Xpeng Inc. Q2 FY2024 Earnings Call

Hello, ladies and gentlemen, thank you for standing by for the Second Quarter 2024 Earnings Conference Call for XPeng Inc. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Alex Xie, Head of Investor Relations and Capital Markets of the company. Please go ahead, Alex.

Thank you. Hello, everyone, and welcome to XPeng's Second Quarter 2024 Earnings Conference Call. Our financial and operating results were issued via Newswire Services earlier today and are available online. You can also view the earnings press release by visiting the IR section of our website at ir.xiaopeng.com. Participants on today's call from our management team will include our Co-Founder, Chairman, and CEO, Mr. Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Corporate Finance and VW Projects, Mr. Charles Zhang; Vice President of Finance and Accounting, Mr. James Wu; and myself. Management will begin with prepared remarks and the call will conclude with a Q&A session. A webcast replay of this conference call will be available in the IR section of our website. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe-Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the company as filed with the US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that XPeng's earnings press release and this conference call include disclosure of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. XPeng's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to our Co-Founder, Chairman, and CEO, Mr. Xiaopeng. Please go ahead.

Yes, I'm sorry. Hello, everyone. In the second quarter of 2024, XPeng Inc. delivered 30,207 smart EVs, up 38% quarter-over-quarter and up 30% year-over-year. Supported by technology-driven cost reductions, efficient operation and management, and revenues from strategic technical cooperation with Volkswagen, our gross margin has further improved to 14%, placing us at the forefront of Chinese EV makers. More importantly, we completed a new round of organizational upgrades and internal restructuring, bringing in top talents who are already adding value in marketing, style design, AI, and other key areas. We're consistently addressing gaps and solidifying our strengths to foster well-rounded competitiveness. With the market launch of MONA M03 in August, we're entering an intense product launch cycle and a period of rapid development with a number of competitive new products and models to be introduced through the end of 2026. With our AI technology advancements targeting product innovations and technology-driven cost reductions, coupled with an enhanced global and domestic marketing and sales system, these new products will fuel our sustainable growth trajectory. We're confident of achieving substantial quarter-over-quarter delivery volume growth in Q3 and Q4 respectively and of reaching a new delivery record in the fourth quarter. On August 8th, 2024, we began pre-selling MONA M03 and were thrilled by consumers' enthusiastic response. So far, pre-sell orders have surpassed last year's G6 pre-sale orders in the comparable sales period. Priced in the RMB150,000 segment among the A-class BEV Sedan, MONA M03 stands out with its trendy stylish design and unique smart cockpit, offering a best-in-class driving experience, which outperforms that of vehicles in the RMB200,000 price range across many aspects. MONA M03 is setting benchmarks and emerging as a top competitor in the A-Class BEV market segment. We'll be hosting our 10th anniversary Gala Night and launching MONA M03 on August 27th, with mass deliveries set to begin shortly thereafter. Our supply chain partners have geared up to support MONA M03's fast production ramp-up alongside us. I'm hopeful that the delivery pace of MONA M03 will set new XPeng records, which will help quickly enhance the reputation of this outstanding product through word-of-mouth and support a strong increase in sales. Next, we will officially launch our next-generation sedan, the P7+, in the fourth quarter. The P7+ features exclusive stable interior space with a three-meter wheelbase and over 5 meter length, making it a superior choice for family customers. Furthermore, P7+ will be our first model based on our next-generation ADAS hardware platform. P7+ not only beats our cost-reduction targets in both ADAS-related hardware and overall vehicle costs but also boasts technology innovations and cost advantages that outperform our competitors. With deliveries of two new models ramping up, we're optimistic about significantly expanding our market share. At the same time, I remain dedicated to bolstering our capabilities across the supply chain, manufacturing, marketing, sales, and customer delivery, which will fuel a more efficient and scalable operational system, accelerating product launches and deliveries during our upcoming major product launch cycle. Looking ahead to the upcoming years, I believe that the impact of AI on vehicles will be even more significant than that of electrification for the automotive industry. AI will fundamentally change the driving and riding experience and will reshape the business models in the auto and mobility sector. The advancement of the end-to-end and AI models is going to break through the limitations of current ADAS technologies and their iterations will happen much faster than traditional coding methods. AI will revolutionize ADAS safety and driving experience, lower the cost, and speed up the mass-market adoption of ADAS. The combination of AI models with XNGP, which is non-HD map reliant and has strong generalization capabilities, is the only path to developing ADAS technology that delivers a seamless experience anywhere, regardless of location or route, and can be scaled globally. Since July 30th, AI-powered XOS version 5.2.0 has been made available to all XPeng owners, taking XNGP to the next level by empowering a smooth experience anywhere, regardless of city and routes. We are the first to deploy AI model technology that offers access to ADAS on all public roads for all users nationwide. The application of end-to-end AI large models in autonomous driving is easier said than done. One of the challenges is how to ensure safe closed-loop testing with both an extremely high upper limit and a solid lower limit. Our extensive datasets and years of experience in urban ADAS driving give us an edge in integrating these end-to-end AI models, providing a safer, more human-like driving experience for our users. We're gearing up to tackle smart driving challenges such as ETC toll stations and parking gauge barriers with our XNGP capabilities. Our goal is to offer an unparalleled parking-spot-to-parking-spot ADAS experience and implement the end-to-end AI models to the next level as our second step. Even more excitingly, our next-generation ADAS hardware platform will debut on the P7+ in the fourth quarter, offering high-level ADAS at the most competitive cost in the Chinese auto industry. In the near future, we'll offer XNGP on more EV models, making XPeng the world's first auto company to deploy high-level ADAS in a car model in the $20,000 price range. I'm optimistic that improved affordability will allow more younger users to buy and enjoy the latest AI technologies, expanding XNGP's active user base and high-quality data pool. This, in turn, will create a positive cycle strengthening our AI-powered ADAS capabilities and further reducing costs. We aim to have our AI-powered XNGP-equipped mass-production smart EVs provide a driving experience equal to that of world-class robotics by the second half of 2025. This means just one manual takeover required for several hundred kilometers in urban areas, which is groundbreaking. In other words, we are going to offer Level 3+ autonomous software and user experience on level 2 ADAS hardware and at a level 2 ADAS price point. With an affordable cost structure, we believe consumers will quickly embrace AI-powered cars just as they quickly switched from traditional fuel vehicles to electric vehicles over the past five years. I'll share more details about our advancements in AI models, robotics, global taxi, and other cutting-edge technologies at our 10th anniversary Gala Night next weekend, and at our Annual Tech Day on October 21st–24th. Starting from this year, our long-term strategy for international models and overseas markets is entering a period of faster growth and is playing a more significant role in driving both sales and profit growth. In the second quarter, XPeng ranked first in export sales of mid to high-end all-electric vehicles or BEVs priced above $30,000 among all Chinese BEV brands. For the first time in our history, overseas sales accounted for more than 10% of our total sales. XPeng G9 has become the number-one in mid to large-size all-electric SUV in Norway, Denmark, and Israel and ranked in the top three in the same class in Sweden and the Netherlands. We believe that in addition to new energy, AI is crucial for us to achieve high-quality globalization. As of August 15th, we completed our over-the-air or OTA rollout of the latest AI-powered XOS for all of our international customers, offering an unprecedented China-made OTA experience for the overseas market. Our unique and premium tech brand has gained worldwide consumer recognition by leveraging our product strength. As we entered the third quarter, we saw very strong momentum in the initial overseas orders for the international version of XPeng G6. Starting from August, we expect to begin deliveries of the left-hand drive and right-hand drive versions of G6. As of July, we have expanded our presence to 30 countries and regions via dealer partners and established over 70 overseas sales stores, including in Europe, the Middle East, and Latin America. We plan to enter more right-hand drive markets in the second half of 2024, including the UK, Australia, and several countries in Southeast Asia. Also, we expect to double the number of XPeng branded international sales stores in the second half of 2024. Over the next couple of years, I anticipate our overseas business will maintain its strong growth momentum, leading global sales of mid to high-end smart EVs and enhancing our reputation as a global tech brand. We have achieved multiple significant milestones in our long-term strategic cooperation with Volkswagen over the past year as we steadily expanded our cooperation scope. In July of this year, we signed a master agreement of E/E architecture technical collaboration with Volkswagen Group to jointly develop industry-leading E/E architecture for all locally produced vehicles built on Volkswagen's China Main Platform or CMP and MEB platform. Beginning in 2026, all locally produced vehicles built on the CMP and the MEB platform will be equipped with this jointly developed E/E architecture. Thanks to the deep mutual trust and collaboration between the two teams, the first model equipped with the jointly developed E/E architecture is expected to go into mass production within 24 months. I'm very much looking forward to expanding the scope of our technical cooperation and further strengthening our win-win strategic partnership. I believe that the combination of China's speed and XPeng’s technologies will create greater synergies and strategic value for us and our partners in this era of profound changes in the global automotive industry. I'm glad that we didn't let every crisis go to waste and that we learned from them, rising above each one. After launching the G9 in September 2022 and experiencing sales fluctuations over the past few years, we have made significant strategic changes to our organization and planning. This has greatly improved XPeng's competitiveness and positioned us for rapid growth. We're now fully prepared to navigate the next decade of AI with steady progress. As we enter our major production launch cycle, we anticipate that our total delivery volume will range from 41,000 to 45,000 in the third quarter of 2024, representing a quarter-over-quarter increase of 35.7% to 49%. Furthermore, we project that our third-quarter total revenue will fall within the range of RMB9.1 billion to RMB9.8 billion, representing a quarter-over-quarter increase of 12.2% to 20.8%. Thank you, everyone. With that, I'll now turn the call over to our VP of Finance, Mr. James Wu, to discuss our financial performance for the second quarter of 2024.

Thank you, Xiaopeng. Now let me provide a brief overview of our financial results for the second quarter of 2024. I'll reference RMB only in my discussion today unless otherwise stated. Our total revenues were RMB8.11 billion for the second quarter of 2024, an increase of 60.2% year-over-year and an increase of 23.9% quarter-over-quarter. Revenues from vehicle sales were RMB6.82 billion for the second quarter of 2024, representing an increase of 54.1% year-over-year and an increase of 23% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly attributable to higher deliveries. Revenues from services and others were RMB1.29 billion for the second quarter of 2024, representing an increase of 102.5% year-over-year and an increase of 28.8% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly due to higher sales from maintenance services and increased revenues from technical R&D services related to the platform and software strategic technical collaboration with the Volkswagen Group. Gross margin was 14% for the second quarter of 2024 compared with negative 3.9% for the same period of 2023 and 12.9% for the first quarter of 2024. Vehicle margin was 6.4% for the second quarter of 2024 compared with negative 8.6% for the same period of 2023 and 5.5% for the first quarter of 2024. The year-over-year increase was primarily attributable to the cost reduction and the improvement in product mix. The quarter-over-quarter increase was primarily attributable to the cost reduction. R&D expenses were RMB1.47 billion for the second quarter of 2024, representing an increase of 7.3% year-over-year and an increase of 8.6% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly due to higher expenses related to the development of new vehicle models as the company expanded its product portfolio to support future growth. SG&A expenses were RMB1.57 billion for the second quarter of 2024, representing an increase of 1.9% year-over-year and an increase of 13.3% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly due to higher commissions to the franchise stores and higher marketing and advertising expenses. As a result of the foregoing, loss from operations was RMB1.61 billion for the second quarter of 2024 compared with RMB3.09 billion for the same period of 2023, and RMB1.65 billion for the first quarter of 2024. Net loss was RMB1.28 billion for the second quarter of 2024 compared with RMB2.8 billion for the same period of 2023 and RMB1.37 billion for the first quarter of 2024. As of June 30th, 2024, our company had cash and cash equivalents, restricted cash, short-term investments, and time deposits totaling RMB37.33 billion. To be mindful of the length of our earnings call, I would encourage listeners to refer to our earnings press release for more details on our second quarter 2024 financial results. This concludes our prepared remarks. We'll now open the call to the questions. Operator, please go ahead.

Thank you. Your first question comes from Tim Hsiao with Morgan Stanley.

So my first question is about the sales momentum of the new models, because XPeng's third-quarter volume guidance of 41,000 to 45,000 suggests that September delivery could be back to previous peak. This, together with the upcoming P7+ could lead sales to a new high of around 30,000. However, in light of the relatively short life momentum of the models launched last year, how could XPeng maintain sustainable sales momentum this time for the new models like M03 and the upcoming P7+? So that's my first question.

Thank you so much for the question. This is actually one of the biggest challenges we face as well. For XPeng, I have these four words hanging up on the wall of my office, meaning that we are aiming for steady growth going forward. Honestly, this is very challenging to achieve in such a competitive environment. Going into next year, we expect the market competition to be even more brutal than what we have seen recently. We have done a lot when it comes to the transformation of our organization, for example, managing the supply chain, adopting platform-based manufacturing, and enhancing our targets for manufacturing quality for M03 and P7+. We have also implemented a monthly OTA and overhauled our customer experience regarding new models and face versions. All of those actions aim to achieve long-term steady growth going forward. When we give out guidance, we conduct careful preparation for future development and sales, taking into consideration the future competitive landscape and the iterations of our new models. Relative to the previous years, we are now much more confident about our quarterly forecasts and how to meet those targets. Thank you.

Hey, Tim, this is Brian. Let me just add a couple of points here. First of all, you're right; when we gave the third-quarter guidance at the high end, we do assume that we will hit likely the 20,000 per month sort of volume delivery, which would be the high point of our delivery record historically. To achieve that, there are several catalysts at play. We are very encouraged by the MONA's debut and also the reception. We think, given the indicative order momentum and the preparations Xiaopeng just mentioned, we’re very confident that MONA delivery in the first months, starting in September, will likely achieve the fastest delivery record for all EV models made by EV startups. We hope to set the record for MONA. Secondly, I also want to emphasize that the delivery number includes a significant growth in our overseas delivery volume as well. As you can see, the overseas delivery volume in the second quarter exceeded 10%. We anticipate that delivery from overseas will probably be above 15% in the third quarter, diversifying our overall order intake, which gives us further confidence in the delivery objectives we set for the third and fourth quarters.

My second question is about XNGP’s high-level ADAS. The constant investment in large NTM models has further enhanced the experience of systematic abilities and AI smart driving technologies and much faster than the nationwide rollout of XNGP. However, when it comes to the return on investments, when do you expect such a massive and constant investment to translate into a real barrier to peer competitors and translate into meaningful upside to expensive new car sales? Would there be any post or metric we can monitor in the following quarters?

Thank you for your question. Since the rollout of our version 5.1.0, we've collected a lot of exciting and encouraging data in two aspects. The first is the option rate and penetration rate of using our high-level ADAS capabilities, which has seen at least a 20% increase from before the rollout of 5.2.0. The second change is that we previously encountered challenges in test-driving in some stores and areas. Now, across all our dealer shops, you can freely test the XNGP, which allows our consumers to experience our ADAS capability first-hand. Currently, among all Chinese EV makers, XPeng is the only actual end-to-end AI model implementer. Other competitors claim they are progressing towards that goal, but we face several challenges. As we increase the upper limit of our ADAS capabilities with the adoption of end-to-end AI models, we also need to secure a solid bottom limit of that capability. This requires significant changes in our technology and architecture.

Great. Thanks a lot for sharing all the details and looking forward to the meaningful sales take-off throughout the rest of the year. Thank you.

Your next question comes from Ming Hsun Lee with Bank of America.

My first question is related to your cost-reduction strategy. You have joined procurement with Volkswagen, and you will reduce the usage of LiDAR in the future. In what area do you think you can achieve more cost-reduction going forward? A shorter question related to your third-quarter gross margin trend. Positive factors include more export and also volume sales growth a lot, but the negative factor includes more sales from MONA. How do we expect the trend of the third-quarter gross margin?

Thank you for your question. XPeng used to prioritize technology without truly considering the importance of other aspects that are also crucial for our company's success. Starting from the second half of this year, we're going to focus more on our commercialization capability. Right now, we have both technology and our products that are performing well. From the second half of this year, we will see more translation of our reform and restructuring of the whole business model to meet market demand and competition. Cost reduction is a key aspect of this. On top of this, we also have cost restrictions driven by our technology, our supply chain reforms, and our strategic partnership with Volkswagen. Expect good news when it comes to our quarter-over-quarter improvement. Overall, we are confident that XPeng can become a company with superior gross profit margins compared to its peers.

So, Ming, on your second question regarding the margin trend, instead of being specific on Q3, I'll just speak generally about the second half. You're right; multiple factors are at play in the second half. As you mentioned, the export volume and percentage is likely going up. Starting Q3, we will likely begin to recognize some revenues from the E/E collaboration with Volkswagen. Meanwhile, we also anticipate significant growth in volume, which will help thin out the manufacturing costs. On the other hand, there is incremental volume from MONA, which we expect to be a high-volume model. Additionally, as we introduce P7+, we expect the margin to be healthy in the double digits. Overall, we expect overall margin to be stable and maintained in the mid to low teens, as we saw in the second quarter.

So the P7+ will be your first model to use the Pure Vision solution. In your view, what would be the progress for you to improve your capability in automatic driving through this technology?

Actually, regarding your question, I would say that more details will be disclosed at our future product launch conferences, including our Tech Day. For now, I can say that, without relying on sensors and Hi-Fi maps, we can significantly reduce costs. Furthermore, the adoption of end-to-end AI models using this vision-based technological approach allows us to greatly enhance our ADAS capability. Please stay tuned for more details in our future events.

Your next question comes from Bin Wang with Deutsche Bank.

I think we achieved the high end of 45,000 units in the third quarter, which means in September we can achieve more than 23,000. Can you provide a breakdown by products and specifically how much more in September if we achieve the high-end?

Hey, Bin, this is Brian. We do not provide a breakdown of specific model mixes for the delivery of coming months. However, as I mentioned before, we anticipate very strong delivery for MONA in September. We hope to achieve a record for EV delivery by EV startups. Additionally, there will also be a significant contribution from overseas, mainly from G9 and G6. The G6 is starting delivery this month and next month, contributing as well. I don’t think we will provide any more details on the mix.

My second question is about our new products. You mentioned a very strong product cycle. Can you elaborate a little bit about our product plans for next year?

Again, on this call, we are not able to provide specific guidance on model launches for next year or the number of new and updated models. We can say, however, that we anticipate a strong product cycle starting in Q4, with more vehicles being launched than this year.

Your next question comes from Paul Gong with UBS.

My first question is regarding the export outlook. We're glad to see the company is pushing for the exports. However, we are seeing rising protectionism in the DMs, including the upcoming extra tariff. We are also seeing in other markets, the rising competition even among the Chinese EV makers escalating. How do you foresee these challenges? How do you overcome them?

Hey Paul, this is Brian. Very good question. The global opportunity is immense, but there are challenges along the way. We have noticed the tariff updates in the European market, etc. So far, we have been very successful in launching our product in Europe and other global markets, positioning those products as a premium EV brand. Looking at the sale price of G6 and G9 in global markets, we can see that we are priced higher than some comparable competitors we face in China, thus achieving a better premium position globally. In Europe specifically, we have to deal with tariffs. Still, thanks to our team’s efforts, pricing, and collaborative relationships with local partners, we can achieve good marginal contributions from those sales. We've been managing this over the last month and a half. Outside Europe, we also see huge opportunities in the Middle East, Southeast Asia, and we will be launching our right-hand driving models this month and next month. We see significant growth in other parts of the world, and with additional product launches and better positioning of our products globally building extensive relationships, we are confident we can achieve the volume and profit contributions we anticipate from global operations.

My second question is regarding the Robotaxi. I recall a few years ago, XPeng had a plan for the Robotaxi, but subsequently, it has been modified. You mentioned that you hope your volume-produced models achieve the similar effect versus Robotaxi operation in overseas markets in the second half of 2025, but I want to understand why, as an industry leader in autonomous driving, you are not more focused on Robotaxi operations?

Thank you. This is a very good question. When it comes to Robotaxi development, both in China and globally, the technological approach is quite different from what we adopt right now, which is the end-to-end AI models architecture. The current focus of Robotaxi development in the market is to offer a safe and good customer experience within a small area. Our target is to provide a full domain or all-domain kind of human-like driving experience, which distinguishes our current focus from Robotaxi. Moreover, based on our previous experience in mobile vehicle operations, we understand that cost remains the number-one priority apart from regulation and mass adoption rates for this technology. Most Robotaxi developers do not balance these aspects well, particularly cost and customer experience. We are indeed considering the future development of Robotaxis, but this is different from our Level 4 ADAS capabilities. Additionally, we are not focusing on operating Robotaxi; instead, we plan to produce high-quality vehicles for mobility operators worldwide.

Your next question comes from Tina Hou with Goldman Sachs.

Thank you management for taking my question. My first question concerns our production preparation for MONA M03. Previously, with the G6, I think the supply bottleneck was mainly related to the LiDAR. However, with M03, we don't have LiDAR, so this should allow for much faster ramp-up. I am wondering how much we are preparing for in the next few months. The second question is regarding our R&D expense. We guided for RMB7.5 billion previously, but looking at our first-half tracking and last year's first-half, second-half seasonality, it seems like it's tracking just below RMB6 billion. So is there any added R&D spending in the second half?

Hey, Tina, this is James. I will try to answer both of your questions. Regarding MONA's production capacity, we have learned from our past experiences with the G6 and X9 launches. We prepared for MONA's production well ahead of time compared to previous cases. We anticipated supply constraints from some key components and set sufficient plans to handle those issues we encountered previously. So far, we haven't seen any signs of issues with our supply chain or production capacity. We continue to expect we will achieve the planned production and delivery as we have communicated earlier. On your second question about engineering expenses, yes, our engineering expenses from the first half tracked relatively flat and comparable to last year. However, we are entering a heavy product cycle, and many engineering expenses regarding design and product development have already kicked in. We still maintain our earlier guidance of about RMB7 billion for the full year in terms of engineering expenses.

So my first question is, I actually went to see MONA for the first time and found its quality very good, but people will only feel this quality when they see the car in person. Do we have any actions to help more people see the car?

Yes, indeed. When it comes to sales and marketing techniques, it is quite different between performance-oriented cars and affordable cars. With MONA, its capabilities are superior to most comparable cars of its class, especially regarding aesthetic and dynamic qualities. Since we rolled out the car across our different stores since early August, we've received unprecedented and encouraging consumer responses. After our official launch later this month, we plan to conduct numerous offline sales and promotional activities, along with a lot of online marketing to encourage customers to test drive it. We believe M03's sales performance will surpass that of G6 in the same sales period. We have a lot of marketing possibilities to promote this kind of affordable vehicle.

My second question is concerning the inner reforms we have implemented since 2022. After two years, how do we evaluate our abilities in sales and marketing?

Thank you for the question. Two years ago, when we started our reform, we began planning not just for product launches, but for the entire business strategy, especially the sales and marketing system. We've seen initial success in various aspects, which will translate into improved sales performance in Q3 and Q4 this year. Our strategic focus includes both product launches and overall capability development, including marketing and customer service. We focus on improving store management across various tiers of cities and have implemented new strategies to better serve customers in after-sales and insurance. We are training our sales staff to enhance their capabilities and efficiency.

My first question is about the gross profit margin. Can management help us break down the overseas margin and domestic part, particularly concerning profitability? Also, regarding the guidance shared by Brian about the second half of the year, is it correct that the benefits from margin support from the software will be largely absorbed by the changing product mix and increased channel discounts?

Yes, this is James. I'll address your questions. As Brian mentioned, we are rapidly expanding on a global basis. We expect overseas sales both in absolute volume and as a proportion of total volume to increase in the second half. The overseas margin is healthy. In overseas markets, we have different business models, including direct sales and dealership models. The margin understanding varies across these models, but overall, our variable profit margins for overseas business are good and improving our overall profitability. Regarding the margin trend in the second half, we didn't refer to the software margin, but a variety of factors will come into play, including higher volume, changes in the overseas and domestic mix, and income from our VW collaboration. Overall, we expect margins to stabilize in the mid to low teens.

Thank you. My second question regards the autonomy differentiation. With everyone developing autonomous driving technology, do you foresee any stage where technology development curves flatten? How might a singular breakout happen? Will it be due to maturing technologies, increased vehicle sales, or finding diversified revenue models?

It will be challenging for me to respond to your question without technical terms, but I'll try. The previous technological approach for ADAS relied on high-definition maps and rule-based architecture, which posed challenges for the customer driving experience. The end-to-end AI models approach allows us to learn from excellent, human-like drivers, addressing issues that rule-based approaches struggle with. The development of capabilities based on this AI end-to-end model will advance significantly and at a quicker pace compared to the previous methods. I hope that clarifies your question.

That does conclude our question-and-answer session. I'd like to turn the call back over to the company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact XPeng's Investor Relations team via the contact information provided on our website. Thank you.

This concludes today's conference call. You may now disconnect your line. Thank you.