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ECARX Holdings, Inc. (NASDAQ: ECX) Third Quarter 2023 Earnings Call Transcript, November 11, 2023
Renee Du: Hello and welcome to our Q3 2023 earnings convention. I’m joined today by the President and CEO of ECARX; Ziyu Shen, chief operating officer; Peter Cirino and CFO. Then Joe, following his ready comments, will be able to answer his questions and answer the question that follows. Please note that today’s call is being recorded. Before we begin, I would like to refer you to our forward-looking statements at the back of our earnings press release, which also apply to this call. More information about specific threat points that may cause actual effects to differ materially can be found in our filings with the SEC. Additionally, this call will come with discussions regarding certain non-GAAP financial measures. Please see our earnings release, which includes a reconciliation of non-GAAP measures to GAAP measures. With that, I would like to hand over the ground to Ziyu.
Ziyu Shen: Thank you, Renee. Hello everyone, and thank you for participating in our third-quarter earnings call. Let me start by saying a few words about the Chinese market. Back in the day, this quarter saw an expanding percentage of cellular cars [ph] and the exercise is obviously accelerating with a global NAV adoption rate reaching an all-time high of 90. 8% in the third quarter. This year, China is well positioned as a wonderful automotive explorer in the world. This year is also very likely to be the first year that domestic brands will also welcome foreign brands to China. One of the significant wins we witnessed this quarter was the launch of car-specific cell phones, which seamlessly incorporate vehicle ecosystems to create a primal-priced experience. Similar integration strategy.
At ECARX, we achieved another quarter of strong expansion with earnings up 50% year-over-year, while continuing to take advantage of higher OEM spend to enhance the in-vehicle experience and meet customer demands for greater creativity and more. Paid virtual co-pay technologies. There are now more than 5. 6 million cars on the road incorporating our generation across 24 brands introduced through our 15 automotive OEM visitors. On-road vehicles stocked with our products increased by 8% compared to the last quarter and 31% compared to the same time last year. With our committed team of over 2000 people, 70% of whom are engineers, we are firmly positioned as the industry’s leading generation provider. I am pleased to report that we have further expanded our visitor numbers. JD Group’s external base in China during the quarter with [indistinguishable], the joint venture between [indistinguishable], which has become a major visitor to ECARX Holdings Inc.
We also scored 6 design wins for iconic car styles in the third quarter, paving the way for further expansion that I’ll leave to Peter to discuss in more detail later. Internationally, Chinese EV brands and generation implementers have indeed made it global following their large presence at the IAA mobility style exhibition in Munich in September. We are investing significant resources into developing our business and pricing beyond this and have several key milestones ahead of us that will particularly strengthen our viability overseas, adding the upcoming launch of Volvo Ex magazine that will showcase our virtual copy solution. The recent debut of the Lincoln Co-08 SUV supplied with our fourth stack solution is a wonderful showcase of the full diversity of technologies we have to offer as our profile in the industry continues to grow.
We are also attracting increased attention as a generation provider in the mobility area through the ecosystem partnerships we announced with Baidu and Mobile this quarter. Overall, we had a very good quarter, both from a business generation and ecosystem perspective. the field to Peter, who will review the operating effects of the quarter in more detail.
Peter Cirino: Thank you, Ziyu and have a nice day everyone. Our state-of-the-art product portfolio allowed us to win several new design contracts during the quarter. Operationally, we have focused on strengthening our overseas portfolio, expanding our partner ecosystem, and offering more complex products with operations in 11 major locations on 3 continents. Our global presence facilitates close relationships with local OEMs and access to a truly global pool of skills. As mentioned by Ziyu, we have gained significant momentum in the Chinese market by adding 3 more OEMs to our visitor base. We also added 6 new design contracts in the third quarter. Three of them will use the ECARX and Antora 1000 Pro platform, 2 will use the ECARX Makalu platform, the rest will adopt the ECARX platform and Toro 1000.
These achievements underscore the growing demand for software-defined automobiles and enriched in-vehicle experiences, reflecting the significant price proposition and market opportunities for our state-of-the-art product portfolio. Our ECARX and Tora series offer consumers a premium virtual cockpit experience. at an attractive price. ECARX is well integrated and Antora SoC also allows them to save on engineering prices and reduce the time it takes to bring their cars to market. ECARX Makalu, on the other hand, offers its consumers a very high price. Virtual cockpit computing platform with edge functionality, subsidized through a rugged AMD SoC and unreal engine graphics solutions. With unparalleled 3D graphics, security features, and entertainment, it is one of the most resilient wallets found on the market.
As Ziyu mentioned, our answers now feed into Dongfeng Peugeot Hisron cars, the new Citron Tani, the Pugeout-4008 compact SUV, and Peugeot’s flagship 508L sedan, which began series production in early August. These cars are supplied with our E02 Smart Cab Computer Module which has already been installed in over a million cars in 32 different models from a variety of car brands. As we continue to grow in China, we also made significant progress in our global expansion during the quarter. The Volvo EX 30, supplied with ECARX Cloud Peak, began production at the end of September and will be presented globally later this year. We are confident that its launch will particularly adorn our overseas visibility and provide consumers around the world with a demonstration. “The most advanced generation and the most fun on board the vehicle we can offer. “
For our developing foreign profile, we presented our very high-end virtual cockpit functions and in particular our Makalu immersive platform at the IAA Mobility trade fair in Munich in September. Our on-site demonstration allowed visitors to fully revel in those cutting-edge answers and gain insight into the technologies that will shape the automotive industry for years to come. In November, we will participate in the Reuters Automotive USA 2023 industry gathering in Detroit, where we will also meet with many North American prospects. On the technology side, we have expanded our product portfolio to include the ADAS ECARX Sky land platforms. ECARX Skylane Pro is our first-generation autonomous driving control unit that integrates automated parking and active, safe driving responses, such as lane adjustments on controlled-access highways.
These ADAS features will allow us to further expand per-vehicle content and visitor loyalty by offering a safer, more user-friendly driving experience. The Peugeot4008 is the first vehicle introduced to contain our full-stack solution. This reflects our ability to drive technological innovation and is representative of the direction in which we are headed. Its virtual cockpit works through the built-in Antora 1000 Pro platform with the ECARX Cloud Peak software stack and Flame Auto to provide a sleek and smooth interactive in-car experience. Combined with the ECARX Skyline Pro ADAS platform and 5R10V sensor configuration, those technologies bring L2 capability to this flagship car. The Lincoln 208 recently earned a top score in initial ADAS tests under China’s new automotive protection assessment program, NCAP.
With such notable results, we are confident that we can leverage the entire solution for the Lincoln 208 to bring new customers closer. We continue to invest thoughtfully in the progress of new cutting-edge technologies and have a strong pipeline of progress that we see. We look forward to sharing with you in the coming months. Let me now share with you some updates on our partnership ecosystem that is helping us expand disruptive technologies that will sustainably drive expansion and innovation in the automotive sector. In August, we started participating with Mobileye. to create a unique solution, integrating driving and parking functions that will enable practical, unattended autonomous driving on controlled-access highways. This solution will be used in the series production of the Polestar coupe four electric SUV, the world’s first mass-produced SUV. automobile to adopt customer-friendly AV technology.
As a component of this collaboration, ECARX will be responsible for the progress of algorithms and functions related to parking, the local production of hardware used in the domain control units, and the management of the source and quality chain. Array: This represents significant progress both in terms of innovation and advancement. • Go-to-market strategies. In the future, ECARX and Mobileye will be components of a driver assistance solution and a built-in in-cab parking solution based on the newest IQ-6 automotive-grade SSC. We also expanded our partnership with Baidu Apollo during the quarter, which will make us one of the first components of the automotive generation to explore the smart cockpit application of its giant AI language model. Through this component partnership, multiple cutting-edge features have been incorporated into ECARX’s competing platforms, some of which are expected to launch on select mass-produced models in the near future.
This partnership will leverage each party’s respective strengths and pave the way for a new era of cutting-edge automotive intelligence responses that will shape the industry as a whole. We hope those answers will allow ECARX to help OEMs deliver more natural and differentiated speech recognition. delivering exclusive intelligent reporting and driving innovation in automotive intelligence. “To increase our generational leadership, we will also integrate LLM functions into our built-in smart eco-formula. Our strategic partnership with Shenzi Meizu is also very important. The core content of Flame automotive eco-formulas is the integration of smartphone computing and garage functions into cars to create a seamless interconnection with exclusive features such as small window demo mode, dynamic effects and sophisticated in-car air conditioning. Plameto has become the first operating formula in the automotive industry. to be certified by the China TL Certification Institute for its incredible performance, offering consumers a complete interactive experience that is unique and seamless.
Finally, an update on the ECARX coupe, Peak, our multi-domain formula evolved in collaboration with our joint venture with Volvo. ECARX Coupe Peak was built to meet stringent data security and vehicle protection requirements. It supports operational formulas and eco-formulas of global mobility with safety protocols that comply with Chinese and foreign standards. At the end of August, the ECARX Coupe Peak received EAL4 certification for data security. In conclusion, as the automotive industry moves towards software-defined cars and therefore distributed EV architectures towards core computing platforms, our cutting-edge responses and strategic partnerships with some of the world’s largest generation corporations and OEMs will enable us to build and solidify our market. leadership and position ourselves at the forefront of this global transition.
Now I’ll leave it to Phil to review our currency effects for the next quarter.
Phil Zhou: Thank you, Peter, and have a nice day. We achieved another quarter of solid expansion, further strengthening our position as a key player in the automotive and generation sectors. Total profit for the quarter RMB 1. 08 billion, up 50% year-on-year. IT hardware profit RMB 734 million, up 38% year-on-year, driven by the development of a call for tenders for our new virtual carpet solution. We have increased brand penetration in the GD, Wise and Lotus ecosystem. Meanwhile, our share of GD’s automotive portfolio business remains stable. We have shipped our product and solution for the new EV market segment and are capturing the market expansion curve. Software license revenue of RMB 137 million, up 73% year-on-year and 21% sequentially, basically. due to what is required by our 2 framework agreements with our strategic partners, Patio and Shinji Meitu.
Similar demand was strong for ECARX and Antora platform software and ECO car IT licensing, reflecting the exclusive pricing proposition presented through our industry-leading solutions. Services earnings also maintained strong expansion momentum, up 92% year-on-year to RMB 209. Million. This remarkable accumulation is basically due to the timing of the popularity of non-recurring engineering gains. As we discussed in our last earnings call, we expected the bulk of the rental earnings source to be recorded in the second half of 2023. Gross margin reached RMB 331 million, a year-on-year increase of 140%. This is well above the approximately 29% year-over-year increase charged to earnings due to temporary differences in the execution of non-recurring trades. and generation contracts that we plan and manage from a year-round perspective.
We expect this to be a component of the recovery from the weak year-on-year gross margin expansion seen in the last quarter. Let’s take a look at the fourth quarter, which is the big season for the industry. We see demanding situations in maintaining the same gross margin point given the fierce festival to drive demand and revenue expansion. In addition, our margin functionality in hardware products may come under further pressure in the coming quarters due to industry-wide declines and value developments. Visiting EE architectures. We will focus on expanding software and facilities profits and gaining better operational efficiencies to mitigate the impact on margin. Operating expenses increased 22% sequentially and 36% year-over-year for two main reasons. First, 27% sequential and 71% year-over-year accumulate as a result of our investments to keep up with technological advancements.
Secondly, our global expansion into Europe and the US, where we are responding to growing demand as OEMs shift towards new electric cars and assessing a truly global skills pool. The adjusted EBITDA loss was RMB 179 million, an improvement from last year. RMB loss of 181 million RMB. This is a slight improvement, but we deserve to be aware that these effects are already accompanied by our acceleration of investment in R&D.
The loss consistent with the constant percentage also increased year-over-year from 1. 48% of RMB to 0. 79%. This is basically due to the expansion of IT platform product profits, increased gross margin, and constant price control. Cost control has not impeded our investments in the progression of complex technologies and our global expansion. Let’s move on to our balance sheet. At the end of the quarter, we had RMB 688 million in cash and limited liquidity. With a strong expansion foundation now in place, we plan to allocate more capital to fuel our expansion trajectory. Maintaining a strong balance sheet is of the utmost importance. Therefore, we will focus on improving our supply chain, stocks, and cash flow. Going forward, we will maintain our national focus on maximizing power and managing pricing, while allocating resources to opportunities that can embellish long-term expansion projects and drive innovation. .
Sustainable and monetarily culpable business practices are the backbone of our long-term monetary health. With that said, I’ll call Ziyo back for some final remarks and then we’ll start the Q&A session. Ziyo?
Ziyu Shen: We are excited about our position in a vital and encouraging market where industry trends are driving physically powerful expansion. We are pleased to see that our visitor base has expanded beyond the GD Group. Our unique generation and varied product offerings have enabled more than 100,000 products. We are committed to continued progress in those areas. At the same time, we plan to allocate resources to opportunities that can enhance long-term customer expansion and drive innovation, reflecting our ongoing efforts in our global strategy. business and pricing. Operator, we will now open the ground to questions. Thank you.
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