Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our combined financial statements and related notes included elsewhere in this report. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” included elsewhere in this report for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Our historical financial data has been derived from the consolidated financial statements and accounting records of Intel Corporation (“Intel”) using the historical results of operations and the historical basis of assets and liabilities. The financial data herein includes costs of our business, which may not, however, reflect the expenses we would have incurred as a stand-alone company for the periods presented.
Company Overview
Mobileye is a leader in the development and deployment of advanced driver assistance systems (“ADAS”) and autonomous driving technologies and solutions. We pioneered ADAS technology more than 20 years ago and have continuously expanded the scope of our ADAS offerings, while leading the evolution to autonomous driving solutions.
Our portfolio of solutions is built upon a comprehensive suite of purpose-built software and hardware technologies designed to provide the capabilities needed to make the future of ADAS and autonomous driving a reality. These technologies can be harnessed to deliver mission-critical capabilities at the edge and in the cloud, advancing the safety of road users, and revolutionizing the driving experience and the movement of people and goods globally.
As of October 1, 2022, our solutions had been installed in approximately 800 vehicle models (including local country, year, and other vehicle model variations), and our System-on-Chips (“SoCs”) had been deployed in over 125 million vehicles. We are actively working with more than 50 Original Equipment Manufacturers (“OEMs”) worldwide on the implementation of our ADAS solutions, and we announced over 40 new design wins in 2021 alone. In the nine months ended October 1, 2022, we shipped approximately 24.0 million of our SoCs. This represents an increase from the approximately 21.2 million of our SoCs that we shipped in the first nine months of 2021. We estimate, based on our existing design wins through October 1, 2022, that our ADAS solutions will be deployed in more than an additional 270 million vehicles by 2030, including approximately 54 million vehicles based on our 2022 design wins through October 1, 2022 and approximately 50 million vehicles based on our 2021 design wins. These estimates are based on projections of future production volumes that were provided by the OEMs at the time of sourcing our design wins with them for the models related to those design wins. These estimates may deviate from actual production volumes (which may be higher or lower than the estimates) and do not include design wins after October 1, 2022. We currently ship a variety of ADAS solutions to 13 of the 15 largest automakers in the world in addition to many smaller OEMs, and we are recognized for our top-rated safety solutions globally. For example, 66% of Euro New Car Assessment Programs (“NCAP”) 5-star rated vehicle models for 2018-2021 are equipped with our solutions.
In January 2022, we announced a design win of our consumer Autonomous Vehicle (“AV”) system, Mobileye Chauffeur™, with ZEEKR, Geely Group’s premium electric vehicle brand. Mobileye Chauffeur™ is expected to be capable of “eyes-off/hands-free” driving with a human driver still in the driver’s seat, in a gradually expanding operational driving domain, and is expected to use surrounding imaging radars and front-facing lidar, but may require driver intervention in certain situations. We believe that this is an early sign of broad interest in consumer-level eyes-off/hands-free driving. Building upon Mobileye Chauffeur™, we are developing Mobileye Drive™, our Level 4 self-driving system targeted for fleet-owned Autonomous Mobility as a Service (“AMaaS”) and goods delivery networks. Mobileye Drive™ will encompass our core autonomous driving technologies and will deliver the driving functions without the need for any in-vehicle human intervention by adding teleoperability and by minimizing cases where human input would be required. We are working to deploy Mobileye Drive™ through various business-to-business and business-to-consumer channels through the formation of collaborations with potential partners around the world.
We were founded in Israel in 1999. Our co-founder, Professor Amnon Shashua, is our President and Chief Executive Officer. Prior to being acquired by Intel for $15.3 billion in 2017, we completed an initial public offering in 2014 and traded under the symbol “MBLY” on the New York Stock Exchange.
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Reorganization and Initial Public Offering
In October 2022, Intel completed the internal reorganization and design of our new public entity (the “Reorganization”) for purposes of the Mobileye IPO. The registration statement related to the Mobileye IPO was declared effective on October 25, 2022, and our Class A common stock began trading on The Nasdaq Global Select Market under the ticker symbol “MBLY” on October 26, 2022. Prior to the completion of the Mobileye IPO, we were a wholly-owned business of Intel. On November 1, 2022, the underwriters of the Mobileye IPO exercised the over-allotment option granted to them in full. Upon the closing of the Mobileye IPO (after giving effect to the exercise of the over-allotment option), Intel continues to directly or indirectly hold all of the Class B common stock of Mobileye, which represents approximately 99.3% of the voting power of our common stock.
For further information and descriptions of the transactions in the Reorganization related to the Mobileye IPO, see “Certain Relationships and Related Party Transactions” and “Unaudited Pro Forma Condensed Combined Financial Information” included in Mobileye’s final prospectus dated as of October 25, 2022, filed pursuant to Rule 424(b)(4) under the Act relating to Mobileye’s Registration Statement on Form S-1 (the “Prospectus”).
Our Business Model
We currently derive substantially all of our revenue from our commercially deployed ADAS solutions. In the future, propelled by our next generation AV-on-Chip SoC, which we call EyeQ Ultra™, our surround computer vision Mobileye SuperVision™ solution and our True Redundancy™ architecture, we believe that we will be positioned to deliver an autonomous driving solution that can enable the mass adoption of AV.
We generate the majority of our revenue from the sale of our EyeQ® SoCs to OEMs through sales to Tier 1 automotive suppliers. We typically sell our products with volume-based pricing and recognize the revenue and costs associated with our products upon shipment.
We invest significant time and other resources early in the process of new program sourcing as part of our relationship with an OEM. We typically have visibility into the number of models that are expected to include our products at least two to three years in advance based on OEM information provided during the sourcing and nomination process, although there is no contractual commitment by the OEM to purchase particular volumes, and programs are subject to changes with respect to timing and volumes. The revenue that we may recognize in any given year is attributable to program design wins in previous years.
We partner with STMicroelectronics, a leading supplier and innovator of semiconductor devices for automotive applications, in manufacturing, design, and research and development. We have co-developed our family of EyeQ® SoCs with STMicroelectronics. We have also established a relationship with Quanta Computer to develop and assemble our ECUs, including the design for our Mobileye SuperVision™, which includes our EyeQ®5 SoCs manufactured by STMicroelectronics.
Our close partnership with Intel exists on multiple fronts. With Intel, we have access to unique and differentiating technologies such as proprietary silicon photonics fabrication technologies, which we may leverage for the early development of our FMCW lidar, which has the potential to replace alternative third-party lidar sensors to further enhance the performance of our sensor suite. We may also license certain technologies from Intel that support design and development of our software-defined radar, including Intel’s mmWave technologies. Additionally, we intend to explore a collaboration with Intel on a technology platform to integrate our EyeQ® SoC with Intel’s market leading central compute capability, with plans to utilize Intel Foundry Services’ advanced packaging capabilities. This potential platform is intended to enable functions essential to safety, entertainment, and cloud connectivity. Intel’s strength in government affairs and policy development around the world will continue to be of significant value to us as we collaborate with regulators who are preparing frameworks to enable commercial deployment of AVs.
Key Factors Affecting Our Performance
We believe there are several important factors that have affected and that we expect to continue to affect our results of operations:
Global demand for automotive vehicles. Our business performance is related to global automotive sales and automotive vehicle production by our OEM customers. Economic conditions in North America, Europe and Asia can have a large impact on the production volume of new vehicles, and, accordingly, have an impact on our revenue. Our OEM customers’ production can vary from period to
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period due to global demand, market conditions and competitive conditions, as well as other factors, including the effects of the COVID-19 pandemic. While the automotive industry is showing recovery from the COVID-19 pandemic, with approximately 3% growth in global vehicle production year over year in 2021, production in 2021 was still approximately 13% below the 2019 level. Moreover, automakers continue to face supply chain shortages, and we expect that global vehicle production will not fully recover to pre-COVID-19 pandemic levels from the impact of supply chain constraints in 2022 and 2023. Furthermore, current uncertain economic conditions and inflation may contribute to a reduction in consumer demand, which may reduce vehicle production over at least the next several quarters. In addition, in prior periods, certain Tier 1 customers increased their orders for components and parts, including our solutions, to counteract the impact of supply chain shortages for auto parts, and we expect these Tier 1 customers will utilize accrued inventory on hand before placing new orders to meet the demand of OEMs in current or future periods. As a result, some demand for our solutions and the corresponding revenue from these customers were shifted to earlier time periods than otherwise would have occurred absent a general supply chain shortage and inflationary environment. We cannot predict when the impact of these factors on global vehicle production will substantially diminish. However, ADAS volumes have grown faster in recent years than the overall automotive market as ADAS penetration rates have increased, and we believe that we will continue to benefit from that trend. Our revenue of $1.3 billion in the nine months ended October 1, 2022 was up 27% year-over-year, outperforming the increase of global automotive production. However, we believe that the expected continued constraint on global automotive production resulting from supply chain shortages and the effects of economic uncertainty will limit our ability to increase our revenue. We expect to continue to capitalize on our strong and collaborative relationships with OEMs and Tier 1s to expand our presence in key markets and capture the long-term growth opportunities in those markets.
Design wins with new and existing customers. Global OEMs are continuously looking for innovative ways to improve the customer appeal and safety of their vehicles. Additional program design wins for production programs are important to our future revenue growth. However, the revenue generated by each design win and the time necessary to achieve a design win can vary significantly. To achieve program design wins, we must maintain our technological leadership and continue to deliver differentiated solutions versus our competition through investment in research and development. Together with Tier 1 automotive suppliers, we work closely with OEMs to understand their solution requirements and have built close long-term relationships with them extending across multiple generations of EyeQ® products, though there is no guarantee that our customers will purchase our solutions in any certain quantity or at any certain price even after we achieve design wins. As of October 1, 2022 our solutions had been installed in approximately 800 vehicle models (including local country, year, and other vehicle model variations), and our SoCs had been deployed in over 125 million vehicles. We are actively working with more than 50 OEMs worldwide on the implementation of our ADAS solutions, and we announced over 40 new design wins in 2021. In the nine months ended October 1, 2022, we shipped approximately 24.0 million of our SoCs. This represents an increase from the approximately 21.2 million of our SoCs that we shipped in the nine months ended September 25, 2021. We estimate, based on our existing design wins through October 1, 2022, that our ADAS solutions will be deployed in more than an additional 270 million vehicles by 2030, including approximately 54 million vehicles based on our of 2022 design wins through October 1, 2022 and 50 million vehicles based on our 2021 design wins.
Investment in technology leadership and product development. We believe our ability to continue to develop and design highly advanced and cost-efficient ADAS and AV solutions will position us to extend our technology leadership and encourage greater adoption of our solutions by enabling greater levels of autonomy. We also believe that our roadmap for future generations of EyeQ® SoCs and advanced systems will ultimately power autonomous driving solutions. The EyeQ® family design further enables scalable ECU architectures, supporting a variety of ADAS solution architectures, and our announced EyeQ Ultra™ AV-on-Chip is designed to host the full workload of autonomous driving, while meeting stringent cost and power efficiency requirements. We expect that our development of software-defined radar will provide a significant cost advantage by eliminating the need for multiple high-cost lidars around the vehicle and require only a single front-facing lidar, significantly lowering the overall cost of the required sensors compared to solutions that use lidar centric or lidar-only systems. Together with Intel, we also are currently in the early stages of development of FMCW lidar, which has the potential to replace alternative third-party lidar to further enhance the performance of our sensor suite. We believe the ability of our foundational technology to provide a low-cost scale solution with low power-consumption, both from an on-board technology and sensor suite perspective, will be critical to enabling the mass adoption of autonomous driving solutions. While our significant investments in these technologies may not result in revenue in the near term, we believe these investments will position us for revenue growth over time.
Regulation for ADAS and autonomous driving solutions. Demand for our solutions is influenced by the impact of regulation and the ratings systems deployed by the various NCAPs, particularly the Euro NCAP and the U.S. NCAP, administered by the National Highway Traffic Safety Administration. As these NCAPs demand more ADAS applications such as automatic emergency braking, OEMs will increasingly include ADAS as a standard feature in their models to maintain or to achieve the highest safety ratings. In many
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countries, these safety assessments have created a “market for safety” as car manufacturers seek to demonstrate that their models satisfy the NCAPs’ highest ratings. We expect national NCAPs to continue to add specific ADAS applications to their evaluation items over the next several years, led by the Euro NCAP. In recent years, as regulatory requirements and NCAP ratings have increased, OEMs have also begun to highlight their safety features as a competitive advantage. We are recognized for our top-rated safety with 66% of Euro NCAP 5 star rated vehicle models for 2018-2021 equipped with our solutions. As additional regulations are implemented around the world, we expect this to lead to increased global adoption of ADAS, and we believe that we are well positioned to benefit from such increasing safety regulations globally, particularly due to the verifiable nature of our current and future solutions.
Fully autonomous vehicles are still nascent, and regulation of autonomous driving is evolving globally on both a local and national level. We believe that regulatory bodies will demand that AV undergo certain validation and audit requirements before autonomous driving is permitted. The potential impact of regulatory requirements and initiatives on the timing for widespread adoption of fully autonomous driving and on the cost of developing and introducing autonomous driving solutions is uncertain. RSS is our framework that informs our driving policy and formalizes a driving safety concept. Our RSS framework and decision-making engine have inspired a global standardization effort of AV safety including IEEE 2846, which is an industry working group that we lead. We are actively engaged in AV regulations globally as they have implications for the pace at which autonomous driving technologies may be deployed as well as which AV technology validation and audit requirements must be met. Importantly, we believe RSS, which is a pragmatic method that is architected to deliver a provably acceptable level of risk defined by governments, will facilitate standardization efforts worldwide as AV deployments accelerate. In addition to impacting the pace at which autonomous driving technologies are deployed, we expect regulations to impact our financial performance on an ongoing basis over time once autonomous driving gains market adoption. We cannot provide any assurance how any such regulations will impact us and the extent of such impact, particularly if autonomous driving is prohibited in certain areas.
Consumer adoption of our ADAS and autonomous driving solutions. Our financial performance is in part driven by public awareness and demand for ADAS solutions. Over time we expect autonomous driving solutions to contribute meaningfully to our revenue growth. As a result, consumers’ demand for, and willingness to adopt, ADAS and autonomous driving technologies will significantly impact our financial performance. We believe that our leadership position in ADAS positions us to continue to set the standard for advanced autonomous solutions and will help us benefit from increasing consumer confidence in and demand for autonomous technology over time.
Solution mix, pricing, and product costs. Solution mix is among the most important factors affecting our revenue and gross margin, as our prices vary significantly across our solutions. The price of our solutions depends on the bundle of applications that are included in the specific product. Our solutions have different margin profiles. As we develop, bundle, and sell full systems that include third-party hardware beyond EyeQ® SoCs, we expect that our gross margin will decrease on a percentage basis because of the greater third-party hardware content. However, as a result of a higher expected selling price for such systems, we expect our gross profit per unit will increase on a dollar basis.
Average selling price (“ASP”) varies based on a solution’s applications and complexity. As a particular solution matures and unit volumes increase, we expect its ASP to decline. In addition, there are generally step-downs in pricing over periods of production as volumes ramp up. While individual solution ASPs may decline, we seek to continually offer new features and functionality and increase the value that our solutions offer to OEM customers as we target new design win opportunities manage the life cycles of existing solutions and create new ADAS categories with advanced features. We believe our differentiated and scalable solutions consistently enhanced by additional features can enable us to maintain or increase overall ASPs over time.
The cost of input materials and manufacturing costs are significant factors affecting our gross margin. Material costs are affected by a variety of factors, including the availability of sufficient supply to meet market demand. For example, in late 2021, semiconductor fabrication costs increased as a result of a global supply shortage that began in 2020 and is continuing. We are currently experiencing increases in input costs as a result of supply chain shortages, including the global semiconductor shortage, and inflationary pressures. While we seek to increase our ASPs to reflect these cost increases, we anticipate that our gross margin will decrease, at least in the short term, as a result of these cost increases. Our gross margin has been and may continue to be affected by our ability to offset these and any future cost increases through realizing pricing increases on our solutions and achieving decreases in other production costs. We work closely with STMicroelectronics and Quanta on a continuous basis to manage material costs, increase yields and improve manufacturing, assembly, and test costs.
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Supply and manufacturing capacity. Our solutions are dependent on the global semiconductor supply chain. The continued and timely supply of input materials, the availability of manufacturing capacity, and packaging and testing services at reasonable prices impact our ability to meet customer demand. Supply chain disruptions, shortages of raw material, such as wafers and substrates, and manufacturing limitations as a result of COVID-19 or other factors could limit our ability to meet customer demand and result in delayed, reduced, or canceled orders. The semiconductor industry is experiencing widespread shortages of substrates and other components and available foundry manufacturing capacity, and we anticipate that such shortages will continue. During 2021 and through the nine months ended October 1, 2022, STMicroelectronics, our sole supplier of EyeQ® SoCs, was not able to meet our demand for EyeQ® SoCs, causing a significant reduction in our inventory level, and we expect to continue to experience a shortfall of chips during the fourth quarter of 2022 and continuing through 2023. We have entered 2022 with significantly lower inventories of our EyeQ® SoCs as a result of the limited supply during 2021, and, due to continuing supply chain constraints, we are operating with minimal or no inventory of EyeQ® SoCs on hand. As a result, we are substantially reliant on timely shipments of EyeQ® SoCs from STMicroelectronics to fulfill customer orders and are unable to offset future supply constraints through the use of inventory on hand. The limited supply of EyeQ® SoCs has already led to rescheduling deliveries to our customers on certain occasions and may continue to cause delays in our ability to fulfill our customers’ orders as scheduled. Our results of operations in the nine months ended October 1, 2022 have not been significantly impacted by the shortfall of chips. Our reliance on single or limited suppliers and vendors for certain components, equipment, and services and the aforementioned shortages of substrates and other components have led to increased supply chain risks and continue to stress our ability to meet the supply demands of our customers. To mitigate these supply chain constraints, management is monitoring inventory levels on an ongoing basis. Although we cannot fully predict the length and the severity of the impact these pressures will have on a long-term basis, we do not anticipate that our current supply chain constraints would materially adversely affect our results of operations, capital resources, sales, profits, and liquidity on a long-term basis.
Public company expenses. As a recently public company, we will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In particular, we expect our accounting, legal and personnel-related expenses to increase as we establish more comprehensive compliance and governance functions and hire additional personnel to support such functions, maintain and review internal controls over financial reporting in accordance with the Sarbanes-Oxley Act, and prepare and distribute periodic reports in accordance with SEC rules. Our financial statements will reflect the impact of these expenses. We also expect the costs of our insurance, including directors’ and officers’ insurance and insurance coverage for AV activity, to increase as a result of higher premiums.
In addition, in connection with the Mobileye IPO, we established an equity incentive plan for purposes of granting share-based compensation awards to certain members of our senior management, to our non-executive directors and to employees, to incentivize their performance and align their interests with ours. Historically, grants of share-based compensation to our employees were made pursuant to Intel’s employee equity incentive plans, and such historical grants will continue based on their original vesting schedules. Equity compensation has been, and will continue to be, an important part of our future compensation strategy and a significant component of our future expenses, which we expect to increase over time.
Intel Segment Reporting
Certain of our financial results are presented as an operating segment within Intel’s publicly reported financial results. The financial results for us reported by Intel in its segment reporting may differ from our standalone financial results primarily due to Intel’s reporting of expenses related to certain corporate overhead functions and differences in the materiality thresholds applied to prepare consolidated financial results for Intel and for Mobileye on a standalone basis.
Components of Results of Operations
Revenue
We currently derive substantially all of our revenue from our commercially deployed ADAS solutions. We generate the majority of our revenue from the sale of our EyeQ® SoCs to OEMs through sales to Tier 1 automotive suppliers that implement our product into vehicles, in which case our direct customer is the Tier 1 automotive supplier that is responsible for paying us for our products. Because of the complex nature of our products and the need to customize and validate a product and to integrate it into the OEM’s overall ADAS system, we also have strong direct relationships with the OEMs.
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EyeQ® SoC sales represented approximately 88% and 94% of our revenue for the three months ended October 1, 2022 and September 25, 2021, respectively, and 90% and 94% of our revenue for the nine months ended October 1, 2022 and September 25, 2021, respectively. Sales of our SuperVision™ product represented the majority of the remainder of our revenue for the three and nine months ended October 1, 2022 and sales of our aftermarket products represented the majority of the remainder of our revenue in the three and nine months ended September 25, 2021. Revenue from the sale of our EyeQ® products, SuperVision™ products and our aftermarket products is recognized at the time of product shipment from our facilities, as determined by the agreed-upon shipping terms. Our sales to any single Tier 1 automotive supplier typically cover more than one OEM and more than one production program from any OEM.
Cost of Revenue
Cost of revenue consists primarily of expenses associated with the manufacturing cost of our EyeQ® SoCs and our SuperVision™ product, and amortization of acquired intangible assets, identified as developed technology. Additional costs are royalty fees for the intellectual property that is included in the EyeQ® SoC, personnel-related expenses, including share-based compensation for employees on our operations teams, logistics costs and allocated overhead costs. As we develop and sell full systems that include hardware beyond EyeQ® SoCs, we expect that our gross margin will decrease because of the greater hardware content included in our solutions. However, as a result of a higher expected selling price for such systems, we expect our gross profit per unit will increase on a dollar basis.
Research and Development Expenses, net
Research and development expenses primarily consist of expenses related to personnel, facilities, equipment and supplies for research and development activities including share-based compensation, material, parts and other prototype development, cloud computing services, consulting, and other professional services, including data labeling, quality assurance within the development programs, and allocated overhead costs.
We occasionally enter into best-efforts nonrefundable non-recurring engineering arrangements pursuant to which we are reimbursed for a portion of the research and development expenses attributable to specific development programs. We do not receive any additional compensation or royalties upon completion of such projects and the potential customer does not commit to purchase the resulting product in the future. The participation reimbursement that we receive does not depend on whether there are future benefits from the project. All intellectual property generated from these arrangements are exclusively owned by us.
We intend to continue our significant investment in research and development activities to attain our strategic objectives. Accordingly, we expect research and development expenses to increase in absolute dollars, but to gradually decrease as a percentage of total revenue, over time. We expect that in the near term our research and development expenses will increase compared to 2021, mainly due to additional research and development headcount and higher direct expenses that we expect to incur in connection with the development of our new EyeQ® SoC generations, Premium Driver-Assist offerings and the productization of our AV solutions and active sensor suite.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of expenses associated with the amortization of acquired intangible assets, comprised of customer relationships and branding costs, personnel-related expenses, including share-based compensation, of our sales force, as well as advertising and marketing expenses and allocated overhead costs.
We expect to increase our sales and marketing expenses as we continue our efforts to increase market awareness of the benefits of our solutions, but we expect sales and marketing expenses to decrease as a percentage of total revenue as our business grows.
General and Administrative Expenses
General and administrative expenses consist of personnel-related expenses, including share-based compensation, of our executive, finance, and legal departments as well as legal and accounting fees, litigation expenses, and fees for professional and contract services.
We expect our general and administrative expenses to increase in absolute dollars but to decrease as a percentage of total revenue as our business grows. The primary reasons for the growth in general and administrative expenses will be the costs related to being a
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public company, including the need to hire more personnel to support compliance with the applicable provisions of the Sarbanes-Oxley Act and other SEC rules and regulations as well as increased premiums for directors’ and officers’ insurance and the increased use of share-based compensation for general and administrative personnel.
Interest Income (Expense) and Other Expense
On April 21, 2022, we and Intel entered into a loan agreement whereby we distributed to Intel the Dividend Note in an aggregate principal amount of $3.5 billion. The Dividend Note is scheduled to mature on April 21, 2025 and accrues interest at a rate equal to 1.26% per annum, such interest to accrue quarterly. In the nine months ended October 1, 2022, accrued interest expense was $20 million.
Our interest income consisted of interest earned on a loan to Intel in the amount of $0.9 billion as of October 1, 2022 and $1.3 billion as of December 25, 2021.
Our functional currency is the U.S. dollar. Other expense consists primarily of fluctuations in value due to foreign exchange differences between our monetary assets and liabilities denominated in New Israeli Shekels and to a much lesser extent, the Euro, the Chinese Yuan, the Japanese Yen, and other currencies.
Benefit (provision) for income taxes
Benefit (provision) for income taxes consists primarily of income taxes related to the United States, Israel and other foreign jurisdictions in which we conduct business, and amortization of deferred tax liability with respect to acquired intangible assets. We are eligible for certain tax benefits in Israel under the Investment Law, at a reduced tax rate, subject to specified terms.
During the years presented in our combined financial statements, certain components of our business operations were included in the consolidated U.S. domestic and certain foreign income tax returns filed by Intel, where applicable. We also file certain foreign income tax returns on a separate basis, distinct from Intel. The income tax provision included in our combined financial statements has been calculated using the separate return method as if we had filed our own tax returns. We present tax loss carry-forward amounts that have not been utilized by Intel only to the extent such tax attributes can be claimed on a separate income tax return as opposed to a consolidated income tax return filing with Intel. The use of the separate return method may result in differences between our income tax provision compared to Intel’s income tax provision.
In the tax year ended December 25, 2021, Mobileye’s Israeli operations became taxable in the United States as a branch entity. In the nine months ended October 1, 2022, Moovit’s Israeli operations became taxable in the United States as a branch entity. As a result, these operations are taxed both in the United States and Israel. For U.S. tax purposes, there are favorable future tax deductions that we could not benefit from due to a valuation allowance position. If warranted in the future by our actual and projected profitability, the valuation allowances may be released, resulting in a benefit at that time. The valuation allowance also resulted in a residual tax expense associated with a deferred tax liability recorded for goodwill in the year ended December 25, 2021 and the nine months ended October 1, 2022.
Realization of deferred tax assets is based on our judgment and various factors including reversal of deferred tax liabilities, the ability to generate future taxable income in jurisdictions where such assets have arisen, and potential tax planning strategies. The valuation allowance for the years presented in our combined financial statements primarily related to U.S. branch deferred tax assets not currently expected to be realized given that we have sustained recent losses based on the separate return method.
Net operating losses reported in the Intel consolidated tax return have not been reflected in our combined financial statements based on a return reality methodology since they will not be available to us in future periods.
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Results of Operations
The following table sets forth our results of operations in dollars and as a percentage of revenue for the periods indicated:
Three months ended
Nine months ended
October 1,
September 25,
October 1,
September 25,
2022
2021
2022
2021
% of
% of
% of
% of
$ in millions
Amount
Revenue
Amount
Revenue
Amount
Revenue
Amount
Revenue
Revenue
$
450
100
%
$
326
100
%
$
1,304
100
%
$
1,030
100
%
Cost of revenue
233
52
%
173
53
%
682
52
%
529
51
%
Gross profit
217
48
%
153
47
%
622
48
%
501
49
%
Operating expenses:
Research and development, net
206
46
%
132
40
%
565
43
%
390
38
%
Sales and marketing
27
6
%
33
10
%
91
7
%
98
10
%
General and administrative
9
2
%
8
2
%
27
2
%
26
3
%
Total operating expenses
242
54
%
173
53
%
683
52
%
514
50
%
Operating income (loss)
$
(25)
(6)
%
$
(20)
(6)
%
$
(61)
(5)
%
$
(13)
(1)
%
Interest income (expense) with related party, net
(6)
(1)
%
—
—
%
(11)
(1)
%
2
—
%
Other income (expense), net
1
—
%
—
—
%
6
—
%
—
—
%
Income (loss) before income taxes
(30)
(7)
%
(20)
(6)
%
(66)
(5)
%
(11)
(1)
%
Benefit (provision) for income taxes
(15)
(3)
%
(6)
(2)
%
(46)
(4)
%
(11)
(1)
%
Net income (loss)
$
(45)
(10)
%
$
(26)
(8)
%
$
(112)
(9)
%
$
(22)
(2)
%
(1) Includes amortization of acquired intangible assets, as follows:
Three months ended
Nine months ended
October 1,
September 25,
October 1,
September 25,
$ in millions
2022
2021
2022
2021
Cost of revenue
$
115
$
100
$
355
$
300
Sales and marketing
16
23
58
68
Total amortization of acquired intangible assets
$
131
$
123
$
413
$
368
(2) Includes share-based compensation expense, as follows:
Three months ended
Nine months ended
October 1,
September 25,
October 1,
September 25,
$ in millions
2022
2021
2022
2021
Cost of revenue
$
—
$
—
$
—
$
—
Research and development, net
32
20
101
57
Sales and marketing
1
1
3
3
General and administrative
3
3
8
13
Total share-based compensation
$
36
$
24
$
112
$
73
Comparison of the three and nine months ended October 1, 2022 and September 25, 2021
Revenue
In the three months ended October 1, 2022, revenue increased by $124 million, or 38%, compared to the three months ended September 25, 2021. This increase in revenue was primarily due to an increase of $87 million, or 28%, in EyeQ® SoC sales, attributable to a 21% increase in volume and a 6% increase in ASP. The remaining increase in revenue was mainly related to the sales of our
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SuperVision™ solution, which was launched during the fourth quarter of 2021, and for which no revenue was generated in the three months ended September 25, 2021.
In the nine months ended October 1, 2022, revenue increased by $274 million, or 27%, compared to the nine months ended September 25, 2021. This increase in revenue was primarily due to an increase of $207 million, or 21%, in EyeQ® SoC sales, attributable to a 13% increase in volume and a 7% increase in ASP. The remaining increase in revenue was mainly related to the sales of our SuperVision™ solution, which was launched during the fourth quarter of 2021, and for which no revenue was generated in the nine months ended September 25, 2021.
Cost of Revenue
In the three months ended October 1, 2022, our cost of revenue increased by $60 million, or 35%, compared to the three months ended September 25, 2021. This increase was primarily due to an increase of $45 million in manufacturing costs relating primarily to increased sales of our EyeQ® SoC and our sales of SuperVision™ solution. The remaining increase of $15 million resulted from an increase in amortization of intangible assets transferred from in-process research and development to acquisition-related developed technology.
In the nine months ended October 1, 2022, our cost of revenue increased by $153 million, or 29%, compared to the nine months ended September 25, 2021. This increase was primarily due to an increase of $96 million in manufacturing costs relating primarily to increased sales of our EyeQ® SoC and our sales of SuperVision™ solution. The remaining increase resulted primarily from an increase of $55 million in amortization of intangible assets transferred from in-process research and development to acquisition-related developed technology.
Gross Profit and margin
In the three months ended October 1 2022, our gross profit increased by $64 million, or 42% compared to the three months ended September 25, 2021.
In the nine months ended October 1 2022, our gross profit increased by $121 million, or 24%, compared to the nine months ended September 25, 2021.
The increase in both periods, was mainly driven by the increase in revenue from our EyeQ® SoC sales, as well as the sales of our SuperVision™ solution, partially offset by the increase in amortization of intangible assets.
Our gross margin increased from 47% during the three months ended September 25, 2021, to 48% during the three months ended October 1, 2022. This increase was mainly due to the lower impact of the cost attributable to amortization of intangible assets as a percentage of revenues. This was partially offset by the impact of SuperVision™ sales contributing lower margin given the greater hardware this product contains. The rise in the cost of our EyeQ® SoCs due to the global semiconductor shortage and inflationary pressures also had a downward impact on our gross margin, but to a lesser extent than the foregoing because we entered 2022 with an opening balance of EyeQ® SoC inventory that we previously acquired at lower-than-current prices and passed on some of the increased costs of EyeQ® SoCs acquired at current prices to our customers.
Our gross margin decreased from 49% during the nine months ended September 25, 2021, to 48% during the nine months ended October 1, 2022. This decrease was primarily due to the impact of SuperVision™ sales contributing lower margin given the greater hardware content this product contains. The rise in the cost of our EyeQ SOCs due to the global semiconductor shortage and to inflationary pressures also had a downward impact on our gross margin. However, this impact was less than the increased amount of hardware because (i) we entered 2022 with an opening balance of EyeQ SoC inventory previously acquired at lower-than-current prices, and (ii) we passed on some of the increase in costs of our EyeQ SoCs to our customers. This was partially offset by the lower impact of the cost attributable to amortization of intangible assets as a percentage of revenues.
Research and Development Expenses, net
Research and development expenses, net, in the three months ended October 1, 2022, increased by $74 million, or 56%, compared to the three months ended September 25, 2021. This increase was primarily due to an increase of $46 million in payroll and related
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expenses, derived from an increase in average research and development headcount of 487 employees and an increase in payroll costs, including share-based compensation. Additionally, there was an increase of $19 million in cloud computing services and investments attributable to new product development..
Research and development expenses, net, in the nine months ended October 1, 2022, increased by $175 million, or 45%, compared to the nine months ended September 25, 2021. This increase was primarily due to an increase of $119 million in payroll and related expenses, derived from an increase in average research and development headcount of 437 employees and an increase in payroll costs, including share-based compensation.Additionally, there was an increase of $37 million in cloud computing services and investments attributable to new product development.
Sales and Marketing Expenses
Sales and marketing expenses in the three months ended October 1 2022, decreased by $6 million, or 18%, compared to the three months ended September 25, 2021.
Sales and marketing expenses in the nine months ended October 1 2022, decreased by $7 million, or 7%, compared to the nine months ended September 25, 2021.
The decrease in both periods was mainly due to a decrease in amortization of customer relationship and brand-related intangible assets.
General and Administrative Expenses
General and administrative expenses in the three months ended October 1, 2022, increased by $1 million, or 13%, compared to the three months ended September 25, 2021. This increase was mainly due to IPO related expenses.
General and administrative expenses in the nine months ended October 1, 2022, increased by $1 million, or 4%, compared to the nine months ended September 25, 2021. This increase was mainly due to IPO related expenses, partially offset by a decrease in share-based compensation expenses.
Interest Income (expense) with related party and Other Income (expense), net
Interest expense, net in the three months ended October 1, 2022, increased by $6 million compared to the three months ended September 25, 2021.
Interest expense, net in the nine months ended October 1, 2022, increased by $13 million compared to the nine months ended September 25, 2021.
The increase in net interest expense in both periods was mainly due to accrued interest on the Dividend Note issued to Intel on April 21, 2022, partially offset by higher interest earned on a loan to Intel.
Other income (expense), net in the three months ended October 1, 2022, increased by $1 million, compared to the three months ended September 25, 2021. This increase in other income was mainly due to the increase in interest rate on short term bank deposits.
Other income (expense), net in the nine months ended October 1, 2022, increased by $6 million, compared to the nine months ended September 25, 2021. This increase in other income was mainly due to the increase in interest rate on short term bank deposits and the effect of foreign exchange fluctuations.
Benefit (Provision) for Income Tax
In the three months ended October 1, 2022, provision for income tax increased by $9 million, compared to the three months ended September 25, 2021. This increase was mainly due to growth in our overall business.
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In the nine months ended October 1, 2022, provision for income tax increased by $35 million, compared to the nine months ended September 25, 2021. This increase was mainly due to a withholding tax expense of $14 million related to a dividend distribution between entities within the Mobileye Group. The foregoing did not result in a corresponding benefit in the United States, as a result of a valuation allowance position and tax expenses incurred pursuant to U.S. tax law due to unfavorable timing adjustments and the amortization of deferred tax liability with respect to intangible assets attributable to the acquisition of Moovit.
Liquidity and Capital Resources
We believe we have sufficient sources of funding to meet our business requirements and plans for the next 12 months and in the longer term. Cash generated by operations is our primary source of liquidity for funding our strategic business requirements.
Our primary uses of funds have been for funding increases in headcount in our research and development organization and for capital expenditures. Our capital expenditures have related mainly to the construction of our campus, data storage and other computer related equipment and were $79 million and $98 million for the nine months ended October 1, 2022, and September 25, 2021, respectively. In connection with the Reorganization, on May 12, 2022, we also declared and paid the Dividend in an aggregate amount of $336 million to Intel, net of $14 million of cash paid to tax authorities to settle related tax obligations.
To fund our cash requirements in the ordinary course of business, we anticipate that we will continue to primarily rely on operating cash flows, supplemented by our total cash and cash equivalents, together with approximately $0.1 billion retained by us out of the Mobileye IPO net proceeds that we retained in accordance with the Master Transaction Agreement entered into in connection with the IPO, which requires that Intel ensure that immediately after completion of the IPO we will have $1.0 billion in cash, cash equivalents, or marketable securities. Accordingly, we used approximately $0.9 billion to repay a portion of the indebtedness owed by us to Intel under the Dividend Note. We expect our total capital expenditures for 2022 to be flat compared our total capital expenditures in 2021. The construction of our campus is planned to be completed by the end of the first quarter of 2023, with a remaining cost we estimate to be between $80 million and $90 million. Our future capital requirements will depend on many factors, including our growth rate and the timing and extent of operating expenses.
We have lease obligations and other contractual obligations and commitments as part of our ordinary course of business. We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements involving commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, cash requirements or capital resources.
Cash Flows
The following table sets forth certain combined statements of cash flow data:
Nine Months Ended
$in millions
October 1, 2022
September 25, 2021
Net cash provided by operating activities
$
395
$
438
Net cash provided by (used in) investing activities
319
(488)
Net cash provided by (used in) financing activities
(451)
67
Effect of foreign exchange rate changes on cash and cash equivalents
(6)
—
Net increase in cash and cash equivalents and restricted cash
$
257
$
17
Operating activities
For the nine months ended October 1, 2022 compared to the nine months ended September 25, 2021, the $43 million decrease in cash provided by operating activities was mainly due to a change in employee related balances resulting from our recruitment of certain employees relating to the Mobileye business from Intel during the second quarter of 2022.
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Investing activities
Net cash provided by investing activities in the nine months ended October 1, 2022 was $319 million, consisting primarily of a $398 million net repayment of a loan by Intel, partially offset by capital expenditures.
Net cash used in investing activities in the nine months ended September 25, 2021 was $488 million, consisting primarily of a $390 million loan to Intel and capital expenditures.
Financing activities
Net cash used in financing activities in the nine months ended October 1, 2022 was $451 million, consisting primarily of the $336 million Dividend to Intel and $200 million of share-based compensation recharge payments made to Intel, partially offset by $99 million as a result of net contributions from Intel.
Net cash provided in financing activities in the nine months ended September 25, 2021 was $67 million, consisting primarily of $69 million as a result of net contributions from Intel.
Liability in respect of employee rights upon retirement
Israeli labor laws and agreements require severance payments upon dismissal of an employee or upon termination of employment in other circumstances. The severance pay liability with respect to Israeli employees is calculated pursuant to Israeli Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date.
Our liability for all of our Israeli employees is covered by monthly deposits with severance pay funds. The value of the deposited funds is based on the cash surrender value of these policies and includes profits (or loss) accumulated through the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligations pursuant to Israeli Severance Pay Law or labor agreements.
Part of our liability for severance pay is covered by the provisions of Section 14 of the Israeli Severance Pay Law (“Section 14”). Under Section 14 employees are entitled to monthly deposits, at a rate of 8.33% of their monthly salary, contributed by us on their behalf to their insurance funds. Payments in accordance with Section 14 release us from any future severance payments in respect of those employees. As a result, we do not recognize any liability for severance pay due to these employees and the deposits under Section 14 are not recorded as assets on the combined balance sheets.
Severance pay liability decreased from $65 million as of September 25, 2021, to $53 million as of October 1, 2022, mainly due to the recruitment of certain employees relating to the Mobileye business from Intel during the second quarter of 2022, partially offset by an increase in salary and related costs.
Indebtedness
We have several bank guarantees aggregating approximately $11 million (denominated in New Israeli Shekels) mainly in connection with lease agreements and import of vehicles.
In addition, in connection with the Reorganization and the Mobileye IPO, on April 21, 2022, we distributed to Intel the Dividend Note, in the aggregate principal amount of $3.5 billion (the “Dividend Note”). The Dividend Note is scheduled to mature on April 21, 2025 and accrue interest at a rate equal to 1.26% per annum.
In November 2022, we used approximately $0.9 billion out of the net proceeds to repay a portion of indebtedness under the Dividend Note and Intel has contributed to Mobileye the remaining portion of the Dividend Note such that no amounts under the Dividend Note remain owed by us to Intel.
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Non-GAAP Financial Measures
Our management uses Adjusted Gross Profit and Margin, Adjusted Operating Income and Margin and Adjusted Net Income, collectively, as key measures in operating our business. We use such non-GAAP financial measures to make strategic decisions, establish business plans and forecasts, identify trends affecting our business, and evaluate performance. For example, we use these non-GAAP financial measures to assess our pricing and sourcing strategy, in the preparation of our annual operating budget, and as a measure of our operating performance. We believe that these non-GAAP financial measures, when taken collectively, may be helpful to investors because they allow for greater transparency into what measures our management (and Intel’s management) uses in operating our business and measuring our performance, and enable comparison of financial trends and results between periods where items may vary independent of business performance. The non-GAAP financial measures are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure presented in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, as well as our combined financial statements and related notes included elsewhere in this report.
We believe excluding items that neither relate to the ordinary course of business nor reflect our underlying business performance, such as the amortization of intangible assets and certain expenses related the Mobileye IPO, enables management and our investors to compare our underlying business performance from period-to-period. Accordingly, we believe these adjustments facilitate a useful evaluation of our current operating performance and comparison to our past operating performance and provide investors with additional means to evaluate cost and expense trends. In addition, we also believe these adjustments enhance comparability of our financial performance against those of other technology companies.
Our non-GAAP financial measures reflect adjustments for amortization charges for our acquisition-related intangible assets, share-based compensation expense and certain expenses related to the Mobileye IPO as well as the related income tax effects where applicable. We exclude amortization charges for our acquisition-related intangible assets for purposes of calculating certain non-GAAP measures, although revenue is generated, in part, by these intangible assets, to eliminate the impact of these non-cash charges that are inconsistent in size and are significantly impacted by the timing and valuation of our acquisitions. These amortization charges relate to intangible assets consisting of developed technology, customer relationships, and brands as a result of Intel’s acquisition of Mobileye in 2017 and the acquisition of Moovit in 2020. We believe that the exclusion of share-based compensation expense is appropriate because it eliminates the impact of non-cash expenses for equity-based compensation costs that are based upon valuation methodologies and assumptions that vary over time, and the amount of the expense can vary significantly between companies due to factors that are unrelated to their core operating performance and that can be outside of their control. Although we exclude share-based compensation expenses from our non-GAAP measures, equity compensation has been, and will continue to be, an important part of our future compensation strategy and a significant component of our future expenses, and may increase in future periods.
We believe that the exclusion of expenses related to the Mobileye IPO is appropriate as they represent items that management believes are not indicative of our ongoing operating performance. These expenses are primarily composed of legal, accounting and professional fees incurred in connection with the Mobileye IPO that are not capitalizable, which are included within general and administrative expenses.
Adjusted Gross Profit and Margin
We define Adjusted Gross Profit as gross profit presented in accordance with GAAP, excluding amortization of acquisition related intangibles and share-based compensation expense. Adjusted Gross Margin is calculated as Adjusted Gross Profit divided by total revenue.
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Set forth below is the reconciliation of gross profit to Adjusted Gross Profit and the calculations of gross margin and Adjusted Gross Margin:
Three Months Ended
Nine Months Ended
October 1
September 25
October 1
September 25
2022
2021
2022
2021
% of
% of
% of
% of
$ in millions
Amount
Revenue
Amount
Revenue
Amount
Revenue
Amount
Revenue
Gross profit and margin
$
217
48
%
$
153
47
%
$
622
48
%
$
501
49
%
Add: Amortization of acquired intangible assets
115
26
%
100
31
%
355
27
%
300
29
%
Add: Share-based compensation expense
—
—
%
—
—
%
—
—
%
—
—
%
Adjusted gross profit and margin
$
332
74
%
$
253
78
%
$
977
75
%
$
801
78
%
Our Gross Margin (gross profit as a percentage of revenue) and Adjusted Gross Margin (adjusted gross profit as a percentage of revenue) reflect the high value-added nature of our solutions and have remained consistent in recent periods. As we develop and sell full systems that include hardware beyond EyeQ® SoCs, we expect that our Gross Margin and Adjusted Gross Margin will decrease because of the greater hardware content included in our solutions. However, as a result of a higher expected selling price for such systems, we expect our gross profit per unit will increase on a dollar basis.
Our Adjusted Gross Margin decreased from 78% for the three months ended September 25, 2021 to 74% for the three months ended October 1, 2022. Our Adjusted Gross Margin decreased from 78% for the nine months ended September 25, 2021 to 75% for the nine months ended October 1, 2022. The decrease in both periods was primarily due to increased sales of our SuperVision™, contributing lower margin given the greater hardware this product contains. The rise in the cost of our EyeQ® SoCs due to the global semiconductor shortage and inflationary pressures also had a downward impact on our gross margin, but to a lesser extent than the foregoing.
Adjusted Operating Income and Margin
We define Adjusted Operating Income as operating loss presented in accordance with GAAP, adjusted to exclude amortization of acquisition related intangibles and share-based compensation expense. Operating margin is calculated as operating loss divided by total revenue, and Adjusted Operating Margin is calculated as Adjusted Operating Income divided by total revenue.
Set forth below is the reconciliation of operating income (loss) to Adjusted Operating Income and the calculations of Operating Margin and Adjusted Operating Margin:
Three Months Ended
Nine Months Ended
October 1
September 25
October 1
September 25
2022
2021
2022
2021
% of
% of
% of
% of
$in millions
Amount
Revenue
Amount
Revenue
Amount
Revenue
Amount
Revenue
Operating income (loss) and operating margin
$
(25)
(6)
%
$
(20)
(6)
%
$
(61)
(5)
%
$
(13)
(1)
%
Add: Amortization of acquired intangible assets
131
29
%
123
38
%
413
32
%
368
36
%
Add: Expenses related to the IPO
1
—
%
—
—
%
4
—
%
—
—
%
Add: Share-based compensation expense
36
8
%
24
7
%
112
9
%
73
7
%
Adjusted operating income and margin
$
143
32
%
$
127
39
%
$
468
36
%
$
428
42
%
Our operating loss increased in the three and nine months ended October 1, 2022 compared to the three and nine months ended September 25, 2021, mainly as a result of an increase in amortization of acquired intangible assets and share-based compensation expense, as well as an increase in research and development expenses, partially offset by revenue growth.
Our Adjusted Operating Income increased in the three and nine months ended October 1, 2022 compared to the three and nine months ended September 25, 2021, primarily due to the growth in our overall business, partially offset by the increase in research and development expenses.
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Our Adjusted Operating Margin decreased in the three and nine months ended October 1, 2022 compared to the three and nine months ended September 25, 2021, primarily due to a decrease in our Adjusted Gross Margin and the impact of increased research and development headcount.
We expect that our Adjusted Operating Margin in future near-term years will decrease compared to the nine months ended October 1, 2022, mainly due to additional research and development headcount and higher direct expenses that we expect to incur in connection with the development of new EyeQ ® SoC generations, Mobileye SuperVision™ enhancements, and the productization of our AV solutions and active sensor suite.
Adjusted Net Income
We define Adjusted Net Income as net loss presented in accordance with GAAP, adjusted to exclude amortization of acquisition related intangibles and share-based compensation expense, as well as the related income tax effects. Income tax effects have been calculated using the applicable statutory tax rate for each adjustment taking into consideration the associated valuation allowance impacts. The adjustment for income tax effects consists primarily of the deferred tax impact of the amortization of acquired intangible assets.
The share based compensation adjustment did not have a material tax impact.
Set forth below is the reconciliation of net income (loss) to Adjusted Net Income:
Three Months Ended
Nine Months Ended
October 1
September 25
October 1
September 25
2022
2021
2022
2021
% of
% of
% of
% of
$in millions
Amount
Revenue
Amount
Revenue
Amount
Revenue
Amount
Revenue
Net income (loss)
$
(45)
(10)
%
$
(26)
(8)
%
$
(112)
(9)
%
$
(22)
(2)
%
Add: Amortization of acquired intangible assets
131
29
%
123
38
%
413
32
%
368
36
%
Add: Expenses related to the IPO
1
—
%
—
—
%
4
—
%
—
—
%
Add: Share-based compensation expense
36
8
%
24
7
%
112
9
%
73
7
%
Less: Income tax effects
(9)
(2)
%
(14)
(4)
%
(27)
(2)
%
(42)
(4)
%
Adjusted net income
$
114
25
%
$
107
33
%
$
390
30
%
$
377
37
%
Our net loss increased in the three and nine months ended October 1, 2022, compared to the three and nine months ended September 25, 2021, mainly as a result of an increase in amortization of acquired intangible assets and share-based compensation expense, as well as an increase in research and development expenses, partially offset by revenue growth.
Our Adjusted Net Income increased in the three and nine months ended October 1, 2022, compared to the three and nine months ended September 25, 2021, primarily due to growth in our overall business, partially offset by the increase in our research and development expenses.
We expect that our Adjusted Net Income margin (which is the Adjusted Net Income divided by total revenue) in future near-term years will decrease compared to the nine months ended October 1, 2022, mainly due to additional research and development headcount and higher direct expenses that we expect to incur in connection with the development of new EyeQ® SoC generations, Mobileye SuperVision™ enhancements, and the productization of our AV solutions and active sensor suite.
Critical Accounting Policies and Estimates
Our unaudited condensed combined financial statements have been prepared in accordance with U.S. GAAP. The application of our accounting policies may require us to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities,revenue and expense, and the accompanying disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time the estimate was made.
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We consider an accounting policy to be a critical estimate if: (1) we must make assumptions that were uncertain when the judgment was made, and (2) changes in the relevant estimate or assumptions, or selection of a different estimate methodology, could have a significant impact on our financial position or the results that we report in our combined financial statements.
We believe that our estimates, assumptions, and judgments are reasonable in that they were based on information available when the estimates, assumptions and judgments were made. However, because future events and their effects cannot be determined with certainty, actual results could differ materially from those implied by our assumptions and estimates.
On an ongoing basis, management evaluates its estimates, including those related to intangible assets, goodwill and deferred taxes. We base our estimates, assumptions and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from the results implied by these estimates and judgments under different assumptions or conditions.
There have been no material changes to our critical accounting policies as compared to the critical accounting policies and significant judgments and estimates disclosed in the Prospectus.
Intangible Assets
Our combined financial statements include acquisition-related intangible assets, consisting primarily of developed technology and customer relationships and brands. The identification and recognition of those intangible assets involve significant judgments relating to, among other things, the projected cash flows attributable to these intangible assets and the estimated useful lives of these intangible assets. We amortize acquisition-related intangible assets that are subject to amortization over their estimated useful lives. The useful lives are determined by management at the time of acquisition, based on historical experience and the economic life of the underlying technology, and are regularly reviewed for appropriateness. Acquisition-related in-process research and development assets represent the fair value of incomplete research and development projects that had not reached technological feasibility as of the date of acquisition; initially, these are classified as in-process research and development and are not subject to amortization. Once these projects are completed, the asset balances are transferred from in-process research and development to acquisition-related developed technology and are subject to amortization from that point forward based on their estimated useful lives at that time.
The asset balances relating to projects that are abandoned after acquisition are impaired and expensed to research and development. We perform a quarterly review of significant finite-lived identified intangible assets to make a judgment on whether facts and circumstances indicate that the carrying amount may not be recoverable and an impairment may be required.
These reviews can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for specific product lines.
Goodwill
We perform an annual impairment assessment of goodwill at the reporting unit level in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. The analysis may include both qualitative and quantitative factors to assess the likelihood of impairment. Additionally, we are permitted to first assess qualitative factors to determine whether a quantitative goodwill impairment test is necessary. Further testing is only required if we determine, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount.
Qualitative factors include industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. Additionally, as part of this assessment, we may perform a quantitative analysis to support the qualitative factors above by applying sensitivities to assumptions and inputs used in measuring a reporting unit’s fair value.
Our quantitative impairment test considers both the income approach and the market approach to estimate a reporting unit’s fair value. Significant estimates include growth rates, estimated costs, and discount rates based on a reporting unit’s weighted average cost of capital.
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For 2021, we performed a quantitative impairment test at the reporting unit level, which had $111 million of allocated goodwill as of December 25, 2021. As of December 25, 2021, the reporting unit was not at risk of failing the quantitative impairment test and the fair value of the reporting unit substantially exceeded its carrying amount. As of October 1, 2022, no indicators of impairment were identified.
Deferred Taxes
Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the combined financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Use of the term “more likely than not” indicates the likelihood of occurrence is greater than 50%.
Accordingly, the need to establish valuation allowances for deferred tax assets is continually assessed based on a more-likely-than-not realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of profitability and taxable income, the duration of statutory carryforward periods, our experience with the utilization of operating loss and tax credit carryforwards before expiration and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.
New Accounting Pronouncements
See “Note 2: Significant Accounting Policies” to our combined financial statements included elsewhere in this report for information on new accounting pronouncements.
Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of the federal securities laws. Mobileye and its representatives may also, from time to time, make certain forward-looking statements in publicly released materials, both written and oral, including statements contained in filings with the SEC, press releases, and our reports to shareholders. Forward-looking statements may be identified by the use of words such as “plan,” “expect,” “believe,” “intend,” “will,” “may,” “anticipate,” “estimate” and other words of similar meaning in conjunction with, among other things, discussions of future operations and financial performance (including volume growth, pricing, sales and earnings per share growth, and cash flows) and statements regarding our strategy for growth, future product development, regulatory approvals, competitive position and expenditures. All statements that address our future operating performance or events or developments that we expect or anticipate will occur in the future are forward-looking statements.
Forward-looking statements are, and will be, based on management’s then-current views and assumptions regarding future events, developments and operating performance, and speak only as of their dates. Investors should realize that if underlying assumptions prove inaccurate, or risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, we undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events and developments or otherwise, except as required by applicable law or regulations.
Forward-looking statements contained in this report may include, but are not limited to, statements about:
● future business, social and environmental performance, goals and measures;
● our anticipated growth prospects and trends in markets and industries relevant to our business;
● business and investment plans;
● expectations about our ability to maintain or enhance our leadership position in the markets in which we participate;
● future consumer demand and behavior;
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● future products and technology, and the expected availability and benefits of such products and technology;
● development of regulatory frameworks for current and future technology;
● projected cost and pricing trends;
● future production capacity and product supply;
● potential future benefits and competitive advantages associated with our technologies and architecture and the data we have accumulated;
● the future purchase, use and availability of products, components and services supplied by third parties, including third-party IP and manufacturing services;
● uncertain events or assumptions, including statements relating to our addressable markets, estimated vehicle production and market opportunity, potential production volumes associated with design wins and other characterizations of future events or circumstances;
● future responses to and effects of the COVID-19 pandemic;
● availability, uses, sufficiency and cost of capital and capital resources, including expected returns to stockholders such as dividends, and the expected timing of future dividends;
● tax- and accounting-related expectations; and
● other statements described in this report and under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” in the Prospectus.
The risk factors discussed under the section entitled “Risk Factors” included in the Prospectus could cause our results to differ materially from those expressed in the forward-looking statements made in this Quarterly Report on Form 10-Q. There also may be other risks that are currently unknown to us or that we are unable to predict at this time.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.