Hesai Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 13, 2023

There are 9 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for Hesai Group's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. Please note that today's conference call is being recorded. I will now turn the call over to our first speaker today, Yan Teng Shi, the company's Investor Relations Director.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining Hexa Group's Q3 2023 earnings conference call. Our earnings release is now available on our IR website at investor. Heseitet.com as well as via newswire services. Today, you will hear from our CEO, Doctor.

Speaker 1

David Li, who will start the call with an overview of our recent updates. Next, our Global CFO, Mr. Louis Tse, will address our financial results before we open the call for questions. We also invite participants to view the slide that we have prepared for part of our discussion today. This slide is available on our IR Web site@investor.heusaipai.com in the financial filings, quarterly results section.

Speaker 1

Before we continue, I refer you to the Safe Harbor statement in our earnings press release, which applies to this call as we will make forward looking statements. Please also note that the company will discuss non GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported on the GAAP in our earnings release and SEC filings. With that, I'm pleased to turn over the call to our CEO, Doctor. David Li. David, please go ahead.

Speaker 2

Thank you, Yuan Ti, and thank you everyone for joining our call today. We're delighted to report that our Q3 financial performance surpassed our expectations. Our quarterly net revenues rose to reach another record high and our total delivery doubled year over year. Both metrics outperformed our initial projections. We're also thrilled to announce that we successfully maintained a gross margin of over 30% in the 3rd quarter Despite the challenges posed by the transition and upgrade phases for both RoboTaxi and ADAS products, The transition of ADAS product is now fully wrapped up.

Speaker 2

This accomplishment was made possible through exceptional efforts as well as our robust manufacturing, engineering and supply chain optimization capabilities. As a result, we're not only satisfied The dip in gross margin at the lower end of the V shape trajectory we initially anticipated at the beginning of the year, but it made a direct leap into a stable long term gross margin step. Upon careful comparison with our 6 U. S. Listed peers using publicly available information, We can probably say that our performance metrics have excelled across entire spectrum.

Speaker 2

This includes stellar achievements in revenue scale, delivery, Market share and gross margin. Remarkably, we have maintained a robust balance sheet throughout this process. Of particular significance The fact that we have achieved positive operating cash flow for the 3rd consecutive quarter, totaling US121 million dollars US17 million dollars for the 1st 9 months of 2023. This places us as the sole standout company Among the peers to achieve this feat, demonstrating our unwavering commitment to operational efficiency amid Continuing growth. These financial milestones are a testament to our devoted team's hard work and underscore our steadfast dedication Achieving a long term sustainable growth and profitability.

Speaker 2

Let's delve into the Q3 business update, starting with notable adjacent win. We're making significant strides on the domestic front. In the Q3, we achieved a global milestone by proudly announcing the first of its kind Series production design wins for our long range ultra thin in cabin ET25 Lidar with FAW Group, 1 of the top OEMs in China for the next generation EV models under their prestigious Hongqi brand Defined by quality, luxury and safety, DT25's revolutionized in cabin placement protect The LiDAR unit itself from dirt, grime and well allowing OEMs to design car models with diminished aerodynamic resistance And sleek, the static foot with the exteriors, fueled by our next generation vertically integrated high performance module, ET25 has emerged as the in cabin LiDAR forerunner in terms of range detection, achieving an impressive 250 meters at 10% reflectivity rate. This success of this new design win with FAW Group signifies Robust progress in the commercialization of this in cabin product and the market and immerse leap forward towards its mass production scheduled to materialize by the first half of twenty twenty five. Furthermore, We recently broadened our client portfolio and secured exclusive partnerships, including multiple new design wins with GRISWAM Motor, 1 of the largest automaker in China as well as Leapmotor in Pao Zhiquo and Neta Nejda Zhiquo, 2 leading EV automakers in Chinese market.

Speaker 2

Their new EV models will feature our flagship AG series LiDAR are set to debut starting in 2024 2025. It is noteworthy that among these recent design wins, Several of them have prior engagement with our industry peers. Their choice to switch to our LiDAR products for certain existing and our proven record of timely deliveries. We're also excited to witness a rising trend where more OEMs are making the switch over to partner with us, while none of our existing customers have made the move to a competitor. With these recent partnerships, we have secured design wins with 14 OEMs and Tier 1 suppliers, Including the top 5 OEMs in China across over 50 vehicle models, a robust testament to our global market leadership, We eagerly look forward to contributing to the fulfillment of these automotive manufacturers' vision of creating more intelligent and safer vehicles.

Speaker 2

In International Development, we're delighted to announce that we are currently deeply engaged in 9 RFI and RFQ Q discussions with 6 leading global OEMs from North America and Europe. While none of these were slated for conclusion in the Q3, We expect 3 RFUs to be finalized in Q4 per customer's projection, including 1 from Global OEM and 2 from Global OEMs Joint Ventures in China. It's worth noting that these vehicles are not to the Chinese market, some of them are intended for global distribution. For 2 of these global OEMs, We have attained supplier qualification status following extensive audit procedures that include evaluation of the product quality, Production line, supply chain, certification, financial stability and other essential aspects complemented by multiple round of site visits. We are enthusiastic about the potential partnerships that may emerge and we look forward to sharing more exciting news and development in the near future.

Speaker 2

In addition, we have broadened our collaboration with the prominent European OEM mentioned in our last earnings call, Including additional strategic development program focused on the research and development of integrating our cutting edge LiDAR technology into a multi sensor package, Targeting car models with SOP dates in 2028 and beyond, this expansion marks a deepened and reinforced partnership With this, the deep OEM underscoring our acknowledged technical excellence and strategically positioning to us for potential future design wins for them. As I highlighted in my previous quarterly update, development programs of this nature are integral to our international market strategy. They provide us with distinctive opportunity to showcase our technological Prowdess and engineering capabilities for OEM customers before they make final decisions regarding vendor selection. Given our accelerating number of global and domestic OEM design wins, it is becoming clear that OEMs prefer facelidar's superior performance in range and resolution and higher quality to that of our competitors' offering. Next, I'd like to share an update on our manufacturing and the product enhancement.

Speaker 2

As you're aware, Hexa is dedicated to expeditiously Advancing new products towards SOP phase. In September, we celebrated a new milestone with our FT-one hundred and twenty, the world's first Fully solid based lines for LIDAR to attain SOP and to be installed on a series production vehicle model post Dome 1, The first full size luxury SUV model from Rock Motor, by harnessing the advantages of the FT120's ultra wide FOV Field of view and the minimum blind spot coupled with our flagship long range 80 series lidar, the resulting Car model features a powerful 3 d high precision perception system providing smarter and safer to an experience across a wide range of growth scenarios. Turning our attention to our AT series LiDAR. In the Q3, we officially launched AT1-128 P model, the upgraded iteration of Black ship AT128A is large LIDAR. AT128P boasted an impressive Set of improvement including brand extension to 240 meters at 10% reflectivity rate, Higher resolution, enhanced the point cloud's regularity and a 20% reduction in power consumption, achieving a seamless transition From SOP to full scale production at our Hearst Center in Hangzhou represents a momentum achievement that strategically positions us to leverage economies of scale through the highly automated production line in this facility, which is specifically tailored for the mass production of our mature products.

Speaker 2

We're now poised to reach the rewards Of the improved cost efficiency with substantial volume shipment expected in the Q4 of this year, The success of our recent product upgrade and seamless ramp up production at Heard Center not only reflect our unwavering commitment To meeting market demand, but also stands at an invaluable learning experience. This endeavor has provided us With crucial insights and knowledge that will play a pivotal role as we contemplate expanding our production capabilities in the future. Moreover, it has strengthened our present market leadership in lighter delivery, positioning us for sustained success. By leveraging our in house manufacturing capabilities, we are well prepared to innovate and thrive in the dynamic landscape of EverEvoli industry. Lastly, I'd like to share what we have recently completed The construction of our R and D and in house manufacturing facility, Maxwell Center, located in Jialing, Shanghai, In addition to actively preparing to produce our new fully solid state FT-one hundred and twenty LiDAR, this facility is now equipped with Spirit had research and development of our next generation LiDAR products.

Speaker 2

We've established 90 functional and performance testing programs With plans to scale this number to 100 in the near future, the seamless integration of R and D activities And the production processes in this state of the art facility not only amplifies efficiency, but also expands our capability To introduce groundbreaking solutions to the market, we're enthusiastic about the potential this facility unlocks, Driving our research initiative and enhancing the overall quality and time to market of our future product offering. To summarize, We steadily and effectively navigated our product transition during the Q3. This triumphs Along with stronger than expected quarterly revenue, deliveries and gross margin put us on track for a strong finish to the year. Our continuous run of design wins and development programs from leading domestic and global OEMs is not just a remarkable feat, It's a resounding testament to our market leadership and strengthens our foundation and enduring growth. Our steadfast commitment to performance, quality, safety and reliability will continue to guide our endeavors And we remain dedicated to advancing the cost of autonomous transportation by enhancing safety systems and saving lives worldwide.

Speaker 2

I'll now turn the call over to Louis to share more details on our financial performance and outlook. Louis, please go ahead.

Speaker 3

Thank you, David, and hello, everyone. Let's go through our operating and financial figures for the 3rd quarter. To be mindful of the length of our earnings call today, I encourage listeners to refer to the 3rd quarter earnings release for further details. We are pleased to see that our net revenues exceeded the top end of our guidance, increasing 33.5 percent year over year, reaching another record high of US46 $1,000,000 We achieved this growth against the high comparable 3rd quarter last year, which benefited from the bounce back after the Shanghai COVID lockdowns in the Q2 of 2022. Deliveries outperformed as well, more than doubling year over year to over 47,000 units in total, further solidifying our leading position in the global LiDAR market.

Speaker 3

In terms of gross margin, I would like to remind you that at the beginning of the year, we anticipated a simultaneous product transition for multiple products Before we could fully benefit from economies of scale, hence Q2 and Q3 were designated as a product transition phase And we are expecting a significant drop on gross margin, forming a V shaped pattern. However, Our gross margin for the Q3 of 2023 reached 30.6%, significantly higher than our earlier guidance, driven by continuous improvement in our manufacturing Cost structure, as David just mentioned, continued robust demand for high margin autonomous mobility products also contributed to the quarter's margin uptake. As a result, both Q2 and Q3, which were previously considered as a product transition phase, has significantly outperformed Our initial projections. Our relentless efforts to improve manufacturing scale and optimize cost structure Also led to our unmatched financial strength in the global LiDAR industry, marked By our Q3 of positive operating cash flow RMB47.6 million, US6.5 million dollars Our robust year to date performance positions us to continue to advance Strong our path toward profitability and achieve sustainable long term growth. Now turning to our financial outlook.

Speaker 3

Well, we expect a strong performance. Our robust third quarter results bode well for our Seasonally strongest Q4. For the Q4 of 2023, we expect net revenues to be between RMB535 1,000,000, US73.3 million dollars and RMB555 1,000,000 US76.1 million dollars representing a year over year increase of approximately 30.7 percent to 35.6 percent. We are pleased to share that with the shift Toward a more optimized AT1-twenty 8p product, we are now entered a Mature stage of production for ADAS. Consequently, we anticipate a high level of predictability for Eta in the future characterized by stabilized manufacturing processes, controlled cost structure and well managed supply chain.

Speaker 3

We take pride in having overcome the challenges posed by the transition process and navigated swiftly and carefully. Thanks to our outstanding capability to in engineering development and the debt supply chain management. We are delighted to announce that we are all on track to deliver on our target of 220,000 LiDARs in total for 2023. In fact, We are seeing growth adoption of LiDAR systems equipment with LiDAR by OEMs globally. We anticipate this momentum will accelerate into 2024.

Speaker 3

For this reason, we expect Our LiDAR volume to more than double to approximately 500,000 units next year. Based on our customer order forecast, by the end of 2024, we anticipate 13 ADAS OEM customers We'll reach SOP, expanding our portfolio to include over 40 SOP vehicle models. As of now, we have secured design wins with 14 ADAS OEMs covering over 50 Vehicle models in total and we expect these figures to climb significantly throughout 2024. Therefore, we reaffirm our annual revenue target of RMB1.8 billion, approximately US250 million dollars in conjunction with a group level blended gross margin of 30% to 35% for full year 2023. By December, We anticipate achieving a monthly delivery rate of 40,000 units, positioning us well ahead of the competition in the global lidar industry.

Speaker 3

The above outlook is based on our current market conditions and reflects The company's preliminary estimates of market and operating conditions and customer demand, which are all subject to change. In summary, while the 3rd quarter was a bridge quarter, we exceeded our own Performance expectations in terms of financial and secured major design wins, setting us apart in the market and laying a solid foundation for further growth and development. Bolstered by the momentum we've generated, We are eagerly looking forward to the exceptionally promising 4th quarter as we continue our journey toward profitability. Before going into Q and A, I'd like to take a moment to add my personal opinion on Alstair's tactics and behavior toward her side. Specifically, I want to address the recent national origin based smear campaign Of false claims being made or directed by Alstair and other competitors against us.

Speaker 3

A point by point discussion of our competitors' fabricated claims regarding Hesai's LiDAR technology and possible intended uses And Hesai's responses can be found in the company's October 12, 2023 press release available on our website And in presentation available on Hesai's IR website at investor. Hesitek.com in the Finance's filings quarterly results section. Ouster and its Media and lobbying agents have attempted to discredit Versailles Technology and Business Practices Seeking to banhesize products from the U. S. Marketplace, relying primarily on basis IP infringement claims and exploiting heightened China U.

Speaker 3

S. Geopolitical tensions. I find this line of attack focused on a company's national origin, deplorable and contemptuous. Ouster's claims are unsubstantiated And Hussai denied all allegations and innuendo by Ouster. Ouster has spent 1,000,000 of dollars on litigation expenses and lobbying fees On Capitol Hill, in a desperate attempt to portray Hersai as a Chinese company that steals American IT And it's possibly working with the Chinese military to undermine U.

Speaker 3

S. National security by potentially using our LiDARs to spy on Americans, Launch cyber attacks and aid the Chinese military in intelligence gathering, all are patently false. These underhanded tactics are the actions of a desperate company that is unable to compete effectively on the merits of its products in the LiDAR marketplace against OSI. Frankly, OSI LiDARs are preferred by customers because They perform much better range and resolution and are of higher quality than Alster's products. As a result, The AlastairVelodyne combination has seen several years of declining revenues, Dwindling LiDAR shipments, shrinking gross margins and mounting losses.

Speaker 3

Losses of $335,000,000 For the 1st 9 months of 2023 on just $59,000,000 in revenues alone. This is all reflected In declining global autonomous vehicle lidar market share, 1% in 2022 for Ouster Compared to Hesai's market leading 47% share according to Yoo Intelligence and Ouster's precipitous Share price drop of over 95% from its high level several years ago. During the ITC investigation, Alstair's desperation became very clear. Earlier this year, Alstair Velodyne Attested to divest the litigation settlement and patent cross licensing agreement entered into with Hussai, which is at the heart of the Ouster Hosei IC case. We tried to divest it into a separate legal entity, Adapt Vision Holdings LLC.

Speaker 3

Then Alstra claims It wasn't bound and did not have to abide by its own contractual obligations contained therein, including the agreement's Patent cross licensing provision allowing each side to use the other's patent LiDAR IT for 10 years and not to sue provision, designating arbitration as a dispute resolution mechanism. Obviously, Ouster knew the agreement was a major, major liability In their case, the ICC judge saw right through Alstair's legal subterfuge It would have none of it. Qi ruled, Alstair is an affiliate of Eladine by a merger. So Ouster could not escape its legalized obligation simply by transferring the agreement to a new entity. If only things were just that simple, spin off the contractor obligations you don't like and keep the ones you do like.

Speaker 3

In this bizarro world, contracts would cease to have a commercial value whatsoever. She then went on to grant the size motion to terminate in the ITC case. As an American, I find Alister's desperate National origin based xenophobic tactics of attacking Hisai with basis stereotypical allegations and innuendo Repugnant and antithetical to American principles and values. In my opinion, Such tactics and behavior should not be tolerated. Simply put, I believe Ouster's smear campaign against Hussai is downright un American.

Speaker 3

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Speaker 4

Thank

Speaker 1

For the benefit of all participants on today's call, if you wish to ask your question

Operator

to management in Chinese, please immediately repeat your question in English. Your first question comes from Tim Hsiao with Morgan Stanley. Please go ahead.

Speaker 4

Hello. Good morning. Thanks for taking my questions. So I got a couple of questions. The first one is about the growth opportunity because over the past quarter, we noticed that in China, more and more EV makers Providing the so called urban education on autopilot and nov functions on the reflection models And cleaned that as one of the key selling points into next year and the year after.

Speaker 4

So just want to know that based on the company's project pipeline, Have you seen that LiDAR adoption at an inflection point, my start taking off for next year? So in the meantime, to get broadly adopted on not just the higher model we saw today, but also the mass market and mid range models, Would KOSI consider on to cutting the competitors' prices more aggressively to capture the 1st wave of function upgrade? Especially we noticed that some of our competitors are still suffering from supply constraints. So that's my first question.

Speaker 3

Thank you, Tim. This is Louis. Your point is very well taken. And I think that's exactly what is happening. So as you know our largest customer Leado is pushing aggressively on urban NOA And I think the take rate will continue to climb into 2024.

Speaker 3

And we've seen that across the high end models from most of the new EV companies like Lioto, NIO, Xiaopeng and BYD. And so they're leading that area. The other ones are coming in behind and we're very pleased With, Hussai's market share gains, I think we have 14 of the 17, OEMs in China, the largest ones. And so we're very pleased with these market share gains. We do have the ability to lower price and in the Tesla style strategy it is something we will consider for 2024 And that's why you've seen us take up our numbers significantly.

Speaker 3

Does that answer your question?

Speaker 4

Yes, that's great. And my second question, I think, Louis, you just Provide additional details and comment about the dispute with the global players, but just want to follow-up on that. So after RTC officially terminated the patent infringement investigations, I think it was brought up by Oscar. So do you think that's going to help us actually increase the size global awareness and make global OEM and card maker feel more confident Comfortable to co work with us? Or do you think there could be any likely more dispute coming through with the group Of global light on makers, as you just mentioned, that might actually urge the global players or global carmakers To adopt the wait and seat attitude.

Speaker 4

So will the carmaker become more aggressive to place the order to her side or basically they will Tend to be more cautious in the near term. So could you share your view with us?

Speaker 2

Yes. Thank you. David, this is David. This is a great question. I think it's very important for people to see evidences on a lot of the IP acquisitions.

Speaker 2

If we briefly review the history, we had a cross licensing with Velodyne and then Velodyne sued Ouster And then after sued us. And then of course, it's in the competitors' best interest to say that we believe Hussai infringes us, right? So but then in the end, we have to look at the rulings of the judges. So the termination is very important to us and it also shows That our ability to defend ourselves at the international court level and also it verifies That we declined all the acquisitions. And then I definitely believe The global OEMs and all of the customers are feeling much more informed and confident to go with us.

Speaker 2

And In the past, while there is ongoing litigation, there is always concern. But whenever there is strong evidence in favor of us, It further verifies that we have the strongest leadership not only in the revenue shipment but also in the intellectual property.

Speaker 3

I think just to add to David's comment, I think the global OEMs will feel more comfortable selecting. You guys remember there has been no selections made By any global OEM so far this year on the ADAS side. The ones that were in the past were 2, 3, 4 years ago, Those selections. So we're in that we're definitely in the hunt and always in the top 1 or 2 for these global, but they have not Made official determinations at this time. That's what we want.

Speaker 3

But you can be rest assured that based on our feedback, our LiDARs are the best performing or none. So I think it's just a matter of time and we are working those global OEMs.

Speaker 2

Yes. We wouldn't know whether Some of the delayed decision was because of IP or not. Of course, that we don't have evidence for it. But we do know that getting this out of the way It's extremely helpful for people to make a decision purely based on performance and the quality of a vendor.

Speaker 3

Yes. So Tim, you understand that all these LiDAR Decisions made in ADAS this year all go to us, right. So it's a testament to the quality and the performance of our products. Thank you.

Speaker 4

Got it. Thanks for all the additional quarters, David and Louis. Just one last question, if I may, because I noticed that during the presentation just now, I think Louis mentioned that I think Louis mentioned that we saw the increasing shift to AT1 to AP Because I think Q3 results really surprised us on the margin surprises on the upside. So could you share a little bit more information about what's the sales mix of AT1 To AP in Q4?

Speaker 3

Yes.

Speaker 4

And when we expect the major customers to fully upgrade their LiDAR to Pro, So if that's the case, will you see the further or more meaningful margin improvement in the following quarters?

Speaker 3

Yes. That's a great question. So in Q3, the mix of old AT128 was 75% AT Pro or P was 25%. It will flip in Q4. In Q4, ATP, the AT Pro version will account for 75% of shipments and the older AT-one hundred and twenty eight will be about 25 I just fully phases out.

Speaker 2

Yes. I want to point out that I think it's we call that AT-1 hundred and twenty eight P as opposed to pro. I think the word pro in different industries sometimes means better, sometimes it means in the interior products than the original one. In our case, this is a major upgrade with better range and better accuracy, better point cloud density And lower power consumption, so it is a major upgrade. That's why we decided not to call that a Pro and really because it's a If anything, it's a max version, not Pro.

Speaker 2

So we don't want people to confuse. So just for the record, we will call that AT1-128 atp.

Speaker 3

So it will be 75% in this quarter, Tim, Q4, AT

Speaker 4

P, got it. Super clear. Thanks for sharing all the details and looking forward to more exciting upgrade in the following quarter. Thank you.

Speaker 2

Thank you. Thank you, Tim.

Operator

Your next question comes from Geoff Chung with Citi. Please go ahead.

Speaker 5

Hi, good morning. This is Jeff from Citi. So my first question is about the new shipment guidance That Louis made in the presentation on around 500,000 units lighter next year. So my understanding The previous guidance was 400,000 units next year. So did the company just Great.

Speaker 5

The sales guidance in the next year. So this is the first things I want to check. And if yes, Why? And was that due to the new shipments and new customers? This is my first question.

Speaker 5

And then separately, Louis also said the 40,000 units shipment in a single month December, Which means that by the end of this year, we can achieve a 480,000 unit annualized rate. So this is very close to the 500,000 units shipment target next year, which means that We do not need to invest much on CapEx. This should result in a very strong cash flow generation into 2024. So I just want to check these those are

Speaker 3

my first questions. Yes. I think the upgraded guidance on the delivery numbers With several things I just answered was one was on the adoption of Leado is pushing very hard on adoption of City or urban NOA and that's going to push volumes up significantly. You also saw Li Auto take up their forecast for 2024 to 650,000 units. So that also helps us as the adoption rate goes up.

Speaker 3

When you get close to level 3, It's almost inevitable you have to have LiDAR. And so that's why as we said, we've been saying for a while, as these OEMs, especially the ones who are way ahead of the game in software Are going to adopt city NOA and other advanced features, LiDAR will become a must. It also includes new wins like Great Wall. So Great Wall Motor has 5 models with us. So that wasn't accounted for last year, I mean last quarter.

Speaker 3

And all those models with the BU SOP in 2024 is Schedule. And then so and then you've seen upgraded numbers from our existing customers as we said plus new wins. That doesn't account for wins we expect In Q4, we have another 2 or 3 that will come in Q4. So basically that's why the uptick. I think $500,000 honestly is probably conservative, but that's as you guys know is my nature.

Speaker 3

2nd point is on the You had a question? Sorry, Jeff.

Speaker 2

The other question is the CapEx.

Speaker 3

Yes. CapEx, we are we have 2 factories now, right. The Hertz factory Has one line. It can hold 3 or 4 lines. So the first line, and December is an unusually high month Because it's pre built for the Chinese New Year.

Speaker 3

So it's always going to be our highest or typically is our highest delivery month. And so that's why. So it probably will not be as high in January in front of Chinese New Year. So I think it's typically what we're fine on CapEx side, but we will also CapEx will not necessarily go down because we do have plans to build overseas plants As well. So in the plans is one for Southeast Asia and also one for North America to service our global customers.

Speaker 3

So we're in a strong cash position, right? We're when we IPO we're $450,000,000 Today we're 440,000,000 Yes,

Speaker 2

great. The other comment I want to make is that The current estimate could be an underestimate and our customers are very bullish. Quite a few of them are very optimistic about their take rate and shipment volume in the coming year. If you think about it as a vendor, the last thing we want to do is to not to prepare for that. So which means that Internally, we need to be prepared for a volume that's higher than our current estimate, but that's always a good thing because all the Lot of investment on the infrastructure, the construction side has already been done.

Speaker 2

So it's very limited additional investment, but The volume could go much higher than what we expect today.

Speaker 3

And Jeff, don't forget the 500,000 unit capacity for Hertz Line 1 means one shift. We could add a second shift if necessary. So I think we're fine as far as capacity goes.

Speaker 5

Great. Yes, that's excellent.

Speaker 3

Okay. Kai wants to speak. Jeff, and also the real demand from some of the customers Next year for some months, their demand is well above 50 ks units a month. So that's why we needed to prepare for the new line.

Speaker 5

That's fantastic.

Speaker 3

And My last problem, don't worry.

Speaker 5

Sure. And my second that's great. And my second question is about the 4th quarter, GB margin guidance, could you give us some colors given that number 1, we observe The Q3 blended ASP actually went up by about 10% Q on Q. So I'm just wondering What was the mix of the robotaxi related LIDAR in 3Q? And how does this should further ramp up in the 4th quarter?

Speaker 5

And could we challenge the 35% to 40% GP margin in a single quarter? Thank you.

Speaker 3

To be honest, I'm if we challenge it, it will be around the 35% mark, But our current forecast is 32% to 34% gross margins for Q4. The reason Q3 was better is because It was more of a TAS Mobility quarter, you're right. I mean the ADAS units were only 40,000. The ADAS units in Q4, Our internal forecasts are double that. So ADAS will typically have a slightly lower margin Then the robo taxi business, but because of the new upgrade and the manufacturing facility at Hertz, it actually the margin is quite good.

Speaker 3

So we if you remember back at the beginning of the year, we forecasted that ADAS margins gross margins would fall in somewhere between 9% and 13% for this calendar year. Because of the Q4 transition to ATP, we will hit that. We'll be squarely up in the double digits. So everything is on track. And then next year those numbers will go up as we hit scale.

Speaker 3

So you can count for about 32% to 34% is our internal guidance.

Speaker 4

Great. Thank you.

Speaker 3

Yes. Actually there's I'll probably add one more point. There's less robo taxi revenue in Q4. That was originally forecast. So this is an ADAS quarter.

Speaker 3

So the fact that we can take up margins is actually pretty amazing that we can take up margin even in ADAS heavy quarter.

Speaker 5

Thank you, Luis.

Operator

Your next question comes from Tina Howe with Goldman Sachs. Please go ahead.

Speaker 6

Thank you, management, for taking my question and congrats on the very strong quarter of results. So my first set of questions is related To price. Yes, so first of all, I'm just wondering how much is the price for ATP versus AT? Is it more expensive product or similar or

Speaker 2

It's at the similar range because it's in the similar range because it's a major upgrade.

Speaker 6

Okay. Got it. And then the second one related to prices. Obviously, great to see so many new OEMs are taking up late LiDAR, but we also know that the price competition is super intense, especially in Chinese market and a lot of the OEMs are loss making. So just wondering like how much of a potential price cut are they looking at like in order to top LIDAR?

Speaker 3

I think on the ASP side, we are planning a price reduction in 2024 at the request of our

Speaker 2

Yes. So I think the price decline is always requested by the customer and we do work with them. But it's at a scale of a very low number because really In the end, it's a decision as a trade out between the performance and the quality. A lot of the Competitions will want to try to offer a lower price. But in the end, if your product cannot ship or doesn't meet the quality And the customers cannot use it.

Speaker 2

In the end, it's the passenger's safety on the line.

Speaker 6

Understood. And then another question, I guess, related to price Obviously, now it's more like higher end vehicles or brands that are adopting LIDAR. But in the mid to longer term, we believe that Autonomous driving or ADAS is going to be like quite prevalent in the market. So what kind of timing do you Foresee like the mass market brand like for example BYT, they are like mass brand taking up LiDAR And then what is holding them back at this point?

Speaker 2

We won't be able to comment on specific customer, But what we do see is that, I think in the end, it's not only about the hardware cost, it's also about the function they develop. Example, when people are able to roll out with the city NOA and other more advanced functions, The value added by such function is much higher than if you're just doing playing level 2 with the LiDAR, which isn't Of greater value compared to the more advanced function. So in the end, I don't think it's about specific brand. It's about All the carmakers as a whole, can we develop more advanced functions to generate more value for the customer?

Speaker 6

Thank you, David. So my next question is relating to cost or margin. So just wondering for our factory, when the utilization rate ramp up at a relatively full stage, what kind of Gross margin can we see for our AT product?

Speaker 3

I think as we've thank you, Tina. It's a good question, but we don't break out the Specific margins by product for competitive reasons because then it makes us lose it doesn't give us leverage in our negotiations with OEMs. Why we give you a blended number and that will be somewhere between 32% 35% for next year is our target. Okay. But you can imagine the AAM margin is slightly higher than but you know that our ADAS margin is quite good For us to get to 32% because ADAS becomes over 50% for sure of revenue next year and growing.

Speaker 3

So we can take that to there you know it's quite good. Okay.

Speaker 6

Got it. Thank you, Louis. That's all of my questions.

Operator

Your next question comes from Jessie Lowe with Bank of America. Please go ahead.

Speaker 7

Thank you for taking my question. So my first question would be on our OpEx guidance because we noticed that in Q3. It came up Quite significantly, probably because we are mass producing in the heart center and also we probably will be entering Into the mass production for the next cloud in 4th quarter as well. So what will be the guidance for the OpEx ratio Entering into Q4 2024.

Speaker 3

It's a good question. I think for The OpEx number was high mostly in the G and A side and that's because of actually professional fees. So as we became a public company, We've had a ramp up on the all the hiring for G and A for financial for SOX compliance For internal audit and also we have to deal with legal fees from the frivolous suits from Ouster. So Mostly from that side. I think long term last year on a non GAAP basis, our OpEx margin Our net margin non GAAP was about 11%, 12%.

Speaker 3

This year we'll probably be around 9% or 10%. Next year we're hoping to get to profitability on a non GAAP basis as you know. So OpEx is actually not out of control. It is because of the professional fees.

Speaker 7

Got it. All right. And my next question will be, can you share some thoughts and the works we have done Regarding of our overseas plan, because previously there has been news saying that we potentially would build a Our plan in Mexico.

Speaker 2

Oh, I see. So we haven't made the decision To build a factory in Mexico, so we are looking at different options in the North American regions because the customers there Prefer if we could build locally meaning in either in the U. S. Or Mexico. So There might be some false news about us deciding to build in Mexico, but that's actually not true.

Speaker 2

But we are actively Working with the customer and for the customer in finding a plant in North America.

Speaker 3

So the plant is to put They start a plant in 2024, if not finish the whole thing in North America.

Speaker 6

Got it.

Speaker 7

Got it. Thank you so much. That's all from me.

Speaker 2

Thank you. Thank you.

Operator

Your next question comes from Shihi Tang with Yutai Securities, please

Speaker 3

go ahead.

Operator

Your next question comes from Olivia Zhang with Haitong. Please go ahead. Olivia Zhang, your line is now live. Please proceed with your question.

Speaker 8

Hi. Can you hear me?

Speaker 3

Yes. We can hear you. Go ahead, Azvi.

Speaker 8

Okay. Okay. Maybe just one quick question from me. As HEZY's product gets Adopted by maybe in the future global OEMs, do you have relevant overseas revenue target for the next 2 or 3 years? Thanks.

Speaker 3

Currently, our overseas revenue is close to 40% Of our total is a little bit below. It used to be a little bit higher because of the autonomous mobility. I think ADAS is growing much Faster in Asia than it is in the U. S. And Europe currently.

Speaker 3

So we would expect Asia to continue to increase the percentage. I think the overseas OEMs will catch begin to add significant volume in 2026, 2027. So I think this trend will continue, but long term we expect Ideally it would be 40% overseas and 60% China and Asia. That will be our target.

Speaker 8

Okay. That's very clear. Thanks.

Operator

Thank you. As there are no further questions now, I'll turn the call back over to the company for closing remarks.

Speaker 1

Thank you once again for joining us today. If you have any further questions, please feel free to contact our IR team. This concludes today's call and we look forward to speaking to you again next quarter. Thank you and goodbye.

Operator

This concludes today's conference call. You may now disconnect your line. Thank you.

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Earnings Conference Call
Hesai Group Q3 2023
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