Q3 2023 Hesai Group Earnings Call

Hello, Ladies and gentlemen, thank you for standing by for his Si group's third quarter 'twenty twenty-three earnings conference call.

At this time all participants are in a listen only mode. Please note that today's conference call is being recorded.

I will now turn the call I bet you milestones speaker today Jan think she the company's Investor Relations Director. Please go ahead.

Thank you operator, Hello, everyone and thank you for joining Costar groups third quarter 2023 earnings Conference call. Our earnings release is now available on our website at Investor Adult who as I said they'll come as well as via Newswire services.

Today, you will hear thought Oh as he opened up that they believe will start the call with an overview of our recent updates.

Our global CFO, Mr. Louis Chen will address our financial results before we open the call for questions.

We also invite participants to view the slide that we had prepared for part of our discussion today.

Doug It's a bubble.

Oh, well I O website, our investors all close I've had dot com in the financial following 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 most thoroughly explained and reconciled to the most comparable measures reported under GAAP in our earnings release, and SEC filings with that I'm pleased to turn over the call to our G O thought that David Li David Please.

Please go ahead.

Thank you Andrea and thank you everyone for joining our call today, we're delighted to report that our third quarter financial performance surpassed our expectations of quarterly net revenues rose to reach another record high and our total delivery doubled year over year, both metrics outperformed our initial projections were.

So thrilled to announce that we successfully maintain a gross margin of over 30% in the third quarter. Despite the challenges caused by the transition and upgrade spaces.

For both mobile attacks and Adas products.

The transition of eight as part of that is now fully wrapped up this accomplishment was made possible through exceptional effort as well as a robust manufacturing engineering and supply chain optimization capabilities as a result, we're totally separate.

The dip in gross margin at the lower end of the abusive trajectory. We initially anticipated at the beginning of the year, but it made a directly into a stable long term growth market.

Upon careful comparison with our six U S disappears using publicly available information, we can probably say that our performance metrics have excelled across entire Stockholm. This includes stellar achievement in revenue scale delivery market share and gross margin remarkably we have maintained a robust balance sheet.

Throughout this process.

Particular significant either.

In fact that we have achieved positive operating cash flow for the third consecutive quarter totaling renminbi.

121 million U S dollars 17 billion for the first nine months of 2033.

This places us at the soles announced company among the peers to achieve his feet demonstrating our ALDA wavering commitment to operational efficiency like admit to Julian growth.

These financial milestones are a testament to our devoted team's hard work and underscore our steadfast dedication to achieving a long term.

Renewable growth and profitability.

Let's delve into the third quarter business update.

<unk> was notable Asia.

We're making significant strides on the domestic front in the third quarter, we achieved a global milestone by proudly announcing the first of its kind series production design problem.

Flowers Lawrey's Ultra thin, Inc happened easy twenty-five lidar MPW.

<unk> one of the top Oems in China for the next generation EV models under your prestige prestigious Oh, Gee, Brad if I buy quality luxury and safety.

25 resolution lies in catheter placement protect the light our unit itself.

Sure, Ryan well, allowing Oems design car models with diminished aerodynamics resisted and the sleep study quickly the exteriors.

Fueled by our next generation vertically integrated high performance module easy 25 has emerged as the incumbent a lighter flu rather in terms of rate reduction achieving an impressive 250 meters at 10% activity rate. This success of this new design win with athletes armed.

It grew.

Five robust progress in the commercialization of this in cabin product in the market and immersed leap forward.

Toward its mass production schedule to materialize by the first half of 'twenty five.

Furthermore, we recently broadened our client portfolio and the secured.

The partnerships, including multiple new design wins with great wall motor one of the largest automaker in China as well as leap most hurting hockey show up and then that's how it actually took two leading EV automakers in Chinese market their new EV models will feature our flagship H E series Light R. R.

Set to debut starting in 2024 and 25.

It is.

Noteworthy that of all of these recent design wins.

Several of them have a prior engagement with our industry peers their choice to switch to a lighter quarter for third to existing or future model is a strong endorsement of the superior performance of our high quality light applauded and our proven record of timely deliveries.

We're also excited to witness a rising trend where more Oems are making the switch over to partner with us well none of our existing customers haven't made the move to a competitor.

With these recent partnerships, we have secured design wins with 14, OEM and tier one suppliers, including the top five Oems in China across over 50 vehicle model, a robust testament to our global market leadership, we eagerly look forward to contributing to the fulfillment of these out.

Emotive manufactured vision of creating more intelligent and safer vehicles.

In international develop a bit we're delighted to announce that we are currently deeply engaged nine odd INR acute discussions with leading global Oems, both North America and Europe, while none of these were slated for conclusion in the third quarter, we expect three.

Our our skus to be finalized in Q4 Q.

Q4 per customers production, including one from global OEM and Sue from Global Oems Joint ventures in China.

It's worth noting that these vehicles are not exclusive to the Chinese market. Some of them are intended for global distribution.

Two of these global OEM, we have attained supplier qualification status. Following extensive audits procedure that includes evaluation of the product quality production lines and supply chain certification financial stability and others digital aspects complemented by multiple around those site visits.

We are enthusiastic about the potential partnerships that may emerge and we look forward to seeing you more exciting news in development in the near future.

In addition, we have broadened our collaboration with a prominent European OEM mentioned in our last earning call, including additional strategic development program focused on the research and development of integrating our cutting edge Lidar technology into a multi sensor package targeting car models with esselte date.

In 2028 and be out this expansion marks a deepened and reinforced partnership with this deep OEM underscoring our acknowledge its technical excellence and strategically positioning us for potential future design wins for them.

I highlighted in my previous quarterly updates development programs of this nature are integral to our international markets trilogy.

Provide us with distinction.

<unk> opportunity to showcase our technological prowess.

And engineering capabilities for OEM customers.

Before they make final decisions regarding vendor selection.

Given our accelerating number of global and domestic OEM design wins, it is becoming clear that Oems before exercise later, our superior performance in a range on that resolution and higher quality to that of our competitors are offering.

Next I'd like to share an update on our manufacturing and product enhancement as youre aware that is dedicated to expeditiously advancing new products towards the S. O P. Faith in September we celebrated a new milestone with our F Q1, 'twenty the world's first fully <unk>.

Based lifestyle lidar to take SLP and to be your thoughts on a series production vehicle motto postal zero what.

The first the full size luxury SUV model rocket motor because harnessing the vantage yourselves FQ120th out for wide F. O V field of view and the minimum bright spot coupled with our flagship La Reg Ats series Lidar, the resulting car model features a powerful three high.

Physician perception system, providing smarter and safer driving experience across a wide range of scenarios.

Turning our attention to our ATC was lighter in the third quarter. We officially launched 80 128 P model the upgraded it a reset of our flagship <unk> was 28, 8% long range Lidar.

100000, AP posted an impressive set of improvements, including a great extension to 240 meters at 7%, reflecting the rate higher resolution enhance upon clubs regularity and a 20% reduction in power consumption, achieving a seamless transition from Adobe.

<unk> to full scale production at our first center in Hangzhou represents a movement is.

She'd been that strategically positions us to leverage economies of scale through the highly automated of production in this facility.

Specifically tailored for the mass production of our mature products.

We're now poised to reap the rewards of improved cost efficient he with the potential volume shipments expected in the fourth quarter of this year.

Success of our recent product upgrade and seamless ramp up of production at Hertz Center non only reflect our unwavering commitment to meeting market demand, but also stands as an invaluable learning experience.

Denver has provided us with crucial insights and knowledge that will play a pivotal role as leasing template.

Pending our production capabilities in the future. Moreover, it has strengthened our present market leadership in lighter deliveries.

Positioning us for sustained success by leveraging our in house manufacturing capabilities, we are well prepared to innovate and thrive in a dynamic landscape of ever evolving industry.

Lastly, I'd like to share what we have recently completed the construction of our R&D and in House manufacturing facility Laxalt Center located in chatting Shanghai. In addition to actively preparing to produce our new fully solid-state F. 'twenty. Later this facility is now.

With with Spirit had research and development of our next generation light of products with established 90 functional and performance testing program with plans to scale as number two hunters in the near future the seamless integration of R&D activities.

And the production processes in the state of the art facility not only amplify efficiency, but it also expands our capability to introduce groundbreaking solutions the market, whereas enthusiastic about the potential this facility <unk> driving our research initiatives and in here.

The overall quality and time to market of our future product offering to.

To summarize.

We steadily and effectively navigated a product transition during third quarter. This volumes are always stronger than expected quarterly revenue deliveries and gross margin put us on track for a strong finish to the year.

Our continuous run of design wins and development programs from leading domestic and global OEM is not just a remarkable feat it reached out and test them and to our market leadership and strengthen our foundation and enduring growth our steadfast commitment to performance quality safe.

And reliability will continue to guide our endeavors as we remain dedicated to advancing the cause of autonomous transportation buying hasn't safety systems and saving lives worldwide.

I'll now turn the call over to Louis to share more details on our financial performance and outlook Lewis. Please go ahead.

Thank you, David and Hello, everyone.

So let's go through our operating and financial figures for the third quarter to be mindful of the length of our earnings call today.

Encourage.

Listeners to refer to the third.

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 five.

5% year over year, reaching another record high of RMB 446 million U S dollar $61 million.

We achieved this growth against the high comparable third quarter of 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 47000 units in total.

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 is simultaneous product transition for multiple products.

Or we could fully benefit.

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 margins, forming a V shaped pattern. However.

Gross margin for the third quarter of 2023 reached 36% 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.

Tribute to the quarter's margin uptake.

As a result.

Q2 and Q3.

Which were previously considered as a product transition phase.

Has significantly outperformed our initial projections.

Our relentless efforts to improve manufacturing scale and optimized cost structure also led.

Through our unmatched financial strength in the global Lidar industry.

Mark.

Our third quarter.

A positive operating cash flow RMB, $47 6 million U S dollar $6 5 million.

Our robust year to date performance positions us to continue to advance strong our path toward profitability and achieve sustainable long term growth.

Now turning to our financial outlook.

But we expect a strong performance.

Our robust third quarter results bode well for our seasonally strongest fourth quarter.

For the fourth quarter of 2023, we expect net revenues to be between RMB 535 million U S dollars $73 3 million and RMB 555 million U S dollars $76 1 million, representing a year over year increase of approximately 37% to 35, 6%.

We are pleased to share that with the shift.

Toward a more optimized 80 128 P product we are now.

Enter the mature stage of production for Adas.

Consequently.

We anticipate a high level of predictability for Adas in the future.

Characterized by stable stabilized manufacturing processes.

Controlling cost structure and well manage supply chain.

We take pride in having overcome the challenges posed by the transition process and navigate it swiftly.

And carefully.

Thanks to all.

Standing capabilities and engineering development.

And that the supply chain management.

We are delighted to announce that we are all on track to deliver on our target of 220000 light hours in total for 2023.

In fact.

We are seeing growth adoption of lidar systems equipment with lidar by Oems globally.

We anticipate this momentum will accelerate into 2024 for this reason, we would expect our lidar volume to more than double to approximately 500000 units next year.

Based on our customer order forecast by the end of 2024.

We anticipate 13, eight us OEM customers will reach so Pete.

Expanding our portfolio to include over 40 SLP vehicle models.

As of now.

We have secured design wins at all with 14, eight us Oems covering over 50 vehicle models in total and we expect these figures to climb significantly.

Throughout 2024.

Therefore, we reaffirm our annual revenue target of RMB, one 8 billion approximately U S $250 million in conjunction with a group level blended gross margin of 30% to 35% for full year 2023 by December we anticipate.

Keeping a monthly delivery rate of 40000 units positioning us well ahead.

Ahead of the competition in the global Lidar industry.

The above outlook is based on our current market conditions and reflects the company's preliminary estimates of market and operating conditions and customer demand, which are all subject to change.

In summary, while the third quarter was a bridge quarter we.

Seeded our own performance expectations in terms of financial and secured major design wins.

Setting us apart in the market and laying a solid foundation for further growth and development.

All served by the momentum we've generated.

We are.

We are eagerly looking forward to the exceptionally promising fourth quarter as weak as we continue our journey toward profitability.

Before going into Q&A I'd like to take a moment to add my personal opinion on <unk> tactics and behavior towards her side.

Pacifically.

I want to address the recent national origin based smear campaign.

Our false claims being made or directed by elster and other competitors.

Against us.

A <unk> five point discussion of our competitors' fabricated claims regarding her size Lidar technology and possible intended uses and the size responses can be found.

And the company's October 12, 2023 press release available on our website.

And in presentation available on <unk> IR website.

Investors Investor Doc beside tech Dot com in the finance.

<unk> filings quarterly results section.

I'll start and its media and lobbying agents have attempted to discredit <unk> technology.

And business practices seeking to ban her size products from the U S marketplace.

Relying primarily on basis IP infringement claims.

And exploiting heightened China U S geopolitical tensions.

I find this line of attack focus on a company's national origin deplorable and.

And contemptuous.

<unk> claims are unsubstantiated and her side, the nice all allegations and innuendo by ouster.

Also has spent millions of dollars on litigation expenses and lobbing fees.

On Capitol Hill, and a desperate attempt.

<unk> is a Chinese company.

That feels American IP and is possibly working with the Chinese military to undermine U S national security by potentially using our lidar to spy on Americans.

Cyber attacks and aid the Chinese military and intelligence gathering all are patently false.

These underhanded tactics.

Are the actions of a desperate company.

That is unable to compete effectively on the merits of its products in the lidar marketplace against the Si.

Frankly, the satellite are preferred by customers because they perform much better range and resolution and our higher quality than <unk> products.

As a result.

I'll start <unk> combination has seen several years of declining revenues.

Windowing lidar shipments shrinking gross margins and mounting losses.

Losses of $335 million for the first nine months of 2023 on just $59 million and revenues alone.

This is all reflected in declining global.

Economists vehicle Lidar market share.

1% in 2022 for Ulster compared to her size market, leading 47% share according to <unk> intelligence.

And our first precipitous share price drop of over 95% from its highs.

Level several years ago.

During the ITC investigation.

<unk> desperation became very clear.

Earlier this year after <unk>.

Tempted to divest the litigation settlement.

And patent cross licensing agreement entered into with Assai.

Which is at the heart of the Elster.

Case.

As you've tried to divested into a separate legal entity adapt vision holdings.

ELC.

And then also claimed it wasn't bound and did not have to abide by its own contractual obligations.

<unk> they're in.

Including the agreements.

Patent Cross licensing division.

Allowing each side to use the others patent lidar.

Like our IP for 10 years and.

Lots of supervision.

Designating arbitration as a dispute resolution mechanism.

Obviously Ulster New the agreement was a major major liability in their case the ICC just saw right through our <unk>.

So some subterfuge.

And we have none of it.

She ruled all started as an affiliate developed by <unk>.

By a merger so alastair could not escape legal obligations simply by transferring the agreement to a new entity.

If only things were just that simple spin off the contractual obligations you don't like and keep the ones you do like.

And this bizzaro world contracts would cease to have.

The commercial value whatsoever.

She then went on to grasp the size motion to terminate the ITC case as an American I find ousters desperate National origin based national origin based xenophobic tactics of attacking her si with basis stereotypical allegations and innuendo.

Repugnant and antithetical to American.

Principles and values and.

In my opinion, such tactics and behavior.

Should not be tolerated simply put I believe ousters smear campaign against the side.

It's downright un-american.

This concludes our prepared remarks for today operator, we are now ready to take questions.

Thank you Laura.

If you wish to ask a question. Please press star one on your telephone and Whitefield names you announced.

If you wish to cancel your request. Please press star two if you're on a speakerphone. Please pick up your handset to ask your question.

For the benefit of all participants on today's call. If you wish to ask you a question to management in Chinese. Please immediately repeat your question in English.

Clarity.

Please ask one question at a time management will respond and then feel free to follow up with you. All next question.

Your first question comes from Tim Michelle with Morgan Stanley. Please go ahead.

Hello.

Good morning, Thanks for taking my question so.

Couple of questions.

The first one is about the gross opportunity because.

Over the past quarter, we noticed that in China, more and more EV makers.

Providing two socotra urban dedication on autopilot functions onto your selection models.

And cleaned out one of the key selling points into next year and the year. After so just wondering if that's based on the company's project pipeline.

Are you seeing kind of like.

Like a reduction at an inflection point my start kicking off next year.

So in the meantime, you can approach be adopted on not just the high end model we saw today.

With some of the mass market or mid range models.

Consider onto caught teens competitors' prices more aggressively to capture the first meaningful function upgrade.

Especially we noticed that Sean that's how our competitors are still suffer from the satellite countries. So that's my first question.

Thank you Tim.

This is Lewis your point is very well taken and I think that's exactly what is happening so.

As you know our largest customer the auto is pushing aggressively on urban.

And I think the take rate will continue to climb into 'twenty four and.

And we've seen that across the high end models from most of the new EV companies like the auto Neosho pung and BYD and so they are leading in that area. The other ones are coming in behind and we're very pleased with <unk>.

<unk> market share gains I think we have 14 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 a 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, just to add that that's great and my second question I think Lucy just some.

Provide additional details and comment about the two skew towards the global players.

Just wanted to follow up on that so after ITC officially terminated the patent infringement investigations I think I brought up by Oscar. So do you think that that's going to help.

Actually increasingly clinical awareness had to make local OEM and card me a few more comprehensive comfortable to work with us or.

Do you think there could be any.

Likely more dispute coming to with a group of global like on makers. Since you just mentioned that my actually urge to global players with global car makers to adopt a wait and see task. So pardon me could become more aggressive to placing over there to sign or basic feature will tend to be.

More cautious in the near term so could you share your view.

With us.

Yes. Thank you.

David This is David this is a great question I think it's very important for people to see evidence is a lot of the <unk>.

Acquisition is with.

Briefly review the history.

We had a cross license with Vela Die and then they realized to the ouster and then Alastair sued US and then of course, it's in the competitors best interest to say that we believe assai infringe it to US right. So but then in the end we have to look at it is that.

The ruling of the judge's determination is very important to us and it also shows that our ability to defend ourselves.

At the International Court level and also a verified that we declines all the acquisitions.

And then I definitely believe the global Oems and all the customers are.

Our fueling a 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 is a strong evidence in favor of us. It further verify is that we have the strongest leadership not only in the revenue shipments but also in.

Intellectual property.

Just to add to David's comment I think the global Oems will feel more comfortable so I think it's 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 password tier 234 years ago.

Those selections so we're in the we're definitely in the hunt and always in the top one or two for these global but they have not made official determinations. At this time. So that's the way you want but you can be rest assured that based on our feedback are like ours are the best performing or not.

So I think it's just a matter of time and we are working those those those global Oems.

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 way out of the way is extremely helpful for people to make a decision purely based on outperformance in the quality of a vendor. So Tim you understand that all of these.

Our decisions made in <unk> this year all go to us.

Right. So so it's a testament to the quality and the performance of our products. Thank you.

Got it thanks for all the attention the callers Julian Lewis just just one last question if I may because I noticed that during the presentation just now.

I think Louis mentioned that.

We saw an increasing shift to 80 128 P.

Because I think the quarter results really surprise us on the ops margin surprised us on the upside. So could you just share led to more information about what the sales mix of 81 to <unk>.

In fourth quarter, and we expect that the mutual customers to fully upgrade your lidar to true.

So if that CAGR, who you see the trade area or more medicines as much improvement in the southern quarters.

Yes, that's a great question. So in Q3, the mix of old 181 hundred 28 was <unk>.

75% ATP.

Pro or <unk> was 25% it will slip in Q4 and Q4.

The pro version will account for 75% of shipments and the older <unk> hundred 28 will be about 25% still is it fully phases out yeah, I want to point out that I think it's a we call it $81 2008 as opposed to a crawl.

The word pro in different industry, sometimes it means better sometimes it means an interior products than the original one in our case. This is a major upgrade.

With.

Better range and better accuracy, better pulling cloud density lower power consumption. So it is a major upgrade that's why we decided not to call that a parole and really because it's a if anything it's a max version Hutzell itself.

Right. So we don't want them with people to confuse.

So just for the record we will call that 80 128 at peak.

So there'll be a 75% in this quarter since Q4.

She.

That's right.

[laughter] got a super clear and thanks for sharing you with the details and are looking forward to more exciting upgrades in the second quarter. Thank you.

Thank you thank you Dan.

Your next question comes from Jade Cheng with Citi. Please go ahead.

Hi, Good morning, this is Jeff from Citi.

My first question is about the <unk>, the new shipment guidance.

Louis made them in the presentation on around 500000 units lineup next year, so to my understanding.

Is the previous guidance was 400000 units next year. So the company just upgraded the sales guidance.

Guidance into next year. So this is.

The first thing is I wanted to check and if yes.

Why and.

Was that due to the new shipments and our new customers. This is my first question.

And then separately.

Louis also signed the 40000 units shipment in a single month December.

Which means that.

By the end of this year, we can achieve a 480000 unit annualized rates. So this is a very close to the 500000 units a shipment target next year, which means that.

We do not need to invest as much on Capex. This should result in a very strong cash flow generation in vitro, which is small so I just wanted to check a decent out 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.

Auto is pushing very hard on adoption of a city or urban MLA and thats going to push volumes up significantly you also saw the auto take up their forecast for 2024 to 650000 units. So that also helps us as the adoption rate goes up when you get close to level III, it's almost.

In other words, you have to have lidar and so thats why as we said we've been saying for a while as these.

Oems, especially the ones who are way ahead of the game and software are going to adopt <unk> and other advanced.

Features a lidar will become a must it also includes new wins like great wall. So great wall Motor has five models with us so that wasn't accounted for last year, I mean last quarter and all of those models with a view Sop in 2024 is the schedule.

So and then you've seen upgraded numbers from our existing customers as we said plus new wins that doesn't account for wins, we expect.

In Q4, we have another two or three that will come in in Q4.

So basically that's why the uptick.

I think 500000 honestly, it's probably conservative, but as you guys noted by nature.

Second point is on the.

Your other question sorry, Jeff. The question is the other question is that yes capex.

We have two factories in outright Hertz factory has one line it can it can.

On hold three or four lines. So the first line in December is unusually high.

<unk>, because it's prebuilt for their Chinese new year, So it's always going to be our highest where it 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 typically what were finding 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 as one for Southeast Asia and also one for North America.

Our service our global customers.

But we're in a strong cash position right.

I mean, I feel were $450 million today were $440 million.

Great. The other thing is.

So then as I comment I want to make is that the.

The current estimate could be an under underestimate and our customers are very bullish quite a few of them are very optimistic about those takeaway that the shipment volume in.

In the coming year.

You think about it as a vendor as a last one wanted to do is to not to prepare for that so which means that internally we need to be prepared for the volume that's higher than our current estimate.

But.

That's always a good thing because all the lot of the investment on the on the <unk>.

Infrastructure. The construction side has already been done so it's very limited additional investments but.

The volume could go much higher today, what we expect today and Jeff don't forget the 500000 unit capacity for Hertz line, one means one shift.

Could add a second shift if necessary.

So I think we're fine as far as capacity goes.

Oh great.

Excellent.

Uh huh.

Yes, okay.

And also the real demand from some of the customers next year for some months, where demand is at well above 50, K goodness I'm months. So that's why we needed to prepare for the new line.

Well that sounds fantastic.

My problem nor sure.

Sure.

That's great and then my second question is about the fourth quarter TV margin guidance could you give us some colors.

Given that.

Number one we all observed with third quarter Blender ASP actually went up by about 10% Q on Q.

So I'm just wondering what was the mix of the.

Robo taxi related either in <unk> and how does this.

So for the ramp up in the fourth quarter and.

Could we challenge of 35% to 40% GP margin in a single quarter. Thank you.

To be honest.

If we challenge it there'll be at around the 35 market Mark, but our current forecast is 32% to 34% gross margins for Q4. The reason Q3 was better is because it was it.

It was more of a.

Mobility quarter Youre right I mean, the eight as soon as we are only 40000, the Adas units in Q4.

Our internal forecasts are.

All that.

So adas will typically have a slightly lower margin.

Then the robot taxi business, but because of the new upgrade.

And the manufacturing facility it hurts it actually the margin is quite good so.

If you remember back to the beginning of the year, we forecasted that Adas margins gross margins would fall in somewhere between nine and 13% for this calendar year.

Because of the Q4 <unk>.

Transitioned ATP.

We will hit that will be squarely in the double digits. So everything is on track and then next year those numbers will go up as the as we hit scale.

So you're going to account for about 30% to 34 is our internal guidance.

Great. Thank you, yes that actually this warmer weather, there's less robo taxi revenue in Q4 that was originally forecast. So this isn't this isn't a das quarter. So the fact that we can pick up margins is actually pretty pretty amazing that.

We can pick our margin even in a in Adas heavy quarter.

Thank you Louis.

Your next question comes from Tina <unk> Goldman Sachs. Please go ahead.

Thank you management for taking my question and congrats on the very strong quarter of results.

My first question is related to price.

Yes, so first of all.

I'm just wondering how much is the price for ATP versus H E.

Is it.

Yes.

Or an hour.

So it has a similar range because it's in the similar range because there's a major upgrade.

Okay got it and then the second one related to prices obviously, great to see so many are new Oems are taking up laser 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.

That potential price cuts are they looking at.

In order to top of Lidar.

I think on the ASC side. We are we are planning a price reduction in 2024 at the request of R. R.

<unk>.

Thanks.

Yes, so I think.

The price decline is always requested by the customer and we do work with them, but it's it's a.

It's at a scale of.

Very low number because really our DNA and it's a it's a decision as a trade off between the performance and the quality of a lot of the competition will wanted to to try to offer a lower price and but in the end.

Youll product cannot ship or doesn't need the quality and the customers cannot use it in the end it's the passenger safety on the line.

Yes.

Understood.

And then.

Another question I guess related to prices that obviously now it's more than I can hire and via <unk>.

Our branch.

In the mid to longer term, we believe that autonomous driving or Adas is going to be like quite prevalent in the market.

What kind of timing do you foresee like the mass market brands like <unk>.

<unk>, they're like mass brands, taking up Lidar and then what is holding them back at this point.

We won't be able to comment on 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 rollout with the city and L. A and other more advanced functions there.

Value added by such function is much higher than if youre just doing it.

Playing level, two with a lidar, which you know and isn't of greater value compared to the more advanced function. So in the end I don't think it's about specific brand its about all the carmakers as a whole can we develop more advanced functions to generate more value for the customer.

Thank you.

So my next question is relating to cost or margin.

So just wondering for our factory when the.

Utilization rate ramp up at a relatively full stage, what kind of gross margin can we see for our <unk> product.

I think as we've got it. Thank you that's a good question, but we don't breakout the specific margins by product.

For competitive reasons, because 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 AAM margins slightly higher than that but you know you know that our <unk> margin is quite good for us to get to 30 June because adas becomes over 50% for sure of revenue next year and growing so we can take that to 30, you know it's quite good.

Okay.

Got it. Thank you Louis that's all of my questions.

Your next question comes from Jason <unk> with Bank of America. Please go ahead.

Thank you for taking my question. So my first question must be on Opex guidance, because we noticed that in the corner.

A question can I squeeze covered because we have a master.

Mass producing on the Heart Center and also are we probably will be unchanged.

Into the mass production for the next round in the fourth quarter ASP I also will.

We will be the guidance for Opex ratio.

<unk> fourth quarter and 2024.

It's a good question I think for the Opex.

Opex number was higher mostly in the G&A side, and that's because of extra professional fees. So as we became a public company we've had a ramp up.

On the <unk>.

All of our hiring for G&A for financial for Sox compliance internal.

Internal audit and also we have to deal with legal fees from the frivolous suits from elster. 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%, 10% next.

Next year, we're hoping to get to profitability on a non-GAAP basis. As you know so opex is actually not out of control. It is because of the professional fees.

Got it alright.

My next question would be can you share some thoughts and D works, we have done.

Uh-huh oversee plan because previously there has been news, saying that.

But BMT plant in Mexico.

Oh I see so.

So we haven't made the decision to build a factory in Mexico.

So we are looking at different options in the North American regions, because the customers there.

Prefer if we could build the local locally meaning in either in the U S or Mexico. So there might be some false news about us deciding to build in Mexico, but that 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 plant the plant do kind of quick.

Let me start start up a plant in 'twenty four is not finished the whole thing.

Okay.

In North America.

Got it got it thank you so much.

That's all from me.

Thank you. Thank you.

Your next question comes from Shanghai Tang with <unk> Securities. Please go ahead.

Okay.

<unk>. Your line is now live. Please proceed with your question.

Your next question comes from Olivia Zhang with Hi, Tom. Please go ahead.

Hello.

Yeah.

Hello <unk>. Your line is now live. Please proceed with your question.

Hi can you hear me.

Yes, we can hear you go ahead.

Okay. Okay, maybe just one quick question from me.

Besides pro Doc.

<unk> adopted by maybe in the future.

Relevant overstated revenue target for the next two or three years.

Currently our overseas revenue is close to 40% of our total is a little bit below it used to be a little bit higher because of the types of mobility.

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 'twenty six 'twenty seven so I think this trend will continue but long term we expect.

Ideally would be 40% overseas at 60%, China and Asia.

That would be our target okay. That's good that's very clear thanks.

Thanks.

Thank you.

Further questions now I will 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.

Yeah.

This concludes today's conference call you May now disconnect. Your line. Thank you.

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Hello, Ladies and gentlemen, thank you for standing by for his Si group's third quarter 2023 earnings conference call.

At this time all participants are in a listen only mode. Please note that today's conference call is being recorded.

I will now turn the call over to Alastair Speaker today, John <unk>, The company's Investor Relations Director. Please go ahead.

Thank you operator, Hello, everyone and thank you for joining <unk> third quarter 2023 earnings Conference call. Our earnings release is now available on our website at Investor Day.

Telecom as well as via Newswire services.

Today, you will hear from our CEO, Dr. David Lee, who will start the call with an overview of our recent updates.

Next our global CFO, Mr. Luis <unk> will address our financial results before we open the call for questions.

We also invite participants to view the slide that we had prepared for part of our discussion today.

Doug is available on our IR website at investors <unk> com in the financial Followings quarterly results section.

While 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 flynn and reconciled to the most comparable measures reported under GAAP the earnings release, and SEC filings with that I am pleased to turn over the call to our CEO Dr. David Li David. Please go ahead.

Thank you Andy and thank you everyone for joining our call today, we're delighted to report that our third quarter financial performance surpassed our expectations.

<unk> revenues rose to reach another record high and our total delivery doubled year over year.

Both metrics outperformed our initial projections were also thrilled to announce that we successfully maintain a gross margin of over 30% in the third quarter. Despite the challenges posed by the transition and upgrade phase.

For both global taxi in Adas products the transition of Adas products is now fully wrapped up this accomplishment was made possible through exceptional effort as well as a robust manufacturing engineering and supply chain optimization capabilities as a result, we're totally.

The dip in gross margin at the lower end of the reshape trajectory. We initially anticipated at the beginning of the year, but it made a direct deep into a stable long term growth market is death.

Upon careful comparison with our six U S disappears using publicly available information, we can probably say that our performance metrics have excelled across entire Stockholm. This includes stellar achievement in revenue scale delivery market share and growth margin remarkably we have maintain a robust balance sheet.

This process of <unk>.

Particular significant is it.

Fact that we have achieved positive operating cash flow for the third consecutive quarter totaling renminbi $121 million U S dollars $17 million for the first nine months of 2023. This places us at the soles Daniels company among the peers to achieve his feet demonstrating our hour.

Wavering commitment to operational efficiency amid continuing growth. These financial milestones are a testament to our devoted team hard work and underscore our steadfast dedication to achieving a long term sustainable growth and profitability.

That delve into the third quarter business update starting with notable Asia stayed that way.

We're making significant strides on the domestic front in the third quarter, we achieved a global milestone by proudly announcing the first of its kind of serious production design wins for our low rate Ultra thin, Inc. Have been 8% to five MPW.

<unk> group one of the top Oems in China for the next generation EV models under your prestige prestigious policy brand.

By quality luxury and safety.

20, <unk> resolution is in capital placement protect the Lidar unit itself from dirt, Brian and well, allowing Oems design car models with diminished aerodynamics resisted and sleep study quickly the exteriors.

Fueled by our next generation vertically integrated high performance module EG 25 has emerged as the in capital light a forerunner in terms of rate reduction achieving an impressive 250 meters at 10% reflected in rates.

The success of this new design win with FCA W grew particularly robust.

Robust progress in the commercialization of this in cabin product in the market and emerged leap forward.

Toward its mass production schedule to materialize by the first half of 'twenty five.

Furthermore, we recently broadened our client portfolio and cured.

The partnerships, including multiple new design wins with great wall motor one of the largest automaker in China as well as lead most of ours in particular and the next hot that Ctrip to leading EV automakers in Chinese market their new EV models will feature our flagship H E series Lidar are.

Set to debut starting in 2024 and five.

It is noteworthy that our malls. These recent design wins.

Several of them have prior engagement with our industry peers their choice to switch to our lighter product for certain existing or future model is a strong endorsement of the superior performance of our high quality light applauded and our proven record of timely deliveries.

We're also excited to witness a rising trend where more Oems are making the switch over to partner with us while none of our existing customers haven't made the move to a competitor.

With these recent partnerships, we have secured design wins with 14, OEM and tier one suppliers, including the top five Oems in China across over 50 vehicle model, a robust testament to our global market leadership, we eagerly look forward to contributing to the fulfillment of these out.

Emotive manufactured vision of creating more intelligent and safer vehicles.

In international develop a bit we're delighted to announce that we are currently deeply engaged.

<unk> RF INR acute discussions with leading global Oems from North America, and Europe, while none of these were slated for conclusion in the third quarter, we expect <unk> to be finalized in Q4 Q4 per customers production, including one from globe.

The OEM and two from global Oems Joint ventures in China.

It's worth noting that these vehicles are not exclusive to the Chinese market. Some of them are intended for global distribution.

Two of these global OEM, we have attained supplier qualification status. Following extensive audits procedure that includes evaluation of the product quality production line supply chain certification financial stability and other digital aspects complemented by multiple around those site visits.

We are enthusiastic about the potential partnerships that may emerge and we look forward to seeing you more exciting news in development in the near future.

In addition, we have broadened our collaboration with a prominent European OEM mentioned in our last earning call, including additional strategic development program focused on research and development of integrating our cutting edge Lidar technology into a multi sensor package targeting car models with <unk> date.

In 2028 and beyond.

This expansion in March a deepened and reinforced partnership with this deep OEM underscoring our acknowledged technical excellence and strategically positioning us for potential future design wins for them.

As I highlighted in my previous quarterly updates development programs of this nature are integral to our international market strategy. They provide us with distinctive distinctive opportunity to showcase our technological prowess and engineering capabilities for OEM customers.

Before we make final decisions regarding vendor selection.

Given our accelerating number of global and domestic OEM design wins, it is becoming clear that Oems before besides lidar superior performance in Reagan resolution and higher quality to that of our competitors operate.

Next I'd like to share an update on our manufacturing and product enhancement as Youre aware Jose is dedicated to expeditiously advancing new products towards the SLP phase in September we celebrated a new milestone with our F Q1, 'twenty the ward.

Fully solid based lifestyle lidar to take SLP and to be your thoughts on a series production vehicle motto postal zero what.

The first the full size luxury SUV model rocket motor, but harnessing the vintages of the FTE <unk> ultra wide FOV field of view and the minimum bright spot coupled with our flagship <unk> ADC with Lidar, the resulting car model features a powerful <unk>.

Precision perceptive system, providing smarter and safer driving experience across a wide range of growth scenarios.

Turning our attention to our <unk> later in the third quarter. We officially launched 80 128 P model the upgraded iteration of our flagship <unk> hundred 28, 8% lower rates later.

100000, AP, both an impressive set of improvements, including a great extension to 240 meters at 7%, reflecting the rate higher resolution.

Has the point of regularity and a 20% reduction in power consumption, achieving a seamless transition from Adobe to full scale production at our first center in Hangzhou represent a movement.

Achievement that strategically positions us to leverage economies of scale.

The highly automated of production in this facility.

Which is specifically tailored for the mass production of our mature products, we're now poised to reap the rewards of.

Improved cost efficiency with the potential volume shipments expected in the fourth quarter of this year.

The success of our recent product upgrade and seamless ramp up production at Hertz Center, not only reflect our unwavering commitment to meeting market demand, but also stand added in valuable learning experience.

This endeavor has provided us with crucial insights and knowledge that will play a pivotal role as we continually expanding our production capabilities in the future. Moreover, it has strengthened our present market leadership in lighter deliveries.

Positioning us for sustained success by leveraging our in house manufacturing capabilities, we are well prepared to innovate and thrive in a dynamic landscape.

Ever evolving industry.

Lastly, I'd like to share what we have recently completed the construction of our R&D and in House manufacturing facility Laxalt Center located in chatting Shanghai. In addition to actively preparing to produce our new fully solid state FY 'twenty Lidar. This facility is now.

With spearhead research and development of our next generation light of products with established 90 functional and the performance testing program with plans to scale number two hunger in the near future.

Seamless integration of R&D activities.

And the production processes in the state of the art facility not only amplify efficiency, but it also expands our capability to introduce groundbreaking solutions to the market. We're enthusiastic about the potential this facility <unk> driving our research initiatives and enhance.

The overall quality and time to market of our future product offering.

To summarize.

We steadily and effectively navigated a product transition during third quarter. This volumes.

I always stronger than expected quarterly revenue deliveries and gross margin put us on track for a strong finish to the year.

Our continuous round of design wins and development programs from leading domestic and global OEM is not just a remarkable feat. It reached out the testament to our market leadership and strengthen our foundation and enduring growth our steadfast commitment to performance quality.

Ft, and reliability will continue to guide our endeavors as we remain dedicated to advancing the cause of autonomous transportation by enhancing our safety systems and saving lives worldwide.

I'll now turn the call over to Louis to share more details on our financial performance and outlook Lewis. Please go ahead.

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 U S dollar $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 47000 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.

Simultaneous product transition for multiple products.

Or 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.

Holding a V shaped pattern. However, our gross margin for the third quarter of 2023 reached 36% 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.

Contributed to the quarter's margin uptake.

As a result.

Both Q2 and Q3.

Which were previously considered as a product transition phase.

Has significantly outperformed our initial projections.

Our relentless efforts to improve manufacturing scale and optimized cost structure also led to our unmatched financial strength in the global light our industry.

Mark by our third quarter.

A positive operating cash flow RMB, $47 6 million U S dollars $6 5 million.

Our robust year to date performance positions us to continue to advance strong our path toward profitability and achieve sustainable long term growth.

Now turning to our financial outlook.

While we expect a strong performance.

Our robust third quarter results bode well for our seasonally strongest fourth quarter for the fourth quarter of 2023, we expect net revenues to be between RMB 535 million U S dollars, $73 3 million and RMB $555 million $76 1 million.

Representing a year over year increase of approximately 37% to 35, 6%.

We are pleased to share that with the shift.

Toward a more optimized <unk> AP product we are now.

Entered a mature stage of production for Adas.

Consequently.

We anticipate a high level of predictability for Ada in the future.

Characterized by stable stabilized manufacturing processes.

Controlling cost structure and well manage supply chain.

We take pride in having overcome the challenges posed by the transition process and navigate it swiftly.

And carefully.

Sure.

Standing capabilities and engineering development.

And supply chain management.

We are delighted to announce that we are all on track to deliver on our target of 220000 <unk> in total for 2023.

In fact.

We are seeing growth adoption of lidar systems equipment with lidar by Oems globally.

We anticipate this momentum will accelerate into 2024 for this reason we are expect our lidar volume to more than double to approximately 500000 units next year.

Based on our customer order forecast by the end of 2024.

We anticipate 13, Adas OEM customers will reach our Sop.

Expanding our portfolio to include over 40 Sop vehicle models.

As of now.

We have secured design wins with with 14, Adas Oems covering over 50 vehicle model in total and we expect these figures to climb significantly throughout 2024.

Therefore, we reaffirm our annual revenue target of RMB, one 8 billion approximately U S $250 million in conjunction with a group level blended gross margin of 30% to 35% for full year 2023 by December we anticipate.

Keeping a monthly delivery rate of 40000 units positioning us well ahead.

Ahead of the competition in the global light our industry.

The above outlook is based on our current market conditions and reflects the company's preliminary estimates of market and operating conditions and customer demand, which are all subject to change.

In summary, while the third quarter was a bridge quarter, where we exceeded our own performance expectations in terms of financial and secured major design wins.

Setting us apart in the market and laying a solid foundation for further growth and development.

<unk> by the momentum we've generated.

We are.

We are eagerly looking forward to the exceptionally promising fourth quarter as we as we continue our journey toward profitability.

Before going into Q&A.

Like to take a moment to add my personal opinion on <unk> tactics and behavior towards her side.

Specifically.

I want to address the recent national origin based smear campaign.

False claims being made or directed by Ulster and other competitors.

First us.

A <unk> five point discussion of our competitors' fabricated claims regarding criticized Lidar technology and possible intended uses.

The size responses can be found in.

In the company's October 12, 2023 press release available on our website.

In presentation available on <unk> IR website at investors Investor Doc beside tech Dot com in the finance.

Finances filings quarterly results section.

I'll start and its media and lobbying agents have attempted to discredit <unk> technology.

And business practices seeking to ban <unk> products from the U S marketplace.

Relying primarily on basis IP infringement claims.

And exploiting heightened China U S geopolitical tensions.

I find this line of attack focus on a company's national origin deplorable and.

And contemptuous.

All stores claims are unsubstantiated emphasized the life, all allegations and innuendo by ouster.

I also have spent millions of dollars on litigation expenses and lobbing fees.

On Capitol Hill, and a desperate attempt.

<unk> is a Chinese company.

That feels American IP and is possibly working with the Chinese military to undermine U S national security by potentially using our lidar to spy on Americans.

Cyber attacks and aid the Chinese military and intelligence gathering all are patently false.

These underhanded tactics.

Are the actions of a desperate company.

That is unable to compete effectively on the merits of its products in the lidar marketplace against the Si.

Frankly, the satellite are preferred by customers because they perform much better range and resolution and are of higher quality than <unk> products.

As a result.

Yeah, I'll start <unk> combination has seen several years of declining revenues.

Windowing light our shipments shrinking gross margins and mounting losses.

Losses of $335 million for the first nine months of 2023 on just $59 million and revenues alone.

This is all reflected in declining global.

Economists vehicle Lidar market share.

1% in 2022 for Ulster compared to her size market, leading 47% share according to <unk> intelligence.

And ulcers precipitous share price drop of over 95% from its highs.

Level several years ago.

During the ITC investigation.

Ulcers desperation became very clear.

Earlier this year after <unk>.

<unk> had to divest the litigation settlement.

And patent cross licensing agreement entered into with Lasalle, which is at the heart of the Elster.

<unk> case.

As you've tried to divested into a separate legal entity.

That vision holdings LLC.

Then also claimed it wasn't down and did not have to abide by its own contractual obligations contained therein incur.

Including the agreements.

Patent cross licensing provision.

Allowing each side to use the other patent lidar.

Our IP for 10 years and.

Lots of supervision.

Designating arbitration as a dispute resolution mechanism.

Obviously Ulster New the agreement was a major major liability in their case, the ICC just saw right through our stores.

So some subterfuge.

And we have none of it.

<unk> rule after an affiliate develop.

By a merger so elster could not escape us legalize obligations simply by transferring the agreement to a new entity.

If only things were just that simple spin off the contractual obligations you don't like and keep the ones you do like.

And this bizzaro world contracts would cease to have.

The commercial value whatsoever.

She then went on to grasp the size motion to terminate the ITC case.

As an American I find Ousters desperate National origin based national origin based xenophobic tactics of attacking her si with basis stereotypical allegations and innuendo.

Repugnant and antithetical to American.

Principles and values.

In my opinion, such tactics and behavior.

Yes.

Should not be tolerated simply put I believe ousters smear campaign against the side.

It's downright un-american.

This concludes our prepared remarks for today operator, we are now ready to take questions.

Thank you Bob.

If you wish to ask a question. Please press star one on your telephone and Whitefield names we announced.

If you wish to cancel your request please press star two.

You're on a speaker phone please pick up your handset to ask you a question.

For the benefit of all participants on today's call. If you wish to ask your question to management in Chinese. Please immediately repeat your question in English.

Jacob clarity and Udo. Please ask one question at a time management will respond and then feel free to follow up with you. All next question.

Your first question comes from Tim Michelle with Morgan Stanley. Please go ahead.

Hello.

Good morning, Thanks for taking my question so.

I got a couple of questions.

The first one is about the gross opportunity because.

Over the past quarter, we noticed that in China, more and more EV makers.

Providing two sakoda urban dedication on autopilot MLB functions, Honduras flagship models and cleaned out one of the key selling points into next year and the year. After so just wanted to touch base on the Companys project pipeline.

You seen cat Lidar.

Lidar adoption at an inflection point.

Start kicking off next year.

So in the meantime, you can approach be adopted on that Jim.

The high end model, we saw it today.

Also in the mass market or mid range models.

Criticized consider onto cutting competitors' prices more aggressively to capture the first meaningful function upgrade.

Especially we noticed that Shawn that competitors are still suffer from satellite countries. So that's my first question.

Thank you Tim.

This is Lewis your point is very well taken and I think that's exactly what is happening.

As you know our largest customer the auto is pushing aggressively on urban.

And I think the take rate will continue to climb into 'twenty four and.

And we've seen that across the high end models from most of the new EV companies like the auto Neosho pung and BYD and so they are leading in that area. The other ones are coming in behind and we're very pleased with <unk>.

<unk> market share gains I think we have 14 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 a 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, just to add that that's great and my second question I think Louisa just some.

Provide additional details and comment about the two skew towards the global players.

Just wanted to follow up on that so after ITC officially terminated the patent infringement investigations I think Ed was brought up by Oscar So do you think thats going to help.

Actually increased criticized clinical awareness had to make global OEM and card make a few more comprehensive comfortable to work with us or.

Do you think there could be any.

Clean warranty dispute coming to with a group of global like on makers that you just mentioned that my actually urge to global players with global car makers to adopt a wait and see attitude. So quite a car maker would become more aggressive to please go there to her si or basic detail.

Tend to be more cautious in the near term so could you share your view with us.

Yes. Thank you.

This is David.

Great question I think it's very important for people to see evidences a lot of the <unk>.

Acquisition.

Briefly review the history.

We had a cross license with Vela Die and then they realized to the altar and then after sue the US and then of course, it's in the competitors best interests to say that we believe assai infringes US right. So but then in the end we have to look at it.

Rulings of the judge's determination is very important to us and it also shows that our ability to defend ourselves.

The International Court level and also a verifies that we did.

Declines all the Activations.

I definitely believe the global Oems in all of the customers.

Our fueling a much more informed and confident to go with us and in the past well there is ongoing litigation, there's always concern, but whenever the strong evidence in favor of us. It further verify is that we have the strongest leadership not only in the revenue shipments but also in.

Intellectual property.

Just to add to David's comment I think the global Oems will feel more comfortable so I think it's 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 password tier 234 years ago.

Those selections so we're in the we're definitely in the hunt and always in the top one or two for these global but they have not made official gras determinations. At this time. So that's the way, but you can be rest assured that based on our feedback are like ours are the best performing or not.

So I think it's just a matter of time and we are working those those 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 way out of the way is extremely helpful for people to make a decision purely based on outperformance in the quality of a vendor. So Tim you understand that all these light our decisions may.

And Eva this year I'll go to us.

Right. So so it's a testament to the quality and the performance of our products. Thank you.

Got it thanks for that.

One of the callers to TVN and Louis just one last question if I may because I noticed that during the presentation just now.

I think Louis mentioned that.

We saw an increasing shift to <unk>.

Because I think the quarter result, actually surprised us on the ops margin surprised us on the upside. So could you just share led to more information about what the sales mix of 81 to <unk> AP.

In fourth quarter, and we expect that the mutual customers to fully upgrading lidar to true.

So if that's kind of who you see in a trade area or more medicines as much improvement in the coming quarters.

Yes, that's a great question. So in Q3, the mix of old 180, 128 was <unk>.

75%, ATP 80 pro or <unk> was 25% it will slip in Q4 and Q4.

The pro version will account for 75% of shipments and the older <unk> hundred 28 will be about 25% still is it fully phases out yeah, I want to point out that I think it's a we call it 80.

102000, AP as opposed to a pro.

The word pro in different industry, sometimes it means better sometimes it means an inferior product than the original one in our case. This is a major upgrade.

With.

Better range and better accuracy, better pulling cloud density lower power consumption. So it is a major upgrade that's why we decided not to call that a pearl and really because it's a if anything it's a max version Hutzell itself.

So we don't want them with people to confuse.

So just for the record we will call that $81 28 at peak.

So it will be 75% in this quarter against Q4.

That's right.

[laughter] got a super clear. Thank you for sharing you with the details and are looking forward to more exciting upgrades in the second quarter. Thank you.

Thank you thank you Dan.

Your next question comes from Jade Cheng with Citi. Please go ahead.

Hi, Good morning, this is Jeff from Citi.

My first question is about the new shipment guidance.

Louis made them in the presentation on around 500000 units next year. So my understanding.

Is the previous guidance was 400000 units next year. So the company just upgraded the sales guidance into next year. So this is.

The first things I wanted to check and if yes.

Why and when.

Was that due to the new shipments and our new customers. This is my first question.

And then separately.

Louis also said the 40000 units shipment in a single month December.

Which means that.

By the end of this year, we can achieve a 480000 unit annualized rates. So this is very close to the 500000 units a shipment target next year, which means that.

We do not need to invest as much on Capex. This should result in a very strong cash flow generation in vitro, which is small so I just wanted to check a decent out those are my first questions.

Yes, I think the upgraded guidance on the delivery numbers.

Things I just answered was one was on the adoption.

<unk> is pushing very hard on adoption of city or urban MLA and thats going to push volumes up significantly you also saw the auto tick up their forecast for 2024 to 650000 units. So that also helps us as the adoption rate goes up when you get close to level III, it's almost.

And the other one you have to have lighter and so thats why as we said we've been saying for a while.

Oems, especially the ones who are way ahead of the game and software are going to adopt city anyway and other advanced.

Features a lidar will become a must it also includes new wins like great wall. So great wall Motor has five models with us so that wasn't accounted for last year, I mean last quarter and all of those models with the EU Sop in 2024 is the schedule.

So and then you've seen upgraded numbers from our existing customers as we said plus new wins and that doesn't account for wins, we expect in.

In Q4, we have another two or three that will come in in Q4.

So basically that's why the uptick.

I think 500000 honestly, it's probably conservative.

As you guys noted by nature.

<unk> point is on the.

Your other question sorry, just as a question is the other question is that yes capex.

We have two factories in outright hurt factory has one line. It can it can hold three or four lines. So the first line in December is an unusually high month, because it's prebuilt for their Chinese new year. So it's always going to be our highest where it typically is our highest delivery month.

And so thats why its so it probably will not be as high in January.

In front of Chinese new year, So I think 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 as one for Southeast Asia and also one for North America.

To service our global customers.

But we are in a strong cash position.

I feel were $450 million today were $440 million.

Great.

So right there.

Comment I want to make is that.

The current estimate could be an under underestimate and.

Our customers are very bullish quite a few of them are very optimistic about their takeaway that the shipment volume.

In the coming year.

You think about it as a vendor as a last one wanted 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.

It's always a good thing because all the lot of the investment on the on the infrastructure. The construction side has already been done so it's very limited additional investments but.

The volume could go much higher than what we expect today and Jeff don't forget the 500000 unit capacity for Hertz line, one means one shift.

Could add a second shift if necessary.

So I think we're fine as far as capacity goes.

Great.

Excellent.

Uh huh.

Yes, okay.

And also the real demand from some of the customers next year for some months where demand is at well above 50 8-K units a.

So that's why we needed to prepare for the new line.

Well that sounds fantastic.

Hey, Manav.

Problem nor sure.

Sure.

That's great and then my second question is about the fourth quarter GP margin guidance could you give us some colors given that.

Number one we observed with third quarter blended area ASP actually went up by about 10% Q on Q.

So I'm just wondering what was the mix of the.

Robo taxi related lighter in <unk> and how does this.

So for the ramp up in the fourth quarter.

Could we challenge of 35% to 40% GP margin in a single corner. Thank you.

To be honest.

If we challenge it there'll be at around the 35 market Mark, but our current forecast is 32% to 34% gross margins for Q4. The reason Q3 was better is because it was.

It was more of a.

<unk> mobility quarter Youre right I mean, the Ada soon as were only 40000, the Adas unit in Q4.

Our internal forecasts are.

<unk>.

So adas will typically have a slightly lower margin.

Then the robo taxi business, but because of the new upgrade.

And the manufacturing facility it hurts it actually the margin is quite good. So if you remember back at the beginning of the year, we forecasted that Adas margins gross margin would fall in somewhere between 9% and 13% for this calendar year.

Q4 <unk>.

Transitioned ATP.

We will hit that will be squarely in the double digits. So everything is on track next year those numbers will go up as the as we hit scale.

So you're going to account for about 32 to 34 is our internal guidance.

Great. Thank you, yes that actually there is a limit where there's less robo taxi revenue in Q4 that was originally forecast. So this isn't this isn't a das quarter. So the fact that we can pick up margins is actually pretty pretty amazing that.

We can take our margin even in Adas heavy quarter.

Thank you Louis.

Your next question comes from Tina <unk> Goldman Sachs. Please go ahead.

Hi, Thank you management for taking my question and congrats on the very strong quarter of results.

My first question is related to price.

Yes, so first of all.

I'm just wondering how much is the price for ATP versus H E.

Is it.

Windsor product or an hour.

So it has a similar range because it's in the similar range because it's a major upgrade.

Okay got it and then the.

Second one related to prices, obviously, great to see so many are new Oems are taking up laser 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 that.

Potential price cut are they looking at.

In order to adopt lidar.

I think on the ASC side. We are we are planning a price reduction in 2024 at the request of R. R.

<unk>.

Okay.

Yeah. So I think it's the the price decline is always requested by the customer and we do work with them, but it's it's.

It's at a scale of.

Very low number because really.

And it's a it's a decision as a tradeoff between the performance and the quality of a lot of the competition will wanted to 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 safety on the line.

Yes.

Understood.

And then.

Another question I guess related to prices that obviously now it's more higher end vehicles are brands that are adopting lidar 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 <unk> for example.

They're like mass brands, taking up Lidar and then what is holding them back at this point.

We won't be able to comment on 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.

When people are able to rollout with the city in L. A and other more advanced functions. The value added by such function is much higher than if youre just doing it.

Playing level, two with a lidar, which.

Isn't of greater value compared to the more advanced function. So in the end I don't think its about specific brand its about all the carmakers as a whole can we develop more advanced functions to generate more value for the customer.

Thank you.

So my next question is relating to cost or margin.

So just wondering for our factory.

<unk>.

<unk> rate ramp up at a relatively full stage, what kind of gross margin can we see for our <unk> product.

I think as we've got it. Thank you that's a good question.

But we don't breakout the specific margins by product.

For competitive reasons, because 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 30% and 35% for next year is our target.

But you can imagine the AAM margins slightly higher than that but you know 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 too.

It's quite good.

Okay.

Alright. Thank you Louis that's all of my questions.

Your next question comes from Jason <unk> with Bank of America. Please go ahead.

Thank you for taking my questions. So my first question must be on Opex guidance, because we noticed that in the quarter.

Come up quite significantly Calgary, because we have mastered.

Mass producing.

Hi, Hunter and so are we.

We will be entering.

Got into the mass production for the next trial in fourth quarter as.

We will be the.

The guidance for the Opex ratio and going into fourth quarter and 2024.

It's a good question I think for the Opex number was higher 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 <unk>.

All of our hiring for G&A for financial for Sox compliance internal.

Internal audit and also we have to deal with legal fees from the frivolous suits from elster. 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.

Next year, we're hoping to get to profitability on a non-GAAP basis. As you know so opex is actually not out of control. It is because of the professional fees.

Got it alright.

My next question would be can you share some thoughts and D works, we have done decline.

Please proceed there Hudson news, saying that.

Kelly.

But building a plant in Mexico.

Oh I see so.

So we haven't made the decision to build a factory in Mexico.

So we are looking at different options in the North American regions, because the customers there.

Prefer if we could build locally locally meaning in 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 plant and the plant is going to quit.

Let me start start up a plant in 2004 is not finished the whole thing.

Okay.

In North America.

Got it got it thank you so much.

That's all from me.

Thank you. Thank you.

Your next question comes from Shanghai Tang with <unk> Securities. Please go ahead.

Okay.

<unk>. Your line is now live. Please proceed with your question.

Your next question comes from Olivia Zhang with Hi, Tom. Please go ahead.

Hello.

Yeah.

Hello <unk>. Your line is now live. Please proceed with your question.

Hi can you hear me.

Yes, we can hear you go ahead.

Okay. Okay, maybe just one quick question from me.

Besides pro Doc.

Adopted by future Global OEM.

Relevant overstated revenue target for the next two or three years.

Thanks.

Currently our overseas revenue is close to 40% of our total is a little bit below it used to be a little bit higher because of the types of mobility.

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 'twenty six 'twenty seven so I think this trend will continue but long term we expect.

Ideally it would be 40% overseas at 60%, China and Asia.

That would be our target okay. That's good.

Thanks.

Thank you as there are nice to have a 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.