XPeng Inc.
Q4 2020 Earnings Call Transcript

Published: 8 Mar 2021

[Operator:]

Hello ladies and gentlemen. Thank you for standing by for the Fourth Quarter and Fiscal Year 2020 Earnings Conference call for XPeng Inc. At this time, all participants are in listen-only mode. After the management's 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. Charles Zhang, Managing Director of Strategy of the company. Please go ahead Mr. Zhang.

[Charles Zhang:]

Thank you. Hello everyone and welcome to the fourth quarter and fiscal year 2020 earnings conference call of XPeng Inc. The company's financial and operating results were issued by our 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.

[Xiaopeng He:]

Hello everyone. Thank you for joining XPeng's fourth quarter and fiscal year 2020 earnings conference call today. In the fourth quarter of 2020, we achieved another quarter of record-high vehicle delivery, which reached 12,964 units, up 303% year-over-year and 51% quarter-over-quarter. Vehicle deliveries for the full year of 2020 increased by 112% year-over-year to 27,041 units. Driven by strong delivery growth, we increased our revenue in 2020 by 151.8% to RMB5.8 billion. More excitingly, we achieved a positive full year gross margin for the first time in the company's history marking a significant milestone. I believe that 2020 signified the beginning of a new era in China's Smart EV development. During the year, our consistent execution of the past six years of full stack in-house R&D strategy bolstered our ability to provide customers with differentiated Smart EV products and lead the technology innovation of Smart EVs in China. Next, I would like to go through our recent advancements in Smart EV technology innovation. In October 2020, we released our second-generation smart in-car operating system through OTA, which features the first of its kind, all-voice in-car System. This is one of our key proprietary technologies that allow our customers to interact with our vehicles in natural language and continuous dialogue.

[Dennis Lu:]

Thank you, Xiaopeng, and hello, everyone. We are very pleased to have achieved solid results in our fourth quarter and throughout fiscal year 2020, which demonstrates our ability to effectively cater to the rapidly growing market demand for compelling smart mobility experience. Our top line in the fourth quarter and for the full year expanded, year-over-year with robust vehicle delivery performance. In particular, we increased gross margin sequentially in the fourth quarter and post the first positive full year gross margin. Additionally, we had a strong cash position to ensure a solid financial foundation to execute our business strategies and to enhance our competitive advantages. Now, I would like to walk you through our detailed financial results for the fourth quarter of 2020. Total revenues were RMB2.9 billion for the fourth quarter, representing an increase of 345% from RMB640 million for the same period of 2019, and an increase of 43% from RMB2 billion for the third quarter of 2020.

[Operator:]

Thank you. Your first question comes from Tim Hsiao of Morgan Stanley. Your line is open.

[Tim Hsiao:]

Hello, everyone. This is Tim from Morgan Stanley. Congratulations on the strong result and thanks for taking my questions. So my question is about the guidance. Because based on the latest guidance, we are looking for around 5% sequential pricing erosion in the first quarter. So could you please elaborate more about the underlying factors, especially I think previously the management mentioned some of XPILOT 3.0 revenue would be recognized in the first quarter. So isn't that ASP-accretive? Why are we still expecting ASP to be down quarter-over-quarter here? Thanks.

[Dennis Lu:]

Okay. Thank you for your question. I think in quarter four, we delivered close to 13,000 units. In the first quarter because of the seasonality issue the February -- which was very slow typically the lowest month in the year. So our guideline for the moment is 12,500 units. So you can see that 500 units are like volume and mix impact. And yes, you're right we have included the XPILOT 3.0 for those vehicles those customers who have activated the functionality. We have included that in our first quarter mainly in the January and part in February. But due to the volume and mix impact we are foreseeing that will have some minor impact on the overall revenue compared with quarter four last year.

[Tim Hsiao:]

Okay. Thanks. My second question is about more like the impact from the component supply tightness. So we have -- we are going to launch the LFP version P7 in second quarter. So I just want to know that will the increased battery variety help to ease the battery bottleneck in second quarter or the other way around. In the meantime, our peers and other traditional OEM highlighted the impact or the hiccup caused by the component tightness. So what's our assessment of the potential impact to expand the company's second quarter shipments? Thank you.

[Xiaopeng He:]

Yes, indeed. I think for the coming six months battery supply will remain very important for all OEMs out there. And for our new models of P7s and G3s for their Q2 deliveries I think that would be very challenging in terms of battery supplies because we are adopting this new LPF battery and we're working very closely with our battery suppliers to solve this challenge. I believe in the long run we will be facing ramp-up in terms of our battery supply. And by Q3 and Q4 and the coming year, we'll be able to solve the supply issue. And with our past experience of successful delivery of the 500 kilometers version, the range version of G3, we are very confident that we can solve this kind of challenge of adopting LFP as a new battery for our vehicles in the coming year.

[Brian Gu:]

Tim, this is Brian. Let me just to add to what Xiaopeng just said on this LFP battery version of our products. We are seeing actually very healthy and very strong demand for that product. As we see actually just since we just recently launched we already see up to like 20% of our P7 actually have the LFP version battery orders, which is actually very interesting and very exciting. The supply issue I think Xiaopeng mentioned, I think we actually expect this to gradually sort of resolve as we actually head towards the second half of the second quarter. And I think this volume will be picking up as we see. So for the second quarter actually we are very confident that we can see actually quite healthy growth over the first quarter, overall for the deliveries.

[Q – Tim Hsiao:]

Got it. Thank you very much Mr. He, Brian and Dennis. Thanks for the answers.

[Operator:]

Your next question comes from Edison Yu of Deutsche Bank. Your line is open.

[Edison Yu:]

Hi. Thanks for taking the questions. First, kind of more near-term. I know you just said 2Q you should see sequential growth. Can you give us kind of an idea of not only 2Q but in the second half as well? Obviously, not trying to pin you down to a number. But just assuming demand is there what kind of monthly sales run rate could we see? And is there any sort of limitations due to the semiconductor shortage?

[Brian Gu:]

So Edison, this is Brian, again. We obviously don't want to give out long-range guidances per company policy. But what we can see as Xiaopeng described in the opening remarks that we actually have new product introductions every quarter for the next three quarters. So we actually see growth picking up on a sequential basis fairly healthy. And in terms of supply constraints, right now we have visibility for about two to three months of semiconductor supply, which I think on a long-range basis, we are monitoring very closely as to whether that will impact our supply chain overall. So far in the foreseeable period, we don't see any impact but that's something we're actually paying a lot of focus on. At the same time, I think we -- given our volume is relatively small compared to some larger OEMs that's facing much bigger crisis, I think we are more nimble to address this issue. But this is definitely something we'll be monitoring very closely.

[Edison Yu:]

Great. Second question unrelated. So I wanted to ask about XPILOT. So as we think about the next-generation offering would you consider moving to a subscription-only model for the features? And if not, would you expect the pricing of it to go up since now you're equipping it with LIDAR? Thank you.

[Xiaopeng He:]

Yes, based on our newer generations of XPILOT, we'll definitely increase the pricing for different configurations. But whether or not it's a subscription model or a one-off payment model, it will depend on our customers' feedback and also our overall strategy. But generally speaking, definitely, the ASP will go up for higher versions of XPILOT.

[Edison Yu:]

Thank you.

[Operator:]

Your next question comes from Jeff Chung of Citi. Your line is open.

[Jeff Chung:]

So my first question is, how should we see the sales mix between LFP and LCM powered BEV going forward, and the differences in margin outlook and guidance on changing the full year sales target? So this is my first question.

[Brian Gu:]

For the LFP battery, we are seeing the -- obviously it's still recent days that on the P7 version, the LFP version actually is close to 20% of the new orders. And then on the G3, I think it's around 10% of the new orders that are LFP battery. We believe that that mix will probably going to increase as we continue the promotion in introducing these new LFP battery products. Another very interesting I would say mix on the LFP battery versions is that since we got rid of the low-end configuration without the autonomous driving and assist-driving systems, actually the percentage of these LFP battery version P7 that's incorporating our XPILOT 3.0 hardware is actually much higher in terms of percentage than the entire P7 population, which also can potentially translate to higher software penetration for these products, which is actually quite exciting. In terms of growth for March and the full year, I think I already gave the comments earlier. I don't know whether you're looking for anything specific.

[Jeff Chung:]

Yeah. Just the margin outlook. If we take off the software portion, just considering the hardware, the vehicle portion, could you give us some -- the roughly level between the margin trend on the vehicle powered by LFP and on vehicle powered by LCM? Because in some OEM actually can achieve a higher margin from the LFP-powered BEV. So I just wanted to know what the company think about the long-term margin trend?

[Dennis Lu:]

Thanks, Jeff. This is Dennis. For the margin, actually the instruction of the LFP product there are two purpose. One is to improve sales. The other one actually is to reduce cost. So definitely this product will improve sales as well as will improve our margin. I cannot give you specifically the number or the amount of the margin improvement, but this product will bring us better margin for these two products, yes both P7 and G3.

[Jeff Chung:]

Okay. Thank you. And my second question is on the autopilot revenue and income. So considering the previous P7 equipment for autopilot 3.0 the software income and also the first quarter income will be combined together in the first quarter earnings this year. But a while ago the management seems to give a rather conservative guidance on the software income, so I just want to know the -- why? And secondly, could you give us some color on the attach rate on the autopilot 3.0 right now? And also going forward as well as they three -- autopilot 3.5 penetration level in the future? Thank you.

[Brian Gu:]

Hey, Jeff, this is Brian again. So as I think I mentioned earlier that the entire P7, the activation of our XPILOT 3.0 represents over 20% of the entire P7 population which we have delivered over 20,000 units already. And upon introduction in OTA in the NGP in January, we saw actually the penetration slightly going up which is very encouraging. We also saw the utilization rate of that product is at a very high level over 50%. So we're actually very confident that as we go into more and more product that's having the XPILOT 3 point architecture embedded in the vehicle, we see the penetration rate will continue to increase. That's the trend that we are foreseeing. It's difficult to predict the XPILOT 3.5 the penetration rate. But for the third product that we're going to introduce in the fourth quarter, we're actually going to have the product mostly in the configuration -- have either 3.0 or 3.5 XPILOT capabilities, which means that the majority, let's say over 80% of the models for the third product we'll be able to charge software revenue and -- because they have the hardware configuration. So we anticipate the penetration rate for that product will be higher than P7.

[Xiaopeng He:]

So I would just like to add to that. Basically, right now, if you look at our current XPILOT upgrading you will notice the trend that we've been upgrading them quite aggressively and rapidly. Basically in the future, new models launched by XPeng, all of them will be equipped with newer version of XPILOT and we plan to remove all of the older versions. For example, this upcoming third model that's going to be launched by XPeng will be equipped with XPILOT 2.5 or above. So all of those will be a chargeable version of XPILOT. And for our fast upcoming model, as to be launch -- to be launched by our company, it will be equipped with XPILOT 4.0. So as a result with the development and advancement of our software and technology and also this kind of investment on R&D efforts in the autonomous driving and with future reduction in cost of these hardware preparation to support such XPILOT technologies, we believe in the future all of the new vehicles launched by XPeng will be equipped with not only the hardware that -- and architecture that are able to support newer versions of XPILOT, but also we will forecast more and more revenue income from the software of XPILOT. Thank you.

[Jeff Chung:]

Thank you, management and no more questions from me. Thank you.

[Operator:]

Your next question comes from Bin Wang of Crédit Suisse. Your line is open.

[Bin Wang:]

[Brian Gu:]

Hey, Bin, do you want to repeat it in English for the other people to understand your question?

[Bin Wang:]

Sure. Actually, I just want to know whether you actually speed up your R&D for autonomous driving. Because if you compare to your plan announced in the last October you actually guide that XPILOT 3.5 actually will only launch in 2022. But it seems that in the opening remarks you mentioned maybe end of this year, you already achieve the XPILOT 3.5. For the same issue, actually, you also announced you will roll out an XPILOT 4.0 in 2022. This seems to be earlier compared to your last -- in the technology that you get on 2023. So that’s actually, can I assume you -- we have speed up the R&D capability? And meanwhile, actually, in the urban driving that actually XPILOT 3.5, it does means you can already achieve the 90-degree turning in the vehicle, but also actually recognize the traffic lights? Last, actually, because if you do need speed up your R&D we do have a big jump in R&D expense for the upcoming two or three years. Thank you.

[Xiaopeng He:]

Thank you for your question. Indeed in 2020 based on our efforts our R&D efforts in particular into XPILOT 3.0, we actually gained confidence into our future R&D effort and future launching of XPILOT 3.5, 4.0, and even 5.0. So, yes, we plan to bring up the -- bring ahead the schedule of launching fewer I mean in the future more higher version of XPILOTs. And all of those comes from our current R&D efforts and also the data that we collected from our customers which are very -- which have been very positive. So, that's to the first part of your question. To the second part of your question, I believe that in the future LIDAR technology, millimeter wave technology, and cameras will be part of the standard configuration of the hardware architecture that supports a safer driving experience for future autonomous driving technology in general. Because that will give us a better computing power that allow us to not only navigate along to level one, level two highways, but also in a broader sense of the urban roads in -- across China and in other regions of the world. However, we believe that in order to achieve the full level of autonomous driving, there is still a long way to go, not only in China but all over the world. But we definitely have confidence that this will come sooner than expected. Thank you. And yes, we are going to significantly increase our R&D spending this year and for upcoming years as well. Mainly we'll be focusing on all of the areas surrounding autonomous driving including the software upgrade, the data, and computing, and also the internationalization of autonomous driving and also an exploration into the level four autonomous driving strategy and also to the hardware upgrade in relation to supporting the software upgrade.

[Bin Wang:]

Thank you.

[Operator:]

Your next question comes from Ming Lee of Bank of America. Your line is open.

[Ming Lee:]

So, my question is regarding the international expansion, especially, in Europe countries. Because for some hardware or HD map because of initial security reasons, so you probably need to change the vendor or change your software et cetera. So, what kind of challenge and bottleneck do you see for your international expansion especially the smart cabin and autonomic driving are your strength?

[Xiaopeng He:]

Yes. Actually, I've had many years of experience into expanding into the overseas market. I've been doing that, since my first entrepreneurial project, which was back in 2010. So my opinion on overseas expansion is maybe quite different from other counterparts in there. I think it takes a lot of time and efforts to build a solid foundation in order to grasp the international opportunities right there. In the future, our strategy on overseas expansion is in general will be very similar to our domestic market ones. Basically, we'll focus on our product portfolio and our operation and organization. In those three areas, I think it would be very similar in our domestic market and international market, so that in the future, it can speed up our process of internationalization. And basically, after XPILOT 2.5, we'll be able to synchronize the launching of future XPILOT versions both in the domestic market and in the overseas market as well. And we plan to launch maybe in the European market and also in some very developed markets XPILOT 4.0 and above in the future at the same time as we launch it in the domestic markets. Now, in terms of our smart cockpit, right now, we are doing everything in-house and we already dedicated a large team of R&D people in – last year in this regard. And in the coming year, we're going to build an even bigger team that focus on the R&D of smart cockpit. Usually, it will take maybe a longer time such as 12 months to build a good solid technological foundation that allow us to really apply it in all of our products and allow us to have a good foundation to expand overseas. But once the foundation is built, we believe that in the future development is going to be very impressive in terms of the speed of expansion, the reduction of costs, and also the core technological, and high quality – the technological foundation and the quality of our smart cockpit product. And so in the future, our overall strategy is that, we are going to be a very powerful platform that are able to launch a very rich product line that have a very solid autonomous driving capability. And also, we are going to have a very strong and powerful sales and marketing team that supports our overseas market expansion in the future. Thank you.

[Ming Lee:]

Thank you. I don't have more questions.

[Operator:]

Your next question comes from Paul Gong of UBS. Your line is open.

[Paul Gong:]

Hi, management. Thanks for taking my question. My first question is regarding on the R&D headcount. I recall during the IPO you had like 1500 R&D people roughly one-third on the autonomous driving. Now you have more financial resources than ever. And I think Xiaopeng also mentioned, you're going to increase R&D significantly this year. Do you have any target of the headcount for the R&D heading towards later of this year?

[Xiaopeng He:]

Indeed, we plan to greatly increase the headcount in not only the R&D, but also our sales and service teams as well. So by the end of this year, we forecast that the R&D team will double in its size. And also we're going to also increase the R&D people that will be surrounded around our ecosystem as well. Thank you.

[Paul Gong:]

Let me translate my question. The second question is regarding the monetization of your autonomous driving. Given the price gap between the XPILOT 2.5 and 3.0, the penetration is just 20% so far for P7 on the XPILOT 3.0. In view you have spent fixed cost on the R&D of the software. And is it worthy for you to consider to narrow down the price gap between the 2.5 and 3.0 and try to monetize less in the near-term, but harvest more data to feed into the software and further improve that?

[Xiaopeng He:]

Actually, we don't have any current plans to shorten or narrow the price gap between different versions of XPILOT software offerings because we are dedicating our R&D efforts into the core AD technological developments. And we believe that in the future, we're only going to have newer and newer or higher and higher versions of XPILOT. And in the future older versions or lower versions of XPILOTs will be removed from our product portfolio. And we believe that as we advance into the exploration into a higher level of AD technologies, actually not only will us be able to upgrade our payment fee for software -- higher-level softwares, but also across the ecosystem we are going to have so many opportunities across different scenarios that allow us to really provide better experience for our customers and also a lot of monetization opportunities in the future. Thank you.

[Paul Gong:]

Thank you.

[Operator:]

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

[Charles Zhang:]

Thank you once again for joining us today. If you have any further questions please feel free to contact us. Thank you. Thank you everyone.

[Operator:]

This concludes this conference call. You may now disconnect your lines. Thank you.