ECARX - Q2 2023

Transcript

Operator (participant)

Good day, and thank you for standing by, and welcome to ECARX Q2 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question, you will need to press star one one on your telephone. I would now like to hand the conference over to Adam Kay, Investor Relations at ECARX. Please go ahead.

Adam Kay (Head of Investor Relations)

Thank you, operator. Good morning, and welcome to our second quarter 2023 earnings conference call. With me today are ECARX Chairman, Chief Executive Officer, and Co-founder, Ziyu Shen, Chief Operating Officer, Peter Cirino, and our recently appointed Chief Financial Officer, Phil Zhou. This call is being recorded. Before we begin the prepared remarks, which will be followed by Q&A, today's presentation will refer to both GAAP and non-GAAP measures and also contain forward-looking statements, which are based on the environment as we currently see it, and as such, includes risks and uncertainties. Please refer to our filings with the SEC for more information on the specific risk factors that could cause actual results to differ materially. With that, I'd like to hand the call over to Ziyu.

Ziyu Shen (Chairman, CEO, and Co-Founder)

Thank you, Adam Kay. Hello, everyone, and welcome. Thank you for joining our second quarter earnings calls. Our momentum built in the second quarter with strong revenue and quarter-on-quarter growth, margin growth, demonstrating the growing interest in our product and the demand from consumers for safe and more enjoyable in-car experience. There are now 5.2 million vehicles on the road that incorporate our technology across 21 brands offered by our 2 automotive OEM customers. Vehicles on the road equipped with our products increased 6% from last quarter and 30% from the same period last year. Our dedicated team of around 2,000 people, including over 1,500 engineers, has firmly established ECARX as a leading tech provider in China, and we are gaining increasing attention from important automotive OEMs outside of China as well. We operate in a rapidly growing and evolving marketplace.

The rollout of digital copies also increase our content per vehicle and ASP. The appeal of a company like ECARX is that we are working in the sweet spot of automotive technology. Our marketplace is currently being reinvented, and we are the experience and the know-how of the Chinese market, with some of the most demanding customers in the world play a vital role. With more than 30 vehicles in our launch pipeline over the next 18 months, we expect those cars combined to ramp into an additional 1 million vehicles on the road with ECARX technology.

In quarter 3 alone, we expect to see production of a new Geely model using the Antora 1000 system-on-chip, as well as the Lynk & Co 08, which showcases our full platform with the Antora 1000 Pro cockpit, Flyme Auto operating system, and our automated driving control unit, ADCU, with L2+ ADAS from JICA. Peter Cirino, our COO, will now discuss this important milestone and some of our operating accomplishments in quarter 2. Peter?

Peter Cirino (COO)

Thank you, Ziyu, and good day, everyone. Ziyu detailed our strategy and customer successes, so I'll cover what we did operationally in Q2. Our focus is twofold: investing into R&D, which translates into better, more innovative products, and expanding our network of partners. Our company now operates in 14 locations across three continents, with recent facilities opened in the U.S. and Germany. The consolidation of JICA brought a further 300 engineers into our company, based mainly in Suzhou and Hangzhou, China. Our new R&D engineering center in San Diego complements our software development center in Sweden and will be led by ECARX's CTO, Yongqi Yang. The team there will focus on advanced automotive IP development, and we will plan to scale up the facility over the next 12 to 36 months. Similarly, our engineering and sales facility in Stuttgart, Germany, was announced this quarter.

It aims to support European OEMs with a focus on customers in Sweden, Germany, France, and the UK. These teams complement our core China-based engineering R&D team, and all in all, we have more than 1,500 engineers supporting our global R&D efforts. This commitment to R&D enables us to lead the sector in the new product introductions that push the boundaries of the in-car experience. At our Tech Day on March 24th in Wuhan, and at our Investor Day on May 9th in New York, we announced several new products that support our growth now and in the quarters ahead. These new hardware and software solutions include the Antora series, which provides a high-end automotive-grade intelligent cockpit experience with competitive cost performance.... ECARX's well-integrated Antora SoC solution also helps customers reduce their engineering costs and speed up their time to market.

Very soon, we will be seeing more and more cars on the road with this technology. Makalu is one of the most powerful intelligent cockpit products available today, and it offers a new in-vehicle experience with amazing 3D graphics, combining both security features as well as entertainment elements, powered by an AMD SoC and Unreal Engine graphics solutions. Cloudpeak, recently debuted in the Volvo EX30, serves as a cross-domain information, infotainment system software. It is also worth noting that we continue to successfully sell our existing products, announcing in May that together with Neusoft Corporation, we will customize the mass production of an intelligent cockpit product for the Changan Mazda CX-50 model. These are based on our E02 SoC core module, which already has been deployed across almost 1 million vehicles, across 26 separate models of a variety of automotive OEMs.

This product offers many useful and sophisticated functions for the modern driver. As you know, ECARX is at the center of a unique, differentiated partnership ecosystem designed to create disruptive innovation and technology for growth for the automotive sector. We were again active in the second quarter in expanding these partnerships, which enable us to more quickly add product features, enter new functional domains, and attract new customers. We have established a close partnership with Xingji Meizu, a leading Chinese smartphone manufacturer, and most recently, we announced Flyme Auto, an exclusive new operating system that seamlessly integrates Meizu smartphones into vehicles. During the second quarter, we also signed an important agreement with Epic Games, a pioneer in 3D immersive tools. We will deploy their 3D graphics capabilities for our Makalu digital cockpit, and we'll further collaborate on next-generation digital cockpits and infotainment applications.

Finally, at the end of June, we increased our investment in our long-term partner, JICA Intelligent Robotics, to 70%, consolidating JICA's results into ECARX. JICA is already focused on autonomous solutions for the Geely Group and will continue to do so, while ECARX will integrate JICA's systems into our products, helping us build an ADAS solution and a customer base outside of the Geely Group, both in China and globally. JICA further increases the breadth of ECARX's technology stack, bringing ADAS capability into our core product line. This combination increases the future content per vehicle we can provide into tech-minded vehicle OEMs. I'd like to spend a few minutes discussing the Lynk & Co 08, which will be on the road later this year. This vehicle contains our entire full product stack as we bring the software-defined vehicle to the road.

The digital cockpit is powered by the Antora 1000 Pro platform, deeply integrated with Cloudpeak software and with Flyme Auto for connectivity and cloud services. It is ECARX's first launch with a L2+ ADAS solution from JICA, a technology that we've now brought in-house, given our recent investment. The total solution offers the consumer a unique, customizable desktop experience with powerful, intuitive, easy-to-use functions that seamlessly connect the car to make travel more comfortable, more secure, and more supportive. Of course, with full intelligent-based learning and voice control, this is a fantastic vehicle. I would advise a test drive when you can. Finally, I want to introduce our recently appointed CFO, Phil Zhou, who has been with ECARX since early 2021 and was the CFO of China and head of our China operations.

His predecessor, Ramesh Narasimhan, will now go on to support ECARX as an advisor on key financial matters. I now turn the presentation over to Phil to review the financial results.

Phil Zhou (CFO)

Thank you, Peter, and good morning, everyone. As you will have already seen in the morning, ECARX enjoyed a very strong second quarter with revenue of RMB 952 million, up 45% compared to the prior year period, driven by sales of goods revenue at 87% and a high-margin software licensing revenue at 212%. Service revenue, while up 144% from the first quarter, was down 36% year-on-year, offsetting some of the growth in goods and software. It was mostly as a result of timing differences in non-recurring engineering revenue, which is expected to be booked in the H2 of the year. Gross margin increased to 31.3%, with increases in all major products and solutions.

Between Q1 and Q2, the gross margin rate on computing platform products and hardware solutions improved from 20.7% to 21.1%. on software and the licenses from 70.5% to 93.8%, and on services from 21.6% to 29.7%. All these were realized through, 1. a dedicated focus on products and solutions portfolio selling. 2. persistent cost optimization. 3. new product development and launch at a higher average selling prices. We also drove the effective operating expense control, with OPEX decreasing by 26% year-over-year. The optimization was primarily driven by, 1. we cut out autonomous driving inception development and high definition mapping in 2022, and optimized our China headcount. 2. we drove lean operations and OPEX control in 2023.

At the same time, we redeployed the savings and invested into global expansion into the UK, Sweden, the United States, and Germany, to make sure that we have a good footprint in international markets to work with top global OEMs. As Peter already emphasized, we continue to invest in R&D, up 2% quarter-on-quarter, but remaining lower than the same period last year, as we lapped the cessation of our ADAS perception software development last year. Following our acquisition of an additional stake in JICA, some of that investment will now come back. Adjusted EBITDA was negative RMB 158 million, up RMB 30 million from the same period of last year. As a result of a significant improvement net loss due to a much higher level of share-based compensation expense last year. Turning to the balance sheet.

At the end of the second quarter, the cash and the cash equivalents balance was RMB 905 million, an improvement of RMB 24 million against the end of 2022, reflecting our good execution on profit improvement and controlling expenses. It is an RMB 90 million outflow versus the end of the first quarter. We are growing very rapidly, and we will need the capital to drive that growth. While we are on the right path to narrow down our profit loss, focusing on operational excellence in the supply chain inventory and collection and payment management, as well as raising new funds, we aim to further improve the cash status. I'd like to remind you of the historical seasonality of the business, which mirrors the common pattern in the industry.

We would anticipate that 2023 keeping a similar pattern through the end of the year, given the pipeline of planned launches scheduled for the third and fourth quarter. With that, I will turn the call back to Ziyu for some concluding remarks. We will start the Q&A session. Ziyu?

Ziyu Shen (Chairman, CEO, and Co-Founder)

As we grow, it is important to remember why we are here and what is our purpose. The rise of the software-defined vehicle is why LVD and I founded ECARX. As vehicles evolve into sophisticated digital devices with greater vehicle autonomy, and as drivers' expectations of their in-car experience increase, the demand for high-powered, seamlessly connected automotive focused computer platforms expands significantly. ECARX is a global mobility tech provider, working with automotive OEMs to create new vehicle platforms from the ground up. We are well positioned to capture here, share in a large and rapidly evolving market, supported by our differentiated full-stack knowledge that simplified and expanded automotive OEM product development timelines. Our strong results this quarter demonstrate the strength of our competitive position and the attractiveness of the market we are pursuing. Operator, could we please start the question-and-answer session now? Thank you.

Operator (participant)

Ladies and gentlemen, we now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star one one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. We are now taking the first question. The first question from Jiaqi Zhang from CICC. Please go ahead. Your line is open.

Jiaqi Zhang (Analyst)

Thank you. Thank you, the team for taking my questions, and congratulations on the results for 2Q. I have 4 questions for the management team. The first 2 questions is about the research and development strategy. The first question is regarding the collaboration with SiEngine. Could you provide a brief update regarding how the collaboration and what is the progression of the development of the next generation SoC? Thank you. I will ask question one by one. Thank you so much.

Peter Cirino (COO)

SiEngine, you know, produced their, their SoC, taped out their most recent SoC at the end of last year.

... and we've been working very closely with them to bring that product to launch in our Antora 1000 and our Antora 1000 digital cockpit platforms. We have both of those platforms launching on vehicles as we go through mid-2023 and into fourth quarter. I mentioned in my presentation around the Lynk & Co 08, this platform has our Antora 1000 Pro system on it, which includes the SiEngine SE1000 SoC. And we're quite excited about the digital cockpit that we're able to launch on that vehicle, which has got a, you know, a full breadth of our technology stack on it. The digital cockpit, we are launching the Flyme Auto Link and Flyme Auto software, our CloudPeak software, as well as our autonomous driving system.

That's a great vehicle that, that demonstrates, you know, the full technology stack of ECARX.

Jiaqi Zhang (Analyst)

Right. Thank you for the answer. For my second question, it's regarding the intelligent driving. We have seen from the presentation that ECARX is gaining a control stake in Zeekr. Could you provide us more insights into how ECARX is going to lay out the roadmap of the intelligent driving products? Thanks so much.

Peter Cirino (COO)

Sure. I mean, we started- we, we invested in ECARX some years ago, in a close cooperation with Geely to launch the autonomous driving control unit. As mentioned, that'll come out on the Lynk & Co 08, where we're quite excited about the Level 2 capabilities that that will bring to the market, including, you know, a navigation on autopilot solution that will eventually be brought to that vehicle. I would expect that we would be announcing further steps in the future to build out our ADAS solution set. We're continuing to make investments, both in the Level 2 system that I mentioned, as well as into further advanced technologies in that space.

Jiaqi Zhang (Analyst)

Right. Just a quick follow-up. We can see a lot of BEV+Transformer, like deep, deep perception, the perception, technology in the market. Is there any plan for ECARX to follow that path, the BEV+Transformer?

Peter Cirino (COO)

Yeah, there's no question we'll continue to advance our technology in the autonomous space. We're, we're pretty excited about the level two capabilities, the level two+ capabilities that get launched with this vehicle. There are additional vehicles that this system will be launched on. ECARX is also aggressively pursuing additional programs in the market. we- I would expect that we'll continue to make announcements in the future, and I also would expect that we'll continue to build out our technology stack in the ADAS space as we go forward.

Jiaqi Zhang (Analyst)

Thank you. Thank you so much. For the next two questions are regarding the performance of ECARX in the second quarter. We have seen that there's a relatively large increase in the revenue for the second quarter. Could you help us do a more detailed breakdown into what projects in the project level, like, what project actually contribute to this increase in revenue? Thank you.

Phil Zhou (CFO)

Yeah, thank you, Jiaqi. This is Phil. I'm happy to take your question. First of all, we achieved a huge revenue with strong year-over-year growth, 45%, and achievement by our strong growth in our core computing platform and the software products. Regarding the computing platform products and its hardware solution, we achieved the RMB 670 million, 87% year-over-year growth. Majority, you know, of latter achievement was attributed by further penetration into Geely Auto and the Geely ecosystem brands in the year, like, you know, smart, Lotus and Zeekr. We also focused on our product and solution offering in a new EV market segment, and, we capture the curve of the market growth.

If you look at the general market growth in the H1 of 2023, the new EV sales in China actually is 44% growth year-over-year. In the quarter, we also grow drove the software and the license revenue. We achieved a record high, like, RMB 130 million, 212% growth. The growth was primarily driven by the IP license sales. At the same time, we also, you know, drove very effective cost reduction on third-party software sales. In short, we optimized the portfolio of the product and the solution sales, increased the ASP or total revenue per unit, and the persistent cost optimization, are the three major reasons or the engines for our profitable growth.

Jiaqi Zhang (Analyst)

Thanks so much for answering. The last question is, is regarding the projects. We have just heard that there, there's going to be 30 models in the next 1.5 years, right? 30. Could you help us do a more clarification of this?

Peter Cirino (COO)

Yeah, certainly. I mean, we've got a very robust pipeline inside of our business. As we mentioned, a engineering team of close to 1,500 engineers that are all working on various set of programs. These products, I think, span numerous OEMs. We mentioned Changan Mazda, we've recently announced FAW as well as, you know, the Lynk & Co product we mentioned today are all in our pipeline. In addition to that, we've got international launches across brands like smart, Lotus, Volvo, and Polestar. We're quite excited about the breadth of products that are in our launch pipeline and, you know, continuing to work with additional OEMs beyond that set to broaden the set of customers that we work with.

Jiaqi Zhang (Analyst)

Right. Thank you, team, for the elaboration. I appreciate it. Thanks.

Peter Cirino (COO)

Yeah, thank you for the questions.

Phil Zhou (CFO)

Thanks.

Operator (participant)

Thank you for your question. We are now taking the next question. The next question from Derek Soderberg, from Cantor Fitzgerald. Please go ahead. Your line is open.

Derek Soderberg (Research Analyst)

Yeah. Hey, everyone. Thanks for taking my questions. I wanted to start with gross margin. Gross margins have been on the rise. Curious if you can maintain gross margin sort of above 30% or at these levels. Then, Phil, can you talk about sort of how you're approaching the pricing of the hardware and software? Is there a target gross margin that you're hoping to get? And how, you know, how should we be modeling gross margin going forward?

Phil Zhou (CFO)

Yes, of course, I'm happy to take the question. We deliver -- ECARX delivered a diversified product and a solution offering, and we on purpose shift our focus on, on how better added product and solution to our customers. We, we are able to integrate the value of the industry chain and offer benefit to our customers and the, and the partners. What happened recently as we focused on transforming our, you know, software and the license selling. Basically, we want to transform our business model into a license or royalty per units business model, which actually can improve our profitability a lot.

At the same time, as Peter just mentioned, we are going to launch, 30 more than 30, vehicle programs in the market, which means we have enough pipeline at our hands, so we are able to continue to drive our service, R&D service growth, in the longer term. Of course, we focus on our, you know, core computing product selling. We launched a new product, and we are evolving our product, hardware solution product, right? We offer Antora, we offer Makalu. We, we offer those advanced technologies and, and, keep, improving, the content per vehicle. With that, we are able to, you know, drive our, our consistency and, and pricing as well as, profit growth.

These are the measures that the company is taking.

Derek Soderberg (Research Analyst)

Got it. That's, that's helpful. And I, I also wanted to ask, just touch on that, that strong pipeline, just as my follow-up question. I'm curious, what's sort of the, the revenue mix between electric vehicles and combustion engine vehicles today? You guys mentioned sort of 30, 30 vehicles or so, in the pipeline planned for launch. I'm curious how many of those are for combustion engine vehicles and, you know, if, if you expect substantial growth in that market as well, you know, beyond electric vehicles, or, or maybe that's not the focus. Thanks.

Peter Cirino (COO)

Yeah, Derek, thanks for the question. We certainly have both types of vehicles inside of our portfolio. You know, the place that I think we're quite excited about the, the technology and the investments that we're making is in the electrical vehicle space. I think most of our -- most of the vehicles inside our pipeline are EVs, and, you know, I think there, that's a great opportunity for us to, you know, bring this always connected, always on, you know, always updated software-defined vehicle life.

Derek Soderberg (Research Analyst)

Got it. Thanks, guys.

Peter Cirino (COO)

Yeah, thank you.

Operator (participant)

Thank you for your question. We are now taking the next question. The next question from Shelley Wang from Morgan Stanley. Please go ahead. Your line is open.

Shelley Wang (Research Associate)

Hi, this is Shelley from Morgan Stanley. Thank you for taking my question. I have 2 questions here. First is about the revenue mix. If we look at the current, the revenue breakdown, the sales of the goods are, the digital cockpit still accounts for the majority of our revenue and the profits. Do we have any targets or priority on the future revenue mix? Do we want to do more hardware or software in the future?

Phil Zhou (CFO)

Thank you, Shelley. This is Phil. This is a very good question. Talking about the product solution around the mix. In the second quarter, actually, we drove a significant growth in the software and the license portion. At the same time, yes, you are right, the 70% of our revenue still came from the hardware and the cloud computing platform. We keep optimizing our revenue mix through like high-value added solution selling to the customers. With that, we are able to, you know, keep our pricing and our margin stable and even can improve our profitability step by step. I would say, going forward, we will keep doing that.

The ideal mix of our business should be, you know, at least 60%, 70% still from our cloud computing platform. That is our fundamental solution. At the same time, we will drive software and the service business, like 30% or 40%.

Peter Cirino (COO)

Shelley, this is Peter, just to add to that, you know, we mentioned on this latest Lynk & Co 08 that we're also launching a, an autonomous system. We have a, a number of additional launches on that same ADCU system in our pipeline. I think we'll continue to diversify our product set beyond the digital cockpit into more, you know, solutions like ADCU, that require, you know, fantastic software and very solid computing platform. It's right within the core of our business. We're, we're definitely excited about that launch and its ability to increase our, our content per vehicle going forward. Yeah.

Shelley Wang (Research Associate)

Got it. My first, my, my second question is about the Baidu partnership. We have recently entered the partnership with Baidu for the large language model. Can management share more color on, like, how we will collaborate with Baidu, and what are the future revenue oppor- opportunities from this partnership?

Peter Cirino (COO)

Yeah, certainly, I'll, I'll, take that. I mean, the, you know, the AI, the AI applications in the digital cockpit and, you know, across the number of different vehicle applications are, are quite exciting for ECARX. This is an opportunity, and we've been collaborating with Baidu for some time and really excited to announce it. You know, the, the, the customizations and capabilities that we think it can bring to the user experience inside the car are quite extensive. You know, certainly there's very clear applications like improved voice control inside the car. I think we'll continue to evaluate and expand how we can help customize the digital cockpit with these types of AI applications within them.

Shelley Wang (Research Associate)

Very clear. Thanks a lot.

Operator (participant)

Thank you for your question. We are now taking the next question. The next question from Xiaoyi Lei from Jefferies. Please go ahead. Your line is open.

Xiaoyi Lei (Equity Analyst)

Hi. Thanks for taking my questions. I have 2 questions as well. The first one is, with increasing application of large language model to the vehicle end, we're seeing there, there are, like, higher requirements on the computing power of SoCs. I'm wondering how we cope with this new trend on our next generation products on this front?

Peter Cirino (COO)

Yeah, I certainly... I mean, that's a trend that I think ECARX has been participating in for some time. This, if you look across our SoC roadmap, you know, on a regular cadence, we continue to launch more capable computing solutions into the vehicle. I think this will definitely continue. You know, the Antora series that we launched recently here, we were able to bring that to the vehicle, both in an Antora 1000 solution and an Antora 1000 Pro, which includes two SoCs. It's a scalable solution that also is cost effective for the OEM to implement. Both of those systems will be in vehicles as we go through this year.

In, in early 2024, we've already announced the, the launch of our Makalu system, both in, some, some G events as well as the smart brand, and that's a very powerful, computing power system. I think, those, those capabilities, we're excited what they bring to the car, and they certainly will include a number of, AI applications within those, in those solutions.

Xiaoyi Lei (Equity Analyst)

Thank you. My next question is about the service revenue. We're seeing that the service revenue was down 36% year-over-year. Any guidance for the H2?

Phil Zhou (CFO)

Yes. The service revenue in the second quarter showed net was 36% year-over-year, but we also grew by around 45% quarter-over-quarter. The service revenue, you know, the decline is primarily due to the timing difference. So in the H2 of the year, we are able to book those, you know, non-recurring engineering or R&D service deal. We are with that, we are able to restore our service revenue growth at a normal level.

Xiaoyi Lei (Equity Analyst)

Okay, understood. Thank you.

Operator (participant)

Thank you for your question. We are now taking the next question. The next question from Poe Fratt from Alliance Global Partners. Please go ahead. Your line is open.

Poe Fratt (Managing Director and Senior Equity Research Analyst)

Yeah, good morning. Thank you. Thank you for taking my question. I had to... I apologize if it's redundant, but I had to log in and out of the call. Can you just talk about gross margins? Gross margin percent was just a little bit over 31%. What, what's the outlook for the H2 of the year, looking into 2024 from that standpoint? Has your pathway to positive adjusted EBITDA changed at all? You know, you're looking for positive EBITDA in 2024.... Do you think you can achieve positive EBITDA for the entire year, or will the, you know, will it be a H1 negative margin, EBITDA margins, and then H2 positive? Can you just give us a sort of an idea on that?

Phil Zhou (CFO)

Thank you. This is a good question. So for the margin performance, actually, ECARX is fully committed to drive, drive the profitable growth. As I mentioned earlier, we have a diversified product and solution offering in the market. At the same time, we keep evolving our offerings. We integrate industrial value for our customers. So that's why, you know, we drove a really good momentum on profitable growth in Q1 and Q2, and we believe that this momentum will continue. For, for the full year, we have confidence to, to deliver our profit growth, as we, as we mentioned earlier.

Poe Fratt (Managing Director and Senior Equity Research Analyst)

And then-

Phil Zhou (CFO)

At the same time, at the same time, regarding the EBITDA outlook, yes, Letian is working pretty diligently in our lean operation. We drove a very effective operating expense control year-over-year. As you can see, that is -26% optimization year-over-year. At the same time, that leaves our room to employ our savings to, to our strategic area, like, you know, our expansion and advanced technology development. We will, we will keep doing that, and our profitability target will be, will be met for sure.

Poe Fratt (Managing Director and Senior Equity Research Analyst)

Great. If you could talk about the next generation, you, you talked about Makalu, sorry. Do you expect to have pricing leverage on that next generation product? Or do you think that the competitive landscape will, you know, how will the competitive landscape impact your ability to, you know, generate some pricing leverage on your next generation products?

Peter Cirino (COO)

Yeah, great question. I mean, we certainly operate in a very competitive landscape. We've, we've done that quite successfully for a number of years. You know, we believe the, the, the, the automotive industry in China and digital cockpit is certainly quite a competitive space. You know, as we continue to launch new products, whether that's the Antora 1000 Pro that I mentioned earlier, the Makalu that you, that you discussed, as well as the, the ADCU, I think we're quite excited about our ability to increase our content per vehicle across, across those applications. So as we look across our pipeline, you know, as these solutions continue to bring additional capabilities into the vehicle, we, we definitely see some level of upward momentum on our content per car.

Poe Fratt (Managing Director and Senior Equity Research Analyst)

Great. Thanks for your time.

Peter Cirino (COO)

Yeah, thank you.

Phil Zhou (CFO)

Thanks.

Operator (participant)

Thank you for your question. We're now ready to take the next question. The next question from Yuqian Ding from HSBC. Please go ahead. Your line is open.

Yuqian Ding (Head of China Auto Research)

Thank you. This is Yuqian from HSBC, I got two. The first question, I think we briefly discussed a part of it, but looks like China is heading towards Level three commercialization, given the favorable policy and also more of the OEM joining the club to launch the city autopilot function. Potentially we're going to see that roll out in more larger scale. Between Level three and Level two, I think you briefly mentioned, there is content opportunity, but could you shed a little bit more light in terms of, like, how our content per vehicle opportunity distinguish between Level three and Level two, and, and what's the margin profile difference over there? If we push this through more value addition, software functions, how much like, if we could quantify that a little bit.

That's the first.

Peter Cirino (COO)

Yeah, sure. I'll take the first part of that question. I mean, when, you know, when we look at the landscape in the ADAS space, you know, we, we fundamentally believe that most of the applications in the short term will be Level 2, Level 2+. You know, getting a vehicle with, with navigate on autopilot on the road for us is quite exciting, and I think we're going to continue to be able to broaden that landscape of capabilities that we have in our Level 2+ system, you know, including parking functions and so on. I think in the near term, we believe most of the volume will be in the Level 2 space and Level 2+ space.

Certainly, we have our eye on the Level three applications and are already working on a number of advanced development programs inside that space as well.

Yuqian Ding (Head of China Auto Research)

Got it. Can we understand that, in terms of Levels 3 to 2, probably more software opportunity for us to explore?

Peter Cirino (COO)

Yeah, certainly as we get to Level 3, there's, there's more capabilities and more requirements from both, both the software and a computing horsepower perspective. I think we'll, we will, you know, as I said earlier, we would, we would expect to, in the future, make additional announcements in our ADAS portfolio and roadmap and continue to broaden the capabilities of that product line.

Yuqian Ding (Head of China Auto Research)

Got it. This naturally leads us to the second question: Help me solve a conundrum. We, we always think the software business would be very scale, under the premises that our customer would be use a standard, standardized software. I guess, you mentioned earlier, we have, like, over 30 projects in our pipeline. I guess each OEM probably would also require a little bit ad hoc work into that. We saw some of the peers, they've been struggling, because each OEM would want them to do different things, and therefore, you need support a huge personnel account for taking a different project. That makes that a little bit less scalable and a little bit more labor heavy.

In order to get some software loaded in more vehicle in the future, you probably also need that kind of reengineering capability. Where are we in terms of this software business conundrum?

Peter Cirino (COO)

I mean, when we look at our, our software teams, I think our organization is very focused on platforming. So whether that's across current generation or, or future generation products, you know, reuse and, you know, expanding our feature set is definitely something our engineering teams spend a lot of time investigating and, you know, ensure that we're kind of maximizing the reuse capabilities so that we can provide a competitive offering in the market. You know, that being said, when we engage with customers, on, you know, on the digital cockpit solutions, there's certainly an element of customization, especially in the, the UI, UX area, and, and that's a place that we work very closely with our OEM partners on.

Yuqian Ding (Head of China Auto Research)

Got it. That's very clear. Thank you very much.

Peter Cirino (COO)

Okay, thank you.

Operator (participant)

Thank you for your question. Just as a reminder, if you wish to ask a question, please press star one one on your telephone. Star one one if you wish to ask a question. There are no further questions at the moment.

Peter Cirino (COO)

Okay. All right, well, maybe we'll wrap the call up. Just certainly wanted to say, you know, thank you for everyone for joining, and great set of questions today. Certainly, if there are any follow-ups, please feel free to reach out to Adam or Renee for any follow-up questions going forward. Thank you for the call today.

Phil Zhou (CFO)

Thank you.

Operator (participant)

That conclude the conference for today. Thank you for participating. You may all disconnect.