Q4 2023 EHang Holdings Ltd Earnings Call
Participants
Anne Ji; Senior Director of IR; EHang Holdings Ltd
Huazhi Hu; Chairman of the Board, Chief Executive Officer, Founder; EHang Holdings Ltd
Conor Yang; CFO & Director; EHang Holdings Ltd
Garrett Zhao; Analyst; TF International Securities Group Ltd.
Rong Nian Tzu; Analyst; Syntek Capital
Ting Song; Analyst; Goldman Sachs (Asia) LLC
Yu Chen; Analyst; Haitong Securities Co. Ltd.
Laura Li; Analyst; Deutsche Bank USA
Presentation
Operator
Good day, ladies and gentlemen. Thank you for standing by, and welcome to the EHang fourth quarter and fiscal year of 2023 earnings conference call. As a reminder, we are recording today's call.
Now I will turn the conference over to on Anne Ji, EHang's Senior Director of Investor Relations. Ms. Anne, please proceed.
Anne Ji
Hello, everyone. Thank you for joining us on today's conference call to discuss the company's financial results for the fourth quarter and fiscal year of 2023. The earnings release is available on the company's IR website. Please note, the conference call is being recorded and the audio replay will be posted on our company's IR website.
On the call today, we have Mr. Huazhi Hu, our Founder, Chairman, and Chief Executive Officer; and Mr. Conor Yang, Chief Financial Officer and a Director of the Board. The management team will successively give prepared remarks. Remarks delivered in Chinese will be followed by English translations. All translation is for convenience purpose only. In case of any discrepancy, the management's statement in the original language will prevail. A Q&A session will follow afterwards.
Before we continue, please note that today's discussion will contain forward-looking statements made pursuant to the Safe Harbor provisions of the US Private Securities 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 statement, except as required under applicable law. Also, please note that all numbers presented are in RMB and are for the fourth quarter of fiscal year of 2023, unless stated otherwise.
With that, let me now turn the call over to our CEO, Mr. Huazhi Hu. Please go ahead, Mr. Hu.
Huazhi Hu
(Spoken in foreign language)
Anne Ji
This is the English translation of Mr. Hu's remarks.
Huazhi Hu
(interpreted) Hello, everyone. Thank you for joining us on this conference call. In the first quarter of 2023, we have achieved remarkable results across various aspects. In October last year, our EH216-S pilotless passenger-carrying aircraft system, an innovative product independently developed by EHang, obtained a Type Certificate, TC, from the CAAC.
This milestone marks the world's first TC for a passenger-carrying eVTOL aircraft, signifying our qualification for commercial applications of pilotless passenger-carrying eVTOL aircraft.
In December last year, our first certified EH216 rolled out of our production line and obtained the world's first eVTOL standard Airworthiness Certificate, which is AC. As a result, we commenced the delivery of the certified EH216-S aircraft.
Following the TC and AC, we are delighted to see a substantial surge in the market demand for EH216-S pilotless passenger-carrying eVTOL, resulting in significant sales volume growth in the fourth quarter with a total of 23 units of EH216 series product delivered. Notably, this represents the highest number of deliveries in a single quarter in the past three years.
The revenue of the fourth quarter surpassed RMB56 million, marking a year-over-year growth rate of over 3 times and nearly doubling quarter over quarter. Moreover, we generated positive operating cash flow in the fourth quarter as demand for our products is strong, and the company's operations continue to steadily improve.
Our strong growth was attributed to the proactive policies and support from local Chinese municipal governments that are actively fostering the high-quality development of the low-altitude economy since the Central Economic Work Conference chaired by President Xi in December last year. When the low-altitude economy was elevated to a strategic emerging industry, nearly 20 provinces in China have incorporated the low-altitude economy into their 2024 government work report.
Furthermore, during the two sessions recently held in China, the central government work report included the low-altitude economy for the first time. This recognition underscores the expectation that the low-altitude economy will serve as a new growth engine for China and a globally competitive emerging industry and a vital sector for nurturing and advancing new, high-quality productive forces.
According to research institution estimate, the market size for China's low-altitude economy surpassed the RMB500 billion in 2023 and is expected to reach RMB2 trillion by 2030. This represent a substantial emerging market, and the pilotless passenger-carrying airway vehicles like the EH216-S are poised to play a leading role in propelling the industry forward.
Capitalizing our first-mover advantage in obtaining airworthiness certification and benefiting from favorable policies, we have witnessed a surge in market demand and enthusiasm for our EH216 series product. In the first quarter, we received hundreds of preorders from domestic and overseas customers: in China's Guangzhou, Hefei, Wuhan, and the UAE and other regions.
Furthermore, we have recently formed a partnership with the government of Wuxi City in Jiangsu Province, resulting in preorders for at least 100 units of EH216-S. Through these collaborations, we are actively planning to create low-altitude economy demonstration applications in the area. The strong market demand from our customers gives us greater confidence in our future growth prospects.
We have also announced the pricing of the EH216-S pilotless passenger-carrying aircraft system in both the domestic Chinese market and overseas markets. The pricing has been set at RMB2.39 million for the Chinese market and USD410,000 for international markets. We believe these prices are highly competitive when compared to other eVTOL products worldwide. Moreover, this pricing strategy aligns with the market demand and contributes to the development of the low-altitude economy.
In preparation for the next stage of mass production, our efforts to obtain the Production Certificate, which is PC, is almost completed. Currently, the CAAC review team has conducted all the on-site inspections, and other required quality system documents have been submitted to the CAAC for the final process. The PC is expected to be obtained in the near future, offering a robust assurance and support for the production quality on the newly produced EH216 under the supervision system of the CAAC.
During the first quarter, we developed several low-altitude economy demonstration site (technical difficulty) and our EH216-S completed the first commercial flight demonstrations at the UAM operation center in Shenzhen, OH Bay; Jiulong Lake Park in Guangzhou, Huangpu District; and the Luogang Central Park in Hefei.
The Hefei municipal government has reached a strategic cooperation agreement with EHang in the low-altitude economy, planning to extend support to EHang in various forms with a target amount of USD100 million, while the Guangzhou municipal government announced the 10 major supportive policies to stimulate the low-altitude economy.
Currently, we are actively conducting a series of crucial preparations for commercial operations, including operator training and the development of our operation systems. By leveraging our distinctive and pioneering expertise in pilotless eVTOL operations, EHang continues to stress collaborations with the CAAC to establish the world's first regulatory system standards for eVTOL commercial operations by the second quarter of this year. This effort will set reliable regulations and benchmarks for the safety operations in the eVTOL industry.
In 2024, we will coordinate with multiple governments to complete the construction of infrastructure such as eVTOL vertiports and shape the benchmark cities that exemplify the potential of the low-altitude economy and launch commercial operations ceremonies in key use cases such as the aero tourism and urban air taxis. This will allow the scenes from science fiction movies to officially step into the public eyes.
In terms of the industry chain, we have been actively cooperating with outstanding suppliers and partners, striving to expand opportunities within the low-altitude economy sector. In January, we entered into a strategic partnership with (inaudible) as a leading global provider of new energy solutions to jointly research and develop battery cells, battery packs, and the storage system and charging infrastructure, especially designed for pilotless airway vehicles.
In February this year, we partnered with Guangzhou Automotive Group, GAC in short, which will capitalize on GAC's extensive experience and a well-established industrial chain in intelligent manufacturing to accelerate the smart production, application, and market expansion of our pilotless airway vehicles.
Regarding product development, we will continuously enhance our EH216-S performance to unlock its full potential for various applications. To this end, last year, we strategically invested in solid-state lithium battery company based in Shenzhen to strengthen the supply chain for solid-state lithium batteries in eVTOLs.
Lithium metal solid batteries offer significant advantage over the liquid batteries in terms of the safety, energy density, thermal stability, cruising range, charging and discharging performance, et cetera. As a result, we believe that the flat range and many other performance of our EH216-S product will be greatly enhanced in the future.
Furthermore, this year, we will develop more R&D efforts toward testing and certification of our VT-30, another pilotless passenger-carrying leased and cruise eVTOL model. This is a long-range aircraft designed for intercity transportation. We will conduct a rigorous testing of all the system of the VT-30 and full transition plans in the near term.
Based on the test result, we will thoroughly analyze and actively iterative improvements to ensure that all the performance indicators meet design requirements. Myself have experienced a flight with VT-30 in person, and it feels amazing. Meanwhile, we also are doing preparations for the PC application for VT-30.
And just a few days ago, we commenced another tour of a passenger cabin flight across several cities in Japan. I would like to extend my thanks to our COO, Mr. Xin Fang, who is currently at our Japan events and thus unable to attend this earnings call.
Next, I will turn the call over to our CFO, Conor, thank you.
Conor Yang
Thank you, Mr. Hu. Hello, everyone. This is Conor. Before I go into details, please note that all numbers presented are in RMB and are for the fourth quarter and fiscal year of 2023, unless stated otherwise. Detailed analysis are contained in our earnings press release, which is available on our IR website.
I will now highlight upon some of the key points here. Having obtained the TC and AC for our proprietary EH216-S, our total revenues reached RMB56.6 million in Q4, a significant increase of 260.9% from RMB15.7 million in the same period last year and a remarkable increase of 97.8% from RMB28.6 million in Q3. The increase was primarily attributed to the increase in our sales volume of EH216 products.
We delivered 23 units of EH216, up 283% year over year and 77% quarter over quarter. For the fiscal year 2023, total revenue were RMB117.4 million, a significant increase of 165% from RMB44.3 million in 2022. The EH216 series of AAV deliveries in 2023 were 52 units, up 148% from 21 units in 2022.
Gross margin remained stable at a high level of 64.7% in Q4, flat from 64.6% in Q3. Gross margin was 64.1% in 2023, despite a slight decrease of 1.8 percentage points from 65.9% in 2022, primarily due to changes in revenue mix. This represents the continued high gross margin level as a result of our competitive strength and first-mover advantage in the global UAM and eVTOL industries.
In Q4, our adjusted operating expenses, which are operating expenses excluding share-based compensation expenses, were RMB64.2 million, down 12.4% from RMB73.2 million in the same period last year and up 18.8% from RMB54 million in Q3. The quarter-over-quarter increase was primarily driven by the expansion of sales channel and intensified marketing efforts in enhancing brand awareness.
On an annual basis, the adjusted operating expenses were RMB226.3 million in 2023, down 6.6% from RMB242.4 million in 2022. As a result, our adjusted operating loss in Q4 was RMB24.9 million, a 59.4% improvement from RMB61.3 million in the same period last year and a 27.3% improvement for RMB34.2 million in Q3.
For the fiscal year, adjusted operating loss was RMB144.8 million, a 30.1% improvement from RMB207.1 million in 2022. Adjusted net loss in Q4 was RMB22.1 million, a 62.8% improvement from RMB59.4 million in the same period last year and at 29.4% improvement from RMB31.3 million in Q3.
For the fiscal year, adjusted net loss was RMB138.8 million in 2023, a 32.7% improvement from RMB206.2 million in 2022, thanks to our stringent approach to cash liquidity management. I would like to highlight that we achieved positive cash flow from operations in Q4, further strengthening our balance sheet.
As of the end of Q4, we had RMB334.1 million of cash, cash equivalents, short-term deposits, short-term investment, and restricted short-term deposit balances. We are also actively in discussion with several commercial banks regarding the expansion of credit facilities, although our current cash position and expected cash flow from operations will be sufficient to fulfill our cash needs for us to reach profitability in the near future.
Looking ahead with our step -- progress towards obtaining TC for mass production and deliveries, we anticipated achieving revenue of about RMB58 million in Q1 this year, representing an increase of 161% year over year.
That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead. Thank you.
Question and Answer Session
Operator
(Operator Instructions) [Garrett Zhao], TF.
Garrett Zhao
Hi, management. Thank you for taking my question. So my first question is really about the order size. So with large-scale deliveries becoming possible after obtaining the TC, have you seen an increase in customer interest that has actually converted into more orders compared to before? Thank you.
Conor Yang
Yes. Thank you for your question. As the low-altitude economy industry grow rapidly, we have seen increasing demand, for our EH216-S from both government-related and (inaudible) operators. In the first quarter, we received an international -- intentional purchase order of 100 units from the Wuxi Municipal Government with the delivery at stage and with a more similar purchase order to come.
With the supportive policies and growing demand that our EH216 is posed to demonstrate, our first-mover advantage in the global market this year contribute to EH's stable growth. So other than the one with -- other than Hefei, Shenzhen, Guangzhou, Wuxi, we also see similar demand from Shaanxi, Henan, Wuhan, Zhuhai, Hainan, and many, many other orders to come. Thank you.
Garrett Zhao
All right, thank you. So my second question is about the competition landscape. So could you elaborate on other customers and how you differentiate yourself from competitors? Also, could you provide further insight into the competitive landscape? Thank you.
Conor Yang
Yes, October last year that we have obtained first TC. And end of last year, we have obtained the first AC. So this is the case of -- the first kind of this time in this industry. And we have many other eVTOL companies and peers in China and overseas still undergoing that the prototype testing and also the application for the TC. So in the next year and half to two years, basically, we will be at the only company that can commercialize for eVTOL.
And compare our product to other EVTOL products. We have several advantage. Firstly, that we have a very compact fuselage, so measuring around 6 meters in length and very lightweight design. So that means, it has been -- we have the lowest demand on the urban infrastructure, so make it, our product, highly adaptive and also very easy to deploy within the city.
And secondly, our 216 is a two-seater that -- without pilot. So this can definitely need a predetermined route that will eliminate the need for pilot training, hiring costs, and potential safety issues related to human errors in piloting. And also that by utilizing our autonomous technology and demand -- command and control system, fleet management can be achieved. So that will enable to operate in a mass scale in the future.
And also, our price is very, very competitive with a domestic selling price of RMB2.39 million and also international selling price of USD410,000. In comparison, as far as we know that our other global peers will be selling at between USD3 million to USD10 million.
So from customer's point of view, we have seen that only our customer can be profitable that -- or enable our business to sustain in the longer term. So with all those advantage that we think we are very, very competitive. These are for -- 216 is for intracity, the short range. For the long distance, we also have a product line of VT-30 that Mr. Hu has mentioned earlier that we plan to send for TC application sometime this year. Thank you.
Garrett Zhao
All right, thank you. That's very clear.
Operator
[Rong Nian Tzu, Syntek].
Rong Nian Tzu
Hello, can you hear me?
Conor Yang
Yes, we can hear.
Rong Nian Tzu
(technical difficulty)
Anne Ji
Okay. Thank you for your question. First of all, I will have to translate the question into Chinese for our CEO. (Spoken in foreign language)
Huazhi Hu
(interpreted) End of last year, the central government at the very top level of China had a central committee meeting. And after this meeting the top authority of China has indicated that the low-altitude economy is one of the strategic industries that the government is going to focus on for this year.
There are currently -- through the essential economy meeting, currently, there are more than 20 provinces, the provincial government that has formally [said] that the low-altitude economy is their focus for this year.
Through the focus of the central and local governments that autonomous passenger-grade aircraft will be applied to not only for tourism but also for urban transportation as integrated as part of the city's transportation system. So also, as in the future that's not very long, the air taxi -- the scenario will come true.
We estimate that the total market size of the low-altitude economy in 2023 that has reached -- in China has reached RMB500 billion, and we expect it to grow to RMB2 trillion by 2030.
So we [expect] to operate the air taxi, make it a real scenario, sometime this year. So by air taxi as a transportation vehicle that the people can use and transfer from their regular transportation from one dimension to three dimension. And this will greatly enhance the total market size of eVTOL.
Conor Yang
This is from our CEO, Mr. Hu, okay?
Rong Nian Tzu
Okay, thank you. Thanks very much for the answer from our CEO, Mr. Hu. And so [next question] about our expense. So in fact, as a company grows, the company's sales and operation costs will be managed more precisely. So will you mind sparing more details regarding the expense in the future just for our company? Thank you.
Conor Yang
Yes, regarding to the -- our operating expenses, which are composed of sales and marketing on our G&A and also research and development, as we ramp up our revenue, so you can see that the first quarter 2023, for example, we have reached revenue of RMB56 million with a year-on-year growth rate of a 260%.
So when the revenue growth, as such you see, our adjusted operating expenses at fourth quarter last year was 113% of total revenue. That, compared to one year ago, our adjusted operating expenses were 466% of revenue. So you can see the rapid drop of OpEx that's due to rapid increase in our revenue.
So we believe that our growth on the revenue will continue to grow at a very high growth rate in the next several years. So we hope that we can manage our adjusted operating expenses in three years' time, so from currently [113%] of revenue dropped to about 40% of total revenue in three years' time. Thank you.
Rong Nian Tzu
Okay, okay. Thanks very much for your answer, and thanks to all of you [at the company] that helped the low-altitude economy in China's development in future. So that's my question and thank you, all of you, and have a nice weekend. Thank you.
Conor Yang
Thank you.
Operator
Ting Song, Goldman Sachs.
Ting Song
Thank you for taking my question. So EHang has announced a launch of UAM operation demonstration center with Shenzhen government in December. So my question is, do we expect to see any revenues from UAM operation this year besides our -- the sales revenues from shipment of EH216-S? Thank you.
Conor Yang
Yes. As Mr. Hu mentioned earlier, the company is planning to kick off the commercial operations this year. (technical difficulty) but it may not be significant this year. In the current and initial stage, majority of our revenue was still coming from sales of our EH216 series for the time being.
And looking forward as we expand flying services to more areas, recurring revenue such as operational revenues will grow gradually. So we can -- have receiving -- we are now receiving orders, domestic and overseas, and we also receive a lot of requests from our customers to form a joint venture for the future operation. So we expect that next year and going forward, the revenue coming out from operation will gradually increase the percentage of our total revenue. Thank you.
Ting Song
Thank you. So my other question is about overseas revenues. So I see the company has a partnership with -- a partner with overseas companies in Dubai and also some government in European countries. So do we expect any progress in overseas market this year or next year? Thank you.
Conor Yang
Yes, after we obtained TC, we also received a very strong demand from overseas markets. Yes, as we have announced that we have formed a strategic relationship and also received orders from UAE customers, Wings Logistics, that they intend to purchase 100 units. And actually, we start to deliver the first batch in first quarter of this year.
As of -- for example, as of fourth quarter last year, we also sold our product, 216, to many places like Colombia, Saudi Arabia, and Qatar. So for -- and we also perform our drone live shows in Japan and Spain. So in first quarter last year, the revenues derived from overseas market was 26% of our total revenues. And this year, we also expect there will be a fairly good amount of our revenue will be coming out from overseas markets. Thank you.
Operator
Yu Chen, Haitong Securities.
Yu Chen
Okay. Thank you, management. I have two questions. And the first one, following the previous one, we would like to know the detailed progress regarding the overseas AC [updation], because if we move to enter the overseas market, we think that the first step is to obtain the overseas AC first.
And the second one is about our production capacity. We would like to know the capacity regarding EH216 this year and in the following three years, as well as the new vertical of VT-30. That's two questions. Thank you.
Conor Yang
Yes, regarding to overseas TC, we have -- as I mentioned earlier, we have seen strong demand from overseas markets, especially in the Middle East, South Africa, and ASEAN countries. And so for those places, we will rely on our local partner to obtain the local TC, so -- and we already obtained the TC from CAAC. So when we apply the overseas TC, we can do a streamlined process we call validation of TC, validation of Type Certificate, with the overseas aviation authorities. And this is expected to be a simplified procedure.
Consequently, this approach enables us to expedite market entry and expansion in these countries. And in terms of the order and the production, we're currently receiving a substantial number of orders and preorders, which will be fulfilled according to our customers' specific requirements. And typically, the government and customers commit to preorders, or customers -- or intentional orders, for example, up to 100 units with an initial purchase of 5 to 10 units for trial operations at local sites.
As their operations expand and demand increase, then they will acquire additional products. So the favorable policies throughout in the low-altitude economy has provided us an attractive environment for growth. So consequently, we anticipate a substantial increase in delivery volumes throughout 2024.
This quarter, we have given our guidance at RMB58 million, slightly increased from quarter over quarter because the first quarter is the Chinese New Year. Typically, there's a long vacation during the quarter. But so far, I look forward that we have seen a very strong demand for orders for this year.
Currently, our production in Yunfu facility has an annual capacity of 600 units of eVTOL. And we are exploring opportunities to establish other facilities to further support our production capacities as market expands, as market demand grows. Thank you.
Yu Chen
Thank you for answering. Have a nice weekend.
Operator
(Operator Instructions) Laura Li, Deutsche Bank US.
Laura Li
Hey, thank you for taking my question, and congratulations on the robust quarter. So my first question is about the VT-30, our new product. You mentioned you're already preparing for the testing and the [communication] now. So are there any specs you can talk about now? And do you expect the client base will be similar to the EH216 or the new product would bring us more applications now? Thank you.
Anne Ji
Okay. I will translate your question to our CEO, who will take your question. (Spoken in foreign language)
Huazhi Hu
(interpreted) Yes, actually, we are doing the R&D work for the VT-30 during our certification in the past few years. We have done some internal testing sites. And for the traffic volume, as we know, the air taxi within the urban area is the most of the traffic demand. Yes, that's why we are doing the certification for EH216, this type of model. And now we have completed all the configuration design and internal testing for the VT-30.
And in this year, we'll put more effort into the testing for the VT-30, and we will release more videos about the flight. Actually, the VT-30 will do a lot of practical flights. And our CEO personally has taken a flight within VT-30. It's a very stable flight experience. And later, we will release our CEO's flight video with the VT-30. And we will submit the TC application for VT-30 within this year.
So the typical way -- the EH216 and the VT-30 almost cover all the application scenarios about -- for the urban air mobility. That's why these two models are our main products. Yes, we have accumulated a lot of -- almost -- the most flight data for EH216. And soon, we will release more updates and progress for the VT-30. Thank you.
Laura Li
Okay. Thank you so much for the color. And my second question is about -- as you mentioned, you recently reached a cooperation agreement with the GAC Group. Could you give more details about this? How does it work? Will you share the R&D or manufacture collectively? What kind of support prepares -- [will you] provide to each other?
Anne Ji
(Spoken in foreign language)
Huazhi Hu
(interpreted) There was a strong [variable] policy and trend in China about the low-altitude economy. So under this background, a lot of governments are working with us. So it's our pleasure to work with some states and enterprises, such as the GAC Group.
Yes, the first thing, maybe, that pop up into people's mind about our collaboration is mainly about the production. And actually, on the other hand, we will also help the GAC Group to develop their flying taxi product.
Now we have selected a production site within Guangzhou in our cooperation with GAC Group. And we are going to establish autonomous production line with GAC. So through our collaboration, we will continue to improve the product quality of our eVTOL product and to ensure the safety of our eVTOL product. Okay. Thank you.
Laura Li
Okay. Thank you so much.
Operator
Thank you. Given the time is limited, let me turn the call back to Ms. Anne for closing remarks.
Anne Ji
Okay. Thank you, operator. Thank you all for participating on today's call. If you have any further questions, please contact our IR firm by email or participating or following investor events through the calendar information provided on our IR website. And we appreciate your interest and look forward to our next earnings call. Thank you.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.
