EHang Holdings Limited (EH) Q4 2021 Earnings Call Transcript

EHang Holdings Limited (EH -0.94%)
Q4 2021 Earnings Call
Mar 29, 2022, 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 fourth quarter 2021 and fiscal year 2021 earnings conference call. [Operator instructions] Now, I would turn the call over to Julia Qian, managing director of The Blueshirt Group Asia, EHang's IR firm.

Ms. Qian, please proceed.

Julia Qian -- Investor Relations

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 fiscal year of 2021. The earnings release is available on the IR website, as well as from newswire services. Please note, the conference call is being recorded and the audio replay will be posted on the company's IR website.

Today, EHang management team, which includes Mr. Huazhi Hu, chief executive officer; Mr. Edward Xu, chief strategy officer; Mr. Xin Fang, chief operating officer; and Mr.

Richard Liu, chief financial officer, will successfully give prepared remarks. Remarks delivered in Chinese will be followed by English translations. All translation is for convenience purposes only. In the case of any discrepancy, management's statements in the original language will be prevailed.

A Q&A session will follow afterwards. Before we continue, please note that today's discussion will contain forward-looking statements made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties.

As such, the company's actual results may be materially different from the expectation expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filing with the SCC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Also, please note that all the numbers presented are in RMB and are for the fourth quarter and the full year of 2021 unless stated otherwise.

With that, let me now turn the call over to CEO, Mr. Huazhi Hu. Please go ahead, Mr. Hu.

Huazhi Hu -- Chief Executive Officer

[Foreign language]

Julia Qian -- Investor Relations

Below is a translation of Mr. Hu's remarks. Hello, everyone. Thanks for joining our earnings call today.

I'm very delighted to show you our operating performance for the fourth quarter and the fiscal year of 2021, as well as our recent developments. Despite challenges at home and across the globe in the past year, EHang has always focused on exploring the vast market of the urban air mobility as an innovative and technology-driven enterprise. We are committed to creating value for our industry, partners, and shareholders while making significant progress in the following key areas. First, obtaining the airworthiness certification of the EHang 216-S has always been placed as our top priority, and the past year has seen remarkable progress on this project.

Notably, we work with the Civil Aviation Administration of China, in short, CAAC, to develop the special conditions for the EHang 216-S Type Certification, the first for passenger-carrying autonomous aerial vehicles in the world, which was formally adopted and issued by the CAAC in February this year. And this means that the type certification of EHang 216-S has the certification basis for further implementation. At present, the certification of EHang 216-S is in the compliance review phase, and we are grateful for the CAAC's support to EHang. Next, turning to our 100 Air Mobility Routes initiative, we are the frontrunner of the industry, and it carried out operational trial flights in China during the certification process.

We are developing UAM pilot projects in multiple cities in China to continuously accumulate real flight experience in various scenarios. In the near future, we will disclose the first group of Chinese cities that will have our commercial UAM services and fly routes after we secure the airworthiness certification. Moving on to sales and marketing, we are pleased to gradually open up a Greater Asian market, following our significant achievement in South Korea, Japan, Indonesia, and Malaysia. We will continue close cooperation with more partners in Southeast Asian countries.

More importantly, the orders and the preorders of our passenger-grade AAVs in the past few years have accumulatively surpassed 1,000 units, forming a solid foundation for our future revenue growth. Moreover, I'd like to address our product and the technological developments. Firstly, about VT-30, EHang has accumulated years of considerable experience and the technical reserves in aircraft manufacturing and aircraft control in the field of UAM. For the product of VT-30, we maintained the principle of safety first without impatience or rash ventures.

At the beginning of the process of designing, R&D, as well as testing for this product, we have been establishing this year with a system already. So far, we have added a large number of aircraft-to-component tests and have conducted a large number of flight tests after ensuring the overall safety of the aircraft. As of March 25th, the test flight time of the VT-30 has exceeded 50 hours. Secondly, with regard to aerial logistics, in the past few years, we have never stopped the research and development of aircraft for logistic uses.

Our main target, aerial logistic use cases, are for interprovincial aerial logistics and long-range aerial logistics over island and the mountains. Currently, we have developed five aerial logistic models that can fly autonomously in the automatic dispatching system. These five models have been tested with loads ranging from 2 kilogram to 200 kilogram. We are conducting a large number of operational trial flights and island logistics scenarios in coastal areas.

It's worth noting that our interprovincial aerial logistic routes between Hezhou and Guangzhou City is about to open soon, which will be a significant step forward to our future operation for inter-provincial, long-range aerial logistics. Next, let's turn to our team. Our staff has gradually increased in the past year, with a key focus on the expansion of our technical R&D team. We established a special team for the EHang 216-S airworthiness certification project to address our top priority and also build up and experienced the UAM operations team.

Additionally, I'm very thrilled that Mr. Xin Fang joined our company in February as our chief operating officer. Today is also the first time for him to join our earnings call. Mr.

Fang has more than 20 years of experience in corporate management, sales of technology products and solutions, and tourism project development and operations. I believe he will bring us significant strengths to our future business growth. I will now turn the call over to our chief strategy officer, Edward Xu, to bring more detail to performance. Thank you.

Edward Xu -- Chief Strategy Officer

Thank you, Mr. Hu. Hello, everyone. I'm Edward Xu, chief strategy officer of EHang.

Now, let me summarize the operational results of the year of 2021. Basically, we followed our strategic positioning as a UAM platform operator and prioritized airworthiness certification of the EHang 216-S AAVs throughout the year. We invested significant resources in the certification project by working closely with CAAC experts since the beginning of the year. With EHang's diligent and solid contributions, in December, the CAAC finally published the world's first Special Conditions for the EHang 216-S Type Certification, which set a foundation for airworthiness certification for all the AAVs.

We believe this is a new milestone not only in the certification project but in the history of human aviation. While the type certification process for the EHang 216-S is still ongoing, we have added the strength in our efforts to obtain the type certificate as soon as possible. On the other hand, we accelerated the test operations of EHang 216 AAVs with the aim to fully roll out commercial operations soon after obtaining the type certificate. As we have positioned ourselves as a world-leading UAM platform operator, it defines our innovative business model as a hybrid one of sales plus operation, which is a combination of OEM and AAV operations.

As we have highlighted in our previous calls, we believe this new model has strategic importance because AAV sales should be posted by real commercial operations. This is especially true on our self-developed autonomous flight technologies, making the hybrid model possible and necessary to ensure absolute safety and maximum market acceptance of our products. Specifically, our ongoing 100 Air Mobility Routes initiative was launched in the middle of 2021 under the guidance of CAAC. With a focus on the Guangdong-Hong Kong-Macao Greater Bay Area, we launched a line operational response in the cities of Guangzhou, Shenzhen, Hezhou, Zhaoqing, and Sanya, etc.

So far, we have completed more than 4,000 trial flights. Notably, we collaborated with the Guangzhou Development District, a communication investment group, in the fourth quarter of 2021 to add a new 5G Intelligent Air Mobility Experience Center in Guangzhou. Through such activities, we were able to accumulate necessary data and gain relevant experiences for future UAM operations. On sales and the promotion of our products and services, we have expanded our efforts by acquiring new customers and partners.

Specifically, since fourth quarter of 2021, we highlighted the partnerships with major SOEs, including Shenzhen Expressway, the Guangzhou Development District Communication Investment Group, and Guangxi Guigang Qintang District Urban Construction Investment Group. In the overseas market, we have built new partnerships with Prestige Aviation in Indonesia, the MASC and AirX in Japan, AEROTREE Group in Malaysia, etc. We believe the expanded partnerships will help us in our future business operations within the next six to 12 months, especially upon receiving the official grant of type certificate from the CAAC. Now, let me turn the call to our COO, Mr.

Fang, to address our operational plan for 2022. Mr. Fang, please go ahead. Thank you.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

Below is the transition of Mr. Xin Fang's remarks. Thank you Edward. Hello, everyone.

I'm Xin Fang. First, I would like to thank Mr. Hu for inviting me to join EHang as COO. After joining the company, I was deeply impressed about the energy, dedication to innovation, and relentless efforts of everyone at EHang.

Safety and security are at the heart of every member of the EHang team. And they strive for innovative AAV technology research and development. We expect to obtain the type certificate of the 216-S AAV around the middle of 2022, which will lay a solid foundation for its commercial operations. Meanwhile, we are accelerating our arrangement for operating the EHang 216 AAVs to ensure that our commercial services can be launched gradually after obtaining the type certificate.

We plan to upgrade the production line at the same time. This way, we can quickly and steadily increase production based on the highest standards of the aviation industry after obtaining the type certificate. Close attention to high quality will also be strictly implemented in order to ensure we will deliver safe, reliable, and compliant product to the market. For the fiscal year 2022, we expected total revenues to be in the range between RMB 190 million and RMB 210 million, with most of the revenues expected to be generated in the second half of the year upon receiving the EHang 216-S AAV Type Certificate and launching commercial operational services.

From the perspective of application scenarios, we expect our revenues in 2022 will mainly come from air mobility uses, including aerial sightseeing, aerial firefighting, and aerial logistics, as well as smart city management aerial, etc. EHang is now seeking partnerships with leading companies in the industry with their application potentials by leveraging our existing technologies. Through the leading advantage in aerial regional fields and a UAM platform and command-and-control center provided by EHang, we will jointly conduct a derivative development of AAV platforms to address the specific industry needs. Through our partners, industry expertise, suitable channels, and their reputations, we can quickly open up additional applications and sales for air mobility businesses.

Urban air mobility is EHang's core strategy, and we actively seek related strategic cooperation with partners, such as domestic mainstream helicopter general aviation companies. By leveraging the original airlines and assuring infrastructures, such as airports, we plan to gradually promote operations of low- and medium-altitude air mobility routes in China. We also expect to bring EHang's AAVs to the market in the following three areas. First, in the tourism sector, we've started to carry out in-depth aerial sightseeing layouts and actively cooperate with targeted tourism operators to explore innovative tourism revenue growth opportunities.

We plan to launch the EHang 216 aerial sightseeing operational services after obtaining the type certificate. Through collaborations with multiple domestic tourist attractions and a continuous expansion of our commercial operation scenic spots, such as the Forest Lake in Zhaoqing city in Guangdong province and the Jingtang in Guigang city in Guangxi province. Secondly, we will partner with leading integrated firefighting solution providers in China for the needs of emergency management departments in firefighting and emergency response. We will leverage our partners' existing channels to promote efficient and tailored aerial firefighting solutions that address the difficulties and the pain points of high-risk building firefighting.

As an innovative enterprise, EHang not only developed our own business but also undertake our social responsibilities to bring values to the people and the community. Thirdly, we are also communicating with several leading logistic companies to jointly develop proper aerial logistic use cases. Combining EHang's self-developed AAVs and command-and-control platform with ample operation experiences from our logistic partners, we can create cost-effective and efficient aerial logistic solutions and operating models. Meanwhile, we intend to utilize our technological advantages of the self-developed command-and-control system platform for further product position, as well as strengthening its promotion and operation in the urban management fields, such as smart city and smart transportation.

We will gradually establish an operational ecosystem with the integration of the hardware and software that combines fleet management and air traffic management while AAVs enter the mass market. As a result, flights will be safer and are more efficiently conducted. And the ecosystem will also be evolving in a healthy way with an increase in fleet in the sky. EHang is continuously improving our trainings and our post-sales service system.

Moreover, EHang partners with professional international and domestic institutions to swiftly establish a more sophisticated training and our post-sales service system based on our partners' existing system and experience. We firmly believe that with the joint efforts of EHang and all the authorities, partners concerned with the UAM industry, we will be able to accelerate to provide everyone with a safe, autonomous, and eco-friendly air mobility. I will now turn the call over to our CFO, Richard Liu, for financial results. Richard, please go ahead.

Thank you.

Richard Liu -- Chief Financial Officer

Thank you, Xin, and hello, everyone. Before I go into details, please note that all numbers presented are in RMB and are for the fourth quarter of 2021, unless stated otherwise. Our percentage changes are on a quarter-over-quarter basis, unless otherwise specified. Detailed analysis are contained in our earnings press release, which is available on our IR website.

I will now highlight some of the key points here. 2021 was a unique year as we initiated a strategic upgrade and transition to implement our strategic positioning as an urban air mobility platform operator and migrate our sales model from a product sales-centric model toward a more operating platform-oriented and integrated model. As discussed earlier, in 2021, we have been focusing on the ongoing certification project and preparation for the 100 Air Mobility Routes initiative in China. And we believe this will lay the essential foundation for our next stage revenue growth with increased sales and deliveries and operational services after obtaining the certification.

As such, in Q4, total revenue were 8.7 million compared with 13 million in Q3. The EH216 series of AAV deliveries in Q4 was four units compared with eight units in Q3. For the fiscal year 2021, total revenues were 56.8 million compared with 180.1 million in 2020. The EH216 series of AAV deliveries in 2021 were 30 units compared with 70 units in 2020.

Gross margin was 60.1% in Q4, a minor decrease of 1.7 percentage points from 61.8% in Q3, mainly due to the changes in revenue mix. I'm glad that our margin continued to be kept at a relatively high level, demonstrating our solid competitiveness. We even achieved a year-over-year increase of 4.4 percentage points in 2021, a record-high gross margin of 63.4% with a contribution from a command-and-control system delivered in 2021. In Q4, our adjusted operating expenses, which are operating expenses excluding share-based compensation expenses, increased by 46.2% quarter over quarter to 90.4 million from 61.8 million in Q3.

The adjusted operating expenses was 246.6 million in 2021, up 62.6% from 151.6 million in 2020. We continue to maintain significant R&D expenditures for the development of AAV models, including the EH216 series, VT-30, and the other new models along with their related operating systems with enhanced functionalities, as well as for the growing R&D team. This reflects our commitment to strengthening our product development and certification efforts in order to drive future sales growth and commercial operations. Continuous and advanced R&D is a cornerstone of our business, and we will remain dedicated to R&D to propel future business growth.

Furthermore, there were additional provisions for receivables due to the impacts of the continuous COVID-19 pandemic and related prevention and control measures in China. As a result, our adjusted operating loss in Q4 was 83.8 million compared with 48.9 million in Q3. Adjusted net loss in Q4 was 82.2 million compared with 47.8 million in Q3. For the fiscal year, adjusted net loss was 192.8 million in 2021 compared with 37.2 million in 2020.

Nevertheless, our balance sheet remains healthy. As of the end of Q4, we had 312.1 million of cash, cash equivalents, restricted cash, and short-term investments compared with 357 million as of the end of Q3 and 189.4 million a year earlier. We will continue to maintain effective operational experience and cost management. That concludes our prepared remarks.

Let's now open the call for questions. Operator, please go ahead.

Questions & Answers:

Operator

[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, everyone. Thanks for taking my questions. This is Tim from Morgan Stanley. I've got two questions.

The first point is about the impact on the resin from pandemic in China. In light of resins, the tightening COVID control majors in China, especially in the first quarter, have we seen any potential hiccup to our supply chain management, TC certification progress, and also the order delivery, especially in largely into second quarter this year? In the meantime, how do we think about this kind of margin trend this year, given the impact from the pandemic and, of course, the cost inflation? So, that's my first question. And my second question is about the urban air mobility operation. We saw pretty strong progress, but could you please share a little bit more about more like the quantitative updates about the business development? It would be great if the management can elaborate a little more about the fleet size, the volume rules in terms of numbers that have been implemented, and also our current operational situation.

Thank you.

Edward Xu -- Chief Strategy Officer

OK. Thank you, Tim, for your questions. This is Edward Xu, chief strategy officer of EHang. So, let me answer your first question.

And I think, yes, our CFO, Richard, can elaborate more on the margin trend. So, on your first question, basically, regarding the ongoing COVID-19 pandemic in China, so far, we see not a material impact on our supply chain because our supply chain suppliers are mostly distributed in South China in Dongguan area. We noticed that the recent closedown of Shenzhen, but it didn't have much impact so far. And also, we did some preparation by prepare the inventories for our products beforehand.

So far, we see our inventories at a satisfactory level. So, we don't see any major impact so far. And on this TC certification, right, progress, we think it is still on the right track. And so far, our special team is working very closely with CAAC experts and so -- which is not disrupted by the pandemic as well.

So, that's all for this. And Richard can elaborate more on the margin trend. Thank you.

Richard Liu -- Chief Financial Officer

OK, Tim. This is Richard. I will take the second part of your first question regarding the margin trend. As Edward just said, we have not seen any material impact from the increased situation of recent pandemic in China.

In addition, there are some recent price increases of raw materials due to the changes of the world political landscape. We have so far seen some impact from this aspect. As such, we have been trying to stock up some key components and materials as our stock reserves. And honestly, it is expected that our overall gross margin might be brought to the average levels of previous years, roughly in the range from 55% to 60%.

Having said that, in our revenues, as you know, there are revenues from selling our proprietary command-and-control systems, on which, the price increases of raw materials and supplies would be limited. So, therefore, if the percentage of the revenues from this in the total revenues will go up in the year, it will actually help enhance our overall gross margin, as you can see. So, basically in sum, we will continue to pay close attention to the development of the cost conditions, you know, as a result of the, you know, recent development and take proper measures to minimize such impacts on our gross margin. So, Edward, probably --

Edward Xu -- Chief Strategy Officer

OK. Tim, I would add -- yeah, I would add one point. Yes, on the operational side, you are right, maybe there are some impact on our operation because we do have collaboration with this helicopter company in Shenzhen. And also, we plan to launch more operational spots in July, for example, so which was disrupted by the pandemic at the moment.

So, on the operational side, we do see some impact, yes. So, next, regarding your second question, right. So, as updated in our earnings release, so far, under the 100 Air Mobility Routes initiative, our UAM operating team has selected and developed the nine operation spots in Chinese cities, including Guangzhou, Hezhou, Shenzhen, Zhaoqing, and Sanya, etc. So, at these nine operational spots, so far, we have conducted over 4,000 operational trial flight with our EHang 216 AAVs in real practical scenarios for the aerial sightseeing.

So far, multiple flight routes can be developed at each operational spots. So, in the near future, we will be able to release the first group of cities in China as our target to launch our commercial operational services and flight routes and local operation spots after we obtain the TC and also the commercial license from the government from CAAC. Thank you.

Tim Hsiao -- Morgan Stanley -- Analyst

Thank you very much Richard and Edward. Thanks for the detailed sharing. Thank you.

Edward Xu -- Chief Strategy Officer

Thank you.

Operator

[Operator instructions] Your next question comes from the line of [Inaudible] from Tianfeng Securities. Please ask your question.

Unknown speaker

Hi. Thanks, management team, for taking my questions. I have two questions as well. First is geographically speaking, like, can we say China is EHang's topmost priority regarding obtaining the type certificate and all the licenses? And how should we think about other regions coming down on this? For example, in terms of licenses, where will be EHang targeting next? Like, for example, like Korea or like Europe? And my second question is in terms of competitive advantages and the market share-wise.

How does the management team view other competitors? And where does EHang stand among those competitors, like, foreign or domestic? Thank you so much.

Edward Xu -- Chief Strategy Officer

Yes, thank you for your question. This is Edward again. Let me answer your questions. So, first of all, you know, regarding the geographical distribution, we believe that China appears to be our most prioritized markets so far, given the following reasons.

First, it is our home market where our firm is based. Second, we got the support from the regulator, i.e., the CAAC, in respect of airworthiness certification for unmanned aircraft for low altitude passenger-carrying urban air mobility operations. And three, this is a huge market, and there was a good potential with the largest population and the prosperous major city clusters, such as Pearl River Delta, the Yangtze River Delta, and the Bohai Bay areas, etc., so which means that, you know, the huge urban population has a potential for this mobility market. And meanwhile, we also keep our focus on the overseas market, such as Asian countries, including Japan, Korea, Indonesia, Malaysia, etc., those countries which we have made a visible progress in client acquisitions, trial flights, and regulatory relationship construction, etc.

And finally, we think that, you know, some Western countries, including Europe and the U.S., but those markets, the regulations could be more conservative. So, we are taking a more passive, you know, stance. And we focus on China, and we believe that any success in China's certification could be a leverage for us to go into those markets. Thank you.

And so, regarding your second question, so, yes, we have kept a close watch on the global UAM market, especially on the development of the peer group as well. And we believe we are a leading player in terms of product design and a real flight record so far. For example, our EHang 216 AAV is by far the world's leading aerial vehicle product that is able to complete autonomous flights. We noticed that, you know, from the peer group, we -- most of them are still focused on this manned flight.

Autonomous flight is definitely something that is, you know, on their next steps. And we have built the world's first centralized AAV platform to manage multiple AAV operations with cluster management technologies. And so far, we have conducted over 20,000 autonomous trial flights in 11 countries. Moreover, we have made the most progress in airworthiness certification with CAAC, who published the world's first set of Special Conditions for the type certification for autonomous air vehicles like our EHang 216, right.

So, that means we are leading in terms of the certification progress as well. As we are targeting around the middle of the year for type certificate grant for our EHang 216-S AAVs, we aim to be the first firm to launch commercial operational service in the world, you know, probably in the second half of the year. So, given that, we believe that, you know, we do have the first-mover advantage over our peer group. Thank you.

Unknown speaker

Thank you so much.

Operator

Thank you. As there are no further questions and the interest of time, I would now like to hand the conference back to the speakers for any closing remarks.

Edward Xu -- Chief Strategy Officer

No further questions?

Richard Liu -- Chief Financial Officer

Thank you, operator.

Edward Xu -- Chief Strategy Officer

OK.

Operator

We do have a question that has just come through. Are you happy to take this? Your question comes from the line of David Zazula from Barclays. Apologies, it looks like we are not taking no further questions.

Richard Liu -- Chief Financial Officer

OK. Operator, can you hear me?

Operator

I can hear you, yes.

Richard Liu -- Chief Financial Officer

So, we can give the closing remarks, right?

Operator

Yes, please. Please go ahead.

Richard Liu -- Chief Financial Officer

Thank you. OK. Thank you, all, for participating on today's call. We will look forward to reporting to you in our next quarter.

Thank you very much.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Julia Qian -- Investor Relations

Huazhi Hu -- Chief Executive Officer

Edward Xu -- Chief Strategy Officer

Xin Fang -- Chief Operating Officer

Richard Liu -- Chief Financial Officer

Tim Hsiao -- Morgan Stanley -- Analyst

Unknown speaker

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