Hello, ladies and gentlemen. Thank you for standing by for Hesai Group's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that today's conference call is being recorded. I will now turn the call over to our first speaker today, Yuanting Shi, the company's Investor Relations Director. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining Hesai Group's Third Quarter 2023 Earnings Conference Call. Our earnings release is now available on our website at investor.hesaitech.com as well as via Newswire services. Today, you will hear from our CEO, Dr. David Li, who will start the call with an overview of our recent updates. Next, our Global CFO, Mr. Louis Hsieh, will address our financial results before we open the call for questions. We also invite participants to view the slide deck we have prepared for part of our discussion today. This deck is available on our IR website at investor.hesaitech.com in the Financial Filings, Quarterly Results section. 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, Dr. David Li. David, please go ahead.

Thank you, Yuanting, and thank you, everyone, for joining our call today. We're delighted to report that our third quarter 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 third 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. 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 in step side ] the dip in gross margin at the lower end of the V-shape trajectory we initially anticipated at the beginning of the year, but made a direct [ V ] 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. This includes stellar achievements in revenue, scale, delivery, market share and gross margins. Remarkably, we have maintained a robust balance sheet throughout this process. Of particular significance is the fact that we have achieved positive operating cash flow for the third consecutive quarter, totaling CNY 121 million, USD 17 million, for the first 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 amidst continuing growth. These financial milestones are a testament to our devoted team's hard work and underscore our steadfast dedication to achieving a long-term sustainable growth and profitability. Let's delve into the third quarter business…

Thank you, David, and hello, everyone. Let's go through our operating and financial figures for the third quarter. To be mindful of the length of our earnings call today, I encourage listeners to refer to the third 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% year-over-year, reaching another record high of RMB 446 million, USD 61 million. We achieved this growth against the high comparable third quarter last year, which benefited from the bounce back after the Shanghai COVID lockdowns in the second quarter 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. 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 third quarter 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, have 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 third quarter of positive operating cash flow, RMB 47.6 million, USD 6.5 million. Our robust year-to-date performance positions us…

[Operator Instructions] Your first question comes from Tim Hsiao with Morgan Stanley.

So I got a couple of questions. The first one is about the growth opportunity because over the past few quarters, we noticed that in China, more and more EV makers are providing this skoda urban navigation on autopilot and NOA functions on your flagship models and clean that one of the key selling points into next year and the year after. So I just wanted to know that based on the company's project pipeline, have you seen that LiDAR adoption at an inflection point might start kicking off from 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 Hesai consider onto cutting the competitors' prices more aggressively to capture the first wave of function upgrade. Especially, we noticed that some of our competitors are still suffer from supply constraints. So that's my first question.

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, Li Auto, is pushing aggressively on urban NOA. And I think the take rate will continue to climb into '24. And we've seen that across the high-end models from most of the new EV companies like Li Auto, Neo, Xiaopeng and BYD. And so they're leading in that area. The other ones are coming in behind. And we're very pleased with Hesai's market share gains. I think we have 14 out 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. Does that answer your question?

Yes. Yes. That's great. And my second question, I think, Louis you just provided additional details and comment about the dispute with the global players. But just want to follow up on that. So after ITC officially terminated the patent infringement investigations, I think it was brought up by Ouster. So do you think that's going to help us actually increase the size global revenues and to make global OEM and car maker feel more confident and comfortable to co-work with us? Or do you think there could be any likely more dispute coming to with the group of global LiDAR makers, as you just mentioned. That might actually urge the global players or global carmakers to adopt the wait-and-see attitude. So while the car makers become more aggressive to place the order to Hesai or basically, they will tend to be more cautious in the near term. So could you share your view with us?

Yes. Thank you, Tim, this is David. This is a great question. I think it's a very important sort of people to see evidences on a lot of the IP acquisitions. If we briefly review the history, we had a cross-licensing with Velodyne and then Velodyne sued Ouster and then Ouster sued us, -- and then, of course, it's in the competitor's best interest to say that we believe Hesai infringes us, right? So -- but then in the end, we have to look at the rulings of the judges. So this 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. And in the past, while there is ongoing litigation, there's always concern. But whenever there's a 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.

I think just to add to David's comment, I think the global OEMs will feel more comfortable selecting -- you got to remember, there has been no selections made by any global OEMs 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 the way we work. But you can be rest assured that based on our feedback, our LiDARs are the best performing or not. So I think it's just a matter of time, and we are working those global OEMs.

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 is extremely helpful for people to make a decision purely based on performance and the quality of a vendor.

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.

Got it. Just one last question, if I may. Because I noticed that during the presentation just now, I think Louis mentioned that we saw the increasing shift to AT128P because I think third quarter results actually surprised us on -- the margin surprise us on the upside. So could you share a little bit more information about what's the sales mix of AT128P in fourth quarter? And where do we expect the major customers to fully upgrade your LiDAR to Pro? So if that's case, would we see the further or more [minimal] margin improvement in the following quarters?

Yes, that's a great question. So in Q3, the mix of old 180, 128 was 75%, AT Pro or P was 25%. It will flip in Q4. In Q4, ATP, AT Pro version will account for 75% of shipments. And the older AT128 will be about 25% as it's fully phases out.

Yes. I want to point out that I think it's -- we call that AT128P 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 a better range, 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, really because it's a, if anything, it's a Max version, not Pro. Right. So we don't want people to confuse. So just for the record, we will call that AT128P.

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

Your next question comes from Jeff Chung with Citi.

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 LiDAR next year. So my understanding is the previous guidance was a 400,000 unit next year. So did the company just upgraded the sales guidance in the next year? So this is the first thing I want to check. And if yes, why? And was that due to a new shipments and new customers? This is my first question. And then separately, Louis also said the 40,000 unit 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 a 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 Q4. So I just want to check this. Those are my first questions.

Yes. I think the upgraded guidance on the delivery numbers was several things I just answered was one was on the adoption. Li Auto is pushing very hard on adoption of City or Urban NOA, and that's going to push volume 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. 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. And all those models would debut SOP in 2024 is the schedule. And then so -- and then you've seen upgraded numbers from our existing customers, as you said, plus new wins. That doesn't account for wins we expect in Q4. We have another 2 or 3 that will come in, 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. Second point is on the -- you had a question. Sorry, Jeff.

The other question is the CapEx.

Yes, CapEx. We are -- we have 2 factories now, right? The Hertz factory has 1 line. It can hold 3 or 4 lines. So the first line in December is an unusually high month because it's prebuilt for the Chinese New Year. So it's always going to be our highest -- well, 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 the 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. But we're in a strong cash position, right? We're -- I feel we're $450 million. Today, we're $440 million.

The other thing is -- so the other comment I want to make is that the current estimate could 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. And 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 -- a lot of the investment on the infrastructure, the construction side has already been done. So it's very limited additional investment. But the volume could go much higher than what we expect today.

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

Okay. Jeff, and also the real demand from some of the customers next year for some months, their demand is well above 50,000 units a month. So that's why we needed to prepare for the new line.

That's fantastic. And my second question...

It's a high-class problem. Don't worry.

And my second -- that's great. And my second question is about the fourth quarter GP margin guidance. Could you give us some color, given that, number one, we observe the third quarter 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 fourth quarter? And could we challenge the 35% to 40% GP margin in the single quarter?

To be honest, I'm -- if we challenge it, it'll be it 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, call it, mobility quarter, you're right. I mean ADAS were only 40,000. The ADAS units in Q4, our internal forecasts are double that. So ADAS will typically have a slightly lower margin than the robotaxi business. But because of the new upgrade and the manufacturing facility it hurts, it actually -- the margin is quite good. So we -- if you remember back at the beginning of the year, we forecasted the 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 the next year, those numbers will go up as we hit scale. So you can count for about $32 to $34 million is our internal guidance. Yes, actually I left one more point. There's less robotaxi revenue in Q4 that was originally forecast. So this is an ADAS quarter. So the fact that we can take up margins is actually pretty amazing that we can take a margin even in an ADAS-heavy quarter.

Your next question comes from Tina Hou with Goldman Sachs.

Congrats on the very strong quarter of results. So my first set of questions is relating to price. Yes. So first of all, I'm just wondering how much is the price for ATP versus AT? Is it a more expensive product or similar?

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

Okay. Got it. And second one related to prices. Obviously, great to see so many new OEMs are taking up 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 adopt LiDAR?

I think on the ASG side, we are finding a price reduction in 2024 at the request of our...

Yes. So I think it's -- 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-off between the performance and the quality. A lot of the competitors 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, in the end, it's the passenger's safety on the line.

Understood. And then another question, I guess, related to prices that, 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 brands like for example, [ QIT ], they're like mass brand taking up LiDAR. And then what is holding them back at this point?

We won't be able to comment on a 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 functions they develop. For 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 a LiDAR, which isn't of greater value compared to the more advanced functions. 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.

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

I think as we've -- thank you, 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. That's why we give you a blended number, and that will be somewhere between 32% and 35% for next year is our target. But you can imagine the AM 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. So we can take that to [indiscernible], it's quite good.

Your next question comes from Jessie Lo with Bank of America.

My first question would be on our OpEx guidance because we not to start in third quarter. It came up quite significantly, probably because we are mass producing in the heart center and also probably will be entering into the mass reduction for the next [world] in fourth quarter as well. So what will be the guidance for the OpEx ratio entering into fourth quarter and 2024?

It's a good question. I think for -- the OpEx number was high mostly in the G&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&A for financial, for SOX compliance for internal audit and also we had to deal with legal fees from the -- sued's 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%. This year will probably be around 9% or 10%. Next year, we're hoping to get the profitability on a non-GAAP basis, as you know. But OpEx is actually not out of control. It is because of the professional fees.

Got it. Very good. And my next question would be, can you share some thoughts on the key works we have done regarding of our overseas plan because previously there has been news saying that we potentially would build a plant in Mexico.

Oh, I see. So we haven't made the decision to build a factory in Mexico. And so we are looking at different options in the North American regions because the customers there prefer if we could build locally meaning 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. But we are actively working with the customer and for the customer in finding a plant in North America.

So the plan is to put -- start a plant in '24, if not, finish the whole thing in North America.

Your next question comes from [ Suji Tang ] with [ TI ] Securities. Your next question comes from Olivia Zhang with Haitong.

Hi, can you hear me?

Yes, we can hear you. Go ahead, Olivia.

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

Currently, our overseas revenue is close to 40% of our total. It's a little bit below. It used to be a little bit higher because of the times mobility. I think ADAS is growing much faster in Asia than it is in the U.S. and Europe currently. So we would expect Asia to continue to increase the percentage. I think the overseas OEMs will begin to add significant volume in '26, '27. So I think this trend will continue. But long term, we expect ideally would be 40% overseas at 60% China in Asia. That would be our target.

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

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.

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