Rivian (Minutes): A fight to the death, R2 decisive victory in 2026

The following is the minutes of Rivian's Q4 2024 earnings call. For the earnings interpretation, please refer to Rivian: The "Ice" and "Fire" of Performance and Guidance:

1. Core Financial Information Review

1. Automotive Business: In Q4 2024, 12,727 vehicles were produced and 14,183 vehicles were delivered. Automotive business revenue reached $1.5 billion, including revenue from regulatory credit sales. The automotive business segment achieved a gross profit of $110 million in Q4 2024, with a gross margin of 7%.

Software and Services Business: Q4 revenue was $214 million, with a gross profit of $60 million and a gross margin of 28%. This includes used car sales, vehicle electrical architecture and software development services, vehicle maintenance and repair services, charging subscriptions, and other services (such as financing and insurance). It is expected that the software and services business revenue will exceed $1 billion for the full year of 2025.

2. Q4 Financial Highlights: In Q4 2024, the company achieved significant financial milestones. The cost of goods sold (COGS) per vehicle in the automotive business decreased by $31,000 year-on-year, while the automotive revenue per vehicle (excluding regulatory credit revenue) increased to $86,000. The company also sold nearly $300 million in regulatory credits, and the adjusted EBITDA improved by $729 million compared to Q4 2023, with losses reduced to $277 million, marking the best performance since production began. Overall cash, cash equivalents, and short-term investments increased to $7.7 billion.

4. Financial Metric Adjustments: Due to lower production in 2024 leading to insufficient absorption of fixed costs, the company revised its 2024 annual adjusted EBITDA guidance to a loss of $2.825 billion - $2.875 billion, while maintaining the 2024 capital expenditure guidance at $1.2 billion. Looking ahead, the joint venture with Volkswagen Group presents significant opportunities, and it is expected that funding obtained after the establishment of the joint venture and reaching certain milestones, along with the company's existing $6.7 billion in cash, cash equivalents, and short-term investments, will support R2's mass production in Normal and the construction in Georgia, driving the company towards positive free cash flow.

5. Operating Expenses & Inventory: Focusing on driving efficiency in every element of the cost structure has enabled us to fund the technology roadmap and invest in sales and services to enhance customer experience and increase brand awareness. We made these investments while reducing operating expenses, with total operating expenses decreasing by 15% in Q4 2024 compared to the same period in 2023. Inventory levels decreased by $372 million at year-end compared to the end of 2023, primarily due to reductions in raw materials and finished goods inventory6. It is expected to generate working capital cash by reducing inventory levels in 2025. The consumer and commercial vehicle manufacturing lines at the Normal factory are expected to be shut down for about a month in the second half of 2025 to prepare for the launch of R2 in the first half of 2026. It is anticipated that 46,000 to 51,000 vehicles will be delivered in 2025, with approximately 8,000 deliveries in the first quarter. The production volume in the first quarter is expected to be 14,000 vehicles, focusing on building inventory to mitigate the impact of the planned factory shutdown in the second half of the year and to increase commercial vehicle deliveries in the second quarter.

7. Joint Venture Transaction: Received $2.3 billion of the expected $5.8 billion funding from the joint venture transaction with the Volkswagen Group. Announced the closure of a $6.6 billion Department of Energy loan, which, along with the remaining proceeds from the Volkswagen Group, is expected to provide an additional $10.1 billion of potential capital for the $7.7 billion we expect to have by the end of 2024.

8. 2025 Guidance: Expected to achieve moderate gross profit for the full year of 2025. Adjusted EBITDA loss is expected to be between $1.7 billion and $1.9 billion. Capital expenditures are expected to be between $1.6 billion and $1.7 billion, primarily for the expansion of the Normal factory, supplier tool development for R2, and the construction of marketing infrastructure.

II. Detailed Content of the Earnings Call

2.1 Key Information from Executive Statements

1. Progress on R1 and Gen 2: Rivian has made significant progress in the development of R1 and Gen 2. In terms of material costs, improvements in factory efficiency lay the foundation for long-term business profitability. Gen 2 not only focuses on costs but also introduces hundreds of design and engineering changes that enhance vehicle performance and customer experience. For example, the newly launched Tri-Motor variant, which features a front single motor and rear dual motor layout, outperforms the first-generation Quad while having lower manufacturing costs and higher efficiency. It can accelerate to 160 km/h in 2.9 seconds and has a high level of connectivity with consumers, with acceptance rates for the three-motor model exceeding expectations. However, Gen 2 faces challenges in the supply chain, with about 50% of the bill of materials costs involving new suppliers or new contracts, and some suppliers have restricted production, which significantly impacted the third quarter, but the company believes this is a short-term issue.

2. R2 Project Status: The R2 project is progressing smoothly and is on track in terms of timeline. The product itself performs excellently, significantly reducing overall costs while maintaining Rivian's characteristics. Approximately 85% of the bill of materials procurement has been completed, all within cost targets, with costs expected to be about 45% lower compared to R1 on a similar content basis. R2 is planned to begin deliveries in the first half of 2026, with factory construction and production line expansion proceeding in an orderly manner, and site leveling work is basically completed. Additionally, R2 uses 4695 cylindrical batteries, with a unique battery pack design that serves not only as an energy storage component but also as a core structural element. The vehicle adopts large high-pressure die-casting technology in its mechanical structure, reducing 65 components and decreasing the number of body joints by approximately 1,500, simplifying the assembly process through component integration and elimination. Optimizations have also been made in electrical and interior aspects, achieving a bill of materials cost of about half that of R1, with non-material costs significantly reduced by more than half of the targetIn addition, the company's continuous progress in technology stacks such as software architecture, computer topology, sensor setup, and related computing platforms has laid the foundation for the launch of the R2 model.

3. Technology Platform and Collaboration: The R2 project fully utilizes the electrical architecture, topology ECU, and software stack of R1 Gen 2, which is also the core of the joint venture project with Volkswagen. There are already drivable demonstration vehicles that apply Rivian's hardware and software to Volkswagen Group products. Volkswagen's investment is significant for Rivian, as it not only supports the launch of R2 in Normal but also aids in the construction of a production plant in Georgia, which will produce R2 and other mid-sized platform vehicles, ultimately enabling the company to achieve positive free cash flow.

4. Brand and Customer Satisfaction: For the second consecutive year, the company has become the brand with the highest customer satisfaction and likelihood of repurchase in leading customer satisfaction and brand service surveys. The company places safety at the core of its vehicle development process, with both the R1T pickup and R1S SUV receiving the highest safety rating of "Top Safety Pick+" from the Insurance Institute for Highway Safety, where R1T is the only electric pickup to receive this rating, and R1S is the only large SUV (including internal combustion and electric models) to achieve this rating. These safety advantages are reflected in consumer recognition and affection for the brand.

5. Progress on Autonomous Driving Platform: The company employs the Rivian autonomous driving platform, equipping the R1 model with 55 cameras and 5 imaging radars, with the computing platform's processing power being ten times that of previous versions, fully considering the use of artificial intelligence to train driving behavior. The company is set to launch hands-free highway functionality in the coming weeks and plans to introduce hands-free and eyes-off features on highways by 2026, with the range of applicable roads and conditions continuously expanding. In terms of investment in autonomous driving technology, the company has acquired a large number of GPUs for training through various means, avoiding significant capital expenditures.

6. Cost Control Measures and Results: The company has achieved higher performance, lower costs, and easier manufacturing and servicing of the second-generation R1 model through engineering-driven design changes. At the same time, meaningful reductions in supplier commercial costs and raw material cost efficiencies have been realized, with these benefits expected to continue through 2025. In terms of operating expenses, the fourth quarter of 2024 saw a 15% reduction compared to the same period in 2023. By strategically focusing on various elements of the cost structure, funds have been provided for technology roadmaps and sales service investments to enhance customer experience and brand awareness.

7. Product Portfolio and Market Positioning: The company has launched a variety of products, such as the R1 series, initially aimed at shaking hands with the world and establishing the brand. The subsequently launched Tribute and international models feature unique power configurations, outstanding performance, and can accelerate to 160 km/h in 2.9 seconds, with a high degree of connection to consumers, and the acceptance rate of the three-motor models is higher than expected. Additionally, the company plans to launch the R2 model in the first half of 2026, based on a mid-sized platform, expected to open up a broader mass market with a starting price of $45,000, significantly improving the cost structure compared to R1, with the bill of materials cost expected to be about half that of R1 and non-material costs reduced by over 50%8. Cooperation with Volkswagen Group: The company's joint venture with Volkswagen Group has completed financial consolidation, and the fees paid by Volkswagen Group for vehicle electrical architecture and software development services are reflected in Rivian's software and services segment revenue and cost of goods sold. It is expected that over the next four years, as the joint venture progresses according to the development roadmap, Rivian will receive approximately $2 billion in revenue from Volkswagen Group, including cash income from intellectual property licensing, equity premiums, and non-cash gains.

2.2 Q&A

Q: What are the assumptions and forecasts regarding tariffs, credits, and other aspects?

A: The company's outlook reflects the current view on potential policy adjustments, covering incentives, regulations, tariff structures, etc. These policy adjustments have a multi-hundred million dollar impact on Rivian's EBITDA, which includes potential demand impacts. However, this is based on the management's current outlook and perspective, and the policy environment is subject to significant changes. The company believes it is important to provide guidance that reflects the current policy assessment. It is expected that there will still be approximately $300 million in regulatory credits in 2025, relatively stable compared to 2024, but may fluctuate due to policy impacts. In terms of software and services, there is expected to be $484 million in related revenue in 2024, and overall revenue from this business is expected to exceed $1 billion in 2025, with gross margins expected to reach around 30%.

Q: Can you elaborate on the cost trajectory of the R1? By the end of this year, will the unit cost be roughly equal to the average selling price (ASP)? Does this indicate that you have a clear expectation of the cost structure and required costs for the R2, given that you mentioned R2 procurement has reached 95%?

A: The R1 product faced initial manufacturing challenges and supplier premium issues during its early production. With the introduction of the second-generation product, the company has re-sourced over half of the vehicle manufacturing materials, significantly reducing the bill of materials costs. Additionally, by implementing new designs, the efficiency of parts production and vehicle assembly has improved. Furthermore, the company has identified additional opportunities for improvement across various stages of the vehicle and supply chain. The material costs for the R2 product are expected to be about half of those for the R1, with the cost of non-manufacturing materials reduced by over 50%. The company continues to work on supply chain and operational efficiencies by collaborating with suppliers, optimizing logistics, and improving personnel efficiency. The R2 product features a simpler design with fewer components and can benefit from the experiences and improvements made with the R1. A project called "Workshop Empowerment," which involves team members and frontline managers, has become a real driver for discovering additional savings and improvements, applicable not only to the R1 but also to the R2.

Q: Rivian has made significant strategic adjustments in the autonomous driving platform area, shifting to end-to-end 10x computing power and enhanced sensor suites. What is the investment in computing and training? Is this done in-house or in collaboration with partners? How much of the future R&D, OpEx, and CapEx is allocated to AI infrastructure and training, and how is proprietary data utilized to drive leadership in this area?A: Platform strategy shift and investment: About three years ago, when the company initiated the development of its second-generation platform, it decided to adopt an AI-centered autonomous driving system, building a big data flywheel and foundational model training platform. To this end, the company independently designed the hardware for onboard cameras and computing platforms and established a software platform running on that hardware. The shift to an end-to-end approach and the application of big data pipeline training fundamentally changed the company's view on autonomous driving, business growth, and functionality.

Functional progress and business prospects: The company is about to launch a hands-free, eyes-off driving feature, with plans to introduce a hands-free, eyes-off feature under specific operational conditions next year, gradually expanding the applicable conditions. In the short to medium term, the hands-free and eyes-off features have the opportunity to be charged as paid features, creating economic value for the company, but in the long term, their pricing will be influenced by the competitive landscape. The company has made significant investments in this area and expects the compound benefits of a vertically integrated stack to manifest in the market. To achieve this goal, a large amount of training capacity is required, and GPUs (graphics processing units) are necessary. This is a business-level decision regarding whether it is capital expenditure (CapEx), whether to purchase GPUs and establish AI training infrastructure, or to lease them, or to create unique off-balance-sheet financing methods, which will ultimately appear as research and development (R&D) or operating expenses (OpEx).

Q: Regarding the software and services segment. Compared to the approximately $300 million figure for 2024, is the assumption for 2025 higher, lower, or similar?

A: Therefore, in terms of regulatory credit outlook, it is indeed expected that there will be approximately $300 million in regulatory credit for the entire year of 2025, which is already included in the outlook. There may be some outcomes that could make this value higher. Of course, policy impacts may cause it to decline slightly. When we look at the revenue related to joint ventures, the software and services revenue for the fourth quarter was $214 million. This compares to a base revenue of about $100 million in the previous quarter. Most of the growth came from the introduction of joint ventures, which actually operated for only half of the quarter. When considering relative scale, no specific numbers will be provided, but I want to offer a relative perspective, that is, growing from about $100 million to $200 million, although we also saw underlying growth in software and services unrelated to joint ventures during the same period, mainly due to our significant growth in used car sales.

Looking ahead, total revenue for the software and services segment in 2025 is expected to exceed $1 billion. Joint ventures will play an important role in this growth.

Q: How will Rivian charge for products related to the autonomous driving platform in the future, and can it be monetized to become a significant business driver? How do you view some low-priced intelligent driving options in China?

A: It is necessary to separate the short to medium term and the long term. In the short to medium term, Rivian has a relative advantage in Level 3 functionality (more like hands-free, eyes-off functionality) and has the opportunity to price this feature. However, in the long term, this largely depends on the competitive landscape and how other companies charge for these features. It is also uncertain whether it will be charged as an optional upgrade or embedded in vehicle pricing. Regardless of the approach, it is believed that this will create economic value for the company, which is also the reason for the company's significant and ongoing investment in this business areaQ: What is the impact on gross profit from the $1.96 billion revenue expected from joint ventures over the next four years?

A: This deferred revenue stream can be viewed as pure profit as it is gradually recognized over the next four years. However, the recognition over these four years will not be evenly distributed and will be allocated based on the overall sustainable development of the joint ventures, with a tendency for greater recognition in the later periods.

Q: What is the quarterly delivery rhythm for 2025, when do you plan to halt production, and how will the annual delivery situation develop?

A: The company is undergoing significant expansion of its factory for the assembly and body shop of R2. At the same time, certain areas of the Illinois factory, such as the paint shop and stamping shop, will be shared by R1, R2, and commercial vans. To integrate the R2 production line into the paint shop and stamping shop, the factory will halt production for about one month, and this situation has been reflected in the guidance data provided by the company. The production numbers have taken this halt into account to ensure there are sufficient suppliers, inventory, and vehicles to support annual deliveries.

Q: How do you view the uncertainty regarding loans from the U.S. Department of Energy and funding disbursement from Washington?

A: The company looks forward to collaborating with the new government and the Department of Energy on loan matters, which will create 7,500 new manufacturing jobs, in addition to the over 10,000 jobs created by Rivian across the enterprise in the past three years. The loan will also provide crucial funding for the company's business expansion, increasing production capacity from the normal 215,000 units to 400,000 units. Additionally, the company's investments in electronics, software, autonomous driving, and artificial intelligence align with the U.S. goal of maintaining global leadership and innovation in transportation and energy systems.

Q: With a projected gross profit of approximately negative $1.2 billion in 2024, and software and service revenue expected to grow by about $800 million year-on-year, with a gross margin increase of 2.24%, is the remaining approximately $1 billion growth mainly due to lower material inventory costs and cost savings, or are there other factors to consider?

A: The total revenue from software and services in 2024 is expected to be around $484 million, with a previous quarterly operating rate of about $100 million per quarter. In terms of overall gross profit composition, the sustained gross profit from software and services will bring significant benefits, expected to exceed $1 billion, with the gross margin for software and services projected to reach around 30%. There are cost efficiency drivers in manufacturing plants and suppliers, as well as favorable factors for commodities, but there are also some offsetting factors, such as potential policy-related impacts or demand influences, and there will no longer be significant benefits related to the lower of cost or net realizable value (LCNRV) in 2025. From a Generally Accepted Accounting Principles (GAAP) perspective, the expected gross profit from the automotive business is negative, but after adjusting for some non-cash items (including depreciation and stock-based compensation expenses), profitability is expected, which will drive an improvement in adjusted EBITDA of about $800 million to $1 billion, as R&D expenses and selling, general, and administrative expenses (SG&A) will increase with ongoing investments in the autonomous driving platform, services, and sales infrastructure.

Q: With flat or declining sales in 2025, partly due to capacity constraints and transitions, is there potential for growth in sales of R1 and commercial vans in 2026? Is it that the products have reached operational rate levels that are difficult to grow, or can significant sales increases be achieved through price reductions as the business develops?**

A: When launching related products, the focus was on capital expenditure efficiency and operational efficiency, managed by a leadership team overseeing a factory that produces three different products, sharing spray painting workshops and stamping equipment, thereby reducing the capital expenditure for each product launch. R1, R2, and commercial vans are produced in the same factory, with the factory design allowing flexibility between different product lines. R1 is the flagship product, while R2 targets price-sensitive mass market customers, with a starting price of $45,000, about half of R1's average selling price, attracting consumers who like the brand and product but cannot afford R1 due to its high price. This factory design allows the company to avoid overly precise planning of R1 and R2 sales in operations and reduces the risk of cannibalization between R2 and R1. The cost structure of R2 shows significant improvement compared to R1, with the cost of non-manufacturing materials being less than half that of R1, and the bill of materials expected to be about half of R1's.

Q: Excluding the BW agreement, what are the revenue opportunities for the software and services business? What is the charging rate situation for Connects+? What is the application outlook for the ADAS platform in the service market in the coming years? What is the long-term gross margin potential for this business?

A: The company decided early on to layer vehicle electronic systems, integrating the number of computing platforms within the vehicle and vertically integrating the software stack running on these computing platforms. This not only helps create an attractive brand, allowing vehicles to improve continuously through monthly updates, but also spurred new businesses, such as a $5.8 billion joint venture and related technology licensing, validating the strength of the company's platform. In vehicles, features like Connects can add more characteristics and connectivity, making it feasible to combine autonomous driving with paid features in the medium to short term. Over time, the market will determine whether these features are included in the total vehicle price or offered as optional features. Regarding vehicle software, the company's software head frequently interacts with customers, who expect improvements in vehicles every month. From a gross margin perspective, it is difficult to assess the long-term situation due to the varying proportions of the components of the software and services business, as well as long-term additional development licensing opportunities. It is recommended to focus on recent impacts; different parts of this business, such as remarketing, vehicle maintenance services, and high-margin subscription-related revenue streams, have different margin situations, which presents a significant opportunity for Rivian in the long run.

Q: Does the 2027 target data exclude the revenue from mass transactions, and theoretically, is this additional revenue? Does the pricing assumption for R2 include the $7,500 IRA tax credit benefit?

A: When designing the R1, R2, and R3 product line business and cost structure, the company considered these independently of the IRA. The $7,500 tax credit is a favorable factor, but the company has built significant flexibility in vehicle configuration and pricing, considering both scenarios with and without the credit, and this credit affects all relevant parties equally, not constituting a relative advantage or disadvantage. Regarding the 2027 target, there are positive factors from joint ventures, but it is also adversely affected by the overall policy outlook. Overall, the company believes there is a path to achieving positive EBITDA in 2027, but it requires revenue from joint ventures and the software and services business to meet the target