Hesai Group Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 23, 2023

There are 11 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for Hisae's Group First 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 would now like to turn the call over to our first speaker today, Wanting Shi, the company's Investor Relations Director.

Operator

Please go

Speaker 1

ahead.

Speaker 2

Thank you, operator. Hello, everyone, and thank you for joining COSI Group's 1st Quarter 2023 Earnings Conference Call. Our earnings release is now available on our IR website, .investor. Cosetech.com, as well as Newswire services. Today, you will hear from our CEO, Doctor.

Speaker 2

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. Before we continue, I refer you to our 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 Recorded on the GAAP in our earnings release and SEC filings.

Speaker 2

With that, I'm pleased to turn over the call to our CEO, Doctor. David Li. David, please go ahead.

Speaker 3

Thank you, Yuan Ding, and thank you, everyone, for joining our call today. Let's start with the big picture. We're pleased to deliver the strongest quarterly financial performance in our history. In the Q1, our net revenues were Up 73% year over year to a new record high and our industry leading gross margins increased quarter over quarter to 38%, up from 30% last quarter. Excluding share based compensation, R and D remains steady and our product lines and organizational structure are approaching maturity.

Speaker 3

As a result, And most excitingly, we achieved non GAAP profitability and positive operating cash flow in the Q1, demonstrating our tremendous future profitability prospects. No validation is more encouraging than the recognition from our customers. Having delivered more than 135,000 LiDAR units to date, Hatai has become the most commercially successful LiDAR manufacturer in terms of shipment in both robotaxi and ADAS market. We stand out from others for two reasons. First, our proven automotive grade product quality built upon our methodology of Having in house manufacturing as a crucial part of the R and D to enable rapid iteration of our product.

Speaker 3

And second, in addition to taking advantage of economics of scale, we have committed to continued innovation on our proprietary ASIC platform, allowing more affordable solutions via highly integrated components. Since 2017, we've gone through 4 generations Our proprietary ASICs development with the contributions from more than 150 dedicated semiconductor staff, we're proud to be uniquely positioned To offer LiDAR solutions, we do best a combination of high performance, high quality and affordability. Now I'd like to share some exciting Q1 business updates. First, we're thrilled to have the privilege of collaborating with 11 pioneering OEMs in the industry Our multiyear ADAS contracts, including Lioto, a leading Chinese EV maker, as well as another top selling EV maker in China. We're also working with a leading consumer electronics maker in China on their planned EV debut, and 2 of the largest automakers in China, including Chang'an and many other leading auto OEMs.

Speaker 3

In the Q1, we continue to gain momentum in sending more In the domestic market, we were selected by Lioutou for its new fully battery electric vehicle platform and by Jiudu, a joint venture We also initiated a partnership with a new customer series, a leading EV maker in China, New car models will be shipped with our AT128 LIDAR. As the China EV market is growing exponentially, We'll be shipping to 6 OEMs by end of 2023 and 11 by end of 2024. Asai has a global vision since its inception. With our proven ability to ship large volume of high quality data sensors, We already advanced in 8 RFI and RFQs with 5 leading global OEMs who are expecting a new round of sourcing decisions to materialize In the next coming 12 months, in the autonomous mobility market, we continue to lead as the best in class player. We recently signed the largest RoboTEFI contract in our company's history.

Speaker 3

According to an independent third party report, We are the primary LiDAR provider for 12 out of the world's top 15 autonomous driving companies with nearly 60% global market share. Next, we're dedicated to in house manufacturing as we see this as the only way to meet automotive grade standards At this early stage of development in ADAS market, during the Q1, we completed the first successful production sample from our Hearst Center, A dedicated manufacturing center in Hangzhou, which takes automation to the next level. Featuring over 90% automation, Hertz produces 1 LiDAR every 45 seconds. With an optimized design, the AT series produced at Hertz We'll improve our ADAS gross margin as it reaches the economy of scale in manufacturing and utilization. Additionally, Our Advanced R and D and Intelligent Manufacturing Center in Shanghai, Maxwell is a true innovation center for new products to be designed, tested, Calibrated under one roof before they are handed over to mass production.

Speaker 3

Its construction is scheduled to be completed in Q3 of this year. Leveraging the development of our latest ASIC Gen 4.0, we're able to continue releasing state of the art products that meet the ever increasing need of both performance and design aesthetics, while keeping them affordable. CD25 is groundbreaking in cabin lidar, featuring an extremely thin profile, According 25 millimeter in height with extended range and enhanced resolution was recently released at the Shanghai Auto Show. EG25's revolutionary concept is attracting interest from OEMs globally, who are demanding Extremely miniaturized lidar is behind the windshield to achieve both and aesthetic's pleasing exterior vehicle design And optimal air dynamics. To conquer the great challenges of putting lidars behind the windshield, we team up We use the global automotive glass leader, FUYA Group, to create a specialized windshield to enhance the laser transmittance efficiency but up to 3x.

Speaker 3

Finally, before I hand it over to Louis for a deeper look at the financial numbers, I wanted to congratulate the whole team from operations to product innovation on an exceptional quarter. With non GAAP profitability and Positive operating cash flow in the Q1, we showcased our potential for continued growth momentum. We remain confident in our ability to see development opportunities in both ADAS and AM markets, bringing a higher level of safety to the future of intelligent driving systems. Now, I'll turn over the call to Louis to share more details on our financial performance and outlook. Louis, please go ahead.

Speaker 4

Thank you, David, and hello, everyone. We further demonstrated our commercial success with a stellar set of financial and operational numbers in the Q1. Be mindful of the length of our earnings call today. I encourage listeners to refer to the Q1 earnings press release for further details. We achieved record net revenues of RMB429.9 million, US62.6 million dollars Up 73% year over year and 5.1% quarter over quarter.

Speaker 4

Product revenues grew even faster, increasing 77.7 percent year over year to RMB424.1 million, US61.8 million dollars during the quarter. Gross margins were 37.8% for the Q1 compared with 50.9% For the same period of 202230.0 percent for the Q4 of 2022 as our revenue Continues to shift from higher margin autonomous mobility products to higher volume ADAS sales. Although we were pleased with this quarter's gross margin, we do, however, anticipate a lower gross margin for Q2 And Q3, due to a larger large volume, but low margin order from a leading robotaxi OEM. We anticipate gross margins will rebound in Q4 as the Hertz Center production line kicks in with anticipated Higher gross margins with updated ADAS products, shipping and volume. At this early stage, we are willing to sacrifice some gross margin In the short term, in exchange for market share gains in the long term, in ADAS and to Some degree in the autonomous mobility as well.

Speaker 4

The ADAS and AM LiDAR markets are at a nascent stage of development. And at this critical point, we are prioritizing market share expansion, but we are still targeting blended gross margins to stabilize in between 30% to 35% in the long term. 1st quarter deliveries Total close to 35,000 units, an increase of over 400% year over year, but a slight decline from Q4 due to seasonal factors. We strategically pulled forward some volume in December To mitigate production constraints and manufacturing slowdown in Q1 due to the Chinese New Year holidays, AT deliveries accelerated in March April, and we anticipate a record Q2 of ADAS and AM deliveries To reach almost 50,000 units, an increase 40% quarter over quarter and a tenfold volume increase year over year, which would represent a record high quarterly LiDAR volume for Versace. In the Q1, we achieved non GAAP net income of RMB1.6 million, US2000000 dollars Excluding share based compensation expense of RMB120.5 million, dollars 17,500,000 This increase in share based compensation expense was mostly attributable to the recognition of one off Expense of RMB90.9 million, US13.2 million dollars upon the completion of our successful IPO in the quarter Before discussing Versailles' 2023 outlook, we would like to reiterate the statements In our April 17, 2023 press release, responding to Alcer's IP infringement lawsuits against Hussai.

Speaker 4

We believe Alstair's claims are deeply flawed and lack merit. Besides independently developed LiDAR technology is the result of years of investment in research, development and engineering. Beside disputes, Alstair's allegations of patent infringement and will vigorously defend ourselves against such allegations. Since the lawsuits are pending, upon the advice of counsel, we will not comment further or take any questions on this matter. Now moving to the financial outlook.

Speaker 4

For the Q2 of 2023, the company expects Our net revenue to be between RMB410 1,000,000, US59.7 million dollars and RMB 430 1,000,000, US62.6 million dollars a year over year increase of approximately 94.3% to 103.8%. This represents an expected doubling in Q2 2023 revenues year over year and an expected tenfold increase year over year in light of our shipments to almost 50,000 units, demonstrating our continued optimization operational execution and strong market demand for our products. It should be noted, however, that last year's Q2 Negatively impacted by the COVID lockdowns in Shanghai. The above outlook is based on the current market conditions and reflects the company's preliminary estimates of market and operational conditions And customer demand, which are also subject to change. In closing, it should be clear to you investors by now The Versailles is the undisputed global leader in the ADAS and autonomous mobility LiDAR markets.

Speaker 4

In fact, We continue to easily outpace the competition, easily delivering higher annual and quarterly revenues And LiDAR shipments than our 6 other U. S.-listed LiDAR peers combined. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator

Thank Management will respond and feel free to follow-up with your next question. Your first question today comes from Tim from Morgan Stanley. Please go ahead.

Speaker 5

Hi, David, and Luis and Tim. Thanks for taking my questions, and Congratulations on the strong Q1 results. So I have two questions. The first question is about our gross margin guidance. Because during the presentation, I think Louis mentioned 2nd quarter, 3rd quarter margin would be lower Despite the record volume sales due to the product mix, so we have the rough breakdown between the Thomas Riving, the mechanical LiDAR And add us solid state ones in Q1, in Q2 and separately, When are we going to see the inflection point of more meaningful gross margin improvement, As Luis mentioned, back to like a 35% or above.

Speaker 5

So that's my first question. Thank you.

Speaker 4

Thank you, Tim. I'll take this one. For the gross margin for Q1 on AAM versus ADAS, We are no longer disclosing the individual breakdowns for competitive reasons. You can imagine that our customers see the same information and use it against us in negotiations. So we are now disclosing a blended gross margin for the our company.

Speaker 4

And as we noted earlier, that's 37.8%, Up 780 basis points from the prior quarter. So we will no longer be breaking down each individual product line, the gross margins. For the trend, Q2, as you know, we have disclosed and Q3 will be slightly lower because of a large the largest order in our history For a robotaxi LiDAR, it's and so that one we conceded a lower price to get the volume. The total contract is approximately US200 $1,000,000 So it's a huge contract. So it's worth it to us to do that.

Speaker 4

We do believe the inflection point on your last question relates to probably Q4 when the Hertz facility is up And running and producing 80 units in volume. At that point, we expect the gross margin to rebound. Our total gross margin guidance for the year Remains at 25% to 30% and our long term gross margin target still remains at 30% to 35%. Thank you, Tim.

Speaker 5

Got it. Thank you very much for a detailed answer. My second question is about the new product. So could the management team elaborate a bit more about Khozlov's new product ET25, the in cabin LiDAR Regarding the project wins, potential shipment rounding contribution this year and how does the margin of this product look like? And separately, without the change to the car body design with the roofline, would ET-twenty 5 be naturally easier for OEM to install this Product in their cars or by any chance to accelerate the process of LiDAR adoption?

Speaker 5

So that's my second question. Thank you.

Speaker 3

Thank you, Tim. Two questions, right? One, you wanted to know by the way, this is CEO, David Li. So you wanted to know the Expected gross margin compared to AT, right? So we don't have this number yet because We don't have signed contracts to disclose on the number on the selling price yet.

Speaker 3

But I could comment is that I think any LiDAR or any in general hardware product, if you are unique, you replace the replaceable for some of the Technical features that competitors don't have, usually a product like this enjoys a better margin. We tend to think ET is a unique product in the sense that it solves quite a few extremely technically challenging Aspects of LiDAR. One is that ET stands for Extremely Fit. It's of 25 millimeter height, Which makes it possible to install behind the windshield in the cabin. If you didn't have that, if you're Very thick.

Speaker 3

And then the problem is that it will be too bulky and it will take up a good part of your windshield as the entire system. That's impossible. 2nd is that if you install something behind the windshield, you can imagine the windshield doesn't really help with Long distance detection, it actually hurts it because it absorbs the light on the way out and on the way back in. So it does that twice. So you need to have very special process, especially highly integrated process with both the OEM And especially the glass maker to do that, we disclosed that one of our partner is FUYA Group, one of the biggest glass auto glass maker in the world.

Speaker 3

And so it takes a long time to develop processes like this to make sure the seamless integration. For those reasons, And also, of course, on top of it, you need to be very quiet. The MDH needs to be very good. For all those reasons, Ity is a very unique product that And make it more unique and we expect them to have higher margins if we do this right with the right partner. Then your second question is how hard it is to integrate it with OEM, was that right?

Speaker 5

Yes, correct.

Speaker 3

Okay. So, yes, it's going to be a little more challenging than AT itself. AT is extremely standardized, Right. Everyone pretty much gets the same hardware. For Ity, the platform is the same, but there is integration work.

Speaker 3

And that's why we are starting to engage with quite a few domestic and the global OEMs in Starting to try to integrate that into their vehicles before they give us official nomination because it's Well, understood that it is an interactive process with a customer. I actually consider this as a good thing because this makes it further unique As a product, essentially, if you use our ET, it'd be more challenging for you to for somebody else to come in and try to replace us Just because they have the performance, integration is also very challenging. Okay. That's it.

Speaker 6

Got it.

Speaker 5

Thank you very much for all your future sharing,

Speaker 4

David and Lewis. Thank you. Thank you.

Operator

Thank you. Your next question comes from Bin from Credit Suisse. Please go ahead.

Speaker 1

Thank you, everyone. I also got a question about our gross margin because subscriber full year would be 25% to 30%. If I want to decouple by quarter, I have an easy calculation, Shoretz. Your second and third quarter maybe at least 15% gross margin and the last quarter maybe 30% gross margin can achieve this full year 25% to 30% guidance. So can you correct me if my calculations now about the margin, especially in the Number 4 quarter, because otherwise on the margin recovery in the number 4 quarter.

Speaker 1

Thank you. Best day, can you give me the number 4 quarter margin guidance? Thank you.

Speaker 4

Yes. Thank you. Thank you, Wang Bing. It's Louis. As I said earlier, we won't give you quarter by quarter Analysis on the gross margin, but based on your calculation, it makes sense what you said.

Speaker 4

So 37.8 For Q1, Q2 will be slightly lower as you already indicated, Q3 will be lower as well and Q4 will rebound And our target is 25% to 30% for the year.

Speaker 3

It's still intact. So Wang Bin, I wanted to give you a little more insight on the What's happening as we transition? So we talk about that It's going to be a V shape on gross margin this year and Q2, Q3 are relatively lower compared to Q1 and Q4 will be better on all the products and also on the blended. So Let's look into look at it in 2 factors separately, right? So robotaxi, We had the biggest order in our history, but that order is a big order that's spanning over a couple of years.

Speaker 3

So you can imagine for a big order like that, it's a negotiated price of all the lifetime. But the truth is that for this year, as we're starting to shift in small volume, the margin is low. That's why Q2, Q3 had some impact limited impact, but some impact on the margins. But starting next year, We will have upgraded products on the Pandora series that will bring the robo taxi margin to a reasonable level For robo taxi, which is historically higher than ADA, similar phenomena happened for our ADA Gross margin, the fact that we were starting a small volume last year and start to ramp up this year. And then as part of the negotiation with the customer, we have slightly lower ASP compared to last year.

Speaker 3

And we also try to address this by upgrading our technology on the semiconductor side on the product. And also as we ramp up in volume, we will be further able to take advantage of the economy of scale. That's why we expect by Q4, the ADAS margin will back to a healthy number. That's why we're taking this C shape, but we already see on the technical side and on the economic side That this will happen.

Speaker 4

The final point there, Wang Bin, is that the Hertz Center will be open in Q4 and that has lower manufacturing costs.

Speaker 1

Thank you. And my second question about volume. Can you provide a full year volume guidance again, especially in the second quarter Since that the ASP was declining because your revenue guidance is similar as the Q1, but volume has been 40% increase. Can I resume the 2nd quarter, ADAS have a much higher growth than 40% Q on Q, but AM tender will be stable? Is that the right assumption for the mix for the Q2 in volume?

Speaker 1

Thank you.

Speaker 4

Yes. Certainly ADAS is growing in Q2 Because in Q1, as we mentioned, Chinese New Year holiday, the deliveries were pulled forward into December of last year. I think the year over year guidance stays in is about 240,000 to 260,000 total units, of which 220,000 to 230,000 are still expected to be ADAS. So there's no change in the annual guidance, which means that Q3 and Q4 obviously will be a higher ramp in ADAS. And remember by Q3, late Q3, 6 OEMs will be shipping.

Speaker 4

And by Q4, we have 11 OEMs for next year. Many of them will be taking some significant delivery numbers in Q4 as they ramp up for their model release In 2024. So Q4, we expect the largest volume for ADAS in Q4, which has traditionally been the case for us. I know it's only been 2 years, We expect a larger volume of ADAS in Q4. And then with the Hertz Center up, the margin should go up.

Speaker 1

How about the Q2 mix? Thank

Speaker 4

you. 2nd quarter mix, well, I think the We're targeting over 40,000 ADAS units and then the remainder will be the autonomous mobility, And our QT and XT, so it should be slightly over 40,000 units for ADAS is what we're targeting. It's not done yet. There's still a lot of work to do. So we said almost 50,000 is our target.

Speaker 1

Thank you so much. That's all my questions. Thank you.

Operator

Thank you. Your next question comes from Olivia from Goldman Sachs. Please go ahead.

Speaker 2

Thank you, David and Louis.

Speaker 7

There are two questions from my side. The first question is about the pricing cuts in the EV industry. Has the general pricing cut in the Q1 being passed to the upstream LiDAR yet? And also, what's your expectation of the EFI pricing trend in the next few quarters? If there is another round of the pricing cut, how would that impact the price and the margin for Eisai's ADASLIDER products?

Speaker 3

Thank you, Olivia. This is David. We anticipated limited impact for a few reasons. Well, the first reason is that let's talk about price first, right? So the nature of those multiyear contracts is that We negotiated price at the earliest stage of this contract.

Speaker 3

Essentially, they're locked in. And they have a projection on the volume. But Yes, of course, it's depending on their actual volume shipment. But when there is a price cut on the customer side, The contract we have with them on the nomination still holds. And then of course, more importantly, it's the volume.

Speaker 3

We're very fortunate that our biggest SOP customer, Li Auto, is going very strong. And that's one of the bigger reasons that we still are very optimistic on the guidance we gave, especially given the fact that Earlier this year, when we had the original guidance, we already knew there was going to be a price war and because we usually OEMs knew that Way before the rest of the market and that was also part of negotiation we had prior to this. So we're actually now seeing that our customers, especially The top lines are going very strong. And then if we put money aside, if we purely talk about technology, If you think about it, LiDAR is not your leather feet because it provides a very strong access function on the safety side. Most of the OEMs are using LiDAR as one of their top selling points to help them sell LiDAR and sell vehicles as opposed to be just purely a cost.

Speaker 3

So that's why a lot of people, even for the cheaper models, they're still considering using LiDAR to help them from the rest of the peers who offer a slightly inferior product just because they didn't have LiDAR equipped driving systems. So that's why we're also seeing a lot of interest even though some of the prices have gone down. LiDAR hasn't been the configurations that they turn off. And then the last one I want to make at the end is that, I feel like if you treat LiDAR as a pure hardware, It's kind of unfair because traditionally when you buy a car, the value of the car depreciates over time as a pure hardware. But an intelligent driving ADAS system with LiDAR, the moment you buy it, the value actually goes up over time as They keep developing more software on an end they push to the customer.

Speaker 3

So essentially, after buying a car in 6 months or 12 months, Your car could be more valuable to you because it provides more functions via the software. One of the interesting example we started to see on the market is, Example for the Alto L9 with our lidars, right, and their AED function with lidars became much strong And there was verifiable evidence that this became a much safer feature. And then L9 also scored 5 stars in the CNCAF crash Safety test. I think it's to be fair to say that LiDAR was a creative part of it. And that is all the value that LiDAR is providing to the customer.

Speaker 3

And that's also the reason we believe the market will start to adopt that actually in an increasing manner.

Speaker 7

Thank you. That's very clear. My second question is about the 4 d millimeter wave radar. What's your view on that? Would that be a supplement or the substitute to LiDAR?

Speaker 3

Yes. Great question. Yes, we do believe they're complementary at this stage. So, well, it's kind of a bigger question because We probably won't be able to comment without mentioning one of the companies who hasn't used the LiDAR, Tesla, right? So at least from my opinion, it's great that Tesla is considering using 4 d radars Because for me, from a technical standpoint, this is a strong message that Tesla agrees that Vision only system It isn't sufficient.

Speaker 3

At least they used to say that all I needed is a camera because human don't need other than our eyes to drive. But now They're voting to incorporate more sensors because it really makes perfect sense for technology to complement each other for sensor fusion to function In a much safer way than 1 sensor alone as they see different part of the world, right? So if we agree with that, I think the natural question is that we do agree you need a multi sensor modality, multi sensor fusion. There's radar, there's LiDAR and there's a camera. How do people make the decision in the end?

Speaker 3

I feel like in the end now it's not a technical It's a commercial decision on how affordable we can make it. Today, 4 d radar isn't cheap. 4 d radar is still a fraction of LiDAR, but not by a huge factor, probably 2, 3 roughly. And we're seeing the LiDAR being more affordable. If you see the history of LiDAR being much more And the trend is going, right?

Speaker 3

And then the last thing is you want to compare the performance. 4 d radar, due to the nature of the wavelength that's roughly 1,000 times longer than the LiDAR sees limited set of objects. For example, it would be much more challenging for 4 d radar To see stuff like lost cargo, it will be hard to see a tire because the conductivity of those Objects are difficult. Even for humans, it's much more difficult for radar to see compared to lidars. So it doesn't cover the full step.

Speaker 3

And lastly, but very importantly, the resolution. Resolution for 4 d radar is very limited, used to be even worse for 3 d radar. Today, 4 d radar is about roughly 1% of the resolution of LiDAR, Like a 100 times of difference. A good analogy would be when the resolution is so low, it's like you have short sighted eyes without glass And you're driving like that because you only have 1% of the resolution. Is it better than not having your eyes?

Speaker 3

Yes, I would agree, but that might not be Very good argument if you want to replace LiDAR. So then in the end, if you look at it, really LiDAR is much better in performance, Becoming cheaper and cheaper over time, and this is a verified sensor To be the critical part of the driving system and everyone agrees that centrifugion is critical. That's why we're still very optimistic, actually more excited that More companies are looking into the fact that vision only isn't going to be sufficient.

Speaker 7

Thank you very much. That's all my questions.

Operator

Thank you. Your next question comes from Paul from UBS. Please go ahead.

Speaker 8

Yes. Thanks guys for taking my questions. I have only one question, it's regarding the innovation in terms of the Direction and the pace. So when you are thinking today and you imagine the LiDAR products next 2 years later, What would be the key areas to improve? Is that going to be resolution?

Speaker 8

Is that going to be rent? Is that going to be Durability, is it going to be cost structure or just the size and the shape of the LiDAR? So The reason I'm asking this question is, if the innovation pace is too slow, of course, that would limit the adoption of LiDAR. But For the 1st 2 years, he is happy with state of art Naida, but for the remaining 8 years, he is a High end expensive large SUV would wear on backwards lighter compared to the Latest products by then in the market. So how should we think about this balance in terms of the innovation in terms of both the PACE as well as the direction, the products, let's say, 2 years later, if it's better than today, Thank

Speaker 4

you.

Speaker 3

Thank you, Paul. This is David. I totally agree that you don't want to be too fast and You definitely don't want to be too slow in pushing forward the pace of the innovation. So let's Divide that into a few technical aspects, right? I will talk about what we think we've done and what we think there is remains as a Potential and the path moving forward.

Speaker 3

First is distance, right? And so today, it's roughly 200 meters Some of the competing technology has 250 meters, and we're also moving in that direction. I think it's roughly meeting the expectation. 2nd is form factor. FormFactor is interesting because it's not about how big it is, it's about how you install that.

Speaker 3

So I think we made a major Progress in being able to install that, make it so small and install that behind the windshield. I feel like that part, the market is extremely excited about and We definitely see a lot of potential for doing so. And so that part is done. And then I want to talk about what Hasn't been fully done and remains as the opportunity and the challenges. One is resolution.

Speaker 3

Let me give an apple to apple So if you think about it, the typical good camera for cars today, it's 8 megapixels per frame, 8,000,000 pixels, right? So LiDARs, what we have today is only 1.5 per second, which means that it's a tenth of Per frame, which is 150 ks per frame, 150 ks versus 8,000,000, that's like a 60 sometimes Room of improvement for LiDAR resolution to meet camera, which is a natural thing people would want. So we have 60 more times To innovate, of course, our next generation will significantly shorten this close this gap, but that's one of the opportunities We were looking at it. And the other one is price. I won't be able to give you specific numbers, but we definitely see For some of the lower end cars, they probably don't want to pay the close to $1,000 level price and they want some cheaper version that will Limited function, but still LiDAR is like a your invisible airbag.

Speaker 3

You definitely wanted it for added safety. So we're also seeing that. And then, as a company, is very determined to be able to take advantage of our in house manufacturing And our strong semiconductor platform to be able to drive down the cost, if anybody, I feel like we have the best chance to build that. So that remains a challenge and the biggest opportunity moving forward. Those are the things that are on my mind to move forward.

Speaker 8

Okay. Thank you so much. Very helpful.

Speaker 3

Thank you.

Operator

Thank you. Your next question comes from Tony Chen from Huaytai Securities, please go ahead.

Speaker 9

Hi, David and Louis and management. Thank you for taking my questions. As we saw the intense EV competition in China and some e specs trend from the product, Many functions will be trapped in their low end model and become optional in their high end product. This is Wang Quan. And as Tesla, I think you just mentioned, they choose to use PureVision and they use phone camera to be their platform For autonomous driving, did you see China EV brand will follow this trend from our perspective?

Speaker 9

Will these two trends slow down the adoption rate Off the line, I'll

Speaker 4

find a perspective. That's my first question. Sure.

Speaker 3

Thank you. Let me make it very clear. I think what I was the reason I mentioned Tesla is a friend, not an enemy in the sense that they are actually Acknowledging that camera alone is insufficient, right, because they're introducing Rate 40 radars. So Again, my argument is that Tesla used to claim very confidently that Vision only is sufficient. And now by introducing 40radar, at least we know they now agree that multimodality sensor fusion It's going to be very, very helpful for increased safety.

Speaker 3

So that's what I see. That's the reason I'm more excited for this because I feel like if LiDARs will keep going in the direction, make it better and cheaper, there's a very good chance that people would agree that this is this So and then back to your question on the China EV. So I think I also talked about it already. We are seeing even for the cheaper models, they want this to be a differentiator. And then and for smart EVs, LiDAR is one of the iconic things.

Speaker 3

And yes, today, for very low end models, it's relatively expensive. We're also making the effort to hopefully to drive down the cost. So but we're already seeing wide range of adoptions this year and the next By next year, we'll be shipping with 11 OEMs, but some of them are on the more affordable models, but they still use it. And some of We'll either use that as a standard configuration for all the cards we ship because they see that as a strong safety feature that they cannot live without. Okay.

Speaker 3

That's great. And my second question

Speaker 9

is, could you give us more color about the R and D progress in ASIC solution in your LIDAR you just mentioned in opening remarks and what's your strategy and how important will this technology will be To win competitive advantages? Thanks.

Speaker 3

Sorry. Can you say it again the question?

Speaker 9

Yes. Can you give us more color about the R and D progress in ASIC solution, just like chips or ASIC? ASIC. Yes.

Speaker 3

So we're at the in the development of the 4th generation. So Each generation is a major step forward in more highly integrated components To further reduce the cost while having exponentially higher performance, When we talk about performance, we're talking about a few things. 1 is the range. Today, we're about 180 to 200 meter range. And then our next generation is going to go way beyond that.

Speaker 3

And the reason we're able to do that is we made a lot of progress On the component, the laser and the receiver side to be able to drive that part of The efficiency up in the way for lack of analogy is like your cell phone camera, right? 20 years ago, if you take Photo at night, you barely see anything. Now it's super clear and you see more things than your eyes. And now we're Driving our components in that direction to be able to detect further, right. ASICs also allow us to handle way more data as we Send out the live posts and receive them because we used to our current AD is 1,500,000 points.

Speaker 3

Next generation will be many times more than that. The reason for that is our ASIC handles way more laser pulses and we can just Multiple multiply, a big factor on what we do many points per second wise. So resolution wise, it's a hugely positive. And also, if you are familiar with Moore's Law, we're also seeing that trend in a sense that For every unit, the ASP isn't declining as very fast, but the performance per point It's declining a lot because we're having many acts of increase on the resolution. So this is what ASIC is allowing us to do.

Speaker 3

And on top of it, it gave us a better security chain management ability because we used to sort a lot from different vendors For some of the semiconductors now, we just own the design and just ask the foundries to do that for us, and we're using very mature process node. So it's very Much safer for us to work with foundries than having to manage a global supply chain system.

Speaker 9

Okay, very clear. Thanks. That's all my questions.

Speaker 4

Thank you. Yes, thank you.

Operator

Thank you. Your next question comes from Joel from Nomura. Please go ahead.

Speaker 6

Thank you, management, for taking my questions. So I'm asking for when management mentioned about the annual cost cut from OEM side, I want to Can we share generally the situation here in terms of the annual cost cost level? If we cannot talk about the detailed numbers, can That's low single digit or maybe high single digit. Can we just talk about that? And also in terms of the OEM attitude toward LiDAR, we're talking about Low end car brands also thinking about lighter adoption.

Speaker 6

But in terms of the current situation, I would say because of the price competition in OEM market, do we see any further pressures or OEMs are being more cautious in cost efficiency in this year and maybe impact the lighter market in

Speaker 4

On your first question, Phil, this is Lewis. Regarding the price decline, we would estimate about 5% to 10% a year year over year decline In the ASP side, but as David mentioned earlier, our contract is signed for the whole year. So they're kind of locked in and sometimes it's multiple years Where the price is locked in. As far as the OEM adoption of lower priced LiDAR and the competition, Like I said, it's a long uphill process because they've already integrated with our LiDAR into their new models. It takes time to change.

Speaker 4

There is severe price competition and we faced that the last 2 or 3 years and that's why the price has come down. A lot of companies used to pick just based on price And then they've regretted it since because the performance is quite poor for the quality. So I think is that we're hoping that and expecting that Price competition evades compared to the performance has the best LiDAR providers come out and able to show that they can produce auto grade LiDAR at affordable prices. So I think the price competition is beginning to wane a little bit. It's more about your products and a price that's affordable.

Speaker 4

You had a second question?

Speaker 6

Okay. Thank you. I actually have one follow-up. So In terms of the because of the current market situation, so in terms of the short term target, I mean, or the task for the companies, So what's the key? It's about the cost down?

Speaker 6

It's about the new technology innovation? In terms of short term, I mean, maybe within 2023. The assumption that the cost down would be the first half? Short term, yes.

Speaker 4

Short term is not as big a factor for us Because the prices were locked in last year or at this point and those models are coming out. So and most of them are actually going to be delivered in 2024. So other than Li Auto, Lotus, Do 4 or 5 players in our universe, the ones that we sell to, there aren't a lot of new companies releasing cars this year For the short term. So and then they're gearing up for 2024. And because LiDAR is a competitive advantage differentiator in the market, As competition increases, you want to have it.

Speaker 4

So in the short term, to answer your question, is probably very, very little impact Since not that many models are shipping yet, longer term, we'll have to see.

Speaker 6

Okay, conscious. Thanks.

Operator

Thank you. Your next question comes from Olivia from Haitong International Securities. Please go ahead.

Speaker 2

Okay. Hi, David and Louis. Thanks for taking my question. Could you provide an update on your new factories in Shanghai and Hangzhou? If I'm not wrong, I remember you said both will be put in operation by Q3.

Speaker 2

And I also wonder if both factories are compatible for EP25

Speaker 3

Thank you. So let me try to clarify a few things, right. So Moving forward, we have 2 major factories. 1 is called Maxwell, we talk a lot about. It's a R and D and the manufacturing center in a sense that the main goal for Maxwell It's to be able to fact iterate product development and the manufacturing under one roof.

Speaker 3

So that's why the name is Maxwell. It's the name of the scientist who came up with the important equation, right? And then the other factory's name It hurts. Hertz is like a cycle time, how many units you produce per second, that type of nature. You can see it's for mass production only.

Speaker 3

So the Hertz factory, it's extremely highly automated with 90% plus Automation and the cycle time from used to be more than 1 minute, now Hertz is 45 seconds per lidar. And also because Hertz is built for high automation and in Hangzhou is a relatively cheaper place, It's actually the labor cost and manufacturing cost is also lower. So having said that, with the two functions, There's another important concept I want to make it clear. So building a factory or retrofitting a factory is one thing, Populating a factory with all its full production capabilities is another and those are completely different things. And sometimes people are confused by those.

Speaker 3

Building a factory like Maxwell, it's like buying a big land. So when you do that, if you wanted to have a lot of space, right, you can buy a couple of acres of land that technically can host hundreds of people to live if you go to a hotel, Right. But we're not stupid. What we do is actually we populate the production line based on actual needs projected down the road. We can build it very quickly.

Speaker 3

Within 6 less than 6 months, we can populate those production lines. And we definitely don't want to build more than we will be able to ship. So that's why, even for Hearst factory, each line today we have is about 300,000 to 500,000 units per line. And currently, we only have one line because we already see this will be and together with MaxSold, we'll be able to meet our needs. It's like you have a big land, you buy it because the land itself is cheap, but then you start to build those houses as you grow on the people.

Speaker 3

But you don't want to build all those houses on the land yet because it only takes 6 months to do that. There's really no point of doing that. So that's why moving forward, we will only slowly expand parts and some part of the math well to keep it very, very lean Because we know with the visibility we have, it takes less than 6 months to do so. And even for each line, It isn't extremely expensive, right? Louis, do you want to comment on the cost down the line?

Speaker 4

Yes. I think the yes, I mean, Devin makes a very good point. The thing that is confusing the investors is we're not building $200,000,000 $300,000,000 plant where the CapEx will eat up our cash. We've already guided CapEx this year and probably next year will be about US50 $1,000,000 and that's all for mostly plant equipment. So it's about $10,000,000 to $15,000,000 per line for the 18 fully 90% automated line and much less for the Anticipated lines for the autonomous mobility because that requires more manual labor.

Speaker 4

So it would be even much less of that. So don't get confused that we're building these plants that cost $100,000,000 that are eating up our cash. That's not the case. So that's why even today, We have $457,000,000 of cash at the end of the quarter. That's much higher than any of our competitors.

Speaker 4

So we're not spending a lot of money on CapEx Other than for equipment and for the assembly line. Okay.

Speaker 3

I hope I answered all the other quick question. Do you think those lines can be used from one product To another well, that's no. Every time you need to do for a different product, you need to redesign the full automation line to do that. So that's also another reason we have the new AG product building in the hard factory.

Speaker 2

Okay. Got you. Thanks.

Speaker 3

Right. And then, sir, Even though the production lines are redesigned, some of the equipment can be reused as we are ramping down on some of the legacy products. And then because of the automation process are shared in great similarity, the majority of those equipment can be used, but the line needs to be redelined.

Operator

Thank you. Your next question comes from Jessie from Bank of America Securities. Please go ahead.

Speaker 10

Hi, David. Hi, Louis. Thank you for taking my question. First of all, as I know that you mentioned ET25 hasn't received from order yet, so we cannot disclose on ASP and margin. But just wanted to understand from a OEM standpoint, so when they need to purchase the upgraded windshield to go with this ET25, How does this cost going in the future for them?

Speaker 10

So is it more expensive compared to the traditional solution or could be cheaper for them?

Speaker 3

Thank you. So first of all, we are in Different processes for some a lot of the sourcing decisions. I think in the script we explained, we were in 8 RFI and RFQ processes for 5 major global OEMs. So I wouldn't say that We don't have progress. It's that we don't have the final nomination we could announce.

Speaker 3

That's the status. And then your next question is about when they make decisions, do you expect them to be cheaper or more expensive? So the biggest reason that this will be cheaper Is that it's a product that's later, a few years later than AT series, right? AT series is We started to ship in 2022. YiTee is a few years later.

Speaker 3

And then it will be able to leverage Our new development on the semiconductor side and as we move forward, even though the performance is going up and we always try to have better integration on the semiconductor To control the total bond cost.

Speaker 4

She is asking for the total

Speaker 3

So you mean like how much more money will be added on the Glass

Speaker 4

side? Something like that.

Speaker 3

Okay. Well, that part is specific To OEMs, I don't expect that to be a major part of it because for the special processes, for sample phase is extensive, but a large production phase is One of the relatively simple process people do. It's no major no significant price increase.

Speaker 4

But Jesse, it just looks so much better. So aesthetically, it's going to be a big factor, right, As OEMs make decisions.

Speaker 3

And of course, OEMs always want to think that are better, more beautiful and cheaper, and that's reasonable.

Speaker 10

Yes, yes. Totally makes sense. So another question would be another peer also states that the software that goes with the LiDAR would be The key to win the long term process, so what's our view on this? Thank you.

Speaker 3

I agree. I think today a lot of the customers are already seeing that they may or may not be the most Sharon is the user for the LiDAR. That's why we provide the reference software system to the customers, especially that We know how to use them. We already have a package that will help them jumpstart. We don't fully take over their development because most of the customers, They prefer still to own process, but we provide the reference software to help them from anything from perception to tracing the targets, to calibration and to some of the algorithms in calibrating and essentially helping them to get things And that part is very important because without that, it's a piece of dumb hardware that no one can take advantage of.

Speaker 3

Did I answer your question?

Operator

Thank you. Unfortunately, that does conclude our time for questions today. I'd now like to turn the call back over to the company for any closing remarks.

Speaker 2

Thank you once again for joining us today. If you have any further questions,

Operator

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

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Earnings Conference Call
Hesai Group Q1 2023
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