Earnings Call Transcript - XPEV Q3 2020

Operator, Operator

Hello, ladies and gentlemen, thank you for joining the Third Quarter 2020 Earnings Conference Call for XPeng, Inc. Today's conference call is being recorded. I will now hand the call over to your host, Mr. Charles Zhang, Managing Director of Strategy of the company. Please proceed, Mr. Zhang.

Charles Zhang, Managing Director of Strategy

Thank you. Hello, everyone, and welcome to the Third Quarter 2020 Earnings Conference Call of XPeng, Inc. The company's financial and operating results were issued by 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 will include our Co-Founder, Chairman and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Finance, Mr. Dennis Lu and myself. Management will begin with prepared remarks, and the call will conclude with the Q&A session. As a reminder, this conference is being recorded. A webcast replay of this conference call will be available on 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 U.S. 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 far with U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under the applicable law. Please also note that XPeng's earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. XPeng's 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.

He Xiaopeng, Co-Founder, Chairman and CEO

Hello, everyone. Thank you for joining XPeng's Inaugural Earnings Conference Call today. On August 27, 2020, XPeng successfully listed on the New York Stock Exchange, a significant milestone marking the start of our new journey as a public company. On behalf of all the employees and myself, I'd like to extend our sincere gratitude and appreciation to all of the long-time and new shareholders who have been supporting us. Today marks another milestone for XPeng as we reported our first quarterly results following our successful IPO. We're pleased to be speaking with you today about our strong operating and financial performance in the third quarter, in which total vehicle deliveries increased by 266% year-over-year to 8,578 units. In addition, we achieved a positive gross margin of 4.6%, bolstered by significant revenue growth and mass deliveries of the P7. The P7 is our Smart Sports sedan, which is also our second mass production level model. Deliveries of the P7 have maintained fast growth momentum since our mass delivery began in late June. During the third quarter, we delivered 6,210 P7s, of which 98% can support XPILOT 2.5 or XPILOT 3.0, our advanced autonomous driving systems. It is worth noting that in October, the 10,000th P7 rolled off our production line in our own Zhaoqing facility. We now hold the record as the fastest emerging smart EV company to surpass the 10,000 vehicle production mark. All these achievements demonstrate our ever stronger capabilities across the entire EV spectrum in research and development, manufacturing, branding and sales and services. I believe XPeng is the only Chinese car-making company that is developing full-stack autonomous driving software and a smart in-car operating system in-house. On the second XPeng Tech Day, which was held on October 24 this year, we showcased our one-of-a-kind, all-voice in-car system, which enables continuous driver-vehicle dialogue interactions covering a broad range of scenarios. It is one of our key proprietary technologies developed for and applied in our second-generation Xmart OS operating system. We also showcased our autonomous driving technology capabilities, bolstered by our in-house developed navigation-guided pilot system, also known as NGP, which enables autonomous driving on highways with features including autonomous lane changes, overtaking other vehicles, and switching ramps, amongst other things. Our goal is to provide the most advanced navigation-guided autonomous driving system in China. We plan to make the NGP system available to our customers via OTA earlier next year. In the first quarter of 2021, we plan to conduct an expedition for our NGP to cross over 2,000 kilometers of highway from Guangzhou to Beijing. We believe this is just the beginning of how high-level autonomous driving technology is transforming mobility in China. I firmly believe that dedication to full-stack in-house R&D is the key to enhancing our product differentiation and solidifying our core competitiveness. In terms of production, after our own Zhaoqing plant officially started mass production of the P7 in the first half of the year, in September, our second manufacturing base broke ground in the Guangzhou economic development zone with strong support from the Guangzhou government. We expect this new XPeng Smart EV manufacturing base to start production by the end of 2022. Together with our Zhaoqing manufacturing base, we have set a solid foundation for XPeng's long-term growth strategy. In terms of sales and service network, as of September 30, 2020, XPeng's physical sales and service network comprised a total of 116 stores and 50 service centers covering 58 cities. Additionally, our supercharging network continued to expand across the nation. As of September 30, 2020, XPeng branded supercharging stations have increased to 135, covering 50 cities. Furthermore, we announced an XPeng sponsored free supercharging program at the Beijing Auto Show on September 26. The program has been initiated in 24 cities and will be expanded to at least 60 cities by the end of the year. XPeng will strategically invest in the nationwide deployment of a supercharging network over the next few years. While continuously strengthening our leadership position in China's Smart EV industry, we're also strategically developing opportunities in international markets. For example, in September, we shipped the first batch of XPeng's G3s to Europe. The super long-range version of the G3 is our Smart SUV model adapted for European markets' specifications. The shipment marked our first step in tapping international markets. In the third quarter, we successfully completed our IPO, which had a total offering size of $1.7 billion. Together with the $900 million raised in Series C plus financing, our fundraising totaled nearly $2.6 billion in the third quarter. With the support of substantial capital reserves, we intend to increase investments in branding, sales and service network, charging network, as well as in technology advancement and model development. For the fourth quarter of 2020, we expect deliveries of our vehicles to be approximately 10,000 vehicles. Our ability to achieve remarkable performance is attributable not only to our strong in-house R&D capabilities, but also to our effective strategies in market positioning, product planning, manufacturing capabilities, and our operational roadmap. Thank you, everyone. With that, I'll now turn the call over to our VP of Finance, Mr. Dennis Lu, to discuss our financial performance for the third quarter.

Dennis Lu, VP of Finance

Thank you, Xiaopeng. And hello, everyone. As noted, we delivered strong top-notch performance in the third quarter and posted a positive gross profit for the first time in our company history. We have reached this milestone in large part due to our successful launch and mass delivery of the P7, which also carries an increased average selling price compared with our prior model. Now I would like to walk you through our detailed financial results for the third quarter of 2020. Total revenues were RMB 2 billion for the third quarter, representing an increase of 343% from RMB 450 million for the same period of 2019, and an increase of 237% from RMB 591 million for the second quarter of this year. Revenues from vehicle sales were RMB 1.9 billion for the third quarter, representing an increase of 376% from RMB 399 million for the same period of 2019. And an increase of 251% from RMB 541 million for the second quarter this year. The year-over-year and quarter-over-quarter increases were mainly due to the acceleration of deliveries of the P7 since we began its mass delivery in late June this year. Gross margin was 4.6% for the third quarter compared with negative 10.1% for the same period last year and also negative 2.7% for the second quarter this year. Vehicle margin was 3.2% for the third quarter compared to negative 10.8% for the same period a year ago and negative 5.6% for the second quarter this year. The increase was primarily due to better product mix, decrease in material cost, and improvement in our manufacturing efficiency. Research and development expenses were RMB 635 million for the third quarter, representing an increase of 46% from RMB 435 million for the same period in 2019 and an increase of 99% from RMB 320 million for the second quarter this year. The year-over-year and quarter-over-quarter increases were mainly due to a significant amount of share-based compensation expense recognized related to the share-based awards we granted to our employees with a performance condition of an IPO. If we exclude these share-based compensation expenses, our research development expense would have decreased year-over-year primarily because we incurred a significant amount of expense relating to the development of the P7 in the same period last year. And the research and development expense would increase quarter-over-quarter due to an increase of design and development expense relating to the new product, which will be launched next year. Selling, general and administrative expenses were RMB 1.2 billion for the third quarter, representing an increase of 321% from RMB 286 million for the same period last year and an increase of 152% from RMB 477 million for the second quarter of 2020. The year-over-year and quarter-over-quarter increase were mainly due to the share-based compensation expense recognized for the reason mentioned above. Excluding the share-based compensation expense, the increase mainly resulted from higher marketing and promotional spending to support the minimum vehicle sales. Loss from operations was RMB 1.7 billion for the third quarter compared with RMB 761 million for the same period last year and RMB 779 million for the second quarter of 2020. Excluding the share-based compensation expense, the non-GAAP adjusted loss from operations was RMB 823 million in the third quarter compared with RMB 761 million for the same period last year. Net loss was RMB 1.1 billion for the third quarter compared with RMB 776 million for the same period in 2019 and RMB 146 million for the second quarter of 2020. Excluding the share-based compensation expense and fair value change on derivative liabilities related to the redemption right of the preferred share, the non-GAAP adjusted net loss was RMB 5 million in the third quarter compared with RMB 751 million for the same period of 2019. And also compared to RMB 770 million for the second quarter this year. Net loss attributable to ordinary shareholders was RMB 2.0 billion for the third quarter compared with RMB 982 million for the same period in 2019 and also compared with RMB 1.1 billion in the second quarter this year. Fair value change on derivative liabilities related to the redemption drive of preferred share and accretion of preferred share to redemption value for non-cash events will no longer recur after IPO. Excluding the share-based compensation expense, the fair value change on derivative liabilities related to the redemption right of the preferred share, and accretion of preferred share to the redemption value, the non-GAAP adjusted net loss attributable to ordinary shareholders of XPeng, Inc. was RMB 865 million for the third quarter compared with RMB 751 million for the same period a year ago and also compared to RMB 770 million for the second quarter this year. Basic and diluted net loss per ADS were both RMB 5.07 for the third quarter of 2020. Non-GAAP basic and diluted net loss per ADS were both RMB 2.16 for the third quarter of 2020. Each ADS represents 2 Class A ordinary shares. Now turning to our balance sheet. At the end of September 2020, the company had cash, cash equivalents, restricted cash, and short-term investment of RMB 20 billion compared with RMB 2.8 billion at the end of last year. The increase was primarily due to the net proceeds we received from our initial public offering in August this year and also the Series C Plus financing. Now for our guidance. As Xiaopeng mentioned earlier, for the fourth quarter of 2020, we currently expect the delivery of vehicles to be approximately 10,000 units, representing a year-over-year increase of about 211%. We also expect the total revenue for the fourth quarter of 2020 will be approximately RMB 2.2 billion, representing a year-over-year increase of about 244%. The forecast reflects the company's preliminary estimates of market, operating conditions, and customer demand, which are all subject to change. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Operator, Operator

Your first question comes from the line of Bin Wang from Crédit Suisse.

Bin Wang, Analyst

Okay. Actually, my question is about the capability timeline. After you launched the NGP and memory parking in the first quarter next year, what will be the next big step in the second half of 2021 or 2022?

He Xiaopeng, Co-Founder, Chairman and CEO

Thank you for your question. Actually, after launching NGP and the memory parking next year, we have several big moves that we're going to launch in the coming future. Those are based on XPILOT 3.0. And the first thing is the memory parking within a parking lot, which means that when your car arrives at the parking lot, it will automatically take you to the available spots for parking. Now the second big launch will be for major cities, first-tier and second-tier cities during the peak rush hours in the morning and in the evening, and that is called the autonomous following. So the autonomous driving technology will allow your car to follow closely to the vehicles in front of you to make sure that you are not left behind. Coming up, we also will launch an identification feature of traffic lights within Chinese city roads and also an upgraded version of the NGP functions that allows us to transfer from highway scenarios to city roads. Coming up, we also have more autonomous features that will allow us to be more advanced in terms of the autonomous driving technology in China.

Bin Wang, Analyst

Can I have a question about the network expansion plan? What numbers can you guide for the end of this year and 2021? And what's the breakdown between the self-owned and third party?

Dennis Lu, VP of Finance

So I'll take these questions. By the end of the year, we forecast that we'll have 150 stores covering 72 cities. And by the end of this year, we will have 68 service centers.

Bin Wang, Analyst

What are your sales breakdown expectations for the upcoming year?

Operator, Operator

Our next question comes from the line of Ming Lee from Bank of America.

Ming-Hsun Lee, Analyst

And my question is regarding our sales store expansion strategy in Guangdong province and also outside Guangdong province, especially nowadays your store expansion is very aggressive. I also want to know what's your long-term expectation regarding your sales breakdown between Tier 1 cities and low tier cities?

He Xiaopeng, Co-Founder, Chairman and CEO

Because XPeng is headquartered in Guangzhou, that's why a lot of people believe that we are mainly focused on our sales in Guangdong. However, we have recognized the situation, and we are quickly expanding into other first tier cities such as Beijing and Shanghai, as well as into other tier cities, second-tier and third-tier cities. And that is part of our strategic roadmap of expansion in the future. This year, we are performing significantly better in terms of sales performance in provinces outside of Guangdong. So our next step for us is to continue improving product quality, and through our marketing and sales efforts, we will be able to achieve a greater extent, a higher quantity of users. Outside of Guangdong, we are quickly expanding to first tier cities, second-tier cities, and third-tier cities through our expansion of store numbers, service centers numbers, and our supercharging network. These will remain part of our priorities in the coming quarter and next year. After the IPO, we'll be able to reorganize our company systematically and make our production procedures more efficient, which will be reflected in our sales performance in the coming quarters.

Operator, Operator

Your next question comes from the line of Jeff Chung from Citigroup.

Ming Chung, Analyst

So I got three questions. My first two questions are regarding the battery bottleneck issue. Do we have a battery bottleneck supply issue? And how do you see this improving going forward? And my second question is about the same-store sales growth between the new store and the old store. Can you give us a breakdown in the third quarter on the total sales volume from new stores and old stores before June and after June opening? What is that ratio into October?

He Xiaopeng, Co-Founder, Chairman and CEO

Thank you for your question. Regarding your first question about the battery bottleneck. I think after the pandemic, the new energy vehicle industry is on the rise. In the European market, we see a recovery in sales in the whole of the market. Also, since the end of last year and earlier this year as a result of the pandemic, many battery makers are trying their best to expand their capacity for production. So right now we are encountering a very temporary supply bottleneck in terms of battery supplies. And lately, we have indeed been restricted concerning production due to the battery supply bottleneck. However, in the future, with our proactive communication with all the battery makers, along with our strong partnerships and better planning in terms of production, I believe we can resolve this bottleneck quickly. In the upcoming 6 to 12 months, many people have apprehensions about this battery supply and think that we are facing a risk of shortage in supply. However, I disagree with that. I am confident in the battery supply because many battery makers are actively preparing in their production capacity. I believe that due to the fierce competition amongst these battery makers, we will benefit from it in terms of supply. Regarding your second question about the breakdown on Q3 sales, actually, I'd like to give you a little bit of context. All of our sales are made after our customers sign the sales contract. Thus, all the deliveries you saw in Q3 result from contracts signed about a month or up to 2.5 months ago. From our development, we've observed something interesting. We initially believed that it usually takes about 6 months for a new store to mature; however, we now realize that it is actually much quicker. As we develop more self-owned factories and solve the battery supply problems, we believe that from Q4 forward, we will be able to achieve even higher efficiency in our product deliveries.

Gui Hongdi, Vice Chairman

So Jeff, this is Brian. Let me just add a point on the battery situation. It is not a bottleneck in a way that we don't have access to battery capacity. It is actually that when you have a certain jump in demand, in the short term, revising up your production dramatically can be very difficult. However, at any given time, I think the capacity issue will be digested very quickly. I just want to offer this context; it's not like we don't have access.

Ming Chung, Analyst

Yes. So my question is regarding the software income. How is our accounting treatment on the software income for 2021? How do we transfer the pent-up revenue from the software income into 2021? And if this pent-up revenue overlaps with the new software revenue in the first half of next year, would that be an inflection point to see a massive increase in the revenue and net profit going forward?

Dennis Lu, VP of Finance

Jeff, this is Dennis. Let me answer your question. Yes, so far, we have received some orders. For example, the hardware vehicle has facilities or equipment to support the autonomous driving on the 3.0. We’ve received some orders and the payment for the software is essentially our kind of prepaid customer money. That's not in our revenue. We need to wait until we OTA the functionality before we can book that into our revenue. The plan is to begin booking loss into revenue starting from next year. We actually have about 40% of our customers picking up the hardware, and among them, about 60% to 70% of customers buy the software. This will translate into a significant amount of software revenue starting from next year. But I need to clarify that so far, we have XPILOT 2.5 and 3.0. The 2.5 is free of charge. We only charge customers for the 3.0, the Autonomous driving 3.0. Going forward, in all four models, we will have more modernization of the software. For example, we may upgrade to 3.5 or even 4.0. As for pricing, we will evaluate it and possibly increase software revenue, but overall, software revenue will be a considerable portion of our overall revenue going forward.

Operator, Operator

Your next question comes from the line of Paul Gong from UBS.

Paul Gong, Analyst

So my first question is regarding the gross margin. Is it correct that Q3 GP margin improvement is mainly a result of the product mix where P7 GP margin is significantly higher than P3, which is still in negative gross margins only in Q3? So my second question is regarding the actual pricing of XPILOT 3.0. If I recall correctly, it is priced at RMB 30,000. How do we think about the split between hardware cost coverage versus software revenue? How do we foresee hardware costs going forward?

Dennis Lu, VP of Finance

Okay. Let me handle the margin question. Yes, we have seen quarter-over-quarter margin improvement. The major contributor is better product mix, meaning more P7 in the third quarter compared with the second quarter. Meanwhile, we have reductions in material costs including battery and non-battery material costs and manufacturing efficiency improvement due to economies of scale. We don’t disclose individual margins, but we are seeing improvement on both models. And then on the autopilot, we charge customers a one-time fee of RMB 20,000 for the XPILOT 3.0. If a customer opts to pay in installments, they will need to pay RMB 12,000 a year for three years, and then they can get lifetime service. We see opportunities in hardware because of technology improvements and scale. Both hardware and software efficiency will improve margins for both software and vehicles going forward.

Gui Hongdi, Vice Chairman

Yes, Paul, you're correct. I believe our hardware for XPILOT 3.0 is more expensive than the version that only has XPILOT 2.5. The price difference covers hardware costs while still providing us with some margin. We expect the costs of this hardware to continue to decrease as we produce more and more of these XPILOT 3.0 equipped vehicles.

Operator, Operator

Our next question comes from the line of Ji Lu from Bank of China.

Unknown Analyst, Analyst

Management. I have a question in terms of our sales distribution. Different from our two peers, we have both self-built and dealership sales modes. How do we compare these two modes in terms of marketing efficiency and customer experience? Can you give us the breakdown of these two modes and what our plans are for the future?

He Xiaopeng, Co-Founder, Chairman and CEO

Currently, we have 116 sales points. Among them, 46 are self-owned, and 70 are partner dealerships or franchise stores. In my understanding, as we begin to build a brand, it is more efficient to have your self-owned stores to educate the market and perform more branding in terms of development. As brands become more well-known in the market, it is more efficient to partner with other dealerships to improve sales efficiencies. Right now, we believe that both channels are very important in contributing to our sales. In the future, we will establish different kinds of stores according to location and the type of cities we're in.

Unknown Analyst, Analyst

Can I explain this in this way: in Tier 1 cities, we will focus on our self-built stores, while in low-tier cities, we will use dealerships. As our brand expands, we will rely more on self-built stores.

He Xiaopeng, Co-Founder, Chairman and CEO

As I mentioned before, we must take into consideration various elements, such as brand awareness, and the level of acceptance of new energy vehicles in the market and amongst our customers. Currently, we do not have a preference for setting up stores in first-tier cities over third-tier cities. It all depends on specific situations.

Unknown Analyst, Analyst

I noticed that SG&A expenses in Q3 surged substantially. Can you provide reasons for the increase in SG&A expenses and future guidance on SG&A?

Dennis Lu, VP of Finance

Yes, we have seen a quarter-over-quarter increase in SG&A, mainly due to spending on branding, channel expansion, channel development, and advertising to support vehicle sales. This is primarily due to higher spending on SG&A related to these activities. Moving forward, as you are aware, we're still in an early phase of channel development to build more strength in our brand to support higher volume targets next year. Therefore, we foresee that marketing and sales expenses will continue to maintain at this level or possibly increase in the near future. At the same time, we will manage other expenses so that they do not grow in line with volume; we will control those. However, there will be some investments for the future that we will continue to support for our growth.

Operator, Operator

Your next question comes from the line of Nick Lai from JPMorgan.

Y.C. Lai, Analyst

Let me translate my question in English. The first question is about the level of backlog orders. Currently, you have a waiting time of about 4 to 5 weeks. What is your strategy to shorten that waiting time? And the second question concerns the new factory in Guangzhou. What is the capacity and the CapEx? Can you provide guidance?

Gui Hongdi, Vice Chairman

So Nick, first of all, as you probably heard during our IPO process, we don't disclose backlog information as a policy. However, regarding wait times, it mainly depends on the specific model you are ordering. My understanding is that 4 weeks to 6 weeks are the standard delivery times for our P7. However, we are trying very hard to shorten that delivery time, as it will obviously improve customer experience and satisfaction. We are currently ramping up our production and also reducing the time lag in transportation, logistics, and delivery cycles. Hopefully, we can control the delivery time and shorten that to within 4 weeks.

He Xiaopeng, Co-Founder, Chairman and CEO

Let me just add to that. Actually, for some hot models, we will do quick preproduction on those models to shorten the waiting time, and by optimizing our delivery processes, we believe that in the coming quarters, we will be able to significantly reduce wait times.

Gui Hongdi, Vice Chairman

As for your question about the Guangzhou plant, the design capacity for the second plant is planned to be 100,000 annual production. In terms of the cost of building that, we estimate this to be close to RMB 3 billion in total costs, including equipment. As you heard from our previous announcement, the government-supported financing package is more than enough to cover the construction and equipment costs of that plant expansion. Regarding your question on our relationship with HIMA, our counter-manufacturing agreement with them will end by the end of next year. We are maintaining a very frequent dialogue with HIMA on how to best optimize that relationship. If there's any decision or conclusion, we will disclose it to the public.

Operator, Operator

As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

Unknown Executive, Executive

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

Operator, Operator

This concludes today's conference call. You may now disconnect.