U.S. markets close in 1 hour 6 minutes

Edited Transcript of EH.OQ earnings conference call or presentation 24-Mar-20 12:00pm GMT

Q4 2019 EHang Holdings Ltd Earnings Call

Mar 25, 2020 (Thomson StreetEvents) -- Edited Transcript of EHang Holdings Ltd earnings conference call or presentation Tuesday, March 24, 2020 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Edward Xu

EHang Holdings Limited - CSO

* Huazhi Hu

EHang Holdings Limited - Founder, Chairman & CEO

* Richard Liu

EHang Holdings Limited - CFO

================================================================================

Conference Call Participants

================================================================================

* Vincent Yu

Needham & Company, LLC, Research Division - Senior Analyst

* Tim Hsiao

Morgan Stanley, Research Division - VP

* Julia Qian

The Blueshirt Group, LLC - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good day. Thank you for standing by, and welcome to the EHang Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time.

Now I will turn the call over to Julie Qian, Managing Director of the Blueshirt Group Asia. Ms. Qian, please proceed.

--------------------------------------------------------------------------------

Julia Qian, The Blueshirt Group, LLC - MD [2]

--------------------------------------------------------------------------------

Hello, everyone. Thank you all for joining us on today's conference call to discuss the company's financial results for the fourth quarter and the full year of 2019.

We released the results early today. The press release is available on the company's website as well as from newswire services.

On the call with me today are Mr. Hu Huazhi, Chief Executive Officer; Mr. Edward Xu, Chief Strategy Officer; and Mr. Richard Liu, Chief Financial Officer.

Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provision of the U.S. Private Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Also, please note that unless otherwise [stated], all figures remain, during the conference call, are in Chinese RMB.

With that, let me turn the call to our CEO, Mr. Hu. Mr. Hu will speak in Chinese, then our Strategy Officer, Edward Xu, will translate his comments into English. Please go ahead, Mr. Hu.

--------------------------------------------------------------------------------

Huazhi Hu, EHang Holdings Limited - Founder, Chairman & CEO [3]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Edward Xu, EHang Holdings Limited - CSO [4]

--------------------------------------------------------------------------------

Thank you, Mr. Hu, and hello, everyone. Let me first translate what Mr. Hu has spoken in his opening remarks, and I will continue to talk about our business.

According to Mr. Hu, 2019 was a historical year for EHang. We achieved a major milestone while we successfully completed our IPO on NASDAQ in 2019 December. We are the world's first publicly traded urban air mobility company. We also got off to a great start as a new public company. We delivered record-high quarterly results, with impressive financial and operating results in fourth quarter of 2019.

Revenues grew by 421% year-on-year, while gross margin was achieved at 61%, and we achieved our first-ever quarterly positive operating cash flow and operating profit. These achievements reflect the inherent value led by our leadership in the global UAM industry.

As the first company to commercialize passenger-grade autonomous aerial vehicles globally, or AAVs, we are at the forefront of our revolution in urban mobility. Our strong fourth quarter results demonstrated our leadership and our ability to commercialize urban air mobility solutions. Sales of EHang 216, our flagship passenger-grade AAV, continued to grow each quarter to reach 26 units in the fourth quarter of 2019, a strong growth from 18 units in the third quarter of 2019. We ended the whole year with 61 units delivered to our clients, including both EHang 216 and EHang 116, which is a nice volume for our innovative air mobility products.

Following Mr. Hu, our CEO's comments, I would like to further talk about our business in more details. Supported by the growing sales of EHang 216 around the world, we continued to expand our footprint and significantly raised our brand visibility. During 2019, we carried our trial or demo flights in 15 cities across China and Europe, such as evidence of UAM use cases for tourism, emergency rescue, logistics and general transportation. For example, in April of 2019, we launched our first public passenger-carrying flights in Europe. These first public flights of our EHang 216 were done in Vienna, Austria, with the support of the ex-Minister of Transportation Innovation Technology of Austria. A record of 17 passengers experienced the safe and smooth autonomous flights. The footprint of our world flight tour program, included Austria in 2019, in addition to China, Netherlands, U.A.E. and Qatar. We are glad that the U.S. became the latest to be included in this program as we did a public demo flights of our EHang 216 in North Carolina in January of 2020, with the support from the North Carolina Department of Transportation.

Furthermore, we have the first in-the-city demo flights in December of 2019. We had simultaneously flights of 2 EHang 216 in the city center of Guangzhou, a precursor to sightseeing flights using EHang 216 in the urban areas. As an industry pioneer, we aim to be not just a technology product provider, but a leading UAM platform company. We will offer a comprehensive suite of solutions and services in order to develop an integrated UAM ecosystem, including both passenger and freight transportation. To achieve this goal, we are building a global UAM network by cooperating with a wide variety of partners, including governments, private entities and regulators. Together, we will jointly promote the commercialization of AAVs.

Initiative is one of the key strategies. We established strategic UAM partnerships with the city governments of Guangzhou in China and Linz in Austria in 2019. More recently in this year, we signed strategic cooperation agreements with the Spanish cities of Seville and Llíria. Both of them joined the European Union's UAM Initiative Cities Community. We expect to establish more city signed partnerships in 2020 in order to further expand our global UAM footprint.

In the logistics industry, our fully automated and smart aerial delivery solutions can help solve the last mile delivery challenges in urban areas. In May of 2019, we entered into a strategic partnership with DHL-Sino-trans, a joint venture of DHL Express in China and a logistic company called Sinotrans. This partnership is implementing an unmanned air delivery service by AAV in China's Dongguan demonstrating our commercial value and the market potential in logistics.

In Smart City management, we entered into an agreement to establish a command-and-control center in Azerbaijan. This center, the first-of-its-kind in the world, is based upon our upgraded intelligent system. This center will showcase our business case for unmanned aerial system traffic management, or UTM, which is critical to support the UAM ecosystem.

Another important element of our system is connectivity. To advance this, a strategic partnership was established with Vodafone Germany in October of 2019. Vodafone will supply their 5G network service to EHang for UAM applications in Europe, which will accelerate our business development and the future operations in Europe.

Our first-mover advantage help us to commercialize our AAV technology by making certification and regulation breakthroughs. Let me elaborate on more of our achievements in this regard. First, we were the first company approved for the passenger-grade AAV airworthiness certification pilot program by Civil Aviation and Administration of China, or CAAC. In early 2020, we obtained the first flight permit for EHang 216 by the Federal Administration of Aviation, or FAA, in the U.S. and also obtained the first flight permit for EHang 216 from the Civil Aviation Authority in Norway. These accomplishments underpin our industry leadership and helped to increase our customer confidence.

Second, as a member of CAAC Special Expert Taskforce, we played an important role in developing standards and the regulations in the air worthiness, personnel qualification and operation monitoring of civil UAVs in China. One example of these standards and regulations is the Provisional Administrative Measures for Trial Operations of Special Types of Unmanned Aerial Vehicles.

Third, the safety and the security of our AAV operations was further proven by CAAC when we became the first AAV company to achieve the Certificate Of Unmanned Aircraft System, or UAS, Safety Level II by passing the UAS fence tests. This further strengthened our customer confidence.

In January of 2020, we issued white paper entitled The Future of Transportation: White Paper on UAM System. The white paper deeply explores the UAM's potential to transform the global transportation industry. It offers insights into vehicle design and overview of potential applications and the current regulatory landscape and recommendations for how to optimize UAM's path towards commercialization.

Looking into 2020, we acknowledge that we are experiencing some short-term turbulence from the virus outbreak. The absence and the late returns of some of our frontline workers and disruptions in our supply chain have caused the potential delays in the delivery schedule. Our customers in the tourism industry has also been affected. However, along with our suppliers and customers, we have gradually resumed work and operations since the middle of February in China. As we speak, the virus outbreak is under control in China. However, it has been spreading globally with unprecedented speed. Our overseas market development is expected to be delayed. We hope the situation would be gradually brought under control later on as global governments are stepping up their efforts of virus control.

Meanwhile, we also see the new business opportunities from the crisis. For example, we have successfully tested our EHang 216 AAV flights by transporting medical supplies and staff from the ground base to the rooftop of a 25-floor building of Hezhou People's Hospital in Guangxi, China. This suggests a good new application for our products in a field of emergency medical services.

Now I will turn it over to Mr. Richard Liu, our CFO, for more detailed financial analysis. Thank you.

--------------------------------------------------------------------------------

Richard Liu, EHang Holdings Limited - CFO [5]

--------------------------------------------------------------------------------

Thank you, Edward, and hello, everyone. Before I go into details about our financial results, please note that all numbers presented are in RMB, and percentage changes are on a year-over-year basis unless otherwise specified. Detailed analysis is contained in our earnings press release, which is available on our IR website.

I'm going to highlight some of the key points here. First, as Mr. Hu noted, we successfully completed our IPO on NASDAQ and became the world's first publicly traded urban air mobility company. We raised roughly USD 41 million in gross proceeds. Our solid cash position gives us extra strength in light of unexpected virus outbreak.

Q4 was our strongest quarter ever. Total revenues were CNY 54.7 million, up 421% year-over-year. Growth was mainly driven by our core business of air mobility solutions, which was CNY 37.1 million. That is 68% of our total revenues and represented nearly 64x growth.

In early 2019, we started commercial deliveries of our flagship passenger-grade AAV, the EHang 216. As Mr. Hu mentioned earlier, we saw sequential growth throughout the year and reached 26 units in Q4 compared with none in Q4 2018. We sold a total of 61 units in 2019 compared to just 3 in 2018. As a result, revenue from air mobility solutions reached CNY 85.9 million in 2019, a nearly 27x increase.

Gross profit in Q4 amounted to CNY 33.2 million, up 464%. This led to gross margin of 60.7%, which was 4.6 percentage points higher than last year. Gross margin for the full year was 58.5%, up 7.7 percentage points. The increased gross margin in Q4 was due to favorable revenue mix and reflected the inherent competitive value that results from our leadership and first-mover advantage in the global urban air mobility industry. This gives us pricing power.

Adjusted operating expenses, excluding share-based compensation expenses, increased by 21% to CNY 31.4 million, and as a percentage of total revenues, was 57% as compared to 246% in Q4 2018. We mainly increased sales and marketing to support our enhanced commercialization efforts globally. We also increased research and development in order to strengthen our product development efforts. As a young technology company, we have always kept tight controls on operating expenses and expect to see further meaningful operating leverage as sales ramp up.

As a result, we're pleased to see in Q4 the first quarterly operating profit in the company's history on an adjusted basis. That was CNY 3.8 million, which compares to an operating loss of CNY 17.8 million in Q4 2018. Adjusted operating margin was 6.9%. This marks an important milestone for the company because it demonstrates the potential of our business model and capability to grow profitably.

With that operating profit in Q4, we were able to generate adjusted net income of CNY 2.9 million, a swing of CNY 28.5 million from the adjusted net loss of CNY 25.6 million last year.

Now let's turn to the balance sheet and cash flow. We ended the quarter with CNY 329.3 million of cash, cash equivalents and short-term investments. Our IPO was timely, as it turns out, and it gave us a strong cash position that can carry us through the virus crisis this year.

More importantly, we generated our first-ever quarterly positive operating cash flow of CNY 15.2 million, a significant improvement compared with negative CNY 6.7 million in Q4 2018. This again reflects the inherent value in our business that will enable us to achieve sustained long-term profitable growth.

In summary, we delivered our strongest quarter ever. Our growth strategy is sound. We believe that our first-mover advantage and execution capability will enable robust growth for years to come.

Now let's turn to the business outlook. Along with what Edward mentioned earlier, we experienced a prolonged return of frontline workers and disruption in our supply chain due to the COVID-19 outbreak. There are also impacts on some of our customer industries, such as tourism. We expect our Q1 2020 results to be affected by these factors, which may extend into Q2. However, we expect such impact should be short term. We are confident about our long-term growth prospects due to more new use case opportunities, new products, deepened expansion in China, growing global reach and strategic partnerships. Thus, we still expect to achieve accelerated annual revenue growth of at least 200% in 2020. Given that, we are confident to also achieve annual operating profitability on an adjusted basis.

That concludes our prepared remarks. Let's now open the call for questions. So operator, please go ahead.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Tim Hsiao from Morgan Stanley.

--------------------------------------------------------------------------------

Tim Hsiao, Morgan Stanley, Research Division - VP [2]

--------------------------------------------------------------------------------

Mr. Hu, Richard and Edward, first of all, congratulations for the strong results.

So just a few quick questions. Firstly, I just want to have a quick follow-up regarding the coronavirus impact you just mentioned. Could you please elaborate a bit about the supply chain impact and how many percentage of the components are we source from overseas that might face lingering impact in the following quarters?

And separately, have we taken any additional effort or measures to manage the potential credit risk or order book volatility, for those clients who focus more on the scenic park or scenic area operations, which as you just mentioned, might see greater volatility in the upcoming quarters?

And lastly, how much of the revenue shipment should we expect would come from the overseas this year? As Edward mentioned, we saw a lot of contracts with overseas clients, but apparently, I would expect probably a huge proportion of the export business might be adversely affected under such a tough situation. So that's all my questions.

--------------------------------------------------------------------------------

Edward Xu, EHang Holdings Limited - CSO [3]

--------------------------------------------------------------------------------

Okay. Thank you, Tim. This is Edward here. I guess you've raised 3 good questions. And so for the first and the third question, maybe I answer for you. And the second question will be answered by Richard, our CFO. First of all, you are right that the outbreak of the virus did impact our supply chain. And your question about the percentage of the components, this -- we are in the process of assessing the impact right now. And so basically, the components, no matter how much percentage, if we are missing 1 component, we won't be able to deliver the whole product, right? So now we are trying our best to deliver despite the virus impact. But it seems that the virus did have some impact, especially for some -- the speed controller. So we are facing some delay of the speed controller right now. So -- but we are not ready to give any number in terms of the impact right now.

And regarding your third question about the overseas shipments for this year, our target is for about 40% of our AAV sales will come from overseas market. This is our original target for this year. But obviously, you can see that we are experiencing the global outbreak of the virus. So this may lead to some uncertainties of our future delivery, which I cannot tell you exact impact right now, sorry. And Richard, please?

--------------------------------------------------------------------------------

Richard Liu, EHang Holdings Limited - CFO [4]

--------------------------------------------------------------------------------

Okay. I will take your second question. So, so far, we have -- so far, we haven't seen any adverse credit situation with our customers. First of all, we usually do credit check when we sign up customers and also continuously monitor their financial status. That is our normal practice.

And moreover, for our customers, in order to run operations with our passenger-grade AAVs, our customers not only prepare their own capital, but also gather fundings from other sources such as sources of government, of bank, of other investors, et cetera.

And further in light of the current virus outbreak, our customers have been actively exploring new use case opportunities, including emergency deliveries and rescue in cooperation with local governments. And along this line, local governments will further support them with additional specific fundings. So in short, we haven't seen any adverse situation with our customers.

--------------------------------------------------------------------------------

Tim Hsiao, Morgan Stanley, Research Division - VP [5]

--------------------------------------------------------------------------------

Great. Thank you very much. Sorry, could I ask just one more quick follow-up regarding the emergency medical services or rescue-related project? Given this kind of epidemic outbreak, could we expect the more significant progress for us to probably monetize such projects in the near term? So will there be any revenue contribution from this kind of medical or emergency rescue-related project this year?

--------------------------------------------------------------------------------

Edward Xu, EHang Holdings Limited - CSO [6]

--------------------------------------------------------------------------------

Yes. I will take this question. Regarding this emergency medical service, I think we did a very good job in Hezhou because, basically, we had a very good application, the new application of our AAV EHang 216, to be able to deliver both supplies and staff, personnel from the ground to the hospital and to the area that is under control or in the quarantine area. So it was a very good job.

But in terms of monetizing this opportunity in the short term, it's very hard to predict. But I think this will definitely lead to some revenue opportunities in the future because, as you can see, our machines can send people and cargo to the area and so -- which can be dangerous. And so without any pilot in it, so this can prevent from any spreading of the disease to the other human beings. So that was very good. So I think this is also the first in the world for application like this, so which received a very good attention from the authorities and the media and some of the medical field. So we are trying our efforts to monetize this in the next few months.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Our next question comes from the line of Vincent Yu from Needham & Company.

--------------------------------------------------------------------------------

Vincent Yu, Needham & Company, LLC, Research Division - Senior Analyst [8]

--------------------------------------------------------------------------------

Hi management, thank you for taking my questions. Congrats on the first solid quarter after IPO. My first question is about the gross margin. We have seen gross margin expansion 5% [YoY] (corrected by company after the call) from 56% to 61%. So can we gain more insight on the driver behind that gross margin expansion and will it keep at that level in 2020?

And so the second question is a follow-up on the coronavirus impact. So are we -- just checking the situation of the factory in Austria, is there any getting -- shutting down or like -- or our existing orders, are they -- our clients like request some products -- should be the products to be manufactured in their factory or that it is okay for the products manufactured in our China Mainland factory as well?

--------------------------------------------------------------------------------

Richard Liu, EHang Holdings Limited - CFO [9]

--------------------------------------------------------------------------------

Okay. Vincent, this is Richard. I will take your first question. You're right that we have a situation of gross margin expansion. This is primarily related to our core business segment, which is air mobility solution, and the specific product is EHang 216. Actually, for Q4, our ASP increased a little bit compared to the ASP historically, and we see this level would be maintained throughout the year of 2020.

And add on to that are the other 2 business segments of the company: smart city management and aerial media solution. Both of them also have relatively high gross margin. So all together contributed to the result of our 60.7% gross margin in Q4. And Edward will take your -- the other question.

--------------------------------------------------------------------------------

Edward Xu, EHang Holdings Limited - CSO [10]

--------------------------------------------------------------------------------

Yes. Thank you. For the second question regarding the shutdown of the plant in Austria, right? So yes, it is true that you can -- as you can see from the media report, most of the plants in Europe are shutting down due to the recent outbreak of the virus. So there is no exception for our Austria FACC plant. However, we understand that the impact for our overall production or sales should be very minimum because I will say that Austria account for low single digit of our total production right now. So it's good to see that in our Guangzhou plant, we have resumed working nowadays, and the supply chain is in the recovery mode. So although in the first quarter, we would expect some impact. Going forward, for the next few quarters, we believe that we should be able to recover gradually. Thank you.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further question at this time. Let me turn the call back to Mr. Liu for closing remarks.

--------------------------------------------------------------------------------

Richard Liu, EHang Holdings Limited - CFO [12]

--------------------------------------------------------------------------------

Well, thank you, operator, and thank you all for participating on today's call and for all your support, and we appreciate your interest and look forward to reporting to you again next quarter on our progress. Thank you.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.