EHang Holdings Limited Q4 2020 Earnings Call Apr 16, 2021, 8:00 a.m. ET.
Good day, ladies and gentlemen, thank you for standing by and welcome to EHang’s Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today’s conference. If you have any objections, you may disconnect at this time. Now, I will turn the call over to Julia Qian, Managing Director of The Blueshirt Group, Asia. Ms. Qian, please proceed.
Linlin Julia Qian — Managing Director
Hello everyone, thank you all for joining us on today’s conference call to discuss the company’s financial results for the fourth quarter and the full year of 2020. We released the results early today. The press release is available on the company’s website as well as from Newswire services. On the call with me today are Mr. Hu Huazhi, Chief Executive Officer; Mr. Edward Xu, Chief Strategy Officer; and Mr. Richard Liu, Chief Financial Officer.
Before we continue, please note that today’s discussion will contain forward-looking statements made on the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involves inherent risks and uncertainties. As such, the company’s actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company’s public filing with the SEC. The company does not assume any obligation to update any forward-looking statement except as required under applicable law.
Please note that today’s call, management will also discuss certain non-GAAP financial measurement for comparison purposes only. Our GAAP results and the reconciliation of GAAP to non-GAAP measures can be found in our earnings press release. Also, please note that unless otherwise stated, all the figures mentioned during the conference call are in Chinese RMB. With that, let me now turn the call over to our CEO, Mr. Hu Huazhi. Mr. Hu will speak in Chinese and then our CSO, Edward Xu will translate his comments to English. Please go ahead, Mr. Hu.
Huazhi Hu — Founder, Chairman and Chief Executive Officer
Edward Huaxiang Xu — Chief Strategy Officer
Thank you, Mr. Hu. Now I’m glad to translate Mr. Hu’s remarks into English. Hello everyone, thank you for joining our earnings conference call today. In the unusual year of 2020, our management team and I appreciate the efforts and the support of our employees, partners, and investors. Today, I would like to take this opportunity to tell more about EHang.
Since our founding, many people have asked me about the vision of EHang. Today, I would like to elaborate our mission, vision, and our strategies so that you can understand EHang better. In my mind, EHang will become an air mobility service provider of integrated door-to-door air transportation products for individuals. EHang is a technological innovation-driven air mobility service provider committed to lead the next-generation of autonomous urban air mobility.
Our mission is to enable safe, autonomous, and eco-friendly air mobility services for everyone. In the future, we will build EHang into a Tesla in the air, allowing people to use EHang’s air taxi services as easily as using Uber today and to enjoy the convenient door-to-door air transportation. Similarly, our air logistics services will also provide convenience for people’s lives.
We have been executing our strategy based upon our unwavering mission and vision as well as our long-term view of the future transportation industry and in-depth understanding of EHang’s first-mover advantages. We believe that with the rapid development of autonomous driving, autonomous flying services will become the focus of the transport sector and compel [Phonetic] price of the market.
In the long run, the function of OEM manufacturers will be integrated and consolidated by the service providers. For example, WeMo and Nuro, two innovative transport enterprises are redefining the transport sector by integrating software, hardware, and services. The UAM industry is promising, which is expected to reach $1.5 trillion by 2040 according to the research report published by Morgan Stanley. We believe with our decades of experiences in technology and the product innovation, we will continue to be a leader and take significant share of the market. Our technology accumulation and product innovation in the past decade gives us full confidence and ability to achieve this goal.
Now, I will tell you more about the development path of EHang following three steps of technologies, rules, and services. First of all, in terms of product research and development, EHang’s vision for future air mobility is based upon three original concepts. First, autonomous flying; second, full redundancy system; and third, cluster management. So far, EHang 184 and EHang 216 have completed full redundancy designs of battery system, speed control system, power system, battery management system, flight control system, and navigation system.
Whenever any system fails, the backup system will take effect and the aircraft can continue to fly without falling, which is totally different from the ordinary drones. We have carried out flight tests for more than five years including a number of extreme tests and flight tests in harsh conditions such as a full power maneuverability test, heavy snow and fog test, high altitude maneuverability test, sea side salt haze environment test, manned typhoon tests, electromagnetic and vibration tests etc.
Here I would like to express my sincere gratitude to our partners who have been with us along the way. Thanks to their strong support, we successfully completed the first step of our vision in 2017. At the same time, since our inception, we have been committed to building and optimizing our systems. We firmly believe that EHang’s AAVs are the pioneering new type of transportation. Our products are not developed exclusively for pilots, but for everyone who doesn’t need to go through rigorous pilot training and testing. Our AAVs are automated and operated by a complete set of systems. Autonomous flying is the soul of our products.
We deeply understand that aircraft can’t fly around without rules, which will have an adverse impact on the future air traffic system. Therefore, back in 2017, we established our own command and control centers for AAVs, which was also the first of its kind in the world. Since then, we have constantly optimized the cluster management technologies. We believe that cluster management is also an important guarantee for future flight operations.
Without cluster management of the command and control center, autonomous aerial vehicles will no longer be safe and reliable and will cause huge difficulties to manage among aircrafts. Cluster management technologies have laid a good foundation for the whole system of our unmanned airport and derived an incredibly valuable concept, i.e., the aerial media performing services and the logistics port for unmanned aerial vehicles.
More importantly, EHang is a company in the global UAM field that is first to carry out a UAM flight test and conducted the most tests widely in this area. Together with our partners, we have carried out numerous test flights in countries such as in China, South Korea, and Netherlands and the United States, Canada, UAE, Qatar etc. Every time our flying vehicles take-off, it attracts countless attentions in the local area, giving people a glimpse of the ease of the transportation in the future.
In addition, as early as 2017, we cooperated with CAC to jointly develop the standards for unmanned air traffic. From the first test flight permit in 2018 to the trial operation approval of the EHang 216 for aerial logistics and to the official acceptance of our application of the airworthiness certification for EHang 216 passenger grade AAVs in the last year, the CAC has been closely working with us along our growth.
Just two days ago, we held airworthiness certification meeting with a national expert group from CAC, which means we have officially entered the certification stage. We are steadily moving forward to obtaining the airworthiness certificates of 216. This is the second step for us to gradually complete our vision since 2018.
Elon Musk once said in the wake of his success in auto driving, Tesla will stop selling cars and start to provide autonomous travel services. EHang understood from the earliest days that the best way for offering autonomous air mobility is to provide autonomous air travel services and has strove to realize this vision. Today, we are opening up a new chapter and about to embark on a new journey of becoming the world’s leading UAM service provider. This will be our most anticipated third step of EHang vision.
In this fiscal year of 2020, the future transportation we envision is getting closer and EHang has made numerous breakthroughs and achievements in many fronts, including products, systems, and production capacity. Based upon the EHang 216 passenger grade AAVs, we launched the EHang 216F and EHang 216L models to actively explore application scenarios for AAVs in the fields of aerial firefighting and large load logistics transportation.
In terms of the development of UAM network, our EHang 216 passenger grade AAVs have ability to carry out air transportation in the city due to its lightness and flexibility. In order to meet the needs of longer ranges, we are about to launch a new model, VT30, with a flight range of more than 300 kilometers as supplement to the inter-city UAM network. Combined with the existing 216, VT30 will fulfill the inter-city traffic connection within the city clusters, making the future UAM network stronger and more complete.
On the product development front, I would like to share with you three breakthroughs. First of all, I’m very pleased to introduce for the first time the development progress of our VT series of a medium to longer range intelligent aircraft. As early as two years ago, we laid out a strategic road map of the VT series of products in the order of size VT10, VT20, and VT30. VT series is a hybrid VTOL design that is configured with both pure electric multi-rotor and a fixed wing. VT30 is designed for carrying passengers in VT series. Between the choices of safety and efficiency, we chose safety as our first priority.
VT30 product have advanced fault detection capability, which can ensure that if the aircraft fails during flight, it can quickly and automatically switch to vertical take-off and landing form, which can bring the passengers to the ground safely as soon as possible. After a considerable period of time of demonstration and exploration, we did not choose the tilt rotor design. No multi-rotor or tilt rotor cannot have a full redundancy capability in all flight modes while the hybrid design can ensure a complete flight redundancy capability in all flight modes.
Redundancy for safety must be the first priority for autonomous aerial vehicles. Other designs like the tilt rotor will definitely add additional complexity to the operation system, leading to the increase of the failure rate. In order to ensure certain level of flight efficiency for our hybrid design, we make lightweight for the overall design of the aircraft and overall weight of the aircraft is within 700 kilograms, so that the aircraft not only has good backup robustness, but also has a good long range flight capability.
We noticed that some media previously reviewed that we are about to release a new product with a flying distance of 400 kilometers. I believe it refers to our VT30, but the media picture is actually a picture of the transition product, VT25, for its patent application rather than the picture of the VT30. We plan to perform trial fligths of VT30 in open areas in North Western China in the near future. Please look out to our official release of the VT30 in which the specific aircraft shape, design, and the related technical parameters will be published.
VT20 and VT10 are another two multi-purpose small aircraft of the same type in our VT series. In the early stage, VT20 participated in the flight verification of VTOL flight systems and other work. Now, it also formed a mature product and it has entered the stage of small batch production. It’s flight time with payload is more than three hours and the flight speed is between 30 kilometers per hour to 120 kilometers per hour. In the future, it will undertake the flight route survey and planning for VT30 fully autonomous flight. It is an indispensible product in the future UAM infrastructure planning process and can also be used for UAV applications in our Smart City command and control centers.
Moreover, we will release the EHang 216M, a manual pilot model of EHang 216 AAV. The EHang 216M is expected to obtain a special airworthiness certificate in the experimental category from CAC in May of this year. As a sports electric vehicle, the EHang 216M is with a small — similar control systems as a traditional helicopter, but simpler and more reliable and it can switch to autopilot mode with one click for all round safety protection.
In 2019, we got the certificate of unmanned aircraft system, UAS fence issued to us by the CAC. Under the protection of our UAS fence, one click take-off and landing will make the flight safer. In the future, we plan to work with our partners to establish a flight experience park with a UAS fence so that everyone can realize their dream of enjoying the fun with manual flight under safety protection.
In addition, we have made significant progress in the AAV logistics port that we collaborate with our partners in Hezhou in Guangxi province of China. Our flagship series of fixed-wing AAV designed for aerial logistics have completed a large number of flight tests there realizing a fleet of fully autonomous flight from take-off to landing from point A to point B. Meanwhile, the Hezhou AAV logistics port is expected to become the first unmanned airport with no operators in the whole system operation except for the system maintenance personnel and all aircraft will be operated automatically by the command and control system.
We have also made remarkable progress in production and R&D. Our new production facility in Yunfu will officially start production in June this year. The structure of EHang’s product is mainly made of composite materials and the production of its composite product is traditionally a manual process. We will continue to invest in Yunfu facility in the next two years and gradually upgrade to fully automated production lines to further improve the product quality and consistency. We will expand our R&D base for intelligent aircraft in our Guangzhou headquarters and believe that more innovative products will be born here.
Future development path. We will achieve our strategic goals through the following four strategic paths. First, we will remain focused on R&D capabilities for our passenger grade and logistics products with the development of EHang 216 series of short to medium range flagship aircraft and the VT series of long range aircraft as [Indecipherable] and the service operation as the orientation. We will continue to strengthen our technologies and increase the bar and focus on improving product safety, flight duration performance, and passenger and cargo capacity.
Second, build a first-class talent team as an operator. According to the established strategic positioning as an urban air mobility platform operator, we will gradually upgrade from a manufacturer to an operation service provider and recruit top level talents for transportation operation. Third, we will concentrate our resources in our core business and gradually divest the AirMedia smart city management and other businesses, which are less relevant to our air mobility business. However, our efforts to upgrade to an operation service provider needs a smooth transition period. These businesses will be gradually outsourced to our partners in the future, but we expect no material impact in the revenues of related businesses.
Last, we will continue to expand our trial UAM operational basis and air mobility scenarios such as tourism, transportation, logistics etc and actively build a number of trial operations based domestically and overseas to carry out the operational services. At the same time, we will continue to accelerate the completion of compliance work such as air worthiness certificate and transportation certificate. In 2021, we will focus more on the R&D of AAVs for passengers and logistics.
As our new production facility continues to be completed and put into production, we expect that in 2021, we will produce a large number of intelligent passenger logistics aircraft. This year, we will gradually carry out air passenger and the logistics trial operation services. In addition to selling AAVs to our existing customers and partners, we will also use some AAVs for trial operation services. At the same time, we will actively carry out trial operation services in more cities around the world.
On this basis, we will simultaneously disclose the relevant data of operation services such as order volume of operational services, number of active users, service mileage, and revenues etc. We are confident that EHang will become a leader in the UAM industry with our dedication and outstanding execution capability. We believe we will make impact in the world and enable people to experience convenient and safe air mobility services in the near future. Next, my colleagues will continue to provide more details. Thank you.
Those were Mr. Hu’s remarks. Now let me elaborate on our strategy and plan. Hello, this is Edward Xu, Chief Strategy Officer of EHang. Based upon the Board decisions to consider the firm’s long-term strategic goal, EHang’s business model will experience a gradual transition in 2021 from a pure equipment sales model toward a operation platform model. This decision is a result of the Board’s deep thoughts and discussions that thoroughly consider the following conditions.
First, to be a UAM platform operator is ultimately the goal of EHang. As a world-leading UAM firm, we are dedicated to providing comprehensive and effective solutions. To this end, we have not only built the most advanced AAVs such as EHang 216, but also grasped the key relevant technologies such as cluster management so that we are able to operate multiple remote AAVs simultaneously through our centralized platform based upon pre-determined and fixed routes. This whole system enables a seamless integration of AAV manufacturing and operations, laying a solid foundation for us to become a UAM platform operator.
Different from some peer companies, our business does not only cover the designing and the manufacturing of equipment AAVs or no [Phonetic], but also systemwide solutions for real operations including route planning, standard setting, 4G, 5G communications etc. We are building large ecosystems for UAM which is compatible with existing systems for civil aviation. Therefore, we have positioned ourselves as a UAM platform operator from the very beginning of our IPO. We believe this is our ultimate choice.
Second, safety is our top priority. As delivery volumes of EHang 216 continues to increase, it adds responsibilities on the customer side to ensure operational safety. For a highly innovative product as such with no precedents, it demands high level of safety standards for daily operations. Therefore, we believe it is critical for us to take full and direct control of daily operations of EHang 216 AAVs to ensure 100% safety.
Third, the timing for EHang 216 commercialization is opportune. We have conducted over 10,000 flights of EHang 216 AAVs in the past three to four years and have accumulated a considerable amount of real data. Based upon the latest results of the recent communications with the CAC, we see significant progress in airworthiness certification for EHang 216. We are hopeful in achieving meaningful progress in 2021 toward the final stages in certification. This will open the door for further commercialization of EHang 216 that enables an upgraded version of UAM operation.
Therefore, we should make sufficient preparations for large scale operation in future. To support this important strategic initiative and also fufill some customer orders in 2021, we are aiming to produce approximately 250 units of EHang 216 in the year, which will be a new record for the company once achieved.
Finally, attractive outlook for UAM operations. More importantly, we see highly attractive outlook for an upgraded model of UAM operations based upon our fully autonomous aerial vehicles. Different from the conventional models of civil or general aviation, our model ensures a higher level of safety, service quality, and profitability, but lower levels of operational costs. Our financial analysis shows highly attractive investment returns with a short payback period for our equipment versus the conventional civil or general aviation. Considering the benefits of a large sharing platform built upon self-owned fleet at a relatively lower cost, we expect a higher degree of equipment utilization and return profiles.
Considering various factors, we have planned 100 Air Mobility Route Initiative by selecting 100 meaningful flight routes for trial operations within China. By accumulating more operating data and experiences, we will be more prepared to launch large scale commercialization activities. Meanwhile, we are planning to release operating data such as flight route, flight sorties and passenger volumes etc as mentioned by Mr. Hu. I will now turn the call over to our CFO, Mr. Richard Liu to provide the financial results for the fourth quarter and the full year of 2020. Richard, please go ahead. Thank you.
Richard Jian Liu — Chief Financial Officer
Thank you, Edward and hello everyone. Before I go into details, please note that all numbers presented are in RMB and are for the fourth quarter of 2020, unless stated otherwise. All percentage changes are on a year-over-year basis, unless otherwise specified. Detailed analysis is contained in our earnings press release, which is available on our IR website. I’m going to highlight some of the key points here.
In Q4 2020, total revenues were RMB54.6 million, on par with total revenue of RMB54.7 million in the same period of 2019. Due to the resurgence of COVID-19 pandemic in the quarter, the total units of EHang 216 sold were 22 units versus 26 units in the same period in 2019, causing the revenue from air mobility solutions to decrease 10% year-over-year. However, our revenues from aerial media solutions increased steadily, offsetting the decrease in air mobility and driving up our total revenues. In full year of 2020, our total revenues increased 47.8% year-over-year, reaching RMB180 million. We’re pleased to maintain a robust annual revenue growth despite the pandemic impact globally.
Adjusted gross profit in Q4 excluding share-based compensation expenses amounted to RMB34.8 million. This led to adjusted gross margin of 63.8%, which was 3.1 percentage points higher than that of last year and the highest quarterly adjusted gross margin in the company’s history. Adjusted gross profit for full year 2020 was RMB108.6 million, up 51.7% from RMB71.6 million in 2019. Adjusted gross margin for the full year 2020 was 60.3%, up 1.5 percentage points from 58.8% in 2019 and off [Phonetic] of the highest annual adjusted gross margin. This reflected the competitive strengths of the company. The increase was mainly due to a favorable revenue mix with a greater proportion of revenues from sales of higher margin models of EHang 216 AAVs.
Adjusted operating expenses excluding share-based compensation expenses increased by 50.5% to RMB47.2 million and as a percentage of total revenues was 86.5% as compared to 57.3% in Q4 2019. We mainly increased expenditures in R&D of new models, including both passenger grade and non-passenger grade AAV models and related operating systems with enhanced functionalities. As a result, our adjusted operating loss in Q4 was RMB10.6 million compared to a adjusted operating profit of RMB3.8 million in Q4 2019. Adjusted operating loss as a percentage of total revenues was negative 19.5% compared to adjusted operating margin of 6.9% in Q4 2019. With adjusted operating loss in Q4, our adjusted net loss was RMB12.3 million compared with adjusted net income of RMB2.9 million in Q4 2019. For the full year of 2020, our adjusted net loss was RMB37.2 million compared with adjusted net loss of RMB31.9 million in 2019.
Now let’s turn to the balance sheet and cash flow. We ended the quarter with RMB189.4 million of cash, cash equivalents, restricted cash and short-term investments. The accounts receivable balance of RMB179.4 million have been reduced to RMB103.1 million with subsequent collection of RMB76.3 million as of March 31st, 2021 representing 42.5% of the above balance have been collected. Together with the private investment of $40 million in late January, it is expected that the company has adequate funding to support the operations in the next 12 to 24 months at least.
Now let’s turn to the business outlook. Our business is experiencing a gradual transition into a more operation-driven model. Given our ultimate strategic goal is to build a UAM platform operator company, we view now is the right time to accelerate this process for better commercialization. Specifically, we are planning to launch a 100 Air Mobility Route Initiative in China from 2021 and onward. We believe the time is opportune as we are getting into the final stages of airworthiness certification of our EHang 216 AAVs. As a result, we expect annual revenues in 2021 to range between RMB130 million and RMB180 million. That concludes our prepared remarks. Let’s now open the call for questions. Operator, please go ahead.
Questions and Answers:
Thank you. [Operator Instructions] Our first question comes from Tim Hsiao from Morgan Stanley. Please go ahead.
Tim Hsiao — Morgan Stanley — Analyst
Hi, Mr. Hu, Edward and Richard, thanks for taking my questions. I have two quick questions. I’m sure like the management team have already touched on this topic several times and according to the company’s announcement noted here is that we did see some progress in terms of the [Indecipherable] and with further collaboration with CAC certification team, but again, how should that translate into more details about the timing of official — special airworthiness certificate, when we can get that? And with that, how should we think about the potential order waves upon the attainment of the certificates? My second question is about competitive landscape because we saw several players are making or plan to make inroads into this market. Will that change the industry dynamics meaningfully and risk EHang’s dominance and current collaboration with the government at the moment. Thanks.
Edward Huaxiang Xu — Chief Strategy Officer
Well, thank you, Tim, this is Edward. Let me take your questions. So first question regarding the type certificate progress. So it was very great progress we have made two days ago with a special meeting with delegates from CAC. This is a very high level, senior members from all over the country and representing different sub-bureaus for the CAC and during the meeting, it is actually the kick-off meeting and the government — the CAC officials, they highly recognized our progress and so the message here is quite optimistic.
However, I cannot tell you the exact timing for when we can get the certification, but based upon our communication so far, we are quite confident about this issue. And about the potential orders you mentioned, I think, yeah, definitely, this will break the last hurdle, our last bottleneck from the regulation perspective, which will lay a very good foundation for our future commercialization of our products. And so that is definitely today a very good message.
And your second question regarding the competitive dynamics. Right, so we understand that nowadays we see quite a number of companies who are making their own products and including some auto companies as well. However, we are quite confident about our technology, which created this entry barrier from the technological perspective because we, as we mentioned earlier, we are not only a company who focus on designing and manufacturing the vehicle itself, we are creating a whole system, we are building the platform.
That is a very key difference which sets us apart from all the other peers and we believe that this will definitely give us a first-mover advantage that we are building a platform and setting the standards and right now working with the CAC delegates, another major task is to set the standard for the certification and so we are working very closely with CAC officials in setting the new standards and we are very proud of that. And so that is also very different perspective and it makes us very unique in this industry and so we are quite confident about our technology, about our system, and our whole idea of future UAM. I hope this answers your question and if you have any further question, please let me know. Thank you.
Tim Hsiao — Morgan Stanley — Analyst
Yeah, very clear. Thank you very much, Edward.
Thank you. Our next question comes from Vincent Yu of Needham and Company. Please go ahead.
Vincent Yu — Needham and Company — Analyst
Thank you management for taking my question. I have two questions and one follow-up question. My two questions is on the order and the clients. The first question is on order book. Can management go into more details on our existing order book and the split between orders that we have received, basically buying deposits versus the ones that are just pure intentional contracts.
And my second question on the client is that we previously we have been working with some touring [Phonetic] sites going to open, [Phonetic] what I remember. So are we expanding our client base like [Indeciphearble] 216F. Are we expanding to governments and what’s our current client base looks like.
And my third question is for follow-up on the timing of airworthiness certificates. We totally understand it’s hard to predict the exact timing, but is there a very rough kind of prediction, let’s say, mid year or by the year-end or next year? What kind of a — like a more — like a rough timing that we can predict. Thank you.
Richard Jian Liu — Chief Financial Officer
Hi, Vincent. Thanks for the question. This is Richard Liu. I will take your first question. So our order backlog, it’s on a running basis. So, right now at this moment, there are roughly around 100 units and in terms of international versus domestic, actually a majority of this are from within China as you can imagine given the still ongoing global pandemic impact and about 40% [Indecipherable].
Edward Huaxiang Xu — Chief Strategy Officer
Yeah, Vincent. This is Edward here. I’ll answer your second question about EHang 216F, right. So this is specially designed AAV for firefighting purpose. However, we’re still in the process of obtaining the last certification from the government and there are two items which we need to do by conducting some experiments to prove the capability and also obtaining final certification from the government.
And the client base will gradually — will generally be the government, the firefighting department and the emergency department from different provincial governments and so far we received very positive feedback from the government. However, we still need to go through the certification and so that we are able to enter the national purchase catalog so that the government can place order for that.
And regarding your last question about the timing of the type certificate. We believe that — as I mentioned, we cannot predict the exact timing, but based upon the message from the government officials, it is a quite optimistic we should say and also the whole process should be a gradual process, which means that toward the final certification, there could be some several milestones during the whole process, which we expect to achieve and to get recognized and so I think during which we should be able to share the news with the market in the next six to 12 months about the progress. And so that is what we can say now. Thank you.
Vincent Yu — Needham and Company — Analyst
All right, thank you. We are approaching the end of the conference. If you have further questions, please contact us by email or phone after the conference call. Let me turn the call back to Mr. Liu for closing remarks.
Richard Jian Liu — Chief Financial Officer
Thank you, operator and thank you all for participating on today’s call and for all your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.
[Operator Closing Remarks]