EHang Holdings Limited (EH) Q1 2022 Earnings Call Transcript

EHang Holdings Limited (EH -0.06%)
Q1 2022 Earnings Call
May 31, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the EHang first quarter 2022 earnings conference call. [Operator instructions] I would now like to hand the conference over to Ms. Julia Qian. Please go ahead.

Julia Qian -- Investor Relations

Hello, everyone. Thank you, all, for joining us on our conference call to discuss the company's financial results for the first quarter of 2022. The earnings release is available on the IR website, as well as on newswire services. Please note the conference call is being recorded, and an audio replay will be posted on the company's IR website.

Today, EHang's management team, which include 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, are successfully giving prepared remarks. Remarks delivered in Chinese will be followed by the English translations. All translation is for convenience purposes only. In the case of any discrepancy, management's statement in the original language will prevail.

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 filings with the SEC. 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 number presented are in RMB are for the first quarter of 2022, unless stated otherwise.

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

Huazhi Hu -- Chief Executive Officer

[Foreign language]

Julia Qian -- Investor Relations

Below is the translation of Mr. Hu's remarks. Thank you, Julia. Hello, everyone.

Thank you for joining our earnings call today. Since the first quarter of 2022, we have been facing and mitigating external impact and uncertainties, resulting from macroeconomics, geopolitics, and ongoing pandemic and its associated prevention and control measures. However, the more adversities, the more important to maintain stable development. As such, we are more focusing on strengthening our results and have ushered in a good start in this year, which is mainly reflected in airworthiness certification, the key talent recruitment, and a market expansion.

First of all, let's dive into our airworthiness certification process, which remains our first and foremost priority of the company's development at the current stage. As the world's leading designer, developer, and manufacturer of a passenger-grade autonomous aerial vehicles, which is dedicated to achieving commercialization, we are undoubtedly receiving attention and assessing expectations across the globe, as well as the most stringent standards and tests from regulators. This is the pressure a pioneer of an innovative industry will inevitably bear, but it is also a motivation for us to consistently challenge ourselves and make breakthroughs. After more than 10 months of in-depth communication and cooperation between our airworthiness team and our type certification team at the CAAC, the CAAC formally adopted and issued special conditions for the EHang 216-S AAV Type Certification in this February, which laid a critical cornerstone for our airworthiness certification and is also a groundbreaking milestone in the development of this innovative industry.

Distinct from the type of certifications of other aircraft operated by pilots, the advanced and innovative nature of EHang's product in the aspect of unmanned aerial technology and operation mode leads to newer challenges in compliance and a verification for data links, complex system, and software. However, our technical team and airworthiness team are tackling challenges step by step and are continuing to explore and refine a means of our compliance. Our project-specific certification plan is about to get CAAC's approval, with which we will reach consensus with the CAAC over expected timelines of the certification project, the certification basis, the means of compliance, verification plans, after-certification management, etc., in order to accelerate the airworthiness certification. In terms of our production, on a basis of AS9100D, an international Aerospace and Aviation Quality Management System certification that we have obtained, we are also following the CAAC's production approval and the supervision procedures with an orientation to secure the type certificate and the production certificate to further refine and improve our quality, manufacturing technique, production, and supply chain systems.

Meanwhile, we have produced validation-used AAVs for manufacturing conformity inspection. We are trying to overcome the impact of many factors, such as the domestic epidemic, and work closely with the CAAC to complete the certification work as soon as possible. Next, let's move on to talent acquisition. We are very pleased to have our chief operating officer, Mr.

Fang Xin, join us in February. He is responsible for managing the company's daily operations and business development. Mr. Fang has more than 20 years of experience in corporate management; technology, product and solutions sales; as well as tourism project development and operation, which will bring new driving forces for the company.

Recently, we also welcomed Mr. [Inaudible], our newly appointed vice president of production on board. He will lead our production team in elevating EHang's manufacturing system to more mature, optimized, and industry-leading levels. Mr.

[Inaudible] has more than 20 years of experience in aircraft manufacturing technology. Notably, he was the manufacturing technology head of China's first fully composite and general-purpose aircraft, complying with CCAR-23; and also the deputy chief engineer of the largest amphibious airplane complying with the CCAR-25. He had also worked for Unison Engine Components, a wholly owned subsidiary of General Electric. We will continue to move forward with talent recruitment and R&D, while always keeping steadfast in continuous innovations.

On the market expansion front, in addition to continuing our development in China, we have also received preorders for a total of 210 units of passenger-grade AAVs so far this year in multiple Asian countries, including Japan, Malaysia, Indonesia, and Thailand. This is a testament to the strong customer demand and a global prospect for our product, which is further illustrated by plans for introducing EHang AAVs into various local markets and a co-developing regional air mobility business with us. And we expect these preorders will be delivered gradually, upon obtaining the airworthiness certificate and lay a solid foundation for our future growth. I will now turn the call over to chief strategy officer, Edward Xu, to bring more detail to performance.

Thank you.

Edward Xu -- Chief Strategy Officer

Thank you, Mr. Hu. Hello, everyone. In first quarter of the year, our company continued its focus on the strategic goal of UAM platform operator, steadily upgrading toward a sales-plus operation, integrating the business model.

EHang's unique AAV technology and smart command and control system will enable the underlying technologies for the future air traffic management, the AAV-distributed operation and management, the digital operating and the service systems, as well as ecosystem expansion. These are also EHang's differentiated advantages and the fundamental driving force, empowering our commitment to becoming a leading UAM platform operator. Based upon our positioning of the AAV operational platform, we have been actively cooperating with upstream and downstream industry stakeholders, such as the government regulators, professional scientific research institutions, aviation component suppliers, telecommunication service providers, general aviation operators, the airport and the road infrastructure operators, real estate enterprises, large commercial groups, as well as our clients and partners in the fields of tourism, transportation, logistics, emergency and rescue, medical, and firefighting to jointly explore and develop a UAM ecosystem, tailored for AAVs, thus leading and promoting the development of a safe, efficient, and sustainable smart air mobility industry. For instance, our recent customers and partners in other Asian countries all have extensive resources and experiences in their local markets, such as CP Group, a large multinational conglomerate in Thailand.

These strong partners will stimulate the expansion and the growth for the company's overseas business development at both sales and operation levels. Besides, China, Asia is one of the significant strategic market for us. Now, let me turn the call to our COO, Mr. Fang, to address our progress on the business front.

Mr. Fang, please go ahead. Thank you.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

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

It has been more than three months since I joined EHang. During the period, the company has been operating well and mostly with a focus on this strategic goal of UAM platform operator and the sales-plus operation integrated business model. Since the first quarter of this year, like most of Chinese companies, we have been facing pressures, challenges, and uncertainties due to the resurgence of the COVID-19 in China and the stricter travel restrictions. For example, our original schedule of offline communication and on-site inspection meetings with the CAAC TC team had to be delayed.

And the tourism-related business also saw adverse impact, as our operational travel flights were restricted at certain tourism sites. Nevertheless, we believe this external impacts are only temporary. We still remain confident in our long-term development and growth, with our inherent core technology advantages, clear strategy, diversified product lines and solutions, ongoing process for our industry-leading airworthiness certification and comprehensive layout, ever-growing market demand within preorders, and our firm manufacturing foundation. As noted earlier, since the first quarter of this year, our market expansion in other Asian countries has achieved positive progress initially.

In January this year, we received a preorder for 50 units of EHang 216 series in Japan from AirX, a leading Japanese air mobility digital platform company and a private helicopter charter service provider. In March, we've partnered with AEROTREE, a leading Malaysian aviation company, and have received a preorder for 50 units of EHang 216 series and 10 units of VT-30. And in April, we received a preorder for 100 units of EHang 216 from an Indonesian aviation company, Prestige Aviation, and successfully performed a flight demonstration in Jakarta, the capital of Indonesia. And last week, we formed a strategic partnership with CP Group, one of the largest conglomerates in Thailand.

And both parties plan to establish a joint venture in Thailand to introduce EHang AAVs to the Thai market with comprehensive cooperation. Meanwhile, we continue to advance travel operations and ordered 100 air mobility routes initiative, with a focus on a Guangdong-Hong Kong-Macao Greater Bay Area. We have worked with our customers and partners like the general aviation companies and the real estate companies to launch nine AAV operation spots in Gwangju, Chuzhou, Shenzhen, Zhaoqing, Sanya, Zhuhai, Yangjiang, and other cities. To date, more than 4,800 operational trial flights have been carried out in practical flight environments and application scenarios.

Moreover, our commercial flight routes are in a process of continuous development, test of flight, data accumulation and verification in order to ensure adequate verification of flight safety and consistent quality with sufficient flight record. Not only that, we are accelerating the layout of the digital low-altitude ecosystem. Derived from our inherent software platform advantages, we are planning on low-altitude flight services and the digital airspace management to create various aerial operation scenarios for smart cities, such as the aerial sightseeing, aerial transportation, aerial media, etc. In addition, we are actively developing and building our online booking platform system, namely our operating system.

The core system architecture and a database construction of online bookings, together with flight scheduling, aircraft dispatching, task management, and other functions have already began to take shape. The initial flight scheduling and operating system has been developed and is running tough, and it is expected to put into delay operations in the third quarter of this year. Overall, all AAV-related operations have been prepared in advance to ensure that the company can quickly start commercial operational services after obtaining relevant regulatory certifications. With the joint efforts of EHang and all parties in urban air mobility industry, including the governments, regulators, customers and partners, we expect to achieve our mission in the near future to make everyone enjoy a safe, a timeless, and eco-friendly air mobility experience.

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 first quarter of 2022, unless stated otherwise. All 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. In the first quarter of 2022, we continue to execute our strategies toward an urban air mobility platform operator. Additionally, we maintained our focus on the E 216 Type Certification process with the CAAC, and further developing the 100 air mobility routes initiative with increasing operational trial flights in selected locations in China. With these concerted efforts, we remain confident and positive on the long-term prospects of our business growth.

As a result, in Q1 of 2022, total revenues were 5.8 million compared with 8.7 million in Q4 of 2021. The EH216 series of AAV deliveries in Q1 were three units compared with four units in Q4. However, it's worth noting that, recently, we have seen increasing interest from customers in China and overseas. For example, we have secured AAV preorders of up to 210 units in Japan, Malaysia, and Indonesia since the beginning of the year, which demonstrate a strong demand and great potential for our products internationally.

These preorders are expected to be delivered in the coming years. Our overall gross margin has continued to maintain at a high level as compared to those of other companies, with new energy mobility products such as electric cars. Our gross margin was 62.5% in Q1, up 2.4 percentage points from 60.1% in Q4 last year, mainly due to changes in revenue mix. In Q1, our adjusted operating expenses, which are operating expenses excluding share-based compensation expenses, decreased by 49.1% quarter over quarter to 46.1 million from 90.4 million in Q4 last year.

There were lesser provisions for accounts receivable related to the impact of COVID-19 pandemic. Additionally, expenditure on R&D materials were lower than Q4 last year, as they usually vary following development progress for different projects between periods. With that, in Q1, our adjusted operating loss was 41.7 million and adjusted net loss was 40.9 million, each representing an improvement of roughly 50% from 83.8 million and 82.2 million in Q4 last year, respectively. With regard to our balance sheet, as of the end of Q1, we had 236.9 million of cash, cash equivalents, restricted cash, and short-term investments.

We will continue our efforts to effectively manage our operating expenditures. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Tim Hsiao from Morgan Stanley. Please go ahead.

Tim Hsiao -- Morgan Stanley -- Analyst

Hi. [Foreign language] Thanks for taking my questions. I've got a few quick questions. So the first one, I think that Mr.

Fang, during the presentation, briefly touched on your collaboration with the CP Group announced last week. So, just wondering, could you please share a little bit more about the details of business opportunities we are looking for and how the business model will work, and what kind of contribution we should expect in the upcoming quarters? Second question is about production discussion because I think a lot of supply chains, they basically suffered from recent COVID lockdown. Have you encountered any hiccups in terms of production, part sourcing, or type certificate payments and all the operation-related stuff? Do we see any risk of further delays in terms of the fixed certificate receiving? So, that's my second question. My last question is about our new models.

Can you please share a little bit more about the operational updates on VT-30, where will we plan to get a certificate on this new model? So, those are my three questions. Thank you.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

Hi Tim. Thank you for the questions. This is Fang Xin. I will take your questions.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

Last week, we are very pleased to announce the strategic partnership with Thailand's CP Group, and we plan to establish our joint venture to launch our partnership. And it reflects both companies' high recognition of each other and the willingness for a deep cooperation. And this will lay a good foundation for AAV sales and urban air mobility business in Thailand in the future. And we look forward to initiating our collaboration.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

As we know, the CP Group is not only one of the largest conglomerates in Thailand, but it also has investments in 21 countries and economies. The group is comprised of eight business lines and 14 business groups covering various sectors of agriculture, industry and food, retail and distribution, media and telecommunications, e-commerce and digital, property development, automated and industrial products, and pharmaceuticals, etc.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

We see a lot of our potential use cases for our AAVs in the CP Group business field, such as the tourism, logistics, healthcare, the disaster relief, agriculture, and so on.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

Both of us plan to leverage our own expertise and resources in a long-term, comprehensive collaboration on the AAV product sales and marketing, regulatory compliance, the business development and the infrastructure deployment, talent cultivation, and so on, for our future UAM operations, and introduce the safe, autonomous, and the sustainable air mobility technology and solutions to the Thailand and more markets.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

That is my answer to Tim's first question. Thank you.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

In light of the recent COVID epidemic for your second question, as mentioned before, since the first quarter of this year, like most of the Chinese companies, we have been facing pressures, challenges, and uncertainties due to the resurgence of the COVID-19 pandemic in China and the stricter travel restrictions.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

In respect of production, we didn't see any significant impact so far from the epidemic on our supply chain because our suppliers are mostly in the Guangdong area in South China. And due to the changes of the global landscape, we saw some price increase of some raw materials. So, we did some preparation with some inventory of the key components and materials beforehand.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

In respect of the type certification, the process was affected and had been slowed down as our offline communication and on-site inspection meetings with the CAAC TC team could not be normally conducted. Having said that, we have been trying our best to minimize the impact of the manufacturers, including the recent domestic epidemic and working closely with the CAAC to complete the certification work as soon as possible.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

From the productive of sales delivery and operation, our tourism-related business was also impacted, as our operational trial flights were restricted at some tourist sites.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

With regard to the revenue of this year, as we are facing many challenges and uncertainties, we are closely watching the development of the market conditions and also the certification progress. And we are adjusting our strategies to be adaptable accordingly. But we remain confident in the long-term outlook going forward.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

That is my answer to your second question. Thank you.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

For your third question, at current stage, our airworthiness certification work is focusing on the EHang 216-S product. For the product of VT-30, we have maintained the principle of safety first, and there is no need to rush in the process of designing, R&D, and testing for this product. We have been establishing this airworthiness system. We started with a lot of aircraft component tests first to ensure the overall safety of the aircraft and then carried out a larger number of flight tests.

Xin Fang -- Chief Operating Officer

[Foreign language]

Julia Qian -- Investor Relations

That is my answer to your third question. Thank you.

Operator

The next question comes from Lu De from Tianfeng Securities. Please go ahead.

De Lu -- Tianfeng Securities -- Analyst

Hi. Thank you. Thank you for taking my questions. I have two questions as well.

My first question is regarding to employees in the research and product development department. I see that we have around, I'm guessing, 50% increase in personnel and mostly in the R&D side. Is it possible to give us a rough distribution between the 189 R&D personnel increase? Like, for example, certain percentage is working on AAV and its new model, and so on. And given the big increase in your R&D employees, what areas are those newly recruited employees mostly working on? And for my second question is about the strategic partnership between EHang and CP Group.

We see that EHang is actively forming key partnership with companies from each countries of Southeast Asia. Are we going to see similar strategies in rest of the global regions? And most importantly, will we see similar strategic partnerships in China as well? Thank you so much.

Richard Liu -- Chief Financial Officer

Thank you, De, for your questions. This is Richard Liu. Let me take your first question.

De Lu -- Tianfeng Securities -- Analyst

Thank you.

Richard Liu -- Chief Financial Officer

And, Edward, probably will tend with your, you know, second question regarding the market strategy. I understand the number of employee you are talking about is from our 20-F of 2021. The size of our R&D team has been steadily increasing as we continue to enhance our R&D capabilities, which is our core competitive advantage. So, basically, the distribution of our R&D team follows our R&D strategy, which is to establish an integrated technology platform that is across different technology co-functional areas and lays a foundation to create synergy for developing different products.

So, overall, our R&D team is roughly 40% in hardware development and 30% in software development, with the rest in other major areas such as certification and testing, etc. The core team of our R&D team has been stable and with the company since early days. They have accumulated abundant and leading experience and insights in AAV and AAV technologies. And the big increase in 2021 you mentioned was evenly distributed with an emphasis on the certification and testing areas, as the year 2021 was an important year for our certification process.

So, I hope this answers your question. Thank you.

De Lu -- Tianfeng Securities -- Analyst

Thank you.

Edward Xu -- Chief Strategy Officer

Hello. Hello, De. This is Edward, chief strategy officer here. So, I would like to answer your second question, all right? So, regarding our global, you know, strategy, forming partnerships, so basically, we -- as we mentioned earlier, right, we've positioned ourselves as UAM platform operator.

And we understand that the UAM industry is a whole ecosystem. So, we are trying our efforts to build this whole ecosystem, which means that it consists not only the regulators but also different partners, in which we are cooperating with real estate operators, amusement park operators, and conventional aviation operators, etc. So, as you can see, this time, we just formed a very good partnership with the CP Group in Thailand, which is very honorable with high reputation and strong capabilities in Thailand. So, similarly, we are also seeking different partnerships with different countries and markets.

But as you know that our focus is in China first, so which means that in China, we actually -- we had built extensive partnership with quite a number of, you know, reputable companies, which include the Greenland, Hong Kong, and Shenzhen Expressway, and Guangzhou Infrastructure Communication Group, etc. So, we have quite a number of solid partners in China. And in overseas market, as we mentioned earlier, the market -- we focus on Asia, including Japan, Korea, and the Southeast Asia countries such as Thailand, Malaysia, and Indonesia, etc. So, we actually see very good interest from those markets.

And furthermore, we are also working with some European and U.S. market partners, so which means that you can see, you know, we had a very good relationship with these partners. So, you know, hopefully, you are going to see more partnership in the future. Thank you.

De Lu -- Tianfeng Securities -- Analyst

Thank you. Thank you so much.

Operator

There are no further questions at this time. I will now hand the call back to Ms. Qian for closing remarks.

Richard Liu -- Chief Financial Officer

Thank you, operator. This is Richard Liu. Thank you, all, for participating on today's call and for all your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.

Thank you.

Operator

[Operator signoff]

Duration: 47 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

De Lu -- Tianfeng Securities -- Analyst

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