Hesai Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 19, 2024

Key Takeaways

  • Hexai was named the world’s #1 automotive LiDAR supplier by market share for the third straight year, capturing 37% of the global automotive LiDAR market and 74% of the robotaxi segment in 2023.
  • The company secured an exclusive partnership with Baidu’s Apollo Go, equipping each robotaxi with four AT128 ADAS LiDARs and marking the first large-scale ADAS LiDAR deployment in China’s robotaxi fleet.
  • In Q2, Hexai delivered RMB 458.9 million (US$63.1 million) in revenue—hitting the top end of guidance—with LiDAR shipments rising 66% year-over-year to over 86,000 units, a 45% blended gross margin, and net loss narrowed 33% sequentially.
  • For Q3, revenues are projected at RMB 450–500 million and full-year sales have been revised to RMB 2.0–2.3 billion, while H2 gross margins are expected near 40% and the company aims for non-GAAP profitability by Q4.
  • LiDAR adoption in China’s EV market hit a 22% penetration rate in June—surpassing the critical 16% inflection point—and Hexai has secured design wins with 19 global OEMs (including exclusivity for next-gen L3 ultra-high-performance LiDAR on a leading EV maker’s 2025 models).
AI Generated. May Contain Errors.
Earnings Conference Call
Hesai Group Q2 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for Hessai Group's 2nd Quarter 2024 Earnings Conference Call. At this time, all participants are in listen only mode. Please note that today's conference call is being recorded. I will now turn the call over to our first speaker today, Yuan Ting Chi, the company's Investor Relations Director.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone. Thank you for joining Hexai Group's Q2 2024 Earnings Conference Call. Our earnings release is now available on our IR website at investor. Heseiqa.com as well as via newswire services.

Speaker 1

Today, you will hear from our CEO, Doctor. David Li, who will provide an overview of our recent updates and address our financial results before we open the call for questions. Before we continue, I refer you to the Safe Harbor statement in our earnings press release, which applies to this call as we'll make forward looking statements. Please also note that the company will discuss non GAAP measures today, which are most thoroughly explained and reconciled to the most comparable measures reported on the GAAP in our earnings release and SEC filings. With that, I'm pleased to turn over the call to our CEO, Doctor.

Speaker 1

David Li. David, please go ahead.

Speaker 2

Thank you, Yuan Ding, and thank you everyone for joining our call today. Let's begin with an overview of the LiDAR market trends and some recent business highlights before moving on to our Q2 financials and operational results. We are thrilled to announce that Hexa has been recognized as the number 1 automotive lidar company by market share for the 3rd consecutive year according to the latest lidar for automotive reports from U. S. Intelligence, a world renowned European independent research firm.

Speaker 2

2023 was a stellar year for Hesai, marked by record breaking revenues and shipments, strategic design wins and expanded product lineup and new partnerships. Our expertise in both passenger cars and robotaxis enabled us to capture 37% of the global LIDAR market and an impressive 74% share of the global robotaxi LIDAR market in 2023, demonstrating our clear leadership of the global automotive LIDAR market. Youth recognition inspires us to aim even higher as we continue to deliver the most advanced and powerful lighter products to any further growth and innovation in the dynamic automotive industry. Next, a brief update on autonomous mobility business. At present, one of the most exciting developments in China is a thriving robotaxi market, which is scaling and commercializing at an impressive pace.

Speaker 2

We're delighted to witness this momentum and proud of Hexai's key role in promoting this trend. Baidu's Apollo Go, an autonomous driving travel service platform, has recently launched operations in Wuhan, one of China's largest cities. This launch has garnered significant market interest and numerous orders highlighting the continued development path and the tremendous potential of the robotaxi business. According to media reports, Apollo Go has provided over 6,000,000 robotaxi rides in 11 Chinese cities since 2019 will be serving as Baidu Apollo Go's exclusive supplier for their vehicles' main perception LIDAR. With their 6th generation rolling out this year, each vehicle is equipped with 4 of our AT1 hundred and twenty eight ADAS lidars, marking the 1st large scale application of ADAS lidar solution on Robo Techies in China.

Speaker 2

Our collaboration with Baidu's Apollo Go is a prime example of how our advanced LIDAR solutions at attractive price point can provide comprehensive object perception, accelerating the adoption and commercialization of fiberless vehicles globally. Let's now turn our attention to the ADAS market. In the last quarterly update, we underscored the significance of 2024 as a decisive year for the LiDAR industry's leap to mass market popularity. According to GGII, a renowned automotive research and consulting firm, the LiDAR adoption rate among EV priced above RMB150000 is projected to surpass 16% this year, barreling towards 50% in alignment with the famous Crossing the Caesars innovation adoption model. We are pleased to note that this critical 16% inflection point was reached earlier than the market anticipated.

Speaker 2

According to the latest data, our overall LiDAR penetration rate in China reached an impressive 22% in June of this year, driven by consistent monthly increases of approximately 2% over the past 3 months. Additional June statistics also reflect this trend, revealing that average LiDAR adoption rate among the top 10 best selling new EV makers in China exceeds 60% of their total sales and volume. In the first half of the year, LiDAR installations increased remarkably by approximately 2 50% year over year outpacing the growth rate of other sensor installations by almost 10 times. These figures highlight LiDAR's accelerated acceptance and its critical role in enhancing vehicle safety and the comprehensively improving autonomous driving capabilities. We anticipated that LiDAR will continue to drive innovation across automotive industry and shape the future of smart transportation.

Speaker 2

In light of these LiDAR market trends, our strategic approach of offering both ultimate performance and ultimate value to cost products has positioned us to adaptively address the diverse needs of our extensive client base. Our next generation flagship products such as the ATX and AT512 are gaining significant traction among OEMs competing on intelligent driving functions. Maintaining a flexible and competitive product roadmap has also enabled us to secure crucial design wins for new car models scheduled for SOP in 2025 and beyond. In the Q2, we recorded a series of new design wins within the domestic market. Our deliveries for those models are scheduled to begin next year.

Speaker 2

These include a flagship model from a top selling EV maker new to our client roster which currently has 15,000 vehicle shipments per month. Our existing customers who are among the largest EV shippers in China have also extended their partnerships with us to include multiple new models and the facelifts set to launch starting in 2025. The rapid adoption of our products by these key players reflects our competitive edge and the substantial value we provide. Notably, as L3 autonomous driving technology promises an unprecedented consumer experience, there is a growing trend in the domestic market to prioritize high performance lighter products for next generation vehicles targeting L3 standards alongside domestic OEMs historical focus on cost efficiency. Among the previously mentioned new design winnings, a leading EV maker has already signed agreement with us to exclusively adopt HACET's next generation L3 ultra high performance lidar for all their new models scheduled for release in 2025.

Speaker 2

This further solidifies our position as a leader in advanced lidar technology and opens the gate for more domestic OEMs to follow. On the international front, we have secured design wins with 4 prominent global OEMs, including 3 joint ventures in China with 2 American and 1 European automotive companies. Some of their models will be shipped both domestically and globally. Most notably, we have been selected by a global automotive OEM for its worldwide shipping programs. Unlike some of the competitors who are still in the B Sample development phase, we are progressing towards the actual delivery of B samples for this milestone design win.

Speaker 2

Additionally, we've been awarded new POC programs with 2 leading global OEMs from Europe, including a prestigious sports car brand to test Hesai's next generation high performance long range and short range lidars. While these 2 POCs are not yet fully designed wins, we believe they have potential to convert into real deals in the future. To date, we have secured ADA's design wins with a total of 19 OEMs globally across over 70 vehicle models. This includes ADA series production partnerships with 6 out of the top 10 global OEMs directly or through entities within their group and 8 out of the top 10 domestic OEMs measured by their revenue in 2023. Among these 19 OEMs, 13 of them have chosen HOSA as their exclusive long range liner supplier, further demonstrating the trust and confidence industry places in our products and capabilities.

Speaker 2

Now let's briefly go through our operating and financial results for the Q2 of 2024. To be mindful of the length of the earnings call today, I encourage listeners to refer to our Q2 earnings press release for further details. In the Q2, we achieved quarterly revenue of RMB458.9 million, US63.1 million dollars reaching the high end of our guidance. In addition, our LiDAR shipments rose to over 86,000 units marking an increase of 66 percent year over year and 46% quarter over quarter. Our blended gross margin was robust at approximately 45%, improving quarter over quarter, thanks to effective cost management and our flywheel approach to cost and scale optimization as well as additional service revenue contribution during the quarter.

Speaker 2

As a result, our quarterly net loss narrowed significantly by 33% quarter over quarter to RMB72.1 million, US9.9 million dollars These accomplishments highlight our best in class execution within the global LiDAR industry in streamlining our operations. We continue to anticipate stronger performance in the second half of the year both in terms of revenues and shipments. For the Q3 of 2024, we expect net revenue to be between RMB450 1,000,000, US61.9 million dollars and RMB500 1,000,000, US68.8 million dollars representing a year over year increase of approximately 1% to 12.2%. In light of our downstream adjustments to accommodate the postponed SOP timeline for certain client vehicle models, we've revised our full year revenue forecast to be within the range of RMB2.0 billion to RMB2.3 billion, roughly US280 million dollars to US320 million dollars Additionally, we anticipate that less than 20% of our total revenue will come from the U. S.

Speaker 2

Market. The vast majority of our revenue will be generated outside the U. S. Driven by the increasing demand for LiDAR technology elsewhere. Despite the recent downstream adjustment in ADAS and unexpected production delays on the Robo Tech Society since late 2023, our financial strength remains robust reflecting the resilience of our business.

Speaker 2

Our cost management initiatives have yielded better than expected results in terms of our blended gross margins. Compared to our earlier guidance, which projected a blended gross margin at the higher end of the 30% to 35% range for the full year of 2024, we now foresee the blended gross margin for the 3rd and 4th quarter is expected to be close to 40%. This expectation holds true even with the notable year over year growth in ADAS business, which although expanding rapidly has traditionally had a lower margin. We are not aware of any other player in the global LIDAR industry that matches our financial strength while operating on such a massive delivery scale. We anticipate that effective expense controls and optimize operational efficiencies will bring us closer to achieving profitability in the Q4 of this fiscal year.

Speaker 2

We like to remind you that this outlook is based on the current market conditions and reflects the company's preliminary estimate of the market and operating conditions and customers' demand, which are all subject to change. Looking ahead, we see strong growth opportunities. Our strategic initiatives and market positioning lay a solid foundation for future success. We're confident in our growth potential for 2025 and 2026 and expect to continue outperforming our LiDAR peers, driven by the following key factors. First, we're strategically positioned to benefit from the rapid growth of the robotaxi market, particularly in China.

Speaker 2

The recent launch of Baidu's Apollo Gold across 11 major Chinese cities marks the beginning of a new era. Industry analysts estimate that this LiDAR deal is worth US200 dollars to US300 $1,000,000 based on Baidu's plan to deploy approximately 100,000 Robo Tech C Vehicles in China. This move is expected to be the 1st extensive deployment of Robo Tech C Technologies in the Chinese market and Baidu's advancements are just the tip of the iceberg. Other leading Robo Techi players are also making significant strides. Notably, all of the top 5 Robo Techi companies in China have selected Hezai as their exclusive main perception buyer supplier.

Speaker 2

As our Robo Tech C customers continue to enhance cost efficiencies and scale their operations, we anticipate a strong rebound in our Robo Tech C related revenues in the coming years. 2nd, the ADAS sector. We've secured key design wins with 19 leading OEMs globally, 13 of which have selected us as their exclusive long range LiDAR supplier. Our strategic approach of offering both ultimate performance and ultimate value to cost products is generating a robust ADAS order pipeline for 2025 and 2026 stronger than that of our peers. Our AGX ADAS lidar designed for mass market and the large scale adoption has skewed design wins from 7 OEMs as of the end of second quarter.

Speaker 2

This positions us for millions of units in use throughout the coming years based on customer demand forecast. Furthermore, we are the sole recognized provider of ultra high performance LiDAR, particularly our AG-five twelve for OEMs aiming to achieve Level 3 standards in their next generation of intelligent vehicles. Notably, we're executing level 3 series production programs using this advanced technology, including collaborations with a leading EV maker in China and a leading global OEM. These achievements position our ADAS business for exceptional growth both domestically and or internationally supported by our cutting edge technology and proven track record of over 450,000 LiDAR deliveries since inception as of end of Q2. 3rd, we anticipate that the introduction of regulations mandating higher safety standards will be transformative for the LiDAR industry.

Speaker 2

Initiatives such as China's newly launched Level 3 policy and the NES test AED speed requirements in the U. S. Are propelling advancements in intelligent driving with an unprecedented emphasis on safety. Meanwhile, more OEMs and consumers are recognizing LIDAR configurations as essential safety features just like safety belts or airbags. As a global leader in automotive LIDAR, Hesai is exceptionally well positioned to capitalize on these dynamic safety trends.

Speaker 2

Last but not least, before I conclude, I'm delighted to announce that the publication of Hexizing Elvira ESG report. This report outlines our efforts and accomplishments in ESP across our business operations and underscores our ongoing commitment to sustainable development. As a leader in the automotive LiDAR industry, Hesai is delighted not only to elevating people's lives within cutting edge Lidar technology and products, but also fostering greener and more sustainable operations. Moving forward, we'll continue to align our business goals with ESG best practices to ensure long term value for our stakeholders and society. For more details on the ESG reports, please visit our IR website.

Speaker 2

In summary, we're poised to capitalize on emerging opportunities in the automotive industry backed by our efficient operations, a robust financial foundation and outstanding technological capabilities. As we look to the remainder of 2024 and beyond, we remain committed to driving innovations and providing top tier LiDAR solutions that enhance vehicle safety and autonomous driving worldwide while adhering to our ESG objectives. This concludes our prepared remarks today. Operator, we're now ready to take questions.

Operator

Thank

Speaker 3

you.

Operator

Your first question today comes from Tim Hsiao from Morgan Stanley. Please go ahead.

Speaker 4

Good morning, David. Thanks for taking my questions. I have two questions. The first one, we noticed that the Financial Times reported that the U. S.

Speaker 4

Defense Department has decided to read news, her side from the blacklist. Could you please elaborate a bit more on the current developments, the progress and of course the implication to your project wins and appreciating overseas because we think this is a very important milestone. So it is great if you can share more details. That's my first question. Thank you.

Speaker 2

Thank you, Tim. Thank you for the question. We have consistently maintained that our inclusion on the 12 CPH list was a mistake. Our products are strictly for commercial and the civilian use and we have no connection to any military bodies. We're not a vendor to any military bodies either.

Speaker 2

As we discussed in the previous earnings calls, being on the DoD means strictly that the U. S. Department of Defense, AKA the Pentagon, cannot buy our product starting mid-twenty 26. But to be honest, as far as we know, we've never sold anything to DoD or any military. And we definitely don't plan in the future.

Speaker 2

Or in simple terms, we've never generated any revenue from DoD or any other military. And again, we don't expect to. However, being on the list did seriously impact our reputation. And as you can see, the stock price, it also impeded some of the business opportunities over the past few months since we've been included. And again, to be honest, it actually made things very tricky for some of the customers because they're worried that we might have ties to the Chinese military as that's what the list meant.

Speaker 2

Unfortunately, it's hard to disapprove until DoD officially takes us off the list. We will not be able to speak to the actual results until it's official, but by any chance, if we are removed with our leading technology and the best in class financial strength, we're very optimistic that we will lock in more global news. And this is the information we would like to share regarding the current status of the DoD. Unfortunately, I will not be able to speak to the status of the Financial Times article because that's a speculation of the case and we definitely need to wait for the official ones. But I think it's more important that people understand our position, understand the fact and also understand that we have been in the by this inclusion and if by any chance we are removed, we are extremely optimistic that a lot of the progress that was indeed in the past will be removed and hopefully on the accelerated path.

Speaker 2

Does this answer your question, Tim?

Speaker 4

Yes, yes. Thanks for sharing all the details. And my second question is currently on investor focusing a lot on the robotaxi and maybe also shared quite a lot of updates during the presentation. But as you mentioned, I think, Chris, that was chosen by the Apollo goes for as next generation of petechi as a sole suppliers across 11 cities. But if there's any further details, how should we think about the market opportunities?

Speaker 4

Because you also mentioned in addition to Baja Polo, the top notch and Robby Taxi operators or makers also want to do the business with us. You mentioned like a 4 light at the car. Would that kind of business also boost the value content with like a potential assembly or software being integrated? In the meantime, when do you think we are going to see the inflection points or more meaningful revenue uptick? As it could be next year or the year after or we are going to see some progress later this year?

Speaker 4

So that's my second question. Thank you.

Speaker 2

Thank you, Tim. I will answer the first part. I think for split of second, I missed your question on the software side and which I might have to ask you to ask again. But let me first take on the question of the business development of the RoboTaxi. I think it's fair to say that we are the biggest RoboTaxi LiDAR supplier in the world by any measures.

Speaker 2

And in China, we are the exclusive, the main perception LiDAR supplier for all of the top 5 robotaxi supplier and most people believe that we have a product that's way superior than the peers and including Baidu, Apollo Go, right. And based on the yield report for 2023, we have a 74 market share of the global lidar market for robotaxi as we I think have been communicated. And historically those people use mechanical spinning LIDAR, but now as you see as we are scaling up, a lot of people are adopting the ADAS AT128, again including Baidu Apollo, which is a very interesting transition as we see because AT128 is a new sensor that we've shipped 100 of 1000 of and it's a very powerful, much more affordable sensor. And I think this actually helps the customers to achieve a better balance between price and performance. At this point, to me, the biggest inflection is more commercial than technological because technological advancement has always been continuously advancing.

Speaker 2

Well, this year is the 1st year most people are talking about commercialization in the sense that you need to look at the total cost of equipment, you need to look at amortization and in the end you need to come to a business case in which if your sensors are still worth tens of 1,000 of dollars each as you still, it makes it tricky for people to do that. And that's why we are working very closely with robotaxi people to do that. And by the way, it's one of the example and they're not the only one by the way. Many other robo taxi people have also adopted the similar trend. So as a result, what we see is that we start to receive significantly larger light up orders for robotaxis for the years to come as some of them have already been locked in.

Speaker 2

And as we expect this market to grow and we expect the customers to move from a smaller scale, high priced mechanical LIDAR to the larger scale 8 bit LIDAR. And also international robot HD players are still focusing on the performance. So they're still focused on the mechanical LIDAR, which is the more high priced and a more much higher margin business for us. So this is on the business part. And again, I remember you had a question on the software.

Speaker 2

Can you repeat that so that I can clear the answer?

Speaker 4

Sure, sure. So basically just want to tell that if there would be any differences between our business with the Rubber Taxi maker and the traditional car maker. So in Rubber Taxi's case, because we are going to provide like a multiple LiDARs, So just wondering if there will be any potential upside to the battery content. So in addition to the LiDARs, will Hexa also provide like assembly services or together with some additional software to facilitate the roll out of the rapid taxi. And so, in short, will there be any value content outside in addition to the LiDAR yourself?

Speaker 2

Okay. So your question is to make it difficult, can we make more money from them by not only selling the hardware, but also selling the software, right? So the quick answer is I believe it's a different business model in a sense that we do provide a lot of tools. We're trying to stay away from the data per se, but we do provide tools for installation and calibration, stitching different point clouds into 1 panorama image. And those are the tools we have.

Speaker 2

But instead of charging them separately, we think the business model is that we provide them with the software as part of the hardware package and that way allows us to have a better margin and a better a more competitive product. So in other words, that's already been embedded in, that is one of our advantages of being able to cater to this market with a better offering.

Speaker 1

Yes. Let me clarify on that. I think Hexai's key focus is exclusively on supplying LIDAR hardware, but not the software. I think we are very, very strict about we never have any data security or privacy risk that can be posed because we never transmit data wirelessly. We do not store even a second of the point cloud and we only supply the lighter hardware but not the software.

Speaker 1

I think that's key.

Speaker 2

Yes. I will give you another example that I consider as analogous. If you think about, for example, Apple, right, they sell you cell phones, right. Technically, they could charge you for the iOS system or if you look at your MacBook, they could charge you for the macOS systems. They never do that.

Speaker 2

They just sell you a more expensive hardware because most people now don't have the habit of buying a separate set of software for the hardware, even though they go together. I think the software is served as a higher barriers and better user experience for the hardware product. I think that's kind of the philosophy we're following.

Speaker 4

Got it. Super clear. Thanks for sharing all your details. Thank you.

Speaker 2

All right. Thank you.

Operator

Thank you. Your next question comes from Tina Hao from Goldman Sachs. Please go ahead.

Speaker 5

Good morning, David, Yuanping. Thanks for taking my questions. So I have two questions. The first one is regarding the robotaxi LiDAR. So you report autonomous mobility LiDAR shipment separately.

Speaker 5

But now I understand that would include the AT128 LiDAR as well, right? So just wondering like how much of that 5,700 is AT and then the rest is, Pandora. Could you give us like a breakdown? And then also for the AT128 that you sell to the robo taxi customers, is it the same pricing and margin as you sell to the EV OEMs?

Speaker 1

So that is a good question. So as we said, currently, within the Chinese market, we are seeing a trend where our Chinese Robo taxi players, one day, would like to commercialize their business. They're switching from the transitional mechanical spin lidars to adopt the ADAS lidar. And as a result, we have received significantly larger lidar orders for use in robotaxis for the years to come. That means that the big order will be split into several years and we will record the ADAS light ourselves to these type of Chinese robo taxi players in the coming years.

Speaker 1

So holistically, I think on the robo taxi side in China, we can expect that they are moving from the smaller scale higher price mechanical LIDAR to larger scale ADAS LIDARs and that will boost our revenue and gross profit in the long run as the Robotaxy business grow in China. And with regard to your second question, are we having a higher price? Are we having the higher margin for the ADAS light that we sell to the Robo Techi players in China? The answer is yes, because the amount that they are buying from us is not as significant as the passenger car OEMs they are buying

Speaker 2

for us.

Speaker 1

So basically, they will enjoy, of course, a relatively better price. And of course, we are selling the ADAS LiDAR to them with the same cost, so the margin will be relatively better as well. So that's why I'm saying that will boost our revenue and the gross profit for the long run.

Speaker 2

Yes. So the other angle to look at it is that to us because they're buying the identical product and in the end the pricing is strictly tied to volume, right. So if you kind of look at it, the ADAS volume usually were in the range of 100 of 1000 of units a year. Well, clearly, Robotech isn't there. So that's why they have to pay for a higher price and add the volume in there.

Speaker 2

But having said that, the long term frame of agreements we have with different robot estimators is such that by the time they reach similar level range level as the ADAS product, the price to them will be also go to the ADAS product. So and it gives the nature of such a business.

Speaker 1

Yes. And financially, I think it's an equation, right? It's about the price you have multiplied by the volume you have, then multiplied by the gross margin you have. And so based on this equation, I think in the long run, having the data slide are shipped to our larger amount of robot equity players that will help their to help them commercialize their business. And in the end, the equation for us, I think, will be beneficial for us financially as well.

Speaker 5

Thank you. That's very clear and makes a lot of sense. And second question is regarding your gross margin because the Q2 gross margin has improved quite a lot from Q1. So could you give us a breakdown in terms of the factor for the improvement? How much is from product mix?

Speaker 5

How much is from like scale benefit? And also, as David mentioned, the LIDAR gross margin has also significantly improved. So just wondering, like how much difference is there between the ADAS gross margin and autonomous gross margin now? And maybe too many questions on gross margin as well. So as you guided for 3Q and 4Q gross margin at 40%, so wondering why is it lower than our 2nd quarter margin?

Speaker 5

And lastly, how should we think about gross margin in 2025? Thank you.

Speaker 2

Thank you. Yes, there are many, many questions in this. So I will try to give you the top level thinking and maybe we can have a more interactive discussion based on this. The first is despite the downstream adjustment to accommodate the postponed SOP timeline for certain clients, Our ADAS ASP will remain relatively stable within the year. The pricing was negotiated at the time of the contract and signed typically fixed for the year.

Speaker 2

The mechanical LIDAR for each specific product also remain stable because most people recognize us being by far the best mechanical LIDAR on the market. And then you're right that we had a 45 percent gross margin blended in 2Q highlighting our financial strength and definitely the resilience of the business despite some of the shorter term headwinds. I think one thing I want to point out is that our quarterly gross profit total is more than RMB200 1,000,000. That's roughly 3x that of the next highest publicly listed competitor on the global side. And I think a few reasons.

Speaker 2

One is our cost management effort has paid off because we upgraded AT-one hundred and twenty eight featuring a more integrated design along with improvement of our in house ASICs. I think that's one of the biggest effects there. Otherwise, definitely we're benefiting from the economies of scale as we ramp up the shipment. And also we were able to take advantage of that to drive down materials and the manufacturing cost. And there is also I have to say there is also a one off high margin service fee AKA NRE from one of the global leading OEM in the Q2, which is very helpful on the gross margin side because of the service revenue.

Speaker 2

So these are the status of it. And looking ahead, I think we initially guided a blended gross margin of the higher end of 30% to 35% range for the full year. We now expect the margin for Q3 and Q4 to be closer to 40%. To be honest, we are not aware of any other player in the global LIDAR industry that can match our financial strength. At the level of the revenue and the number of units we deliver, which is already at scale.

Speaker 2

And with effective expense controls and optimized operational efficiencies, our OpEx is expected to grow 10% to 15% compared to the full year of 2023. And these initiatives bring us closer to achieving profitability in the Q4 of the year. We are also optimistic about approaching non GAAP breakeven for the second half of twenty twenty four And these are what we expect for the future and also the current status of the year.

Speaker 1

So in short, our gross margin will be very robust. We delivered 45% in 2Q, and we are expecting Q3 and Q4 to be closer to the 40%. You mentioned why there will be a Q o Q slightly decline, right, from 45% to 40%. It is because we recorded a one off high margin services revenue during the Q2, as David mentioned. However, on the other side, if you look at the cost management capability we have, if you look at the economies of scale benefits we are enjoying, the 40% level of the gross margin is probably very leading position in the industry.

Speaker 1

And if you look at the gross profit, absolute value we have recorded more than RMB200 1,000,000 in 2Q along. I think we can as of now, we are not aware of anyone else in the industry actually have this kind of financial strength. And that is helping us to garner a lot of deals from other passenger car OEMs as well because the best in class financial strength, they have more confidence to partner with us in the following years to come.

Speaker 2

Does that help you understand the gross margin fluctuation?

Speaker 1

Yes, very helpful. Thank you.

Speaker 2

Okay. Thank you.

Operator

Thank you. Your next question comes from Jessie Lowe at Bank of America Securities. Please go ahead.

Speaker 6

Hi, David. Thank you for taking my question. My first question is sort of answered just now because I was wondering that we have already reiterated our breakeven for the Q4 of the year. And then you mentioned that we are targeting the non GAAP breakeven in the second half of twenty twenty. I'm just making sure that I have heard it correct.

Speaker 1

Excuse me, Jesse, would you mind repeating your question? We answered

Speaker 2

the first part. We answered that already. Is there a new question?

Speaker 1

Is that about the breakeven time line? I think we just answered that question when Tina

Speaker 6

breaks the question. Yes, yes, sure. And then I would like to ask about, as Tom mentioned that they will not use Zaiya going forward, of course, they are not a meaningful client to us as of now. But then we're just wondering that would it be the chance that other weather maker will try to follow what they are doing on the technology side because what we see is very diverse for us. We are seeing a lot of orders coming in and a lot of side inches, a lot of sampling with our clients.

Speaker 6

But on the other hand side, we're still also seeing like someone decided not to use and then I guess they have their own reason as well. So how do we see this to develop in the future?

Speaker 1

So may I clarify your question if you're asking about the master project pipeline?

Speaker 6

I am asking about Exxon, they are not using they decide not to use LIDAR on their future models. And then what other OEMs tend to be like in the future trying to follow or copy what they are doing right now?

Speaker 2

So let me make sure I under your question.

Speaker 1

So you're asking about the question about Tesla's vision only solution and Xpens switching from LiDAR solution to non LiDAR, am I correct?

Speaker 6

Yes, yes. And then of course, it does not impact us, but then what if other OEMs trying to copy and or like do what they're trying to do right now?

Speaker 1

Yes, sure, sure, sure.

Speaker 2

So the Tesla question is the same question as it is before, right? The one thing I think people should pay closer attention is that there has been a publication by the Wall Street Journal and they've been listing out a lot of the publicly available sources on the different technological challenges on the safety side Tesla had. And definitely, they believe some of them could have been avoided with a LiDAR. I think that even though it's public data, it was very interesting for people to collect them in such a way and to see, oh, it's a much more intuitive image for us to understand LiDARs as the seat belt or the airbags. And the other fact I want to point out is that in my mind, Teslalot of the carmakers today, they're shipping Level 2 or Level 2 plus plus sensor systems in which ultimately it's all human, right?

Speaker 2

It's not on the machine. While clearly there have been lot of efforts globally for sure and also in China that an industry is moving towards level 3. The nature of level 3 is you need redundant measures to achieve that level of functional safety. Functional safety meaning that you need the redundancy to have different ways to measure the same results or same object and that requires a LiDAR. And at least that's what we see almost every other global OEMs and the vast majority of the OEMs in China when they develop Level 3 system.

Speaker 2

So the message is that, A, look at Tesla's recent the accidents, B, for level 3 globally everybody else agreed you need a LiDAR, look at China level 3 everybody agrees you need a LiDAR. For level 2, some people think you could save that money, but even with that, we're making that affordable enough that most people are widely adopting Mana and a lot of the players decided to make it standard configuration moving forward. And so this is really the status of the industry.

Speaker 6

Yes, sure. Thank you so much. And then second, I still have one more question, which is our previously guided Q3 shipment to be 150,000, 4th quarter 200,000 and full year at $500,000 would that have any update? And if you could, could you sort of shed some light on the key client breakdown as well, for example, lean versus the best?

Speaker 1

Yes, sure. So I can take that question. So for the second half of twenty twenty four, we are now expecting 300,000 to 350,000 shipments in the second half of the year. And this is due to downstream adjustments by certain ADAS clients, where some of their models have been pushed out to early next year. However, on the other side, we are seeing 2 trends.

Speaker 1

The first trend is that our ATX has garnered significant interest among the domestic OEMs. And as we stated in earnings is that we have already secured 7 OEMs for our ATX product already. And the second trend is that we have noticed that in China, especially recently, there has been a growing trend where the domestic OEMs are also moving toward Level 3 standards. So they are requesting for even better performance of the ADAS LIDAR. So like we said in the earnings that one of the leading EV maker has already signed the agreement with us to adopt our next generation ultra high performance ADAS LIDAR for all of their new models scheduled to SOP in 2025.

Speaker 1

And we believe that this will open a gate for others to follow as well for even ultra higher performance lidars. So as we offer both ultimate performance and also ultimate value to cost products, we are seeing some clients have decided to switch from our competitor to us. So that's why we are we will be anticipating very strong and solid order pipelines in 2025 and 2026. And in 2024, as we stated, because of the push outs for certain models from the clients, we are guiding $300,000 to $350,000 for the second half of the year.

Speaker 6

Got it. Thank you so much.

Speaker 1

Thank you, Jesse.

Operator

Thank you. Your next question comes from Zhang Yu at Huay Thai Securities. Please go ahead.

Speaker 7

Good morning, Yuanping and David. Can you hear me?

Speaker 1

Yes. Please go ahead.

Speaker 7

Okay. We see the ATS is about to go on the market. My first question is, do you know what's the difference between the ATS and the AT1 to AT1 for the strategy? And what's the impact for the gross margin?

Speaker 1

That's a good question. Thank you, Zhang Yu. So our ATX is a high value to cost long range ADAS LIDARs and comparing with AT1-twenty 8, I think the key point is that it's having very reasonable price, of course. And unlike similar products from our competitors that sacrifice performance for their lower priced ADAS LIDARs, our ATX offers both performance upgrades and cost efficiencies. And that's why we are securing a bigger number of partnerships on the OEMs.

Speaker 1

So since its launch, we have seen that the ATX has secured design wins with 7 major OEMs by the Q2 as we said. And the SOP timing for ATX, we expect that it will begin in the Q1 of next year with significantly larger volumes expected in 2026 as well. And we anticipate that it will penetrate into a broader range of vehicle pricing segments with small models featuring as a standard configuration and further driving our flywheel of scale and cost optimization. And because of this, I think the gross margin for the APS product will be very reasonable, even though we didn't specifically disclose what the gross margins will have.

Speaker 7

Okay. Thank you. And my second question is, when you see other competitors that they have received orders for the robotic slider, could you tell us more about the capacity plan for the robot hole? Holder? Thank you.

Speaker 1

You're talking about the robotics, right? Yes.

Speaker 2

Right. So the question is do we have a specific product for robotics industry. And depending on the definition of robotics, we always have non ADAS sensors. For example, the QT series, the XE series, they were not for ADAS product. So we always had that.

Speaker 2

And having said that, we do recognize that there have been a lot more embodied AI and robotics applications who would benefit from an even more miniaturized product with a lower price point. And so we are looking into that. And we do have a lot of interest and some of the orders already at a reasonably large scale from the non ADAS industry. But we don't have plans to disclose their names yet, but we have been aggregating them into the generic robotics sector or non ADAS sector.

Speaker 1

Yes. I think industrial robotics has always been part of our AM business. And remember that we are the global leader in AM capturing most of the market worldwide and all thanks to the best performance of our mechanical spinning lidars. For example, if you look at the recent news in July, we just signed a deal with Westwell to speed up the global expansion in AD for logistics. And our LIDARs can, of course, be used in many kinds of robotics applications, namely logistics, mining trucks, last mile delivery robotics, electronics, even human robotics in the future potentially, you name it.

Speaker 1

So we see huge growth opportunities ahead, I would say. And also stay tuned for our IAA event in Germany in September this year. Okay?

Speaker 7

Okay. Thank you. Thank you for taking my questions.

Speaker 1

Thank you, John.

Operator

Thank you. Your next question comes from Jiakli Zhang from CICC. Please go ahead.

Speaker 3

Hi, management team. Thank you for taking my questions. I'm Jiaqi Zhang from CICC. So congratulations on this quarter results. I have two questions to ask.

Speaker 3

The first one is regarding to the Level 3. Just I mentioned that Level 3 requires certain level of redundancy. So I want to go to more specific regarding the conditions. So are there any scenarios or conditions that can only be met with LIDAR, so that to make LIDAR necessity for Level 3? Thank you.

Speaker 2

Yes. That is a very good question in the sense that if you think about Level 3, the functional safety requires that, first, you need to have multiple measures of the same object in case one fails, right? That's the nature of such a system. And then directly to your question, will we see the best use of LiDAR being the one that steps up when cameras fail. There are 2 main scenarios.

Speaker 2

And those are not hypothetical cases. Those are the data we see from the 100 of 1000 of sensors which have shift and when they're operating on the road, we get those feedback. One is they call that general objects and for AED functions, if you have an object like a truck laid down sideways on the highway or an unidentified object lost to cargo that type of object, your neural network training would require your system to have seen such an object in the past to be able to recognize that. That's one. The other is generally a night.

Speaker 2

Again, I encourage you to look into the Wall Street Journal data set, which I think they include more than 200 cases. And if you look at those cases, a lot of them are generally in change of lighting conditions, especially in darkness or in or out of the tunnels in which your computer vision is struggling to see anything until it's too late. And then that is where LiDAR could reliably and stably and precisely identify the best timing to break or not. So those are the two scenarios we consistently see across different even level 2 plus plus application. But again, as I said, for level 2 plus plus you can always play in the human and that's not a big deal if machine fails because humans are supposed to be the backup plan.

Speaker 2

But Level 3, you're giving humans freedom to not to pay attention and that is a big safety risk.

Speaker 1

And we also talked about the introduction of regulations mandating higher safety standards, for example, the Level 3 policy rolling out from China and also the AED speed requirements rolling out from NASA. I think with these kinds of safety standards rolling out, the content per vehicle financially will be higher as well. That means that the number of LiDARs per car can potentially increase. That will be beneficial to us financially. Hope that answers your question, Tianqi.

Speaker 3

Yes, that's very clear. So for my second part, I have few many questions regarding to the ATX products. The first one is, how is the progress of ATX to be integrated with headlights? I guess there should be some there probably will be some technical issues with that. And the second question is regarding how do you guys achieve a lower cost for ATX other than the economic skills?

Speaker 3

Do we employ more maybe the Chinese supply chain, etcetera? Thank you.

Speaker 2

So the I'll do the second question first. The way we achieve a lower cost for ATX are a few things. The first is that it is the next level of economies of scale as we expect millions of units to be shipped over the lifetime of such a product and we already see that. And second is the further interest level of integration and ASICs because it's using our Gen 4 semiconductor, while if you remember the AP was Gen 2. And so that is a major improvement on the level of integration.

Speaker 2

Integration in semiconductor industry means cost saving because you just use less area of part of the wafer to build such a chip. Number 3 is the product definition fit in a sense that AT series was more generic because that's the first time we define ADAS forward looking sensor. By the time of ATX, we had 100 of thousands of sensors of experience knowing where to focus and where we can relax the spec a little bit to achieve a relatively similar higher performance. So we are able to fine tune such a sensor to fully utilize where it's needed best and then cut cost at the part that is not necessary. So with the combination of those three factors, we are able to achieve a superior cost to performance ratio.

Speaker 1

And with regards to your first question about integration, we signed a partnership together with Marelli several months ago to integrate our ATX LiDAR into the headlines. And remember that Marelli is, of course, one of the most famous Tier 1 supplier for global OEM. So that's about the integration. I think ATX can be applied to magnet placements on the cars and we will be seeing large adoption for the ATX product starting in 2025 and even bigger volume in 2026.

Operator

Thank you. That concludes our question and answer session. I'd like to turn the call back over to the company for closing remarks.

Speaker 1

Thank you once again for joining us today. If you have further questions,

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