Earnings Call Transcript
Hesai Group (HSAI)
Earnings Call Transcript - HSAI Q3 2023
Yuanting Shi, Investor Relations Director
Thank you, operator. Hello, everyone, and thank you for joining Hesai Group's Third Quarter 2023 Earnings Conference Call. Our earnings release is now available on our website at investor.hesaitech.com as well as via Newswire services. Today, you will hear from our CEO, Dr. David Li, who will start the call with an overview of our recent updates. Next, our Global CFO, Mr. Louis Hsieh, will address our financial results before we open the call for questions. We also invite participants to view the slide deck we have prepared for part of our discussion today. This deck is available on our IR website at investor.hesaitech.com in the Financial Filings, Quarterly Results section. Before we continue, I refer you to the safe harbor statement in our earnings press release, which applies to this call, as we will make forward-looking statements. Please also note that the company will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported on the GAAP in our earnings release and SEC filings. With that, I'm pleased to turn over the call to our CEO, Dr. David Li. David, please go ahead.
Yifan Li, CEO
Thank you, Yuanting, and thank you, everyone, for joining our call today. We're delighted to report that our third quarter financial performance surpassed our expectations. Our quarterly net revenues rose to reach another record high, and our total delivery doubled year-over-year. Both metrics outperformed our initial projections. We're also thrilled to announce that we successfully maintained a gross margin of over 30% in the third quarter despite the challenges posed by the transition and upgrade phases for both robotaxi and ADAS products. The transition of ADAS product is now fully wrapped up. This accomplishment was made possible through exceptional efforts as well as our robust manufacturing, engineering and supply chain optimization capabilities. As a result, we're not only in step with the dip in gross margin at the lower end of the V-shape trajectory we initially anticipated at the beginning of the year, but made a direct leap into a stable, long-term gross margin outlook. Upon careful comparison with our six U.S.-listed peers using publicly available information, we can confidently say that our performance metrics have excelled across the entire spectrum. This includes stellar achievements in revenue, scale, delivery, market share and gross margins. Remarkably, we have maintained a robust balance sheet throughout this process. Of particular significance is the fact that we have achieved positive operating cash flow for the third consecutive quarter, totaling CNY 121 million, USD 17 million, for the first nine months of 2023. This places us as the sole standout company among the peers to achieve this feat, demonstrating our unwavering commitment to operational efficiency amidst continuing growth. These financial milestones are a testament to our devoted team's hard work and underscore our steadfast dedication to achieving long-term sustainable growth and profitability. Let's delve into the third quarter business update, starting with notable ADAS advancements. We're making significant strides on the domestic front. In the third quarter, we achieved a global milestone by proudly announcing the first-of-its-kind series production design win for our long-range, ultrathin, in-cabin ET25 LiDAR with FAW Group, one of the top OEMs in China, for the next-generation EV models under their prestigious Hongqi brand defined by quality, luxury and safety. ET25's revolutionary in-cabin placement protects the LiDAR unit itself from dirt and debris, allowing OEMs to design car models with diminished aerodynamics resistance and sleek exterior designs. Fueled by our next-generation, vertically-integrated, high-performance module, ET25 has emerged as the in-cabin LiDAR forerunner in terms of light detection, achieving an impressive 250 meters at a 10% reflectivity rate. The success of this new design win with FAW Group signifies robust progress in the commercialization of this in-cabin product and marks a significant leap forward towards its mass production scheduled to materialize by the first half of 2025. Furthermore, we recently broadened our client portfolio and secured exclusive partnerships, including multiple new design wins with Great Wall Motor, one of the largest automakers in China; as well as Leapmotor and Neta, two leading EV automakers in the Chinese market. Their new EV models that will feature our flagship AT series LiDAR are set to debut starting in 2024 and 2025. It is noteworthy that among these recent design wins, several of them have prior engagements with our industry peers. Their choice to switch to our LiDAR product for certain existing or future models is a strong endorsement of the superior performance of our high-quality LiDAR products and our proven record of timely delivery. We're also excited to witness a rising trend where more OEMs are making the switch over to partner with us while none of our existing customers have made the move to a competitor. With these recent partnerships, we have secured design wins with 14 OEMs and Tier 1 suppliers, including the top five OEMs in China across over 50 vehicle models, a robust testament to our global market leadership. We eagerly look forward to contributing to the fulfillment of these automotive manufacturers' vision of creating more intelligent and safer vehicles. In international development, we're delighted to announce that we are currently deeply engaged in nine RFI and RFQ discussions with six leading global OEMs from North America and Europe. While none of these were slated for conclusion in the third quarter, we expect three RFQs to be finalized in Q4 per customers' projection, including one from a global OEM and two from global OEM joint ventures in China. It's worth noting that these vehicles are not exclusive to the Chinese market. Some of them are intended for global distribution. For two of these global OEMs, we have attained supplier qualification status following extensive audit procedures that include evaluation of the product quality, production line, supply chain, certification, financial stability and other essential aspects complemented by multiple rounds of site visits. We are enthusiastic about the potential partnerships that may emerge and we look forward to sharing more exciting news and developments in the near future. In addition, we have broadened our collaboration with the prominent European OEM mentioned in our last earnings call, including additional strategic development programs focused on research and development of integrating our cutting-edge LiDAR technology into a multi-sensor package, targeting car models with SOP dates in 2028 and beyond. This expansion marks a deepened and reinforced partnership with this esteemed OEM, underscoring our acknowledged technical excellence and strategically positioning us for potential future design wins for them. As I highlighted in my previous quarterly update, development programs of this nature are integral to our international market strategy. They provide us with distinctive opportunities to showcase our technological prowess and engineering capabilities for OEM customers before they make final decisions regarding vendor selection. Given our accelerating number of global and domestic OEM design wins, it is becoming clear that OEMs prefer Hesai's LiDAR superior performance in range and resolution and higher quality to that of our competitors' offerings. Next, I'd like to share an update on our manufacturing and product enhancements. As you're aware, Hesai is dedicated to expeditiously advancing new products toward SOP phases. In September, we celebrated a new milestone with our FT120, the world's first fully solid-state blind spot LiDAR to attain SOP and to be installed on a series production vehicle model, Polestone 01, the first full-size luxury SUV model from Rox Motor, harnessing the advantages of FT120's ultrawide field of view and the minimum blind spot coupled with our flagship long-range AT series LiDAR. The resulting car model features a powerful 3D high perception system, providing smarter and safer driving experiences across a wide range of road scenarios. Turning our attention to our AT series LiDAR. In the third quarter, we officially launched AT128P model, the upgraded iteration of our flagship AT128 ADAS long-range LiDAR. AT128P boasts an impressive set of improvements, including range extension to 240 meters at a 10% reflectivity rate, higher resolution, enhanced performance regularity, and a 20% reduction in power consumption, achieving a seamless transition from SOP to full-scale production at our Hertz Center in Hangzhou. This represents a momentous achievement that strategically positions us to leverage economies of scale through the highly-automated production line in this facility, which is specifically tailored for the mass production of our more mature products. We're now poised to reap the rewards of improved cost efficiency with the potential volume shipment expected in the fourth quarter of this year. The success of our recent product upgrade and seamless ramp-up production at Hertz Center not only reflects our unwavering commitment to meeting market demand, but also stands as an invaluable learning experience. This endeavor has provided us with crucial insights and knowledge that will play a pivotal role as we contemplate expanding our production capabilities in the future. Moreover, it has strengthened our present market leadership in LiDAR delivery, positioning us for sustained success. By leveraging our in-house manufacturing capabilities, we are well prepared to innovate and thrive in the dynamic landscape of the ever-evolving industry. Lastly, I'd like to share, we have recently completed the construction of our R&D and in-house manufacturing facility, Maxwell Center, located in Jiading, Shanghai. In addition to actively preparing to produce our new fully solid-state FT120 LiDAR, this facility is now equipped with spearhead research and development of our next-generation LiDAR products. We've established 90 functional and performance testing programs with plans to scale this number to hundreds in the near future. The seamless integration of R&D activities and the production processes in this state-of-the-art facility not only amplifies efficiency but also expands our capability to introduce groundbreaking solutions to the market. We're enthusiastic about the potential this facility unlocks, driving our research initiatives and enhancing the overall quality and time to market of our future product offerings. To summarize, we steadily and effectively navigated our product transition during the third quarter. This triumph, along with stronger-than-expected quarterly revenue, deliveries and gross margins, puts us on track for a strong finish to the year. Our continuous stream of design wins and development programs from leading domestic and global OEMs is not just a remarkable feat. It's a resounding testament to our market leadership and strengthens our foundation for enduring growth. Our steadfast commitment to performance, quality, safety and reliability will continue to guide our endeavors as we remain dedicated to advancing the course of autonomous transportation by enhancing safety systems and saving lives worldwide.
Tung-Jung Hsieh, CFO
Thank you, David, and hello, everyone. Let's go through our operating and financial figures for the third quarter. To be mindful of the length of our earnings call today, I encourage listeners to refer to the third quarter earnings release for further details. We are pleased to see that our net revenues exceeded the top end of our guidance, increasing 33.5% year-over-year, reaching another record high of RMB 446 million, USD 61 million. We achieved this growth against the high comparable third quarter last year, which benefited from the bounce back after the Shanghai COVID lockdowns in the second quarter of 2022. Deliveries outperformed as well, more than doubling year-over-year to over 47,000 units in total, further solidifying our leading position in the global LiDAR market. In terms of gross margin, I would like to remind you that at the beginning of the year, we anticipated a simultaneous product transition for multiple products before we could fully benefit from economies of scale. Hence, Q2 and Q3 were designated as a product transition phase, and we were expecting a significant drop in gross margin, forming a V-shaped pattern. However, our gross margin for the third quarter of 2023 reached 30.6%, significantly higher than our earlier guidance, driven by continuous improvement in our manufacturing cost structure as David just mentioned. Continued robust demand for high-margin autonomous mobility products also contributed to the quarter's margin uptake. As a result, both Q2 and Q3, which were previously considered as a product transition phase, have significantly outperformed our initial projections. Our relentless efforts to improve manufacturing scale and optimize cost structure also led to our unmatched financial strength in the global LiDAR industry, marked by our third quarter of positive operating cash flow, RMB 47.6 million, USD 6.5 million. Our robust year-to-date performance positions us to continue to advance strongly on our path toward profitability and achieve sustainable, long-term growth. Now turning to our financial outlook, where we expect a strong performance. Our robust third quarter results bode well for our seasonally strongest fourth quarter. For the fourth quarter of 2023, we expect net revenues to be between RMB 535 million, USD 73.3 million and RMB 555 million, USD 76.1 million, representing a year-over-year increase of approximately 30.7% to 35.6%. We are pleased to share that with the shift toward a more optimized AT128P product, we have now entered a mature stage of production for ADAS. Consequently, we anticipate a high level of predictability for ADAS in the future, characterized by stabilized manufacturing processes, controlled cost structure and well-managed supply chain. We take pride in having overcome the challenges posed by the transition process and navigated it swiftly and carefully thanks to our outstanding capability in engineering development and adept supply chain management. We are delighted to announce that we are on track to deliver on our target of 220,000 LiDARs in total for 2023. In fact, we are seeing growth adoption of LiDAR systems equipped with our technology by OEMs globally. We anticipate this momentum will accelerate into 2024. For this reason, we expect our LiDAR volume to more than double to approximately 500,000 units next year. Based on our customer order forecast, by the end of 2024, we anticipate 13 ADAS OEM customers will reach SOP, expanding our portfolio to include over 40 SOP vehicle models. As of now, we have secured design wins with 14 ADAS OEMs, covering over 50 vehicle models in total, and we expect these figures to climb significantly throughout 2024. Therefore, we reaffirm our annual revenue target of RMB 1.8 billion, approximately USD 250 million, in conjunction with a group-level blended gross margin of 30% to 35% for the full year 2023. By December, we anticipate achieving a monthly delivery rate of 40,000 units, positioning us well ahead of the competition in the global LiDAR industry. The above outlook is based on our current market conditions and reflects the company's preliminary estimates of market and operating conditions and customer demand, which are all subject to change. In summary, while the third quarter was a bridge quarter, we exceeded our own performance expectations in terms of financials and secured major design wins, setting us apart in the market and laying a solid foundation for further growth and development. Bolstered by the momentum we've generated, we are eagerly looking forward to the exceptionally promising fourth quarter as we continue our journey toward profitability. Before going into Q&A, I'd like to take a moment to add my personal opinion on Ouster's tactics and behavior toward Hesai. Specifically, I want to address the recent national origin-based smear campaign of false claims being made or directed by Ouster and other competitors against us. A point-by-point discussion of our competitors' fabricated claims regarding Hesai's LiDAR technology and possible intended uses and Hesai's responses can be found in the company's October 12, 2023, press release available on our website and in the presentation available on Hesai's IR website at investor.hesaitech.com in the Finances, Filings, Quarterly Results section. Ouster and its media and lobbying agents have attempted to discredit Hesai's technology and business practices, seeking to ban Hesai's products from the U.S. marketplace. Relying primarily on false IP infringement claims and exploiting heightened China-U.S. geopolitical tensions, I find this line of attack focused on a company's national origin deplorable and contentious. Ouster's claims are unsubstantiated, and Hesai denies all allegations and innuendo by Ouster. Ouster has spent millions of dollars on litigation expenses and lobbying fees on Capitol Hill in a desperate attempt to portray Hesai as a Chinese company that steals American IP and is possibly working with the Chinese military to undermine U.S. national security by potentially using our LiDARs to spy on Americans, launch cyberattacks and aid the Chinese military in intelligence gathering. All are blatantly false. These underhanded tactics are the actions of a desperate company that is unable to compete effectively on the merits of its products in the LiDAR marketplace against Hesai. Frankly, Hesai LiDARs are preferred by customers because they perform much better in range and resolution and are of higher quality than Ouster's products. As a result, the Ouster-Velodyne combination has seen several years of declining revenues, dwindling LiDAR shipments, shrinking gross margins and mounting losses, losses of $335 million for the first nine months of 2023 on just $59 million in revenues alone. This is all reflected in the declining global autonomous vehicle LiDAR market share, at 1% in 2022 for Ouster compared to Hesai's market-leading 47% share according to Yole Intelligence, and Ouster's precipitous share price drop of over 95% from its high level several years ago. During the ITC investigation, Ouster's desperation became very clear. Earlier this year, Ouster-Velodyne attempted to divest the litigation settlement and patent cross-licensing agreement entered into with Hesai, which is at the heart of the Ouster-Hesai IP case. Ouster tried to divest it into a separate legal entity, Adapt Vision Holdings LLC. Then Ouster claims it wasn't bound and did not have to abide by its own contractual obligations contained therein, including the agreement's patent cross-licensing provision allowing each side to use the other's patent LiDAR IP for ten years and not to sue provisions, designating arbitration as a dispute resolution mechanism. Obviously, Ouster knew the agreement was a major liability in their case. The ITC judge saw right through Ouster's legal subterfuge and would have none of it. She ruled Ouster is an affiliate of Velodyne via merger. So Ouster could not escape its legal obligations simply by transferring the agreement to a new entity. If only things were just that simple, spin off the contractual obligations you don't like and keep the ones you do like. In this bizarre world, contracts would cease to have a commercial value whatsoever. She then went on to grant Hesai's motion to terminate in the ITC case. As an American, I find Ouster's desperate national origin-based xenophobic tactics of attacking Hesai with baseless stereotypical allegations and innuendo repugnant and antithetical to American principles and values. In my opinion, such tactics and behavior should not be tolerated. Simply put, I believe Ouster's smear campaign against Hesai is downright un-American.
Yuanting Shi, Investor Relations Director
This concludes our prepared remarks for today. Operator, we are now ready to take questions.
Operator, Operator
Your first question comes from Tim Hsiao with Morgan Stanley.
Tim Hsiao, Analyst
So I got a couple of questions. The first one is about the growth opportunity because over the past few quarters, we noticed that in China, more and more EV makers are providing this skoda urban navigation on autopilot and NOA functions on your flagship models and claim that one of the key selling points into next year and the year after. So I just wanted to know that based on the company's project pipeline, have you seen that LiDAR adoption at an inflection point might start kicking off from next year? So in the meantime, to get broadly adopted on not just the higher models we saw today, but also the mass market and mid-range models. Would Hesai consider cutting competitors' prices more aggressively to capture the first wave of function upgrades? Especially, we noticed that some of our competitors are still suffering from supply constraints. So that's my first question.
Tung-Jung Hsieh, CFO
Thank you, Tim. This is Louis. Your point is very well taken. And I think that's exactly what is happening. So as you know, our largest customer, Li Auto, is pushing aggressively on urban NOA. And I think the take rate will continue to climb into '24. And we've seen that across the high-end models from most of the new EV companies like Li Auto, Neo, Xiaopeng and BYD. And so they're leading in that area. The other ones are coming in behind. And we're very pleased with Hesai's market share gains. I think we have 14 out of the 17 OEMs in China, the largest ones. And so we're very pleased with these market share gains. We do have the ability to lower prices, and the Tesla-style strategy is something we will consider for 2024. And that's why you've seen us take up our numbers significantly. Does that answer your question?
Tim Hsiao, Analyst
Yes. Yes. That's great. And my second question, I think, Louis, you just provided additional details and comment about the dispute with the global players. But just want to follow up on that. So after ITC officially terminated the patent infringement investigations, I think it was brought up by Ouster. So do you think that's going to help us actually increase the size of global revenues and make global OEM and car makers feel more confident and comfortable to work with us? Or do you think there could be any likely more disputes coming from the group of global LiDAR makers, as you just mentioned? That might actually urge the global players or global carmakers to adopt a wait-and-see attitude. So while the car makers become more aggressive to place the order with Hesai or basically, they will tend to be more cautious in the near term. So could you share your view with us?
Yifan Li, CEO
Yes. Thank you, Tim, this is David. This is a great question. I think it's a very important question. People need to see evidence on a lot of the IP acquisitions. If we briefly review the history, we had a cross-licensing with Velodyne, and then Velodyne sued Ouster, and then Ouster sued us. Of course, it's in the competitor's best interest to say that we believe Hesai infringes us. But then in the end, we have to look at the rulings of the judges. So this termination is very important to us. It also shows our ability to defend ourselves at the international court level and also verifies that we declined all the acquisitions. And then I definitely believe the global OEMs and all of the customers are feeling much more informed and confident to go with us. In the past, while there was ongoing litigation, there was always concern. But whenever there's strong evidence in favor of us, it further verifies that we have the strongest leadership not only in revenue shipment but also in intellectual property.
Tung-Jung Hsieh, CFO
I think just to add to David's comment, I think the global OEMs will feel more comfortable selecting Hesai. You've got to remember, there have been no selections made by any global OEMs so far this year on the ADAS side. The ones that were in the past were two, three, four years ago. So we're definitely in the hunt and always in the top one or two for these global, but they have not made official determinations at this time. That's the way we work. But you can rest assured that based on our feedback, our LiDARs are the best performing.
Yifan Li, CEO
Yes, we wouldn't know whether some of the delayed decisions were because of IP or not. Of course, we don't have evidence for it. But we do know that getting this out of the way is extremely helpful for people to make a decision purely based on performance and the quality of a vendor.
Tung-Jung Hsieh, CFO
Yes, so Tim, you understand that all these LiDAR decisions made in ADAS this year all go to us, right? So it's a testament to the quality and performance of our products. Thank you.
Tim Hsiao, Analyst
Got it. Just one last question, if I may. Because I noticed that during the presentation just now, I think Louis mentioned that we saw the increasing shift to AT128P because I think the third quarter results actually surprised us on the margin upside. So could you share a little bit more information about what's the sales mix of AT128P in the fourth quarter? And where do we expect the major customers to fully upgrade your LiDAR to Pro? So if that's the case, would we see the further or more substantial margin improvement in the following quarters?
Tung-Jung Hsieh, CFO
Yes, that's a great question. So in Q3, the mix of old 180, 128 was 75%, AT128P was 25%. It will flip in Q4. In Q4, AT128P will account for 75% of shipments. The older AT128 will be about 25% as it's fully phased out.
Yifan Li, CEO
Yes. I want to point out that we call that AT128P as opposed to Pro. I think the word Pro in different industries sometimes means better; sometimes it means in the interior products than the original one. In our case, this is a major upgrade with a better range, better accuracy, better point cloud density and lower power consumption. So it is a major upgrade. That's why we decided not to call that a Pro, really because it's a, if anything, it's a Max version, not Pro. Right. So we don't want people to confuse. So just for the record, we will call that AT128P.
Tung-Jung Hsieh, CFO
So it will be 75% in Q4, Tim. AT128P.
Operator, Operator
Your next question comes from Jeff Chung with Citi.
Ming Chung, Analyst
This is Jeff from Citi. So my first question is about the new shipment guidance that Louis made in the presentation on around 500,000 units LiDAR next year. So my understanding is the previous guidance was 400,000 units next year. So did the company just upgrade the sales guidance for next year? So this is the first thing I want to check. And if yes, why? And was that due to new shipments and new customers? This is my first question. And then separately, Louis also said the 40,000 unit shipment in a single month in December, which means that by the end of this year, we can achieve a 480,000 unit annualized rate. So this is a very close to the 500,000 units shipment target next year, which means that we do not need to invest much on CapEx. This should result in a very strong cash flow generation into Q4. So I just want to check this. Those are my first questions.
Tung-Jung Hsieh, CFO
Yes. I think the upgraded guidance on the delivery numbers stemmed from several factors. One was the adoption. Li Auto is pushing very hard on adoption of City or Urban NOA, and that's going to push volume up significantly. You also saw Li Auto take up their forecast for 2024 to 650,000 units. So that also helps us as the adoption rate goes up. When you get close to level 3, it's almost inevitable that you will have to have LiDAR. And so that's why we've been saying for a while that as these OEMs, especially the ones who are way ahead of the game in software, are going to adopt City NOA and other advanced features, LiDAR will become a must. It also includes new wins like Great Wall. Great Wall Motor has five models with us. So that wasn't accounted for last quarter. All those models would debut SOP in 2024 as scheduled. And then you have seen upgraded numbers from our existing customers, as you said, plus new wins. That doesn't account for wins we expect in Q4. We have another two or three that will come in Q4. So basically, that's why the uptick. I think 500,000, honestly, is probably conservative. But that's, as you guys know, my nature.
Ming Chung, Analyst
That's fantastic. And my second question...
Yifan Li, CEO
It's a high-class problem. Don't worry.
Ming Chung, Analyst
And my second question is about the fourth quarter GP margin guidance. Could you give us some color, given that, number one, we observe the third quarter blended ASP actually went up by about 10% Q-on-Q? So I'm just wondering, what was the mix of the robotaxi related LiDAR in 3Q? And how does this should further ramp up in the fourth quarter? And could we challenge the 35% to 40% GP margin in the single quarter?
Tung-Jung Hsieh, CFO
To be honest, if we challenge it, it'll be around the 35% mark. But our current forecast is 32% to 34% gross margins for Q4. The reason Q3 was better is because it was more of a, call it, mobility quarter, you're right. I mean, ADAS were only 40,000 units. The ADAS units in Q4, our internal forecasts are double that. So ADAS will typically have a slightly lower margin than the robotaxi business. But because of the new upgrade and the manufacturing facility, it hurts, the margin is quite good. If you remember back at the beginning of the year, we forecasted the ADAS gross margins to fall in somewhere between 9% and 13% for this calendar year. Because of the Q4 transition to AT128P, we will hit that. We'll be squarely up in the double digits. So everything is on track. And the next year, those numbers will go up as we hit scale. So you can count for about $32 to $34 million as our internal guidance. Yes, actually, I left one more point. There's less robotaxi revenue in Q4 than was originally forecast. So this is an ADAS quarter. So the fact that we can take up margins is actually pretty amazing that we can take a margin even in an ADAS-heavy quarter.
Operator, Operator
Your next question comes from Tina Hou with Goldman Sachs.
Tina Hou, Analyst
Congrats on the very strong quarter of results. So my first set of questions is relating to price. Yes. So first of all, I'm just wondering how much is the price for ATP versus AT? Is it a more expensive product or similar?
Yifan Li, CEO
It's at a similar range because it's a major upgrade.
Tina Hou, Analyst
Okay. Got it. And the second one related to prices. Obviously, great to see so many new OEMs are taking up LiDAR, but we also know that the price competition is super intense, especially in the Chinese market, and a lot of the OEMs are loss-making. So just wondering how much of a potential price cut are they looking at in order to adopt LiDAR?
Tung-Jung Hsieh, CFO
I think on the ASG side, we are finding a price reduction in 2024 at the request of our customers.
Yifan Li, CEO
Yes. So I think the price decline is always requested by the customer, and we do work with them. But it's at a scale of a very low number because, in the end, it's a decision as a trade-off between the performance and the quality. A lot of the competitors will want to try to offer a lower price. But in the end, if your product cannot ship or doesn't meet the quality, and the customers cannot use it, in the end, it's the passenger's safety on the line.
Tina Hou, Analyst
Understood. And then another question, I guess, related to prices that, obviously, now it's more like higher-end vehicles or brands that are adopting LiDAR. But in the mid- to longer term, we believe that autonomous driving or ADAS is going to be quite prevalent in the market. So what timing do you foresee for mass market brands like, for example, GAC, taking up LiDAR? And then what is holding them back at this point?
Yifan Li, CEO
We won't be able to comment on a specific customer. But we do see that in the end, it's not only about the hardware cost; it's also about the functions they develop. For example, when people can roll out with the City NOA and other more advanced functions, the value added by such functions is much higher than if you're just performing Level 2 with LiDAR, which isn't of greater value compared to the more advanced functions. So in the end, I don't think it's about a specific brand; it's about all the carmakers as a whole, can we develop more advanced functions to generate more value for the customer.
Tina Hou, Analyst
David, so my next question is relating to cost or margin. So just wondering for our factory when the utilization rate ramps up at a relatively full stage, what kind of gross margin can we see for our AT products?
Tung-Jung Hsieh, CFO
Thank you for the question. We don't disclose specific margins by product due to competitive reasons, as it could weaken our position in negotiations with OEMs. Therefore, we provide a blended margin target, which we aim to be between 32% and 35% for next year. You can expect that the AM margin is slightly higher, and while our ADAS margin supports reaching 32%, we anticipate that ADAS will make up over 50% of our revenue next year, and is expected to grow. This is a positive outlook for us.
Operator, Operator
Your next question comes from Jessie Lo with Bank of America.
Yu Jie Lo, Analyst
My first question would be on our OpEx guidance because we noted in the third quarter, it came up quite significantly, probably because we are mass-producing in the Hertz Center and also probably will be entering into mass production for the next quarters as well. So what will be the guidance for the OpEx ratio entering into the fourth quarter and 2024?
Tung-Jung Hsieh, CFO
It's a good question. The operating expenses were primarily high due to the general and administrative costs, which included actual professional fees. Since becoming a public company, we've increased our G&A hiring for financial, SOX compliance, and internal audit purposes, and we've also incurred legal fees related to lawsuits from Ouster. Overall, last year, our non-GAAP operating expense margin was about 11% to 12%. This year, we expect it to be around 9% to 10%. Next year, we aim to achieve non-GAAP profitability. However, the operating expenses are not out of control; they are mainly due to professional fees.
Yu Jie Lo, Analyst
Got it. Very good. And my next question would be, can you share some thoughts on the key work we've done regarding our overseas plans, because previously there has been news saying that we would potentially build a plant in Mexico.
Yifan Li, CEO
Oh, I see. So we haven't made the decision to build a factory in Mexico. And so we are looking at different options in the North American regions because customers there prefer if we could build locally, meaning either in the U.S. or Mexico. So there might be some false news about us deciding to build in Mexico, but that's actually not true. But we are actively working with the customer in finding a plant in North America.
Tung-Jung Hsieh, CFO
The plan is to start a plant in '24, if not finish the whole thing in North America.
Operator, Operator
Your next question comes from Olivia Zhang with Haitong.
Xing Zhang, Analyst
Hi, can you hear me?
Tung-Jung Hsieh, CFO
Yes, we can hear you. Go ahead, Olivia.
Xing Zhang, Analyst
Okay. Maybe just one quick question from me. As Hertz product gets adopted by maybe, in the future, global OEMs, do you have relevant overseas revenue target for the next two or three years?
Tung-Jung Hsieh, CFO
Currently, our overseas revenue is close to 40% of our total. It's a little bit lower; it used to be a little bit higher because of the times mobility. I think ADAS is growing much faster in Asia than it is in the U.S. and Europe currently. So we would expect Asia to continue to increase the percentage. I think the overseas OEMs will begin to add significant volume in '26, '27. So I think this trend will continue. But long term, we aim ideally for 40% overseas and 60% in Asia. That would be our target.
Operator, Operator
As there are no further questions now, I'll turn the call back over to the company for closing remarks.
Yuanting Shi, Investor Relations Director
Thank you once again for joining us today. If you have any further questions, please feel free to contact our IR team. This concludes today's call, and we look forward to speaking to you again next quarter. Thank you and goodbye.
Operator, Operator
This concludes today's conference call. You may now disconnect your line. Thank you.