Industrial

Mobileye (MBLY) had a smashing IPO as investors embraced the story and the stock as a leading provider of the next generation of cars that can drive themselves. The next few years are more about increased safety rather than real self-driving vehicles but the adoption ramp is already steep.  Here are some highlights from the IPO roadshow transcript help illustrate the positioning and story. The slides are also available: MBLY IPO Roadshow Deck.

IPO Roadshow Transcript - Just the juicy parts:

Much like the human eye, the Mobileye solution is capable of performing driver-scene interpretation, detecting and classifying different objects on the road; including other vehicles, pedestrians, cyclists, lane markings, traffic signs and more. The system's capabilities provide life-saving warnings and driving enhancement features, from automatic emergency braking to completely autonomous driving, which will revolutionize human transportation.

With recent changes in safety legislation, advanced driver assistance systems are becoming a prerequisite for meeting the highest safety standard. A majority of the world's car manufacturers are already using Mobileye as a significant accident-prevention measure with many moving towards implementing the technology as a standard feature. Mobileye's technology can also be retrofitted as an aftermarket system to existing vehicles as a complementary safety accessory. By installing Mobileye, individual consumers and leading vehicle fleet providers have benefitted from a reduction in accidents and significant savings in operational costs.

Founded 15 years ago we are currently working with a majority of the automakers worldwide and we already have 3.3 million cars on the road fitted with our technology.

The U.S. safety-rating regulator issued new regulations. On every new car, the sticker must indicate if it's equipped with lane departure warning and forward collision warning. This was a clear message to the market that the race to introduce active safety in the car had begun. In 2012, the European safety rating regulators, Euro NCAP, also introduced new regulations. In order to maintain a safety rating of 4 or 5 stars, the automakers are required to include autonomous emergency braking in front of vehicles by 2014 and in front of pedestrians by 2016.

In addition to preventing collisions, the system must sense the road [in great detail], including lane markings, curves, barriers, [and] obstructions. Recognize a large vocabulary of traffic signs and traffic lights and be fault tolerant to a degree unparalleled by today's driver assistance systems.

Cameras are low cost, and generate a very rich source of information about the scene. In the 2016 timeframe, we expect to launch hands-free driving capabilities designed for highway conditions, like the type of driving we're having now. For the first phase in 2016, we have already signed production agreements with two OEMs and an additional six have begun pre-development with us.

To solve the complexity of our autonomous driving, we need to capture three different fields of view. We developed a configuration of the trifocal system, which runs on three separate monocameras and requires a set of three chips. The price for this setup is $150 which multiplied by 100 million potential cars gives us an addressable market of $15 billion each year.

There are, currently, 1 billion cars on the road worldwide — the vast majority of which represent a potential target market for Mobileye. In our aftermarket activity, we use the same technology that was introduced to the OEMs, but is a retrofit. Today, our main focus is sales to fleets and we are also very active with insurance companies and in promoting regulation.

We sell our system cheap to the automotive suppliers, also called Tier 1s. The Tier 1s, then, develop a system around our chip and sell it to the OEMs. Although our customers are the Tier 1s, we work directly with the OEMs at all times.

It is very common that multiple Tier 1s respond to an RFQ, where each is using our technology. For Mobileye, this is the best position in the value chain of the automotive industry, since through the Tier 1s, we can work with all the OEMs.

We don't believe that any automaker will install separate systems for different safety features — both [because of] the additional cost and space. This is also one of our competitive advantages on price. Its additional features require only additional software on the same system.

It took us eight years until we got our first production agreement; but today, as you can see, the majority of our customers are already in a serial production phase. By working with a majority of the OEMs, we've collected millions of miles of scenes around the world. It took us 10 years to build this database in more than 43 countries; every time of day; in all kinds of weather. This way, when we developed our complex algorithms, we optimized them against an unparalleled massive database, allowing us to achieve detection that is nearly error free and by far best in class.

We have developed our own system on a chip. Look at this. All our ingenuity resides in this small chip. By developing our own system of chip, we created another significant advantage as our solution consists of the most advanced and the most cost-effective combination of hardware and software. Our software is so powerful and complex that they couldn't find any other existing system or chip that can run our algorithms. We developed our hardware based on our deep understanding of the needs of the vision-based algorithms. The best analogy to the uniqueness of our approach is the PC market. We consider ourselves as both the Microsoft and the Intel of the industry.

One of the disadvantages in introducing hardware to the automotive industry is a very long and costly process carried by the automakers. On the other hand, once selected, automakers are unlikely to replace you, which gives us long-term revenue visibility. We are now developing the first generation of our EyeQ chip which is going to be 384x faster than the first generation.

70% of our team is focused on R&D, 3% of which is hardware and ASIC-related. With more than 400 employees and an additional 150 dedicated QA specialists, our team is the biggest and the most sophisticated team in the world working on various applications.

Our OEM segment revenues, which accounts for more than 80% of our business, grew by more than 120% in both 2012 and 2013. Our aftermarket segment has also grown substantially, driven by increased consumer awareness and new safety legislation.

Gross margins have increased from the mid-60% in 2011 to the mid-70% last year. The increase in gross margins is tied to launches of small, advanced features with higher ASPs. On an adjusted net income basis, Mobileye has been profitable since 2012 and our margins have continued to grow in 2013.

We have high-revenue visibility. In the past few years, we have won more than 80% of RFQs that we have participated in. Every RFQ won will generate revenues starting two years from the sourcing date and will usually last five years. For example, our revenue in 2014 is attributable to RFQs that we won in and prior to 2012. These programs will continue generating revenue for years to come. Looking at the models we have already won, by 2016, our technology will be implemented in 237 car models of 20 of the largest global OEMs.

In our long-term financial model, we are targeting over 50% adjusted net margin. A few factors contributing to this favorable margin: high gross margins, as I discussed; low sales and marketing expenses in our main OEM segment, as we maintain constant relationships with automakers.

Overall a very impressive story with strong growth ahead at very high margins.