ECARX Holdings Inc. Q4 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the ECARX Fourth Quarter and Full Year 2023 Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Rene Du. Please go ahead.

Thank you, operator. Good morning and welcome to ECARX fourth quarter and full year 2023 earnings conference call. With me today for 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. Please note today’s call is being recorded. 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 measure to GAAP measure 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.

Thank you, Rene. Hello, everyone and thank you for participating in our fourth quarter and full year 2023 earnings call. 2023 was a pivotal year for China’s automotive industry. China exported 4.9 million vehicles in 2023, supporting Japan to become the world’s top auto exporter. Global auto sales topped at 74 million as EVs continue to gain significant market share with their global penetration hitting another record high of 23% in December. With demand for EVs expanding globally, the software capabilities they offer will grow in tandem. According to PCG, software platforms for vehicles are forecast to grow at a 12% compound annual growth rate (CAGR) by 2030 with a market value of $13 billion, creating a normal market opportunity that we are uniquely positioned to benefit from, with our innovative product portfolio. There are now over 6 million vehicles on the road that incorporate our technology across 25 brands offered by our 15 automotive OEM customers. ECARX equipped vehicles on the road increased 8% from last quarter and 30% from the same period last year. We are starting out the year strongly with a solid pipeline that includes the expected launch of 49 vehicle models over the next 18 months, which we expect to translate into an additional 1 million vehicles on the road that incorporate our technology. This growth is reflected in our financial results where our revenue during the fourth quarter hit a record high of RMB1.87 billion, up 22% year-over-year, while for the year 2023, revenue hit RMB4.67 billion, up 31% year-over-year. The sector continues to present enormous opportunities for growth despite increased employee pressure and competition intensity. While we continue to invest in our future long-term growth, we are simultaneously working to improve operating intensity across our supply chain to build a sustainable path towards profitability as our business grows to scale. Our net loss for the year narrowed significantly to RMB1 billion compared to RMB1.6 billion in 2022. Our customer base continues to grow as automotive OEMs increasingly recognize the significant value proposition that our solutions offer them. We added one new mass-market Japanese brand in December and the motive for our EV project wins through our strategic collaboration with one of China’s top automotive OEMs also grew. This is all in addition to winning three new projects within the Geely Ecosystems during the quarter. Our international portfolio and brand awareness continues to strengthen alongside our expanding customer base. Last month, we showcased our full product line and met with a number of well-known global automotive OEMs at CES in Las Vegas. Quarter four also saw the launch of the Polestar 4 and Volvo Car EX30, which showcase the Polestar OS, the customized OS based on Flyme Auto and ECARX Cloudpeak software stack. Both vehicles are equipped with Google Automotive Service, which highlights our ability to deploy these services at scale and support both Chinese and global automotive OEMs with the launch of their vehicles internationally. Our unique partnership ecosystem continues to be a key driver of our success. During quarter four, we embarked on our new joint venture with smart to collaborate on intelligent automotive products and strengthen our existing partnership with Black Sesame to further develop our intelligent driving ecosystem. This is in addition to our partnership with Mobileye which was launched on April 4 with the introduction of the Polestar 4. I am extremely pleased with the progress we have made throughout the year with our profile growing internationally, strong partnerships, and cutting-edge solutions. We couldn’t be in a better position to benefit from the enormous growth opportunities ahead. I will now pass the call over to Peter, who will go through the operating results for the quarter in more detail.

Thank you, Ziyu, and good day, everyone. We gained significant momentum in diversifying our business and partners during the quarter. As Ziyu mentioned, we added a mass-market Japanese brand to our customer base and recently picked up multiple project wins for EV models through our collaboration with one of China’s top automotive OEM groups, with the start of production expected by the end of 2024 or early 2025. To sustain this momentum and boost the visibility of our solutions, we had eight tech shows across five cities in China in Q4, which generated significant engagement with over 2,000 attendees. We also won three new projects from existing customers within the Geely Group and Ecosystem brands during Q4. Our recent progress underscores the significant market opportunity for our innovative product portfolio and the strength of our technology. I’ll start with the ECARX Antora series, which embodies the fundamental requirements needed for a truly intelligent vehicle. The Antora series integrates the world’s leading 7-nanometer high-performance automotive grade SoC, SE1000, which features unique hardware architecture, including built-in function and information safety islands that don’t require virtualization, and a high-performance programmable MPU with 8 TOPS AI computing power and multiple acceleration engines. Building on the Q3 debut of the Lincoln 208, the first vehicle to launch with our full stack solution, Q4 saw the mass production of the Antora 1000 computing platform to be integrated into the updated version of the Lincoln 206. The Antora series has become a benchmark platform for a number of car models in our pipeline. The Makalu platform is one of the most powerful intelligent cockpits available on the market with its ultra high-performance digital cockpit computing platform, unparalleled 3D graphics, security, and entertainment features. The Makalu platform is expected to begin production in the first half of this year on two car models, which we are very excited about. ECARX Skyland Pro, our first-generation autonomous driving control unit with L2 plus capabilities, integrated safe parking and driving solutions. Highway NoA and remote parking assist was deployed on the Lincoln 208 last September. With computing power of 118 TOPS and a high safety MCU, ECARX Skyland Pro is able to support more advanced software such as bird’s-eye view and LiDAR perception. Its integrated ADAS solutions combined with our cockpit solutions strengthen the loyalty of our automotive OEM customers while providing end users a seamless in-car experience. One of the key growth drivers for ECARX has been our focus on innovation. We continue to invest in research and development to ensure a steady pipeline of cutting-edge technologies and features for our products. This keeps us ahead of the curve. As of December 31, 2023, we had 563 registered patents and 557 pending patent applications globally. We have a clear product roadmap that spans from entry-level solutions to premium level with plans to integrate next-generation supercomputing platforms starting later this year and into 2025, a key driver for our ambitious market share objectives. Our profile continues to grow globally as more vehicles with our technology hit the road. The Polestar 4 launch was a significant milestone during this quarter. It is the first model to feature Polestar OS and an operating system based on Flyme Auto, highlighting our ability to build custom operating systems with iconic brand designs for global automakers. The Polestar 4 also marked the debut of the integrated driver assist system we developed in partnership with Mobileye. This mass produced one box solution is a strong testament to our ability to put advanced technologies from our partner ecosystem onto the road. The Volvo EX30 was launched across 33 markets internationally during the quarter and comes equipped with ECARX Cloudpeak cross-domain software stack and Google Automotive Services. ECARX Cloudpeak manages the seamless integration of all the information an EX30 driver needs, including navigation instructions from Google Maps and hands-free help from Google Assistant and apps from Google Play. Of particular note, it also integrates wireless CarPlay for the first time in Volvo, in addition to wireless Android Auto. Cloudpeak is also networked into the vehicle’s comprehensive suite of ADAS features, including collision avoidance and mitigation, traffic genesis, lane change assist, pilot assist, door opening alerts, and 360 camera views. Cloudpeak is a fully flexible modular platform created to provide global automotive OEMs with a customized and intelligent platform for state-of-the-art infotainment and advanced driver assist systems in the market today. This is a key product line for us and leverages our unique ability to develop full SaaS solutions in-house in close collaboration with other suppliers, technology companies, and automotive OEMs. The successful launch of the Volvo EX30 will significantly boost our brand recognition in the industry. We also had a great presence at this year’s CES in Las Vegas where we showcased our latest cutting-edge technology offerings and sought to make new connections with global automotive OEMs. It was a highly productive week as we were able to meet over 50 customers and partners on the sidelines of the events. Lastly, I’ll share a couple of key updates on our partnership ecosystem. In December, we formed a new joint venture with smart to locally develop intelligent experiences within smart vehicles. We previously worked with smart to co-develop a customized Smart OS operating system for two of their earlier models and are excited about what we can accomplish as we deepen our collaboration. We also strengthened our partnership with Black Sesame, which will pave the way for us to bring a powerful new ADAS solution into the market. We have lots of synergies with Black Sesame and are incorporating their cutting-edge intelligent driver technologies into our products, and this will enable us to offer a compelling full stack solution to automotive OEMs. In conclusion, our growing commercial momentum, leading technology, and rich partner ecosystem ideally position us to seize the tremendous opportunities created by the growth of the EV and software-defined vehicles in China and globally. While we are pleased with the progress we’ve made in 2023, we recognize that we are still in the early stages of our journey with a lot of work ahead of us to meet our ambitious market share goals. With confidence at all-time highs, we look forward to executing our plan and our vision for the future. I will now turn the call over to Phil, who will go through our financial results.

Thank you, Peter, and hello, everyone. We closed out the year with strong momentum as our business continues to grow and our financials improve. Total revenue for the quarter was RMB1.87 billion, a significant increase of 22% year-over-year. Computing hardware goods revenue was RMB1.31 billion, up 26% year-over-year, driven by volume increases in digital cockpit sales for new vehicle programs. Software license revenue came in at RMB93 million, a decrease of 62% year-over-year and 32% sequentially, primarily due to the timing of booking intellectual property license revenues and the decrease in volume of software sales. Service revenue maintained strong growth momentum, surging 95% year-over-year to RMB463 million. This remarkable increase was primarily due to the launch of Volvo EX30 and Polestar 4 during the quarter. Gross profit was RMB432 million, an increase of 1% year-over-year, which translates into a gross margin of 23.1%. Total cost of revenue was up 31% year-over-year, primarily driven by an increase in sales volume of digital cockpits and service revenue. As discussed on the last earnings call, we expected margin pressure on our hardware products to continue over the medium term, driven by enhanced industry-wide pricing competition, customer electrical engineering architecture evolution and transition, acquisitions, and strategic progress we have in the pipeline. Our focus going forward will remain on enhancing the adaptability of our business and improving operating efficiency. We will do this by driving products and solutions around growth, strategically cutting costs, and making targeted new investments. This will allow us to strike a balance between top line growth and profitability as well as mitigate any potential impact on our margins. Operating expense during the quarter increased 28% sequentially and decreased 37% year-over-year. The sequential increase was primarily due to the impact of seasonality as well as continued investments in our core product roadmap and international R&D expansion. The year-over-year decrease was mostly due to lower share-based compensation expenses. Adjusted EBITDA loss was RMB232 million, up from a loss of RMB222 million during the same period last year, primarily attributable to a change in fair value of equity investment. Loss per share was minus RMB0.87 compared to minus RMB3.26 in the same period last year. Having finished the year on a solid footing, 2023 full year revenue came in at RMB4.67 billion, up 31% year-over-year, with gross profit of RMB1.27 billion, an increase of 38% year-over-year, giving a gross margin of 27.2%. Throughout the year, we further optimized and improved operating efficiency by prioritizing investments in our global expansion and technology development. Full year operating expenses decreased 17% year-over-year with adjusted EBITDA loss of RMB710 million, an improvement of RMB37 million from last year. Moving on to our balance sheet. As of December 31, 2023, we had RMB588 million of cash and restricted cash, which gives us sufficient resources to invest in our future and accelerate growth. Going forward, we will further optimize our operating expenses with a particular focus on product, sales, and supply chain and manufacturing strategies. On the product side, we will continue to invest in R&D to drive mid to long-term growth opportunities. On the sales side, we will focus on engaging with new automotive OEM partners, both in China and internationally. Finally, we will further optimize the supply chain management and improve the cost structure of products and components. This will also support the strategic transition of our manufacturing strategy from ODM to an OEM model. To summarize all of this, we will focus on a balanced portfolio and a wider area of higher-margin premium products. Lastly, in order to proactively mitigate the impact of an increasingly challenging geopolitical environment, we are strategically expanding our global presence for both R&D and customer acquisition. We want to build two closed-loop systems, one for China and the other for global markets. Each closed-loop system will span the entire process from R&D to delivery. To do so, we have had to make acquisitions, strategic investments, and supply chain upgrades that will take time to mature, but are critical to ensuring the sustainability of our business model. The acquisition of GCAR and investments in ADAS over the past few quarters reflect the careful and strategic nature of this approach. We will ensure our business will be in a healthier and more sustainable position over the long term. In conclusion, we are pleased with the strong finish to 2023 and look forward to the enormous opportunities ahead of us.

Thank you. And the first question comes from Derek Soderberg from Cantor Fitzgerald. Your line is open. Please ask your question.

Yes. Good evening, everyone. Congrats on reaching the 6 million vehicle mark. So you talked a bit about operational efficiencies. How will that impact gross margins for 2024? Can you talk about your expectations on how gross margins will trend throughout the year? And when do you guys think you’ll hit EBITDA profitability?

Hey, Derek, thank you. This is Phil. I’m happy to address your questions. So we had communicated earlier that we foresee pricing competition in the entire industry. Many Tier 1 players are experiencing profit decreases due to rapid pricing erosion, while the cost optimization is lagging behind the pricing erosion. So we’re still facing challenges regarding product profitability. We will encounter headwinds in the upcoming quarters as we see continued high competition and pricing pressure from our customers. We also want to pursue new business acquisitions and development in the pipeline. To mitigate the impact, we will continue to provide our diversified and full-stack solutions. We will implement proactive pricing strategies and improve our cost structure through these initiatives. At the same time, our consistent strategy is to embrace the software-defined EV evolution in a big way. As a result, the share of wallet in the bond structure keeps increasing and the content of vehicles continues to improve strongly. We are also expanding our coverage to OEM brands with footprints in both China and overseas markets. Many customer names like Smart, Lotus, Volvo, and Polestar. The Volvo EX30 is a typical example as we support Volvo to launch a flagship vehicle in 33 global markets with our unique Cloudpeak cross-domain software, which is highly integrated into the advanced ADAS features. We are one of the few players in the industry with the ability to deploy Google Automotive Services globally. Our dedicated focus enables us to diversify our business portfolios, and we are able to drive sustainable profit growth. In other words, Derek, we will maintain our focus on the product software service portfolio selling and drive ECARX service, products, and solutions from growth, cost reduction, supply chain efficiency, and fulfillment. We will stay disciplined on new investments and balance between top-line growth and profitability to mitigate margin impact.

Got it. That’s helpful. And just on a little bit of the pricing pressure, what’s your average content per vehicle today? And how do you see that trending through 2024 as you guys continue to innovate, adding new feature sets? You guys continue to sign new partnerships, and it seems like from an R&D standpoint, you continue to add more features. Can you just talk about how you expect that to trend? And additionally, can you talk a bit about the software element within the content per vehicle? And how we should think about how you’re allocating the content on the software side per vehicle? What’s the revenue per vehicle on the software side? Or maybe talk about some of the attach rates on software? Anything there would be helpful. Thanks.

Yes. Sure, Derek. So I will talk about content per vehicle numbers, and Peter, maybe you can address the question regarding how to allocate the software and how to increase our profitability through the content per vehicle improvement. So Derek, we have a wide portfolio of our product solutions, and the content per vehicle range from RMB1,000 to RMB15,000 per car. We have solutions covering low-end to high-end to meet the different customer demands on their vehicle programs. For instance, with Lincoln 08, we provide our full-stack solution, and we’ve increased our content per vehicle to around RMB9,000 to RMB10,000. For the Volvo EX30, we also provide our unique cross-domain Cloudpeak solution that is newly developed for the market. The software will improve our profitability as well. So these are the numbers I can share with you. And Peter, maybe you can add more information.

Yes, sure. Hope you are doing well. Nice talking to you today. So just some comments on the product portfolio and the impact of software. This tends to be a very OEM-specific topic. With some OEMs, we provide a base platform with base-level capabilities and then work with that OEM to build the software stack on top of it. For others – Phil mentioned a few examples, Lincoln Co and Volvo where we’re doing the complete software stack. I think it’s very dependent on the OEM strategy and how we engage with them. But we are very confident from ECARX's perspective that with our capabilities, we bring a unique value proposition that can work closely with the OEMs and align with their models to drive value in all markets.

Appreciate the detail. Thanks, guys.

Thank you. Now we are going to take our next question. And the next question comes from the line of an unidentified analyst from Jefferies. Your line is open. Please ask your question.

Hi, thanks for taking my questions. My first question is regarding ECARX cooperation with Mobileye. It was mentioned that we will have a collaboration with Mobileye on the IQ 6 platform. And I’m just curious if there are more details to be provided for the IQ 6 project at the moment?

Yes. Thank you. This is Peter. I’ll address that question. We announced we were collaborating with Mobileye on a number of different platforms. The first one will come out with Polestar in 2024, and then the more advanced Chauffeur system, we would expect to launch a few years later. We’re very excited about our collaboration with Mobileye. They have a great system and we’ve partnered with them in a unique way where we can bring our specific value propositions to the table as we integrate the systems into the vehicles. As we are able to help customize and adapt those solutions to OEMs’ needs and requirements, we’re pretty excited about what we can see on a go-forward basis from Mobileye across a number of different brands.

Thanks. That’s very helpful. And my second question is regarding the progress of overseas expansion. So what proportion of overseas revenue do we expect long-term? And do we have any breakdown by each market?

Yes, sure. As you know, we started our international expansion a few years ago. I think this year marks a significant event that we’re able to launch the Volvo EX30 with Google Automotive Services on top and bring that across more than 30 different markets around the world. So, this is a big milestone for ECARX to demonstrate that capability. As we continue to move forward, we’re having great engagements with several European OEMs. I hope we’ll make further announcements as we go throughout the year. Design cycles in this industry can be lengthy. It may take time before we see significant movement in financial numbers. However, the traction we’re getting as we engage with several large customers gives us optimism for the future.

Okay, understood. I have no more questions.

Thank you. The next question comes from an analyst at Soochow Securities Financial Holdings Limited. Your line is open. Please ask your question.

Thanks. Hello, everyone. Congratulations on the performance. My first question is, Antora has already applied IPC to the call. Therefore, I would like to know if there is any impact on our company? Is it a challenge or an opportunity?

Yes. Thank you for the question. I think if we look at the AI impact, we’ll see broad changes throughout the entire environment. The applications in the vehicle, speech enhancement capabilities can enhance the user experience significantly. We’ve got a number of projects in our pipeline that we anticipate sharing more details about throughout this quarter. We’ve got numerous programs deploying AI into our systems, both for user experience and back-end improvements to drive efficiency and effectiveness inside the software. Our internal development processes are also seeing significant opportunities to use AI to improve our capability to deliver excellent software in the vehicle rapidly. This capability can enhance our ability to deliver solutions quickly in the automotive market.

Thank you very much. And the next question is, I would like to know how we view the impact of exchange rate fluctuations on our company?

Okay, thank you for the question. We are monitoring the Chinese yuan (RMB) trend carefully, but we’ve decided not to engage in hedging, considering the costs could outweigh the benefits. Many multinational companies are also opting not to hedge RMB for their operations in China for the same reasons. Our revenue and operating expenses are primarily in RMB, while 70% of our costs are in foreign currency. To mitigate risks, we have implemented foreign exchange rate cost measures in procurement and sales contracts. We are also evolving ECARX outside of China, as I mentioned earlier. We will form closed-loop systems in overseas markets from R&D to customer delivery. As our overseas revenue mix increases, we will employ proactive treasury tactics, including currency hedging, to stabilize the foreign exchange impact.

That’s okay. Thank you very much. I have no more questions.

Thank you. The next question comes from Chang Xing from CICC. Your line is open. Please ask your question.

Thank you for taking my questions. Big congratulations to the team for a very strong revenue for the year 2023. So I have three questions. The first one is regarding the gross margin. For 2023, we saw a trend of evolution. We are also experiencing fierce competition in China, and the trend is definitely going to intensify for the year 2024. Could the team give us a forecast on the quarterly gross margin in 2024? What actions will you take to improve the profit margin, for example, to have more software content? That’s my first question, please. Thanks.

Yes. Thank you for the good question. Since the second half of 2023, we observed fierce pricing competition throughout the industry, and the value chain profits are compressed. Our goal is still to maintain a gross margin of around 20% through our product, service, and software portfolio selling, as well as the launch of premium products, while balancing revenue growth with profitability. As I mentioned earlier, ECARX has unique solutions, and we’ve launched a proactive pricing protection plan to drive aggressive cost-reduction initiatives through 2023, which we will continue in 2024 as well. We will continue to increase the average selling price of content per vehicle. The successful launch, like those of Lincoln 08 and Volvo EX30, demonstrates what our ecosystem can deliver to support our path to profitable growth. We aim to mitigate the impact of pricing competition on margin erosion with our diversified full-stack solutions, proactive pricing activities, and improvements in cost structure, which will drive margin stabilization in 2024.

Thank you. So my second question is regarding the project design win with the Japanese company. Congratulations on the win. Could you provide us with more insights into how you managed to secure this design with the Japanese OEM? Is this project going to be global or phase into the Chinese market? Thank you.

Yes, sure. Thank you for the question. We’ve put a lot of energy toward customer diversification, which is one of our top priorities. We aim to broaden our customer base, onboard new clients, and execute with excellence. We have made significant progress through the quarter, and today, as we ended the last year, we onboarded two new customers. These projects will initially start in the Chinese market, and we see opportunities to work closely with those customers to broaden that partnership and grow beyond China as well. We will continue to focus on this aspect as we advance through 2024, expecting similar announcements with new customers, both in China and the rest of the world.

Yes. Thank you. The engagement is definitely very important. My third question is regarding inspiration from the previous Mobileye questions. Could you give us a clearer indication of the boundary of collaborations? Are we going to develop on Mobileye’s domain controller or will they develop on GCAR’s domain controller, etc.?

Yes, sure. Our engagement with Mobileye is a tight collaboration, combining ECARX and Mobileye capabilities as we implement these systems. We bring the best of both organizations together. Mobileye brings fantastic technology in their SoCs, perception software stack, and sensor set for the vehicles. ECARX contributes overall system integration capability to that partnership, as well as supply chain capabilities. Additionally, we inject key software from our portfolio for functions like driving decisions and parking. We had a productive discussion with the Mobileye team at CES, and we will continue to explore opportunities to collaborate closely and bring great systems into vehicles.

Well, that’s very clear. Thank you so much.

Thank you.

Thank you. Now, we will take our next question. Please give us a moment. The next question comes from the line of Megan Jin from Macquarie. Your line is open. Please ask your question.

Thanks for taking my question. I have two questions. One is on our overseas business. I noticed that from this year in Europe and the U.S., the trend of the EV transition seems to start slow, with reports of delays in plans, and I am wondering how this would impact our growth outlook for the year? What is our competitive advantage versus established Tier 1 players like Bosch and Continental when we try to get orders from these OEMs? That’s my first question.

Yes. Thank you. That’s a great question. Looking at the market outlook, we continue to see significant opportunities for our technologies. The investments in this industry are substantial, often focused on EVs, but they’re not exclusive to them. The digital experience inside vehicles, autonomous driving, and software-enabled vehicles are receiving considerable investment. Many automakers are investing heavily in these technologies, and we see large and growing opportunities across our markets. Regarding ECARX capabilities, our full stack solution is a significant differentiator, allowing us to create customized solutions from silicon to cloud services. We operate with a broad set of customers, whether price-sensitive or premium brands, showcasing our exceptional capabilities in a wide market spectrum.

Thanks, and that was very clear. My second question is on the Chinese market. I also noticed the trend of adding more advanced features in cheaper models in China. How do we think about this trend and its impact on our business, especially in terms of competition as we move into the lower end of the product range?

I think we see the Chinese market as very dynamic. This market evolves quickly. Customers respond rapidly to advancing industry trends. ECARX has done a fantastic job executing in this market and has been highly successful in a competitive environment. We can bring new technologies into vehicles in less than 12 months, which is unique and combined with global quality certifications. Competition in China is tough, but ECARX's successful execution strategy gives confidence in managing the dynamic and challenging environment.

Got it. Thanks for taking my questions.

The next question comes from Michelle Liu from HSBC. Your line is open. Please ask your question.

Thanks, management, for taking my questions. I have two, following the previous questioners. The first is regarding the customer. Could you roughly map out the models equipped with our smart hardware this year in both domestic and global markets? What is the pipeline for the next few years?

Yes, for sure. In the current environment, we don’t get hyper-specific on upcoming launches. However, we had a great 2023, especially with the Volvo EX30 launch. We talked about the Polestar launch in China. We will scale it globally in 2024. We will also see additional broad launches this year. For instance, we have discussed two new customers whose vehicles should reach the market by the end of this year. We are also in talks with some European customers, which could lead to launches in 2025. Our rapid development execution will continue across global markets.

Got it. Thanks. The second question is regarding costs. We note that the competitive environment is fierce this year, and you've mentioned it previously. We also see customers prioritizing smart functions, including digital cockpits and autonomous driving, but they are less willing to pay for smart hardware or software. Last year, OEMs indicated they would cut 50% of their smart hardware in cars. How do we project our trajectory of cost reduction along with the overall smart hardware cost reduction in the coming years? Thanks.

Thank you. This is also a very good question. Since ECARX provides comprehensive solutions, including computing platforms and software, we are aggressively driving our cost down activities for hardware. Our scale enables effective price negotiations with suppliers. At the same time, we protect our software product costs, ensuring a healthier cost structure across hardware and software products. We invest heavily in next-generation computing solutions, which allows for price premiums when launching in the market. Our service revenue mix also supports profitability. As we deliver satisfactory services, we can achieve substantial profits from service revenue. Our software, services, and hardware portfolio will support balanced profitability in the coming year.

I would add that our operating expense management is effective. We have seen significant top-line revenue growth while maintaining stringent cost control across our operations in 2023. We aim to improve efficiency as the business continues to scale through 2024, linking all of these activities to stronger gross margins while investing in technology and engineering.

We strive for lean operations. Our operating expense saw a year-over-year decrease of 17%, all while redeploying our savings from SG&A to R&D and global expansion. This strategic approach is about capturing future growth opportunities effectively.

Got it. Thanks management. That’s very helpful.

Thank you. There are no further questions at this time. I would now like to hand the conference over to ECARX management team for any closing remarks.

Alright. First of all, thank you everyone for your time and questions today. At ECARX, we have continued to execute well in an increasingly competitive environment. We have done this for many years and continue to anticipate growth while making the right investments for driving profitability expansion. We are looking forward to a very exciting 2024 with many new activities, launches, and customers. Thank you again for your time.

Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.