EHang Holdings Limited (EH) Q3 2021 Earnings Call Transcript

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EHang Holdings Limited (EH -3.08%)
Q3 2021 Earnings Call
Dec 2, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, thank you for standing by and welcome to the EHang Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today's call. 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 result for the third quarter of 2021. We released the result 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 US 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.

Also, please note that unless otherwise stated, all the figures mentioned during this call are in RMB.

With that, let me now turn the call over to our CEO, Mr. Hu Huazhi. Mr. Hu will speak in Chinese, then our CSO, Edward Xu will translate his remarks to English. Please go ahead, Mr. Hu.

Huazhi Hu -- Founder, Chairman and Chief Executive Officer

[Foreign Speech].

Edward Huaxiang Xu -- Chief Strategy Officer

Thank you, Mr. Hu. Hello, everyone. I'm Edward Xu, Chief Strategy Officer of EHang. First, let me translate our CEO's remarks into English. Hello, everyone, I'm Hu Huazhi, the Founder, Chairman and CEO of EHang. Thank you all for joining our earnings call today. I would like to start by sharing with you our business progress for the third quarter of 2021.

As it is known to many of you that we are applying for airworthiness certification for unmanned aircraft with the Civil Aviation Administration of China or CAAC. Considering that obtaining the airworthiness certification is critical to the sales and operational services for our AAVs. EHang's recent focus remain on accelerating the progress for obtaining airworthiness certification for the EHang 216, instead of achieving large number of sales.

To give more details on where we are with airworthiness certification, CAAC has basically completed the formulation of airworthiness certification standards for unmanned aircraft systems. Meanwhile, we are continuing to work on the EHang 216 type certification and the completing the certification program according to our established certification plan. EHang and the CAAC you have a reached a consensus on the guiding principle that operational trial flights can gradually be carried out, while advancing the certification progress.

Moreover, we continue to implement our 100 Air Mobility Routes Initiative with seven operational spots established. During these trial operation stage, we can use this opportunity to optimize our products, conduct a more stress test on all hardware and software systems, review upon all kinds of simulated failures and increase test of the fusion controls for multiple flight control systems to make each and every flight smooth and safe.

We will not tolerate any possibility of errors for any flights or operations and must maintain absolute safety. We are conducting test flights and trial operations based upon actual scenarios in cities such as Guangzhou, Hezhou, Shenzhen, Zhaoqing and Sanya etc. This way we are exploring the construction of air mobility systems that will also make air mobility a common transportation method for everyone.

At the same time, we are also creating entire operational system strictly designing product management, operation services and other systems that include digital operational platform, hardware and software, such as cluster management for multi-AAV formulation flights, EHang cloud, cybersecurity and air taxi booking, AATs [Phonetic], etc. I believe that in the near future, these autonomous air taxi booking platform AAT [Phonetic] will be commercially available for everyone to use.

As for long range products, our VT30 is already capable of flying. The key systems in all our products, including those for flight control, batteries, speed control motors are developed, designed and produced independently by ourselves, which form our core competitiveness for future. Our goal for the VT30 is to achieve well developed and commercially available system and deployment based upon stability of the EHang 216.

In recent months, we have been working on test flights to significantly improve the stability and safety of every key component in the VT30 to prepare for a flight demo in due course, while ensuring, it is a mature and qualified product. We are now actively engaged in pioneering business without any precedent to follow. So patience is needed for success. I see that many investors have been supporting us and even some singers from overseas have written songs for us. We greatly appreciate the support, and we know that only achieving commercial operation can we call it a true victory. We will keep moving forward toward this goal to meet everyone's expectations for EHang and realize all our Company's potential value.

Above were Mr. Hu's remarks. Following his remarks, I will elaborate on our operation results in the third quarter and our plan for future. We continue to make further progress in our EHang 216 operations and airworthiness certification effort. As guided in our previous conference calls, we continue to make efforts in executing our 100 Air Mobility Routes initiative in third quarter of 2021, with specific focus in the Guangdong-Hong Kong-Macao Greater Bay Area.

During this quarter, our footprint further expanded to Shenzhen, a major city in the Greater Bay Area. With the cooperation with our local partners, our EHang 216 AAVs are able to fly regularly in Shenzhen Yantian. More importantly, this is world's first example of operating both our AAVs and helicopters in an integrated airspace, a great breakthrough in the history of aviation. Notably, we have been establishing a sample regular air mobility operation model for aerial sightseeing at the vertiport of partner, HELI-EASTERN, in the oceanfront of Maluan Hill area in Shenzhen since middle for [Phonetic] November.

With a daily frequency of six operational trial flights currently, we look to expand the flight frequencies to meet increasing market demand. We estimate our full scale operation in this spot will serve over 30,000 passengers per year. Furthermore, we have launched more operational spots in Guangzhou, Hezhou, Zhaoqing, Sanya etc, in collaboration with our partners, providing aerial tour and short distance travel experiences to passengers.

With execution of our 100 Air Mobility Routes initiative, we have launched seven operation spots. In compliance with the relevant regulations, we conducted about 2,800 operational trial flights at these spots. The abundant operational experience accumulated and safety records built from these operational trial flight provides us with essential information for future commercial operations officially.

On the certification of our EHang 216 AAV, we have attached paramount emphasis on these project and have been promoting our cooperation with CAAC. After multi rounds of discussion with CAAC expert team, our certification work has entered into the final stages of verification. So far the work progress appears to be satisfying, so we remain hopeful to obtain CAAC's approval on EHang 216 type certification in the next few months.

This year EHang 216 has received the attention of government officials from all over the world, which include President Macron from France, Premier Li of China and the King of Spain, all who have visited of EHang's exhibition booth to express their recognition of our product and technologies. Our sales focus remain on the sale of our EHang 216F AAVs, the firefighting version.

In promotion of our product, we have participated in several fire drills held by local governments in Guangzhou, Hezhou, Qingdao, Ningbo and Qingyuan, which have won wider recognition from the authorities. We will strengthen our promotion activities and sales channels further. Looking forward, we will attempt to accelerate the type certification work for EHang 216 according to our established certification plan. We will also continue to implement our 100 Air Mobility Routes initiative by adding more operation spots and frequencies to gradually build our UAM network in the Guangdong-Hong Kong-Macao Greater Bay Area.

I will now turn the call over to our CFO, Mr. Richard Liu for financial results. 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 third quarter of 2021, unless stated otherwise. All percentage changes are on a quarter-over-quarter basis, unless otherwise specified. Detailed analysis are contained in earnings press release, which is available on our IR website.

I want to highlight some of the key points here. We have been strategically transitioning from a product sales centric model into an operation platform-oriented model since early this year. This shift is a gradual process and important for the long-term growth of the Company.

Total revenues were RMB13 million in Q3, an increase of 6.6% quarter-over-quarter. The EHang 216 series of AAV deliveries in Q3 were 8 units, including 2 units of EHang 216F, the firefighting model, an increase of 5 units from Q2.

Gross margin in Q3 was 61.8%, though it was 6.2 percentage points lower than Q2 due to the changes in revenue mix, with a higher margin command and control system delivered in Q2. Our gross margin continue to be maintained at relatively high level, which reflects the unique inherent competitive value in our business.

Adjusted operating expenses, which are operating expenses excluding share-based compensation expenses increased by RMB1.9 million to RMB61.8 million in Q3 from RMB59.9 million in Q2. The increase in Q3 was mainly due to the continuously increasing R&D expenditures in developing and upgrading AAV models, including the long range VT30 and other products in pipeline and expansion of the R&D team to enhance the R&D capabilities of the Company. As a result, our adjusted operating loss in Q3 was RMB48.9 million, a slight decrease, as compared to RMB49.4 million in Q2. Adjusted net loss in Q3 was RMB47.8 million, as compared to RMB49.1 million in Q2.

In respect of the balance sheet and cash flow, we ended Q3 with RMB357 million of cash, cash equivalents and short-term investments, compared with RMB189.4 million, as of December 31st, 2020. We will continue to run a healthy operation and manage the cash burns in the development process.

Now let's turn to the business outlook. We have adjusted the annual revenue forecast for 2021 to be between RMB50 million and RMB60 million mainly due to the following reasons: first, the Company has been strategically transitioning from a product sales centric model into a more operation platform-oriented model and the ramp-up of operational revenues is subject to the ongoing certification processes of the EHang 216 AAV; and secondly, the potential orders of EHang 216F are expected to take longer sales cycle due to the procurement procedures of relevant government entities, which are typical customers for the product.

Further on November 29th, we announced the appointment of PwC succeeding EY, as our independent registered public accounting firm in connection with the audit of our consolidated financial statements for the fiscal year of 2021. The change was made after careful and thorough evaluation process and has been approved by the Company's audit committee and the Board of Directors.

PwC has abundant experience and knowledge in clean mobility technology sectors, such as electric vehicles, mobility as a service, and in particular, the global eVTOL and urban air mobility industries. We believe that PwC's appointment is helpful [Phonetic] to a next phase of growth under our long-term UAM platform operator strategy. Now, it's also good timing for the change, as there will be adequate time for smooth transition for 2021 annual audit. As always, we are committed to maintaining the highest standards of corporate governance and timely disclosures in compliance with the applicable rules and regulations of the SEC and NASDAQ.

That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Tim Hsiao from Morgan Stanley. Please ask your question.

Tim Hsiao -- Morgan Stanley -- Analyst

Hi, and management team, thanks for taking my questions. I have two questions. The first one is about the competitive landscape. How do we see the [Indecipherable] changes of the competitive landscape following are there peers or you go to [Phonetic] companies going public [Indecipherable] back. And in the meanwhile, in China, we saw some new players trying to tap into this market, such as Xpeng. So could you briefly comment on the -- your view on the potential competition?

And the second question is about strategic partnership. I think we made some announcements regarding our partnership with Greenland and Shenzhen East General Aviation. So looking forward in the next six months, nine months, if there is any potential partnership deal that we can make more substantial progress and could help us to accelerate our commercial roll out? Thank you.

Edward Huaxiang Xu -- Chief Strategy Officer

Okay. Thank you, Tim. This is Edward. I'll take your question. So first of all about these emerging players on the market both domestically and overseas, we think that this is not surprise. This is within our expectation. It definitely shows that more and more companies and institutions see the UAM market as a very attractive industry to enter. And especially we noticed that a lot of these auto manufacturers are making these flying cars, which is similar to this AAV model.

But we see that many of these so-called new products are still in early prototype stage, and we are proud that we are still leading the curve, and we are definitely the leader. And so there was nothing to worry about the competition, but we definitely, we acknowledge the potential competitors. And we believe that the market is big enough to accommodate the existence of more companies.

And if you look at the auto industry, there were so many different new energy car makers, but still it is a very attractive. And so far for these urban air mobility market, it is very big and it is at a very early stage. And of course, we see the emerging players on this market, and actually we welcome this trend and there is nothing to be seriously worry about.

And we will focus on our strategy, first is to implement, to accelerate our airworthiness certification. We believe that this is very, it's quite a long journey. And for us, we have already made effort in the past few years, and we believe that this is also big challenge for the new comers. And the second, we will implement our 100 UAM Air Mobility Routes Initiative. So far we have achieved very good progress.

So that comes to your second question, right. So I'm happy that you noticed that we have already achieved strategic partnership with several players, one in Shenzhen, which is HELI-EASTERN, which is a conventional helicopter operating company. But [Phonetic] this helicopter company definitely they noticed that the future is for autonomous aviation. And so -- and especially from the cost perspective, they noticed that AAV [Phonetic] can definitely save cost for them because this is fully autonomous, and it is driven by electric power. And so we took this opportunity to introduce our AAV service and launch a lot of the trial flight in Shenzhen. And we believe that Shenzhen is very important in the Greater Bay Area in Guangdong, and so this is very important. And with this partnership, we are able to gradually add more frequency and add more operational site in Shenzhen.

And second, our partnership with Greenland, Greenland Hong Kong is a listed company. It's a property company listed in Hong Kong. And this Greenland developed quite a large real estate project in Zhaoqing. And so we were able to introduce our AAV trial flight in their project, which received a very good recognitions from both the developer and also their customers and because they use our AAV service, as attraction [Phonetic] for their customers either to visit their project or even buy the apartment in that area. So this is a very good application.

So going forward, we are going to ramp-up with more operation projects, especially the one, which is worth noting is in Zhuhai, right. So we are working with the partner in Zhuhai. And recently, we did test a flight in the Opera House in Zhuhai, very, very beautiful scenery and very good application because this Opera House is located on island. And so this service can be both air tour and also the transportation.

And moreover, we are further expanding our services in Hezhou and in -- even in overseas, just now you noticed that we also launch a flight in Indonesia, right. So Indonesia is -- so Indonesia is a country of many, many islands, so which is ideal for the application of AAVs. And moreover, we had this partnership with the Spanish National Police, etc and further expand our network in Europe.

So we believe that with the progress with our airworthiness certification going on, we should be able to expand our trial flights or even more regular commercial flight in those areas in the future. So now the period is very important for us because we are able to accumulate abundant data, safety records and also the experiences and also building our team to further commercialize our operation in future. Okay. So please stay tuned for more news in future. Thank you.

Tim Hsiao -- Morgan Stanley -- Analyst

Got it. Thanks for the detailed [Phonetic] sharing, Edward. Thank you very much.

Operator

Your next question comes from Duo Lu [Phonetic] from Tianfeng Securities. Please ask your question.

Duo Lu -- Tianfeng Securities -- Analyst

Hello, Richard and Edward, thanks for taking the questions and I have two questions as well. First, I read in Q3 earnings that you have established seven operation spots and conducted about 2,800 operational trial flights at these operational spot on the [Phonetic] relevant compliance framework. Could you shed more light on this particular compliance framework?

And the second question is, could you elaborate on the sample model of the regular air mobility operation in Shenzhen. What's our plan regarding expand operation spots for next year and for achieving the 100 Air Mobility Routes plans? Thank you.

Richard Jian Liu -- Chief Financial Officer

Thank you. The -- this is Richard. I will take your first question. So basically there are two main aspects forming the compliance framework for this operational trial flights in China. First on the product and operation front, as we mentioned in the -- in this earnings release, we and the CAAC have reached a consensus on a guiding principle that operational trial flights can gradually be carried out, while advancing the certification process. And it is understood that more operational experience and records are instrumental in facilitating and accelerating the certification process.

Secondly, in respect of the use of airspace [Phonetic] in China, approvals from various in charge Department of China Air Force, which is responsible for regulating the airspace in China have been retained [Phonetic] for every, for all of the operational trial flights.

Edward Huaxiang Xu -- Chief Strategy Officer

Okay. This is Edward. So I'm answering your second question regarding the air mobility operation in Shenzhen and the plan to expand other [Phonetic] spots next year, right. So first of all, we believe that our operation model in Shenzhen is very representative because this is a definitely cooperation between us, which is AAV or UAM company with conventional helicopter company. And so this helicopter company is very professional because they have trained and they have very -- they obtained these certain standards and the certification from CAAC, so which means that they can definitely help to improve the overall operating standards by adopting some of the existing CAAC standards.

So -- and this is also the first operation of integrated airspace of [Phonetic] both AAVs and helicopters, which is the first in the history of aviation. So this is of very great significance. And so the cooperation is so far is very smooth and successful. And so we had a -- about six flights per day on a frequency, and gradually, we are going to launch more, right. And so this can help to gain -- we can gain more experiences from this operation, and we should be able to replicate such a model to more operation spots in future.

So in future, we look to further intensify our operation frequencies, especially in the Hong Kong-Macao-Guangdong Greater Bay Area because this is very highly important area in China and also in the world and with very strong market potential for AAVs. And gradually we should be launch the more longer distance service after the launch of our VT30 in the future, so which will help to accomplish [Phonetic] a more network for our AAV services.

And so far as we mentioned in our guidance, right, we are about to launch our service in Zhuhai, so which is at the other side of the Pearl River Delta or this Greater Bay Area, so which is another important city in this area. So in the future, we look to see a very big triangle [Phonetic] in Guangzhou, in Shenzhen, and in Zhuhai, right. And moreover, we are going to expand our operation sites in Hengqin [Phonetic] etc. So in the future, you can see more and more AAVs can be flied in this area, and so that we definitely, we are going to build the world's first UAM field in the world in China. So I hope you are going to see more of our progress in future. Thank you.

Duo Lu -- Tianfeng Securities -- Analyst

I see. Thank you. Thank you, Richard, and Edward. Thanks for the detailed elaboration.

Operator

Thank you. Seeing no more questions in the queue. Let me turn the call back to Mr. Liu [Phonetic] for closing remarks.

Richard Jian Liu -- Chief Financial Officer

Okay. 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 further progress.

Operator

[Operator Closing Remarks].

Duration: 35 minutes

Call participants:

Linlin Julia Qian -- Managing Director

Huazhi Hu -- Founder, Chairman and Chief Executive Officer

Edward Huaxiang Xu -- Chief Strategy Officer

Richard Jian Liu -- Chief Financial Officer

Tim Hsiao -- Morgan Stanley -- Analyst

Duo Lu -- Tianfeng Securities -- Analyst

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