worldwide, with engagements across virtually all leading global vehicle OEMs and Tier 1s.
Specifically, during the second quarter of 2023, we grew the revenue 102% year-over-year and 29% sequentially to $52.1 million and achieved a gross margin of 52.2%. As we'll outline, we're gaining design win traction across ADAS, user experience and electrification applications.
Of special note, during the quarter, we captured our first-ever program win at Bosch, one of the world's leading suppliers to the automotive industry. This particular win rounds out our Tier 1 customer base and dramatically extends our OEM reach initially at Toyota, including Lexus. At a higher level, wins like this, in the hundreds of millions of dollars in potential lifetime revenue, set the stage for sustained above-market growth and the generation of annuity-like free cash flow.
To that end, we're making our biggest engineering investments and design win strides within ADAS. In fact, the entire automotive industry is now squarely focused on advanced vehicle safety features, above all else. For instance, the National Highway Traffic Safety Administration, NHTSA, has recently proposed a regulation that would mandate all new passenger vehicles be equipped with automatic braking capabilities, capable of preventing rear-end crashes with other vehicles and collisions with pedestrians. We applaud this proposal and similar safety initiatives that leverage the next generation of Autotech technologies to prevent countless injuries and save lives.
Despite the incremental industry regulations and the addition of new centers and processes within the vehicle, the incalculable benefit of safer cars and roadways, certainly far outweigh the associated costs. And at indie, we've made this our company mission: empowering vehicle OEMs and Tier 1 suppliers with increasingly more sophisticated, yet cost-effective, safety semiconductors and software for the vehicles of tomorrow and, ultimately, leading towards the uncrashable car.
Specifically, we are following a highly differentiated sensor fusion strategy versus a discrete approach, enabling either the integration or flexible partitioning of multiple modalities, including radar, computer vision, LiDAR and ultrasonic solutions. We apply these modalities to capture data in different environments and ranges and to enable a comprehensive and accurate perception of the vehicle surroundings. The potential for a sensor fusion product road map, amplified and expedited by our targeted acquisitions, has set indie distinctly apart from our competition, many of whom are just trying to develop a single modality, often in the hopes of landing an exclusive customer.
Contrast this with indie, we believe that no single technology will monopolize the playing field due to the complexity and diversity of the driving environment. The combination of sensor technologies in a harmonious fusion forms the cornerstone over a robust and efficient solution for advanced safety applications. We believe this holistic sensor strategy, at scale, ensures the highest levels of safety and effectively meets the diverse and immediate needs of ADAS implementations and one day, further out, the autonomous vehicle market.
Within the Vision product area, we're proud to highlight the aforementioned milestone achieved in the past quarter, our first program win with Bosch, which was enabled by our acquisition of GEO earlier this year. This pivotal collaboration not only underscores the effectiveness and adaptability of our solutions but also broadens our footprint in the area of driver and occupant monitoring systems. Our Vision products combine the industry's leading real-time signal processing, functional safety-enabled microcontrollers and perhaps, most importantly, artificial intelligence, AI accelerators, which enable perception algorithms to instruct the vehicle to take corrective actions.
As global safety initiatives continue to evolve, the demand for these monitoring systems is intensifying, positioning in-cabin sensing solutions as critical elements to enable enhanced autonomous features. S&P Global Mobility's recent forecast reinforces this view, with the market for these OMS/DMS semiconductors projected to cross the $0.5 billion threshold by 2029. With our unique combination of Vision and RADAR capabilities, indie is well positioned to ascend to the leadership within this rapidly emerging market as we ramp at BMW and soon at Toyota.
Speaking of radar, we've similarly made significant strides in an extremely short period of time in automotive terms, aided by deep R&D investments and augmented by synergistic acquisitions, including the radar division of Analog Devices, ON Semi's radar development team and, most recently, Silicon Radar, with each bringing unique and highly complementary design teams and product IP. These acquisitions have also led to concrete achievements, including our largest design win to date, and a strategic supply agreement with a top-tier supplier.
On the LiDAR front, we continue to make great progress with our Surya SoC, demonstrating our frequency modulated continuous wave, or FMCW, LiDAR chipset and an increasing number of leading OEMs in the U.S., Europe and Japan. And more recently, we announced a strategic partnership with SiLC Technologies to deliver a world-class FMCW LiDAR solution. This partnership offers a fully integrated laser scanning system, deploying coherent detection and sets the high-water mark for rapidly emerging LiDAR applications.
By background, FMCW-based LiDAR delivers multiple real-world benefits compared to direct detection-based time-of-flight solutions, including long range with high precision, interference immunity, per-point instantaneous velocity and distance measurement. This partnership combines award-winning products from SiLC and indie into reference platforms that enable an order of magnitude improvement in sensing performance, manufacturability, power consumption, form factor and cost relative to competing architectures.
Turning to user experience. During the quarter, we further ramped our highly integrated power-efficient portfolio across leading global automakers as OEMs prioritize a best-in-class cabin experience more than ever. With modern cars becoming rolling entertainment centers, network hubs and doubling its workplace environments, providing the ultimate user experience throughout the entire cabin is becoming the new car buyer paradigm.
For example, OEMs are increasingly focused on unique and differentiated interior lighting as it can drive an emotional connection with the driver while creating a strong linkage to brand recognition. Likewise, wireless charging and USB PD are now at the OEM design forefront. These features not only provide convenience and seamless integration of personal devices into the vehicle ecosystem but also serve as key factors in creating a tech-forward impression, thus bolstering brand affinity. And similar to interior lighting, wireless charging and USB PD are components that form an integral part of the user's interaction with the vehicle, contributing to the overall in-cabin experience and, again, reinforcing the brand's commitment to technology and innovation.
During the quarter, we also launched a highly integrated automotive wireless power charging system on chip. This product simplifies and accelerates the development of cost-effective WPC, also known as Qi-based in-cabin mobile device charging systems. By background, in-cabin charging has become a necessity for drivers and passengers who use their smartphone to provide real-time navigation, music, voice connections and many other services. The emerging Qi 2.0 standard, featuring the magnetic power profile, is particularly relevant to automotive designs, offering faster, more reliable charging by automatically aligning smartphones with an inductive charging coil, maintaining the device in position irrespective of vehicle motion.
At the same time, we embarked on a key USB PD module design collaboration with a leading Tier 1, facilitating the integration of power delivery functionality to a high-speed USB hub application for a rapidly emerging OEM. As these designs ramp into high-volume production, we'll certainly have more details to share.
Finally, in the electric vehicle area, we continue to see long-term secular tailwinds as EV sales gain momentum. According to Cox Automotive, Americans bought nearly 300,000 full battery electric vehicles in the second quarter of 2023, implying more than 1 million EVs annually for the first time in U.S. history. In fact, in the second quarter, EV sales were up 48% versus the prior year in the U.S., yet the EV share of the total market is still in the single digits. In other words, EV penetration remains relatively low, with massive sales headroom.
Further to that end, NHTSA has introduced a proposed plan for fuel economy improvements through 2032, with a target fleet average of 58 miles per gallon, clearly encouraging EVs to reach this ambitious goal. With advancements in EV technology, rapid proliferation of charging infrastructure and declining bathe costs, the expansion potential of the EV market is truly extraordinary. Given indie's customer engagements spanning market leaders, including Nio, Ford, Rivian, GM, BMW, Mercedes, Xiaopeng, BYD, Hyundai, Nissan, Li Auto and Volkswagen, we are especially well positioned to outpace this third mega trend.
I'll now turn the call over to Tom for a discussion of our Q2 results and our Q3 outlook.

Thomas S. Schiller

Thanks, Donald. indie delivered a solid second quarter, once again exceeding our top line and gross margin guidance. In fact, this represents our ninth consecutive quarter of beating, or at least meeting, such targets post indie's IPO.
Specifically, revenue for the period was on the higher end of our guidance range and up 102% year-over-year and up 29% sequentially to $52.1 million. Gross profit was $27.2 million, translating into a 52.2% gross margin, up 363 basis points year-over-year and ahead of our 52.0% guidance.
R&D was $34 million and slightly above plan given multiple tape-outs and accelerated product development costs, which converged in Q2 but, importantly, also has the benefit of pulling in our time to revenue.
Similarly, SG&A was $9.5 million, reflecting further extension of our sales and marketing reach, particularly in Asia, with near-immediate results.
In turn, our Q2 operating loss was $16.3 million, a 3-percentage-point operating margin improvement year-over-year and a further narrowing on a sequential basis.
With negligible other net interest expense below the line, our net loss was $16.4 million, and we posted a $0.10 loss per share on a base of 164.1 million shares.
Turning to the balance sheet. Given our aggressive growth plans during the quarter, we invested $22 million in working capital, entered a multiyear supply agreement with a strategic foundry partner for $4 million and expanded our internal test capacity and quality lab capabilities via $3 million in capital expenditures. To partially offset these cash outlays, we issued 1.9 million shares under our ATM program, including 1.1 million shares via block trade, for total proceeds of $18 million, enabling us to exit the quarter with $181 million in cash and equivalents.
Looking forward, for the third quarter, we intend to scale into a $240 million annualized revenue run rate, up 100% year-over-year and 15% sequentially, and up more than tenfold versus our 2020 revenue base, with all of this growth despite 2 OEM program pushouts and the choppy macro backdrop.
At $60 million in sales, we expect gross margin expansion to the 53% range, particularly as we begin to realize operational synergies from our GEO acquisition.
We are also planning $35.5 million in R&D, elevated once again from additional mass costs and expect SG&A to remain flat sequentially. As a result, we intend to further narrow our operating loss to approximately $13 million.
Below the line, we anticipate $0.5 million of net interest expense and no taxes. Assuming 167 million shares outstanding from scheduled vestings and no further ATM activity, we expect an $0.08 net loss per share.
Further, we remain on track to more than double our annual revenues for a third consecutive year and reached profitability in the fourth quarter of this year. driven by sustained sales growth, gross margin expansion and operating expense leverage.
Longer term, based on the depth of indie's new product pipeline, as Donald outlined, we plan to continue to deliver outsized top line growth over the forecast horizon towards our 60% gross and 30% operating margin target model.
With that, I'll turn the call back to Donald for his closing comments.

Ross Clark Seymore

Thanks, Tom. As our design win traction, operational agility and scalability demonstrate, indie is effectively executing to our strategy. In fact, as a net result, we now see a clear path to over $1 billion in annual revenue by 2028. And yet, we're just getting started. Our diverse product and IP portfolio, deepening customer engagements, collaborative supplier partnerships and innovative road maps and last, but not least, of course, our stellar team, are positioning us to capitalize on the $48 billion ADAS user experience and EV triple mega trend and, in the process, build an Autotech powerhouse and, most importantly, create extraordinary shareholder value.
That concludes our prepared remarks. Operator, let's open the call for questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question is from Suji Desilva of ROTH MKM.

Suji Desilva

Congrats on the progress here. I mean, obviously, it's choppy. But I'm looking ahead at 3Q, the guide here is a little bit behind consensus in my number. I'm just curious, you talked about 2 pushouts here. I want to understand, maybe some color on those. And then were those indie-specific pushouts reasons, customer-specific reasons or just end market reasons? Any color there would be helpful.

Donald McClymont

Sure. Yes, so there were 2 significant pushouts, which were really to do with the customers' programs per se, nothing that was within our control, their own engineering execution. And I would say it's important to note that no business has been lost here. It's just been pushed out by a few quarters in order to allow these guys to complete whatever they need to do on the engineering side.

Suji Desilva

Okay. That's very helpful. And then on the Bosch win for OMS, it'd be helpful to understand the magnitude of that lifetime, I think it's hundreds of millions of opportunity, and the timing of that. Perhaps contrast it with the large radar win you had, just to kind of give us a sense of maybe how the 2 layer on together as you start to build up a book of these.

Donald McClymont

Yes. I mean, we're super excited about this. I mean Bosch is one of the top 2 or 3 players in the industry. And they've been, I would say, largely missing from our portfolio to date. It's hard to size exactly. But given that this is one of their key platforms, which they will likely attach to multiple OEMs, then we feel it will be up there with the largest design wins that we've made in the history of the company. So we're super excited about it.

Operator

The next question is from Cody Acree of The Benchmark Company.

Cody Grant Acree

Yes. Don, maybe just to go back to Suji's question, the total outlook, like you said, is a little light. But how much of that is macro? We're seeing countervailing data points out of some end markets, and there's been a lot of speculation that autos are going to finally hit a bit of a softer patch. Now if you look at this, is this more of the estimates getting ahead of themselves? Or is it more to do with the changes in the end market?

Donald McClymont

Well, good question, Cody. I mean from our side, obviously, we see the chop in the macro market. We're not blind to that. And of course, nobody is immune to it. But from our perspective, it's a secondary issue versus the growth rate that we've achieved as a company. In Q2, we grew 100% year-on-year. In Q3, we're guiding to 100% growth year-on-year. And likely, Q4 will be that way or better. So from our perspective, it's kind of hard for us to see the macro effects translate directly into our own business. So I mean, from our perspective, it's there. But I mean, really, the larger effect on us is a couple of program pushouts, which is just a minor air pocket for us and doesn't really change anything about our long-term outlook.

Cody Grant Acree

Okay. So if you look at the revenue that you're getting in from longer-term prior agreements, that's making up the bulk of your $52 million here, versus those that are new programs, can you talk about breaking up the $52 million as to what's contributed on established platforms that are shipping in volume to customers and, therefore, you've got to take a look at total SAAR vagaries? And then how much of that $52 million is getting into new programs that may or may not be on your timing schedule?

Donald McClymont

I mean it's a mix. Once we once we ramp our product and we've done our bit of engineering, if you like, then there's typically still a ramp at the OEMs, which contributes to our overall revenue profile. And of course, by virtue of the fact that we're a growth company, new products that are planned to ramp, we typically can mitigate those. We have a lot of ramps ongoing. And I would say there's always going to be a mix of new product starts as well as ongoing growth from existing programs. It's just the nature of the beast. We're a growing company, so there are new programs that are going to ramp, in addition to running revenue.

Operator

The next question is from Craig Ellis of B. Riley Securities.

Craig Andrew Ellis

Yes, I'll start with a longer-term question for Donald. Donald, I was very intrigued by the comment that you feel like you have increased visibility to becoming a $1 billion sales company by 2028. I was just wondering if you could flesh that out a little bit more and talk about what you see in that time frame from the user experience business broadly, the ADAS business broadly, and what role electrification will play in getting to that $1 billion?

Donald McClymont

Yes. Well, I mean, we've been building our, let's say, customer portfolio and design win portfolio over the course of the last period. And as you know, of course, our heaviest R&D investment is in the ADAS space, and that's going to be one of the large drivers for that growth into that time frame. The user experience will continue to grow. But ADAS, as you can say, would be the main engine behind that and e-vehicle, directly pertaining to the propulsion system, maybe a little behind that.

Craig Andrew Ellis

Got it. And then, Tom, I wanted to flip it over to you and ask much more of a near-term question. So really liked the renewed or reiterated target to get to operating profitability this year. Can you just help us kind of bridge the gap between where we were this quarter? Next quarter, which I think would be a $13 million operating loss all the way to profitability, that seems to imply either very significant sequential fourth quarter revenue growth, a pretty dramatic gross margin or operating expense reductions. Just a little help there.

Thomas S. Schiller

Sure. Yes. In fact, it's all of the above. So it's accelerating growth into Q4, a continued gross margin expansion. And then operating leverage, we actually expect Q4 OpEx to tick down because, for Q2 and Q3, we're seeing higher tape-out costs, mass costs coming through. But that will reduce in Q4. So all of those factors get us to profitability next quarter.

Operator

The next question is from Ross Seymore of Deutsche Bank.

Ross Clark Seymore

Just want to follow up to Craig's question on the fourth quarter side of things, and not to sound too cynical, but considering the pushout side of things, in the third quarter, what gives you the confidence in that acceleration on the revenue side in the fourth quarter?

Donald McClymont

Just the situation of our backlog where we are, where we can see things going, we feel extremely confident about it. Otherwise, we wouldn't have called it in that sense given that it's a short-term turn. As Tom also mentioned, we do have a little help from the OpEx dropping. We have evermore, let's say, labor and R&D cost intensive programs, which we're deploying right now. And so the middle of the year is where we spent heavily to get to tape-outs, which are going to drive the revenue in the '24, '25, '26 time frame and beyond.

Ross Clark Seymore

Got it. And then, I guess, if I think a little bit longer term, maybe in Wall Street terms longer term, not so much in automotive, and to 2024 as a whole, Donald, what would you think would be the tailwinds and potential headwinds that you would look to as far as kind of growth ramping out of your backlog, new product ramps, different types within user experience, sensing, ADAS, those sorts of things, what are the pluses and minuses that you see looking into next year?

Donald McClymont

Well, in '24, you'll begin to see the thin end of the ramp of the designs that we began to win as we became a public company, which were significantly larger than the ones that we could command as a private company. And so generally speaking, that's really the beginning of that sort of second phase of the company's growth, which we expect to take us into the back half of this decade. Again, we spent a great deal of time in the ADAS space. The ASPs are significantly higher, the gross margins are higher, in terms of mix. And that's really going to be one of the heaviest drivers in '24 and '25 and beyond.

Operator

The next question is from Anthony Stoss of Craig-Hallum Capital Group.

Anthony Joseph Stoss

A couple of questions. Tom, maybe you can share how much GEO was in Q2 and what you expect GEO to be in terms of your guide for Q3. And then, Donald, maybe if you can share, the 2 OEM pushouts, what revenue would that have equated to?

Thomas S. Schiller

Sure. The first one, Tony, we just aren't sub-segmenting, as you may know. But at a higher level, I would convey that we're delighted with GEO as an acquisition. It's certainly bearing fruit already in terms of the large-scale programs. We had mentioned Bosch, Toyota. We'll have some other names soon to be able to share on that particular front. So the long-term opportunity around GEO just continues to look better and better. And Don, on the second part?

Donald McClymont

Yes, on the second part of that, I mean these programs are significant. And when they fully ramp, which, of course, takes a little bit of time, they are about $50 million combined annually.

Anthony Joseph Stoss

Okay. And then shifting back to Tom, knowing what you're expecting from OpEx in Q4, when you run the math, you would be over $70 million in revenues to breakeven on a 55% gross margin for Q4. Is that kind of what you're thinking about for Q4?

Thomas S. Schiller

Yes. That's the right idea. Yes, $75 million roughly in revenue, gross margin in the, yes, 54% range. I think that gets you there.

Operator

Ladies and gentlemen, we have been reached the end of the question-and-answer session. And I would like to turn the call back to Don McClymont for some closing remarks.

Donald McClymont

Thanks, everybody, for listening and see you at the investor conferences over the next few weeks.

Operator

Thank you very much, sir. Ladies and gentlemen, that concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.