ECARX (ticker not provided), a player in the automotive computing hardware market, has announced a significant 31% year-over-year revenue growth for the third quarter of 2024, reaching RMB1.4 billion.
This increase has been attributed to the strong demand for the company's Antora and Makalu platforms. Despite the robust revenue growth, ECARX faces challenges, including a decrease in gross margin to 17% due to pricing pressures and a net loss of RMB0.97 per share.
However, the company is optimistic about its future, focusing on cost optimization and manufacturing expansion, with the ambition to control a significant portion of production over the next few years.
Key Takeaways
- Revenue increased by 31% year-over-year to RMB1.4 billion, driven by strong demand for computing hardware.
- Gross margin declined to 17% due to pricing pressures and increased competition.
- ECARX technology is now integrated into over 7.3 million vehicles.
- The company reported a net loss of RMB0.97 per share and an adjusted EBITDA loss of RMB233 million.
- Cash reserves stand at RMB688 million, supporting ongoing investments and expansion.
Company Outlook
- Aiming to control 15-20% of production by the end of 2024 and over 50% by 2025.
- Geely and affiliates currently account for 90% of revenue; plans to diversify by 2025.
- Strong customer engagement and expansion efforts, particularly with German OEMs.
- Focus on converting pipeline opportunities and continuous R&D investment to improve profitability.
Bearish Highlights
- Decreased gross margins due to hardware pricing strategies and increased competition.
- Net loss of RMB0.97 per share and adjusted EBITDA loss of RMB233 million.
- Software (ETR:SOWGn) license revenue fell by 39% year-over-year.
- Service revenue decreased by 26%.
Bullish Highlights
- Hardware sales reached RMB1.2 billion, up 61%.
- Key product launches, such as the Geely Galaxy E5 and Lynk & Co Z10, have been successful.
- Two new design wins and expanded partnerships to enhance technology offerings.
- Management is confident in achieving breakeven soon due to the scale of business.
Misses
- Despite increased revenue, gross profit dropped by 25%, resulting in lower gross margins.
- Software and service revenues saw a decline compared to the previous year.
Q&A Highlights
- Management discussed improvements in hardware gross margins with existing customers.
- There is a strategic focus on volume and supply chain management to enhance margin performance.
- Growth opportunities in software with core products like Flyme Auto and ECARX.
- Commitment to customer satisfaction and ongoing R&D investments to improve profitability.
ECARX's third quarter of 2024 showcases a company navigating industry pressures while capitalizing on market opportunities. With a clear strategy for cost optimization and an eye on global expansion, ECARX is poised to continue its growth trajectory despite the current challenges it faces.
InvestingPro Insights
ECARX's recent financial performance reflects both promising growth and significant challenges. According to InvestingPro data, the company's revenue growth remains strong, with a 25.7% increase over the last twelve months as of Q3 2024, aligning with the 31% year-over-year growth reported in the article. This robust top-line expansion underscores the company's success in capturing market demand for its automotive computing hardware.
However, the company's profitability remains a concern. InvestingPro Tips highlight that ECARX is "quickly burning through cash" and that "short term obligations exceed liquid assets." These insights corroborate the article's mention of the company's net loss and adjusted EBITDA loss. The operating income margin of -19.86% further illustrates the profitability challenges ECARX faces as it invests in growth and expansion.
The stock's performance has been volatile, with InvestingPro data showing a significant year-to-date price total return of -41.77% as of the latest data. This aligns with the InvestingPro Tip that the "stock generally trades with high price volatility," which investors should consider when evaluating ECARX's market position.
For those seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for ECARX, providing a deeper understanding of the company's financial health and market position.
Full transcript - Ecarx Holdings Inc (ECX) Q3 2024:
Operator: Good day and thank you for joining us. Welcome to ECARX Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management to give their prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to hand the conference over to your host, Rene Du, Head of Investor Relations at ECARX. Please proceed.
Rene Du: Thank you, operator. Good morning, and welcome to ECARX third quarter 2024 earnings conference call. With me today from ECARX are Chairman and Chief Executive Officer, Ziyu Shen; Chief Operating Officer, Peter Cirino; and Chief Financial Officer, Phil Zhou. Following their prepared remarks, they will all be available to answer your questions during the Q&A session that follows. Before we start, I would like to refer you to our forward-looking statements at the bottom of our earnings press release, which also applies to this call. Further information on specific risk factors that could cause actual results to differ materially can be found in our filings with the SEC. In addition, this call will include discussions of certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to GAAP financial measures can be also found at the bottom of our earnings release. With that, I'd like to hand the call over to Ziyu. Please go ahead.
Ziyu Shen: Thank you, Rene. Hello, everyone, and thank you for joining our third quarter earnings call today. The solid growth momentum we picked up in the first half of the year continued into the third quarter. The global automotive industry is rapidly evolving towards software-defined vehicles, which we are uniquely positioned to benefit from, and I think our results this quarter reflect that. Let me start with a brief market update. Looking at the broader automotive landscape internationally, the sector continues to face a challenging environment globally. Despite the headwinds, the overall trajectory remains positive, particularly for electrical vehicles and intelligent car technologies, with the automotive industry still projected to reach approximately 88 million vehicle sales in 2024. In contrast, Chinese automotive market has been gradually picking up. Total (EPA:TTEF) sales from January to September increased 2.4% from the same period last year, among which China's export data showed a much more positive outlook with overall export volume rising every month this year. China exported 4.3 million vehicles from January through September, an impressive increase of 27% year-over-year. Electrical vehicle sales in China during the same period increased 33% year-over-year, accounting for 39% of total new car sales. The market continues to yield significant opportunities for us despite headwinds. This underscores our unique positioning to drive growth in China and overseas. Regardless of market cycle, our evolving product portfolio, diverse customer base, and strategic global partnerships and operations are key factors that enable us to capitalize on these opportunities. By the end of quarter, there were over 7.3 million vehicles on the road, incorporating ECARX technology, with 442,000 vehicles added this quarter alone. This translates into an increase of approximately 31% year-over-year or 6% sequentially. Our global reach across the sector remained stable from last quarter, with 17 OEMs across 26 brands. Notably, the number of project wins from existing customers increased substantially as we deepen our relationship and build upon the success of existing mass production projects. Revenue during the quarter increased by 31% year-over-year to RMB1.4 billion on the back of recent vehicle launches such as the Geely Galaxy E5. Competition remains fierce, with ongoing pricing pressures causing gross margins to decline to approximately 17% during the quarter. Despite the challenging competition and impact on margin, we remain firmly on track with our top line continuing to outperform the broad market as we scale and build a path towards profitability. We have a very strong track record of growing our top line with new vehicle launches, and have a robust and healthy pipeline with over 40 vehicle models currently in development. To offset the impact of pricing pressure on our margins, we are working aggressively to optimize our cost structure by taking greater vertical control of our manufacturing and supply chain, optimizing our product portfolio, improving engineering and operational efficiency. At the same time, we are expanding our global footprint to provide us with the flexibility to mitigate geopolitical risks. I'm highly confident in our ability to drive significant growth throughout the year and beyond. Our strategy has not changed, and we remain on course for success as we focus on sustaining revenue growth momentum, capturing sales volumes and improving margins. Our flexibility to adapt to a changing market environment ensures that we can see new opportunities as they arise, leaving us very optimistic about the future. I will now pass the call over to Peter, who will go through operating results of the quarter in more detail.
Peter Cirino: Thank you, Ziyu, and good day, everyone. Our customer base remained diverse and stable during the quarter as our business continues to scale and gain momentum. We secured two new design wins from existing customers during the quarter, further deepening our relationships with them. Both vehicles are for the China market, and will deploy a version of our Antora series computing platform and some integrated with Flyme Auto OS. These wins showcase our ability to deliver customized cutting-edge technology solutions and reflect the growing value proposition we offer automakers with our unified computing platforms for China and overseas. Our global ecosystem of strategic partnership forms the backbone of our strategy to reshape the global automotive technology value chain. We entered into a formal partnership with MulticoreWare at the end of August, having initially worked together to optimize our intelligent driving software algorithms used in the Lynk & Co 08 earlier this year. We are strengthening our partnership and expanding the scope of our collaboration to cover all projects to reduce the time-to-market for mass production of Skyland Pro and provide global OEMs with unique vehicle experiences. In addition to leveraging our global ecosystem of partnerships to improve our performance of our leading hardware and software stack, we continue to strategically invest in R&D while at the same time, improve R&D efficiency. We are investing in our lower cost R&D centers. We are engaging AI tools to improve efficiency and quality, onboarding new partners with innovative and cutting-edge support models and completing a deep dive of our entire cost structure. Our ADU solutions now feature real-world rendering capabilities compatible with mainstream 3D engines such as Unreal and Unity, and are expected to be integrated into Hongqi and smart models currently in development. We deployed ECARX AutoGPT by adopting Microsoft (NASDAQ:MSFT)'s Smart Occupancy Monitoring system to track and monitor in-vehicle behavior of children to ensure safety, while we continue to work closely with ecosystem partners to explore more in-vehicle scenarios under ECARX AutoGPT. We also developed an automotive hypervisor that allows multiple vehicle systems to run on the Makalu platform using AMD (NASDAQ:AMD) chips. Our technology leadership continues to strengthen as a result, with our robust intellectual property portfolio now expanding to include 613 registered patents and 656 pending patent applications globally as of September 30. On the product side, we had several new exciting vehicles launched this quarter that showcased our technological strengths and demonstrate our remarkable versatility to replicate and scale our solutions across various brands and models. Demand for the Geely Galaxy E5 since its launch in August has been particularly strong, with over 12,000 vehicles sold in that month alone. Notably, the Galaxy E5 is the first vehicle to integrate digital cockpit and parking capabilities into a single board using the Antora 1000 computing platform under Geely's new EE architecture, which serves as the foundation for their next-generation vehicles. On top of that, the Antora 1000 SPB, which integrates digital cockpit parking and driving capabilities on the Antora 1000 platform has also been launched and can be replicated and scaled with any AI chip, providing a highly cost-effective and streamlined solution that aligns seamlessly with evolving EE architectures. This broadens the Antora 1000's appeal as the central computing platform of choice for automakers globally. Lynk & Co's flagship Z10 began mass production during the quarter following its debut in June. This vehicle showcases the strength of the Makalu computing platform powered by AMD Ryzen V2000 processors and our self-developed hypervisors, which I mentioned earlier. Our extensive experience in digital cockpit design, combined with AMD's advanced computing capabilities has resulted in a vehicle that sets a new benchmark for in-vehicle technology and user experience. The smart #5 officially launched on October 27, following its global debut in August, also comes integrated with the Makalu computing platform. I'm happy to see our Antora and Makalu series widely adopted across various vehicle models, ranging from entry-level to premium. This demonstrates our strong competitiveness in the market and ease with which our solutions can be scaled and replicated. The Lynk & Co 02 known as the Z20 in China, debuted in Milan on October 11 and has since launched officially in Europe. Integrated with our Galena computing platform, we are committed to support the state-of-the-art model as we explore market opportunities globally for this tailor-made solution. Lastly, our Pikes computing platform officially launched this quarter, utilizing Qualcomm (NASDAQ:QCOM)'s Snapdragon 8295 SoC. This solution will first be integrated into a new Geely model planned for the start of production in 2025. We are making solid progress in establishing ourselves as a partner for automakers, as they transition to software-defined vehicles by delivering solutions that are scalable and cost efficient. Our expertise in commercializing and deploying these integrated vehicle solutions on a global scale, not only optimizes costs, but also speeds up market entry for manufacturers around the world. We attended the third Global Digital Trade Expo in Hangzhou at the end of September, where we showcased the Makalu and Antora platforms, and signed an agreement to further expand our Fuyang smart facility. Fuyang represents a critical step in our strategy to integrate manufacturing and supply chain processes. This facility is opening at the highest industry standards, deploying the latest in connectivity, advanced analytics, automation and advanced manufacturing technology. Production capacity has quickly ramped up since production started in April, with about 30,000 Antora 1000 units produced and shipped for the Galaxy E5 in August and September. In 2023, we were deeply engaged in the supply chain management, but all our end product manufacturing was completed through partners and joint ventures. Now by the end of 2024, we have taken control of our manufacturing and we should end the year with about 15% to 20% under our own control. By the end of 2025, we expect that metric to be over 50%, with a long-term target in the range of 70% or more. By improving our control over costs, product quality and operations, we will be able to further enhance our competitive position in the market. I'm pleased with the progress we have made and remain highly optimistic that we will continue to see tremendous growth going forward as our investments, technological innovation, diversification of customer base and global expansion begin to generate significant returns. I will now turn the call over to Phil, who will go through our financial results.
Phil Zhou: Thank you, Peter, and hello, everyone. Our strong performance in the first half of the year continued into the third quarter as our business continues to grow. Total revenue for the quarter was RMB1.4 billion, an increase of 31% year-over-year. Revenue from the sales of computing hardware was RMB1.2 billion, up 61% year-over-year, mainly driven by continued global demand for the Volvo (OTC:VLVLY) EX30 and Polestar (NASDAQ:PSNY) 4, as well as an increase in sales volume for the Antora series and Makalu platform digital cockpits and autonomous driving controlling units, which contributed approximately 23% and 11%, respectively, to total revenue. Software license revenue came in at RMB84 million, down 39% year-over-year, due to a decrease in the sales of navigation and operating software compared to the previous year. Compared to the last quarter, software license revenue grew by RMB28 million or 49%, with the ramping up of Flyme Auto sales volume and intellectual property revenue growth. Service revenue decreased 26% year-over-year to RMB161 million, mostly as a result of timing differences in completing non-recurring engineering revenue contracts. Our year-to-date service revenue grew approximately 10% year-over-year. Gross profit was RMB248 million, a decrease of 25% year-over-year, which translates into a gross margin of 17%. Margins on hardware products continue to be under pressure, as we adopt a penetration pricing strategy to drive revenue and volume growth to gain market share and achieve economies of scale and cost reductions against the backdrop of an industry-wide price war in automotive sector and ongoing transformation of customers' EE architecture. As I discussed in the previous earnings call, we expect this pressure on our hardware margins to remain over the medium term. To offset this impact, we will continue to focus on driving sales of our unique product portfolio, deepening cost reductions and improving operational efficiencies. OpEx during the quarter decreased 2% year-over-year. This was primarily driven by improved global operational efficiencies and lower share-based compensation expense during the quarter, which were partially offset by continued investment into R&D, core product roadmap and future technologies. Loss per share was RMB0.97 compared to the previous quarter, RMB0.84. Adjusted EBITDA loss was RMB233 million, up from a loss of RMB181 million during the same period last year, primarily attributable to: one, a decrease in gross margin as a trade-off for the growth in automotive computing platform business and increased market share; and number two, lower foreign currency exchange gain, partially offset by lower operating expenses and an increase in fair value of financial assets compared to the previous year. Moving on to our balance sheet. As of the end of the third quarter, we had RMB688 million of cash and restricted cash, which gives us ample resources to fund our core products roadmap, key initiatives and global business expansion, while we continue to improve our working capital and profitability. Overall, we maintained robust growth despite intense market competition. We will continue to focus on expanding our customer base, deepening our penetration of both Geely and the non-Geely ecosystem to gain market share, driving economies of scale and cost optimization. We will also continue to optimize our operating expense and carefully control the new investments to improve our margin performance and the sustainability of our business in the long run. That concludes our prepared remarks today. I would now like to hand the call back to the operator to begin the Q&A session.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Wei Hung [ph] with Deutsche Bank (ETR:DBKGn). Your line is open.
Unidentified Analyst: Can you hear me?
Operator: Yes, we can hear you.
Unidentified Analyst: Thanks for taking my question. So, my first question is regarding the sale of goods margin. We've seen a decline Q-over-Q and year-over-year to around 9% in the third quarter. Can you maybe talk a bit on the factors contributing to that? And how should we think about it in the fourth quarter and into next year?
Phil Zhou: Okay. Sure. This is Phil. I'm happy to address your question regarding the margin performance in the third quarter. Yes, there's a fierce market competition, which drove the hardware solution margin deterioration in the quarter, which is from last quarter, 14% to current quarter 8.9%. Actually, we chose to drive the volume increase and maintain a share of wallet stability in our key accounts, our customer base. And we also want to have an opportunity to further work on the supply chain and cost optimization. As I mentioned, it's all about economy of scale. The other reason is the product mix also impacts the current quarter's margin performance. Normally, 50% of our profit came from our services and our software. Their margin performance is pretty stable, ranging from 57% to 60%. Due to the software selling ramp-up and the service booking seasonality issue, the mix from services and software changed from 30% to 17% in this quarter. And all these are the key factors that impact our overall margin performance. However, moving into Q4, we foresee that we will rebalance the portfolio of sales on services and software, and we are able to restore our margin performance through that. And meanwhile, we are able to further drive our cost optimization, which can help uplift the hardware margin performance as well. So, that is the answer for your question on the margin performance in Q3.
Unidentified Analyst: Thank you. That is very clear. And the other question I had was – we've seen Geely, the Galaxy brand launched two vehicles, the Galaxy E5 and the Star Wish sedan. And we know the company has disclosed that the E5 uses the Antora platform and the Flyme Auto OS system. Can you maybe talk about the Star Wish then? Does ECARX also supply the hardware for that model as well?
Peter Cirino: Yes. This is Peter. I'll grab that question. I mean, yes, the Galaxy E5 uses our Antora 1000 platform along with the Flyme Auto software as you mentioned? And the Star Wish's platform uses our Venado platform. So, that's our E02 platform where we have – that's a very robust product that we've had in the market. We have more than a million units lifetime on that program. So, they both use solutions from ECARX.
Unidentified Analyst: Thank you. That is very clear. And maybe a last one for me. After the Lynk & Co Z10 and the smart #5, can you maybe give us some outlook on what other vehicle models will the Makalu platform be used on?
Peter Cirino: Yes. I'll grab that one as well. I mean, the Makalu platform is really a benchmark lighthouse project for us. It's a deep strategic cooperation with AMD. We're the first automaker to adopt the V2000 platform, which is AMD's newest automotive platform. And we've built up, even as we discussed in our prepared remarks, a unique hypervisor that extends our software capabilities and really drives a very tight software hardware linkage to have fantastic performance. We've got great user feedback from the vehicles. The Z10 has been in production. Smart is in a ramp-up phase right now. And we will continue to promote that to both – to future vehicles for smart for Lynk & Co as well as others in the market.
Unidentified Analyst: Understood, thank you very much. That’s all from me.
Operator: Thank you. Please standby for our next question. Our next question comes from the line of Dai Shen with SPDBI. Your line is open.
Unidentified Analyst: [Foreign Language] Dear management, this is Tony from SPDB International. I've got two questions here. The first question is also going back to the gross margin. Do we have an outlook for the gross margin for next year for 2025? Do we have a direction here? Do we expect the gross margin to improve from the gross margin of third quarter, especially for the hardware products? And for the gross margin, specifically, I think that our in-house manufacturing is improving, especially for 2025. Is this a plus for the gross margin for next year? This is my first question.
Phil Zhou: Thank you, Shen, Dai. This is a very good question. I'm happy to address this one. We observed that the market competition starting from September 2023 and we keep seeing aggressive pricing pressure from our customers. But again, as I just mentioned, we also would like to drive the volume uplift and maintain our installed base in our customers. This is very critical because we want to drive the economy of scale. And only with that, we are able to further negotiate the cost optimization from a supply chain perspective. And yes, you mentioned that we – for sure, we will try our best to keep our overall gross margin performance over 20-ish. That is our goal as well because half of our profitability came from the services and software, and their margin performance is pretty stable. And as long as we can keep the reasonable sales mix from the two products, then we should be able to keep the overall margin performance at a reasonable level. However, I agree with that the pricing pressure on – especially on the hardware solution is right now a challenge, but we do have our plan to recover that first. We will keep innovating. We keep investing in our R&D, and we will keep innovating. And we always can bring our best-of-breed solutions for our customers. And within the time window, we are able to charge a price premium as well. So, we are pioneering in this hardware solution in the market sector. And we will also drive the lean operation as well, right, in terms of the loss of operation, the total profitability with our focus on SG&A optimization, which is also a highlight in the quarter, right? SG&A, OpEx actually declined 19% year-over-year. This also reflects our ability to control the expense as well. So in general, I would comment that we will try our best to keep our gross margin performance above 20-ish, but that depends on our execution on services and software sales. At the same time, right, how to bring the higher-margin hardware solution to the market to delight our customers and meanwhile, control our operating expense tightly. And in the end with the scale of our business, we are able to achieve a breakeven very soon. So, that is our – that concludes my answer to your margin questions.
Unidentified Analyst: That's very clear. A quick follow-up on the in-house manufacturing. And is it positive to gross margin?
Phil Zhou: Yes, for sure. So right now, we adopt OEM manufacturing model. And the good thing is we keep receiving orders from our customers. And for sure, we would like to achieve the scale as well. So as long as we keep optimizing the CapEx investment, the expense happening in supply chain sites and manufacturing sites, we should be able to control our manufacturing cost within a reasonable level, which is also very competitive in the market. So, I can share with that, that's also on our radar.
Unidentified Analyst: Okay. It's very clear. And my second question is about the overseas business. Can we have an update on our overseas expansion and also on the overseas customers? Do we expect any revenue or profit from overseas customers for 2025?
Peter Cirino: Yes, I'll grab that. This is Peter. So, I mean, the company has been driving down this global expansion road for a number of years now. I mean, as you remember, in early this year, we established our office in Stuttgart to help expand our customer intimacy with the German OEMs. And presently, we're engaged in a number of RFQ processes with new customers there. So, we're quite excited about the progress. The European OEM business, I would say, moves on a very rigorous structured timeline. So, we might see some NRE service revenue towards the end of 2025, likely in 2026. And SOPs, we're looking at are probably in the 2027 horizon, and that's just, let's call it, a standard development cycle that the European OEMs follow. But we definitely see a lot of strong customer intimacy, customer engagement. And as I said, a number of very tangible programs that we're working through the RFQ processes with. So, we're very excited about the progress we're making there.
Unidentified Analyst: Okay. Thank you very much. Thank you, Phil. Thank you, Peter. That’s all my questions.
Operator: Thank you. Please standby for our next question. Our next question comes from the line of Jiaqi Zhang with CICC. Your line is open.
Jiaqi Zhang: Hi, my name is Jiaqi Zhang from CICC Auto. So, I have three questions for this quarter. And the first one is regarding to the Geely Group. We have seen Geely Group has performed a very strong quarter. And also for the October, Geely has delivered the single most number of deliveries in a single quarter. And my question is regarding, what is the percentage of revenue actually currently contributed by Geely? And what is the ECARX's expectation for the percentage of revenue contributed by Geely in the year 2025 and maybe the years coming?
Phil Zhou: Sure. Thank you, Jiaqi. This is Phil. So regarding the business mix from Geely and Geely ecosystem and non-Geely business, so in 2024, the expectation is still 90% of our business still came from Geely and Geely ecosystem, including Geely affiliation like Volvo, Polestar, smart and Lotus. And yes, we still have lots of opportunities to further improve our non-Geely business mix. And in 2025, we foresee that the mix will keep improving, including new business from FAW. And we also foresee that more business from our international OEMs as well, which is also a highlight of our non-Geely business expansion, especially from a global OEM perspective. And by moving into 2025 and 2026, our goal will not change. We will keep focusing on our non-Geely business expansion. So, our goal is by end of 2026 and 2027, nearly 40% of our business will be from non-Geely.
Jiaqi Zhang: Thank you so much. Then just one quick follow-up. So, could you give us more color on the projects dealing with FAW? Because previously, you mentioned that we are going to expand into a wider spectrum of models. So, how is the progress on this? Thank you.
Phil Zhou: Yes. Sure. I can address the question and maybe Peter can chime in additional information. So, everything is on track, Jiaqi. We are delivering two flagship vehicle programs from FAW Hongqi project, and the contract has been signed – had been signed and the team is working diligently to make a traction and that we are on track to deliver our program. And the SOP is expected by end of the quarter – early year and Q1 of next year. And yes – and we foresee more FAW Hongqi vehicle programs coming, which also can significantly contribute to non-Geely business to our portfolio.
Ziyu Shen: Well, so this is Ziyu speaking. So, I would like to add more information here about Hongqi FAW program. So right now, we have two models under development right now, and we will make then SOP at the end of this year and beginning of next year. And actually, not only the full vehicle model, but also the platform because that will be very similar to what we are deploying in Geely already, that Antora plus Flyme Auto platform. So, that will be a very unique computation platform for all FAW Hongqi future vehicle models. Yes. So that's I would like to add here.
Jiaqi Zhang: Right. Thank you so much. That's very clear. My second question is regarding to the progress in ADAS. So, we have seen from the news that the AD1000 chip has picked off. So, a big congratulation on that. So from the management perspective, how can we evaluate the breakeven point for the chip, like how many deliveries that we can lead to breakeven? And is there any new contractual design wins that can be shared? Or is there any technology breakthrough regarding the chip that can be shared? Thank you.
Ziyu Shen: Okay. Well, so, AD1000, that's very successfully, we tape out the TSMC. And also, I would like to share more information to you because right now, all performance record already achieved regarding the design point of view. And from investment point of view from ECARX, we will start computing system R&D with this SoC. But for SoC investment, 100% in SiEngine, which is a separate company from ECARX. We are a shareholder, but a separate company. So that means ECARX will invest AD1000 computing platform next two years and three years to accelerate our ADAS portfolio. Yes. So that's our plan. And this one is – this SoC is very competitive, the 7-nanometer and with 512 TOPS AI capacity. And also, as you know, we already had 7-nanometer experience, already shipped SE1000 over 0.5 million in the market. So, that's why we're quite confident AD1000 will be faster and quicker to go to the market in production soon.
Jiaqi Zhang: Thank you so much. That's very promising. Just one quick follow-up. So, are we going to develop the algorithm software by ECARX ourselves? Or are we going to collaborate with external partners?
Ziyu Shen: Yes. Because AD1000 platform will be the open platform. Of course, we will finish our platform and integration and engineering. But of course, that open platform can support some customer like OEM in-house software or also we can support a third-party software on top. Very similar position like NVIDIA (NASDAQ:NVDA) platform in the market.
Jiaqi Zhang: That's very clear. And my last question is regarding to the – so what are the costs and expenses actually associated with developing new platforms because we see there are quite a number of new platforms that is currently under development and the research – R&D expense is actually going up. So, I'm quite curious like what are the costs and expenses associated with developing a new platform? And what's the point of breakeven regarding to each of these platforms? Thank you.
Ziyu Shen: Yes. I think you're asking a very good question here. So, I think most important for the company that every year, we are having 30% growth of revenue. That's very important. Also, we are keeping more than 20% gross margin for three years. So, that's why we are expanding – we are spending R&D investment actually year-by-year. We can keep the same percentage, but we can get more total amounts because of our revenue growth. So that's the logic. So, that's why we are doing very carefully like 10% R&D investment. Maybe future we'll drop to like 9% or 8%, but the total amount will be much bigger because our revenue is growing faster. And SG&A, we will be going to be like 7% or maybe below 7%, this kind of thing because we are trying to breakeven as fast as – as early as possible. So, that's why we want to balance this kind of percentage for R&D and SG&A. Does that make sense?
Jiaqi Zhang: Right. Thank you. Just one very quick follow-up. Currently, we have Qualcomm chip, SiEngine chip and AMD chip. So, which one of these actually contribute the most gross margin and probably why? Thank you.
Ziyu Shen: I think from a revenue perspective – so because this will – and gross margin perspective, that will be the very different segment. So, SiEngine chip will be entry plan and very strong cost competitor for China market and for worldwide market as well. I think for your information, we have one global OEM opportunity building that we are using SiEngine right now. That's quite advantage for us because cost competitor comparing the global chipset. But for Qualcomm and AMD, NVIDIA for future, that's for global roadmap and for high-end segment. Yes, probably like gross margin are bigger like NVIDIA and AMD, even Qualcomm, but for gross margin percentage should be similar.
Jiaqi Zhang: Right, totally honest. Thank you so much for answering my questions. Thank you. That's the end of my question. Thank you.
Operator: Thank you. Please standby for our next question. Our next question comes from the line of Derek Soderberg with Cantor Fitzgerald. Your line is open.
Derek Soderberg: Hey, guys. Thanks for taking the questions. So Phil, you guys talked about new wins. I guess, on the hardware gross margins, just specifically referring to new wins here, these are with existing customers. And I'm curious, are hardware gross margins improving with existing customers as you guys are sort of becoming more integrated into their vehicle platforms? Again, I'm specifically asking on the hardware gross margins.
Phil Zhou: Yes. Thank you, Derek. Again, yes, hardware gross margin, we did see the challenges. And this is all about the competition, right, because in the China market, the competition is fierce. At the same time, as I mentioned, we are expanding our footprint into the globe. We want to serve the top customers in global OEMs. So that's why we can balance the margin, especially the hardware margin performance from different customer base, different customer segment. But in China, the competition will be always there. And we also chose to – again, we also want to choose the game to play, to win as more as the volume as much as possible, which is also a foundation for us on the supply chain management. And yes, we also expand our footprint into other OEMs, FAW Hongqi, which can also help improve our hardware margin performance. So it's all about the portfolio play from a different customer base, from a different products like hardware, service and software.
Derek Soderberg: Got it. Got it. And then on the software side, pretty good margin there. You guys have made some good partnerships. What are the biggest growth opportunities looking ahead for that business? Can you talk about ways to maybe expand that over the medium term? Thanks.
Phil Zhou: Yes. So look, right now, the core software business in China is all about, like, operating system Flyme Auto and ECARX in-house developed software product. And we basically, along with the customers' demand, we also promote those software products aggressively. And for the last generation product, they are end of life. And that's why there's a transition. As you can see that from the software revenue year-over-year perspective, there's a slight decline over there. But in the longer term, we foresee that our software from Flyme Auto and Cloudpeak will climb up for sure and will replace the traditional old generation software and the growth will be there. And as you can see that from a quarter-on-quarter perspective, the software revenue from Flyme Auto and Cloudpeak is outstanding, right. So, that momentum will continue.
Derek Soderberg: Got it. Really appreciate it. Thanks.
Operator: Thank you. [Operator Instructions] I'm showing no further questions in the queue. I would now like to turn the call back over to Phil for closing remarks.
Phil Zhou: Okay. Thank you. Thank you all for attending today's earnings call. So, we are on right track to deliver our commitment to the customers. The growth momentum will definitely continue through the solid execution on pipeline conversion and new business acquisition, both from non-Geely and global expansion perspective. ECARX always takes a long-term focus strategy. We will keep investing into R&D, keep innovating and bringing the best solutions to the market and delighting our customers. We will take multi initiatives to optimize the cost structure, drive lean operations and improve our profitability. Our global business expansion will carry on, and we will keep diversifying our customer base. And we are on the right track to deliver our profitability improvement and achieve our breakeven point in the very short-term. And this concludes the remarks for today's earnings call from the management side.
Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.