EHang Holdings Limited (NASDAQ:EH) Q3 2021 Earnings Conference Call December 2, 2021 8:00 AM ET
Julia Qian - MD, Blueshirt Group Asia, IR
Huazhi Hu - Founder, Chairman & CEO
Richard Liu - CFO
Edward Xu - Chief Strategy Officer
Conference Call Participants
Tim Hsiao - Morgan Stanley
Good day, ladies and gentlemen. Thank you for standing by, and welcome to the EHang Third Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time.
Now I will turn the call over to Julia Qian, Managing Director of the Blueshirt Group Asia. Ms. Qian, please proceed.
Hello, everyone. Thank you all for joining us on today's conference call to discuss company's financial results for the third quarter of 2021. We released the result early today. The press release is available on the company's website as well as from Newswire services. On the call with me today are Mr. Huazhi Hu, Chief Executive Officer; Mr. Edward Xu, Chief Strategy Officer; and Mr. Richard Liu, Chief Financial Officer.
Before we continue, please note that today's discussion will contain forward-looking statements made on the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under capable law. Also, please note that unless otherwise stated, all the figures mentioned during this call are in RMB.
With that, let me now turn the call over to our CEO, Mr. Huazhi Hu. Mr. Hu will speak in Chinese, then our CSO, Edward Xu, will translate his remarks to English. Please go ahead, Mr. Hu.
Thank you, Mr. Hu. Hello, everyone. I'm Edward Xu, Chief Strategy Officer of EHang. First, let me translate our CEO's remarks into English.
Hello, everyone. I'm Huazhi Hu, the Founder, Chairman and CEO of EHang. Thank you all for joining our earnings call today. I would like to start by sharing with you our business progress for the third quarter of 2021. As is known to many of you that we are applying for air worthless certification for unmanned aircraft with the Civil Aviation and Administration of China, or CAAC. Considering that obtaining the air worthless certification is critical to the sales and operational services for our AAVs.
EHang's recent focus remains on accelerating the progress for obtaining Air worthless certification the EHang 216 instead of achieving a large number of sales. To give more details on where we are with airworthiness certification, CAAC has basically completed the formulation of air worthiness standards for unmanned aircraft systems. Meanwhile, we are continuing to work on the EHang 216 type certification and completing the certification program according to our established certification plan.
EHang and the CAAC have reached a consensus on the guiding principle that operational trial flights can gradually be carried out while advancing the certification progress. Moreover, we continue to implement our 100 air mobility routes initiative with 7 operational spots established. During this trial operation stage, we can use this opportunity to optimize our products, conduct more stress tests on all hardware and software systems, review upon all kinds of simulated failures and increase tests of the fusion controls for multiple flight control systems to make each and every flight smooth and safe. We will not tolerate any possibility of errors for any flights or operations and must maintain absolute safety. We are conducting test flights and trial operations based upon actual scenarios in cities such as Guangzhou, Hezhou, Shenzhen, Shanghai and Sanya, et cetera. This way, we are exploring the construction of air mobility systems that will also make Air Mobility a common transportation method for everyone.
At the same time, we are also creating an entire operational system, strictly designing product management, operation services and other systems that include a digital operational platform, hardware and software, such as cluster management for multi AAV formulation flights, EHang cloud, cybersecurity and air taxi booking APPs, et cetera. I believe that in the near future, this autonomous air taxi booking platform, APP, will be commercially available for everyone to use.
As for long-range products, our VT-30 is already capable of flying the key systems in all our products, including those for flight control, batteries, speed control, motors are developed, designed and produced independently by ourselves, which form our core competitiveness for future. Our goal for the VT-30 is to achieve well-developed and commercially available system and deployment based upon stability of the EHang 216. In recent months, we have been working on test flights to significantly improve the stability and the safety of every key component in the VT-30 to prepare for a flight demo in due course while ensuring it is a mature and qualified product.
We are now actively engaged in pioneering business without any precedent to follow. So patience is needed for success. I see that many investors have been supporting us and even some singers from overseas have written songs for us. We greatly appreciate the support, and we know that only achieving commercial operation, can we call it a true victory. We will keep moving forward towards this goal to meet everyone's expectations for EHang and realize all our company's potential value.
Above were Mr. Hu's remarks, following his remarks, I will elaborate on our operational results in the third quarter and our plan for future. We continue to make further progress in our EHang 216 operations and air worthless certification efforts. As guided in our previous conference calls, we continue to make efforts in executing our 100 air mobility routes initiative in third quarter of 2021, with a specific focus in the Guangdong, Hong Kong, Macau Greater Bay area.
During this quarter, our footprint further expanded to Shenzhen, a major city in the Greater Bay area. With the cooperation with our local partners, our EHang 216 AAVs are able to fly regularly in Shenzhen Yantian. More importantly, this is a world first example of operating both AAVs and helicopters in an integrated aerospace, a great breakthrough in the history of aviation. Notably, we have been establishing a sample regular air mobility operation model for errors at scene at the verticals of our partner, Heavy Eastern in the ocean front of Maran Hill area in Shenzhen since middle of November.
With the daily frequency of 6 operational trial flights currently, we look to expand the flight frequencies to meet increasing market demand. We estimate our full-scale operation in this spot will serve over 30,000 passengers per year. Furthermore, we have launched more operational spots in Guangzhou, Hezuo, [indiscernible], Sanya, et cetera, in collaboration with our partners, providing area tour and short distance travel experiences to passengers.
With the execution of our 100 air mobility route initiative, we have launched 7 operation spots. In compliance, with the relevant regulations, we conducted about 2,800 operational trial flights at these spots. The abundant operational experience accumulated and safety records built from these operational trial flights provide us with essential information for future commercial operations officially.
On the certification of our EHang 216 AAV, we have attached paramount emphasis on this project and have been promoting our cooperation with CAAC. After multi rounds of discussion with CAAC expert team, our certification work has entered into the final stages of verification. So far, the work progress appears to be satisfying. So we remain hopeful to obtain CAAC's approval on EHang 216 type certification in the next few months.
This year, EHang 216 has received the attention of government officials from all over the world, which include the President Macron from France, Premiere Li of China and the King of Spain, all who have visited the EHang's exhibition booth to express the recognition of our products and technologies. Our sales focus remains on the sale of our EHang's 216F AAVs, the fighting version. In promotion of our products, we have participated in several fire drills held by local governments in Guangzhou, Huzhou, Qingdao, Yunfu and Xingren, which have won wide recognition from the authorities. We will strengthen our promotion activities and sales channels further.
Looking forward, we will attempt to accelerate the type certification work for EHang 216 according to our established certification plan. We will also continue to implement our 100 Air Mobility route initiative, by adding more operations spots and frequencies to gradually build our UAM network in the Guangdong, Hong Kong, Macau Greater Bay area.
I will now turn the call over to our CFO, Mr. Richard Liu, for financial results. Richard, please go ahead. Thank you.
Thank you, Edward, and hello, everyone. Before I go into details, please note that all numbers presented are in RMB and are for the third quarter of 2021, unless stated otherwise, all percentage changes on a quarter-over-quarter basis, unless otherwise specified. Detailed analysis are contained in our earnings press release, which is available on our IR website. I will now highlight some of the key points here.
We have been strategically transitioning from a product sales-centric model into an operating platform oriented model since early this year. This shift is a gradual process and important for the long-term growth of the company. Total revenues were RMB 13 million in Q3, an increase of 6.6% quarter-over-quarter. The EHang 216 series of AAV deliveries in Q3 were eight units, including two units of EHang 216F the firefighting model, an increase of five units from Q2.
Gross margin in Q3 was 61.8%, though it was 6.2 percentage points lower than Q2 due to the changes in revenue mix with a higher margin command control system delivered in Q2. Our gross margin continued to be maintained at a relatively level, which reflects the unique inherent competitive value in our business. Adjusted operating expenses, which are operating expenses, excluding share-based compensation expenses, increased by RMB 1.9 million to RMB 61.8 million in Q3 from RMB 59.9 million in Q2.
The increase in Q3 was mainly due to the continuously increasing R&D expenditures in developing and upgrading AAV models, including the long-range VT-30 and other products in pipeline, and the expansion of the R&D team to enhance the R&D capabilities of the company. As a result, our adjusted operating loss in Q3 was RMB48.9 million, a slight decrease as compared to RMB49.4 million in Q2. Adjusted net loss in Q3 was RMB47.8 million as compared to RMB49.1 million in Q2.
In respect of the balance sheet and cash flow, we ended Q3 with RMB357 million of cash, cash equivalents and short-term investments compared with RMB189.4 million as of December 31, 2020. We will continue to run a healthy operation and manage the cash burns in the development process.
Now let's turn to the business outlook. We have adjusted the annual revenue forecast for 2021 to be between RMB50 million and RMB60 million, mainly due to the following reasons. First, the company has been strategically transitioning from a product sales-centric model into a more operating platform-oriented model. The ramp-up of operational revenues is subject to the ongoing certification processes of EHang 216 AAV. And secondly, the potential orders of EHang 216F are expected to take longer sales cycle due to the procurement procedures of relevant government entities, which are typical customers for the product.
Further, on November 29, we announced the appointment of PwC succeeding EY as our independent registered public accounting firm in connection with the audit of our consolidated financial statements for the fiscal year of 2021. The change was made after careful and thorough evaluation process and has been approved by the company's Audit Committee and the Board of Directors. PwC has abundant experience and knowledge in clean mobility technology sectors, such as electric vehicles, mobility as a service, and in particular, the global eVito and urban oil mobility industries. We believe that PwC's appointment is helpful to our next phase of growth under our long-term UM platform operator strategy.
Now it's also a good timing for the change that there will be adequate time for a smooth transition for our 2021 annual audit. As always, we are committed to maintaining highest standards of corporate governance, and timely disclosures in compliance with the applicable rules and regulations of the SEC and NASDAQ.
That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.
[Operator Instructions] Your first question comes from the line of Tim Hsiao from Morgan Stanley. Please ask your question.
Hi, Management team. Thanks for taking my questions. I have two questions. The first one is about the competitive landscape. How do we see the recent changes of the competitive landscape following other peers or veto companies going public via back? And in the meanwhile, in China, we saw some new players trying to tap into these markets, such as expand. So could you briefly comment on the -- your view on the potential competition?
And the second question is about the strategic partnership, I think we made some announcements regarding our partnership with Greenland and Shenzhen East General Aviation. So looking forward in the next 6, 9 months, if there is any potential partnership that we can make a more substantial progress and could help us to accelerate our commercial rollout? Thank you.
Okay. Thank you, Tim. This is Edward. I'll take your question. So first of all, about these emerging players on the market, both domestically and overseas, we think that this is not a surprise. This is within our expectation. It definitely shows that more and more companies and the institutions see the UAM market as a very attractive industry to enter. And especially, we noticed that a lot of these auto manufacturers making these flying cars, which is similar to this AAV model. But we see that many of these so-called new products are still in early prototype stage. And we are proud that we are still leading the curve, and we are definitely the leader. And so there is nothing to worry about the competition, but we definitely -- we acknowledge the potential competitors. And we believe that the market is big enough to accommodate the existence of more companies.
And if you look at the auto industry, there are so many different new energy car makers, but still, it is very attractive. And so far for this mobility market, it is very big, and it is at a very early stage. And of course, we see the emerging players on this market. And actually, we work on this trend, and there is nothing to be seriously worry about. And we will focus on our strategy. First is to implement -- to accelerate our Airworthiness certification. We believe that this is a very -- it's quite a long journey. And for us, we have already made efforts in the past few years. And we believe that this is also a big challenge for the newcomers.
And the second, we will implement our 100 UM air mobility route initiative. So far, we have achieved very good progress. So that comes to your second question, right? So I'm happy that you noticed that we have already achieved a strategic partnership with several players, one in Shenzhen, which is heading Eastern, which is a conventional helicopter operating company. But this helicopter company definitely they noticed that the future is for autonomous aviation. And so -- and especially from the cost perspective, we noticed that our AUV can definitely save the cost for them because this is a fully autonomous, and it is driven by electric power.
And so we took this opportunity to introduce our AAV service and launch a lot of trial flights in Shenzhen and we believe that Shenzhen is very important in the Greater Bay area in Guangdong. And so this is very important. And with this partnership, we are able to gradually add more frequency and add more operational sites in Shenzhen.
And the second, our partnership with Greenland. Greenland, Hong Kong is a listed company -- is a property company listed in Hong Kong. And this Greenland developed quite a large real estate project in [indiscernible]. And so we were able to introduce our AAV trial flights in their project, which received a very good recognition from both the developer and also their customers. Because they use our AAV service as attraction for their customers, either to visit their project or even buy their apartments in that area. So this is a very good application.
So going forward, we are going to ramp up with more operation projects especially the one which is worth loading is in Zhuhai, right? So we are working with a partner in Zhuhai. And recently, we did test the flight in the opera house in Zhuhai, very, very beautiful scenery and a very good application because this opera house is located on an island. And so this service can be both air tour and also the transportation.
And moreover, we are further expanding our services in Hezuo and even in overseas, just now you noticed that we also launched a flight in Indonesia. So Indonesia is a country of many, many islands, so which is ideal for the application of AAVs. And moreover, we had this partnership with Spanish National Police, et cetera, and further expand our network in Europe.
So we believe that with the progress, with our Airworthiness certification going on, we should be able to expand our trial flights or even more regular commercial flights in those areas in the future. So now the period is very important for us because we are able to accumulate abundant data safety records and also the experiences and also building our team to further commercialize our operation in the future. Okay. So please stay tuned for more news in the future. Thank you.
Got it. Thanks for the detailed sharing Edward. Thank you very much.
Your next question comes from [indiscernible] from Tianfeng Securities. Please ask your question.
Hello Rich and Edward. Thanks for taking the questions. And I have two questions as well. First, I read in Q3 earnings that you have established 7 operations spots and conducted about 2,800 operational trial flights at these operational spots on the relevant compliance framework. Could you shed more light on this particular compliance framework? And the second question is could you elaborate on the sample model of the regular air mobility operation in Shenzhen. What's our plan regarding expand operations spots for next year and for achieving the 100 air mobility route plan? Thank you.
This is Richard. I will take your first question. So basically, there are two main aspects forming the compliance framework for this operational trial flights in China. First, on the product and operation front, as we mentioned in this earnings release, we and the CAAC have reached a consensus on a guiding principle that operational trial flights can gradually be carried out while advancing the certification process and it is understood that more operational experience and the records are instrumental in facilitating and accelerating the certification process.
Secondly, in respect of the use of aerospace in China, approvals from various in-charge department of China Air Force, which is responsible for regulating the air space in China, have been pertained for every -- for all of the operational trial flights.
Okay. This is Edward. So I'm answering your second question regarding the air mobility operation in Shenzhen and the plan to expand the sports next year, right? So first of all, we believe that our operation model in Shenzhen is very representative because this is definitely a cooperation between us, which is AAV or UAM company, with a conventional helicopter company. And so this helicopter company is very professional because they have trained and that they have very -- they obtained these certain standards and certification from CAAC. So which means that they can definitely help to improve the overall operating standards by adopting some of the existing CAAC standards.
So -- and this is also the first operation of integrated aerospace of both AAVs and helicopters, which is the first in the history of aviation. So this is of very great significance. And so the corporation is so far is very smooth and successful. And so we had about the six flights per day on frequency. And gradually, we are going to launch more, right? And so this can help to gain -- we can gain more experiences from this operation, and we should be able to replicate such a model to more operations spots in the future.
So in future, we look to further intensify our operation frequencies, especially in the Hong Kong, Macau Guangdong Greater Bay area because this is a very highly important area in China and also in the world and with very strong market potential for AAVs. And gradually, we should be launched the more longer distance service after the launch of our VT-30 in the future, so which will help to complete our network for our AAV services.
And so far, as we mentioned in our guidance, we are about to launch our service in Zhuhai. So which is the other side of the per river delta or this Greater Bay area, so which is another important city in this area. So in the future, we look to see a very big triangle in Guangzhou, in Shenzhen and in Zhuhai, right? And moreover, we are going to expand our operations sites in Zhongshan, et cetera. So in the future, you can see more and more AAVs can be flying in this area and so that we definitely, we are going to build the world's first UAM field in the world, in China. So I hope you are going to see more of our progress in the future. Thank you.
Thank you. Thank you Rich and Edward, thanks for the detailed elaboration.
Seeing no more questions in the queue, let me turn the call back to Mr. Liu for closing remarks.
Okay. Thank you, operator, and thank you all for participating on today's call and for all your support. We appreciate your interest and look forward to reporting to you again next quarter on our further progress.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.