ECARX - Q2 2024

Transcript

Operator (participant)

Good day, and thank you for joining us. Welcome to the ECARX Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After management gives their prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I would now like to turn the call over to your host for today, Rene Du, Head of Investor Relations at ECARX. Please proceed, Rene.

Rene Du (Head of Investor Relations)

Thank you, Operator. Good morning and welcome to ECARX Second Quarter 2024 Earnings Conference Call. With me today from ECARX are Chairman and Chief Executive Officer Ziyu Shen, Chief Operating Officer Peter Cirino, and Chief Financial Officer Phil Zhou. Following the prepared remarks, they will all be available to answer your questions during the Q&A session that follows. Before we start, I would like to refer you to our forward-looking statements at the bottom of our earnings press release, which also applies to this call. Further information on specific risk factors that could cause actual results to differ materially can be found in our filings with the SEC. In addition, this call will include discussions of certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to GAAP financial measures can be also found at the bottom of our earnings release.

With that, I'd like to hand the call over to Ziyu. Please go ahead.

Ziyu Shen (Chairman and CEO)

Thank you, Rene. Hello, everyone, and thank you for joining our second quarter earnings call today. We maintained robust growth momentum during the second quarter, building upon the strong performance we had at the start of the year. The automotive industry continues its rapid evolution towards software-defined vehicles, which ECARX remains at the forefront of. Let me start with a brief market update here. While the sector faces some global headwinds, the overall trajectory remains positive, particularly for electric vehicles and intelligent car technologies. Global car sales were mixed but remain on track, averaging around 88 million vehicles in 2024. An increase of almost 2%-3% year-over-year. China's automotive sector was similar, with mixed sales during the first half of the year but resilient exports. China vehicle sales were 12 million during the first half of the year, with exports reaching 2.8 million, up 6% and over 3% year-over-year.

Respectively, Chinese electric vehicle sales, in particular, were robust, hitting 4.9 million during the same period, a 32% year-over-year increase. The market continues to yield significant opportunities for us. Our evolving portfolio, diverse customer base, and strategic global partnerships and operations uniquely position us to capitalize on the enormous opportunities in this space. The scale of our business is key to building a sustainable path to profitability, and I'm pleased to report that we made substantial progress in this regard. By the end of the quarter, there were over 6.9 million vehicles on the road incorporating ECARX technology, with 472,000 vehicles added in this quarter alone. This translates into an increase of almost 32% year-over-year or 7% sequentially. We now serve 17 automotive OEMs across 26 brands, maintaining our reach from first quarter and deepening relationships with existing customers.

This can also be seen in our financials, with revenue increasing 31% year-over-year to RMB 1.3 billion. We continue to expand our customer base and broaden our project pipeline with five new design wins during this quarter, primarily for overseas projects. These wins demonstrate the appeal of our unified computing platforms both overseas and in China. Our relationships are deepening across the board, with a new design win from a well-known European automaker that builds upon our existing mass production projects from last quarter and four additional projects from Geely Ecosystem for vehicles targeting overseas markets. Discussions are also underway with FAW Group for additional projects beyond the two currently in development. We are also currently working on five global RFQs beyond the Geely Ecosystem.

Our diverse ecosystem of partnerships is fueling our project pipeline with cutting-edge innovation that sets new industry benchmarks and keeps automakers at the forefront of technology change. Building upon our initial collaboration in 2019, we strengthened our partnership with Tencent Smart Transportation in June. This partnership is intended to join different intelligent driving and cockpit solutions, which seamlessly integrate their robust suite of technologies and services for the domestic China market. For overseas markets, we began working with DXC Technology to accelerate the development of in-vehicle capabilities with a focus on enhancing the user experience of our full stack of infotainment, digital cockpit, and advanced driver assistance hardware and software. Continued technical innovation is critical for showcasing our strengths and maintaining a distinctive edge in the market. As our customer base grows, we are creating opportunities to replicate and scale our existing solutions for different vehicle models and markets.

I will later go into specifics in more detail, but I want to highlight that our technology, versatility, and adaptability make it the ideal solution for global automakers looking to offer the best user experience and keep bill of materials costs low. I'm highly confident in our ability to drive significant growth going forward. Our technology is mature and ready to be deployed more widely as our relationships with auto manufacturers deepen. Our comprehensive product portfolio and ability to innovate and scale solutions across multiple brands and markets underscores our competitive edge and is accelerating our global expansion. With our profile growing globally, we are well-positioned to generate sustainable growth and create long-term value for our shareholders, and I look forward to building on this momentum in the second half of the year and beyond.

I will now pass the call over to Peter, who will go through the operating results of the quarter in more detail.

Peter Cirino (COO)

Thank you, Ziyu, and good day, everyone. Our customer base continues to diversify and grow as our business scales and gains momentum. We secured five new design wins during the quarter, primarily for overseas projects. These wins directly reflect the unique value proposition we offer automakers with our unified computing platforms for markets in China and across the world. A number of these wins were generated from deepening relationships with existing customers, which are opening the door to additional opportunities. As Ziyu said, one of those five design wins was from a well-known European automaker that builds upon our existing mass production project from last quarter. The remaining four projects are for various brands in the Geely Ecosystem targeting overseas markets.

Beyond the Geely Ecosystem, discussions are also underway with FAW Group for additional projects in China beyond the two previously announced projects, which are still progressing smoothly through the development process and remain on track to begin start of production later this year. We're also actively participating in five global RFQ processes. Synergies created through strategic partnerships form a key part of our strategy to reshape the global automotive technology value chain. We're working with partners to develop innovative intelligent cockpits and intelligent driving solutions for a broader range of automakers and brands. In June, we strengthened our partnership with Tencent Smart Transportation, the smart mobility division of Tencent, to jointly develop intelligent driving and cockpit solutions.

This will reinforce our position in the China market by seamlessly integrating our unified computing platforms with Tencent's robust suite of technologies and services in big data, cloud computing, artificial intelligence, mapping services, and infotainment ecosystems. Together, we will initially focus on integrating Tencent's fully cloud-based lightweight maps product and broader ecosystem of apps and services. Over the longer term, we intend to develop a sophisticated platform to train and operate large language models that can be deployed in intelligent cockpits for a broader range of automakers worldwide. For international markets, we partnered with DXC Luxoft in June, a trusted global automotive software systems integrator, to jointly accelerate the development of in-vehicle capabilities. ECARX's full-stack hardware and software offering will now support a wider range of services with the addition of DXC's Luxoft's expertise in software integration and engineering and its ability to develop customized solutions for automakers globally.

Put simply, together, we will be able to help automakers integrate our world-leading hardware and software stack according to their individual needs, developing a bespoke user experience. Our technological leadership is further evidenced by our robust intellectual property portfolio with 598 registered patents and 656 pending patent applications globally as of June 30th. On the product side, we had several exciting new vehicles launched this quarter that showcase our technological strengths and demonstrate our remarkable versatility to replicate and scale our solutions across various brands and models.

Following the successful launch of the Lynk & Co 08 last year, we rapidly adapted its solution powered by the Antora Pro computing platform and integrated with Flyme Auto to several other high-profile models, including the Lynk & Co 07 in May and the LEVC L380 in June. The two FAW projects moving through the various stages of development will also use the same solution. The Lynk & Co 07 and 08, in particular, come integrated with our full-stack solution, which includes the Skyland Pro ADAS computing platform.

This shows the popularity of the solution and its ability to meet the needs of multiple automakers and also helps us focus on iterating and improving this platform with feedback from multiple launched vehicles. The integration of our dashboard and in-vehicle systems with the mobility ecosystem such as Flyme Auto is one way that we can work to future-proof the driving experience. We are also driving innovation in other areas to ensure that our offer to automaker and drivers remains at the cutting edge. As an example, this year, we will see the first vehicles using our pioneering Makalu computing platform entering the market. Makalu is powered by the AMD Ryzen Embedded V2000 processor and is the first platform to offer automakers the power of this advanced chip.

Makalu is not only able to support ambitious applications, including unparalleled 3D graphics, AAA gaming, and other powerful entertainment and security features, but it also provides the processing headroom to allow automakers to continue to upgrade the driver experience with software upgrades well into the future for a deeper relationship with their customers. The new Lynk & Co flagship BEV, the Z10, will be the first car to bring the advanced features of Makalu to the road, with vehicle deliveries expected to begin next month. The Smart #5, which debuted in April at the Beijing Auto Show, will also be driven by the power of Makalu. As chips become more powerful and capable, we also have an opportunity to create more efficient and inexpensive systems that meet infotainment, assisted driving, and security requirements in a single unit.

The Geely Galaxy E5, the first vehicle to integrate digital cockpit and parking capabilities into a single board using the Antora 1000 platform under Geely's new EE architecture, will significantly reduce the bill of materials costs for the vehicle and serve as the foundation for their next-generation vehicles. It's clear that our Antora computing platform is increasingly broadening the appeal to the market, and we plan on replicating the solution to other vehicles in the future. By providing scalable, replicatable, and cost-effective solutions, we are clearly becoming a crucial partner for automakers in their transition towards the software-defined vehicles. Our ability to commercialize and deliver these integrated vehicle solutions at scale globally maximizes cost efficiency and accelerates speed to market for automakers globally. We achieved a significant milestone with the start of our production at our Fuyang facility in April.

This new manufacturing facility marks a crucial step in our strategy to vertically integrate our manufacturing and supply chain capabilities. The Fuyang factory has already begun contributing to production capacity, enhancing our ability to control product quality, further reduce costs, and streamline operations. This vertical integration allows us to better manage the entire process from research and development to manufacturing and sales, strengthening our competitive edge in the market. As we continue to ramp up production and optimize operations there, we expect to increase efficiencies and cost savings, which will ultimately benefit our customers and shareholders and build a sustainable path towards profitability.

To echo what Ziyu said earlier, I am very confident and optimistic that we will continue to see tremendous growth based on the progress we have made so far, especially as we lean into our investments in technological innovation, diversifying our customer base, and expanding our business globally. I will now turn the call over to Phil, who will go through our financial results.

Phil Zhou (CFO)

Thank you, Peter, and hello everyone. Our strong start of the year continues into the second quarter as our business continues to grow and our financials improve. Total revenue for the quarter was CNY 1.3 billion, an increase of 31% year-over-year. Computing hardware goods revenue was CNY 944 million, up 41% year-over-year, driven by growing global demand and shipments, mainly for the Volvo EX30 and the Polestar 4, as well as the ramping up of sales volume for the Antora series digital cockpit and the autonomous driving control unit. These contributed approximately 14% and 8% respectively to total revenue. Software license revenue came in at CNY 57 million, down 50% year-over-year, due to a decrease in intellectual property licenses revenue, which was CNY 80 million during the same period last year. Service revenue increased 45% year-over-year to CNY 257 million.

This was primarily due to the launch of the new Antora series vehicle program and the continued growth of our overseas TSP business, which accounted for approximately 9% of the service revenue. Gross profit was CNY 292 million, a decrease of 3% year-over-year, which translates into a gross margin of 23% and an increase of 1% sequentially. As competition and pricing pressures across the automotive industry deepens, margins on hardware products will remain challenging over the midterm. As discussed on the last earnings call, to address this challenge, we are maintaining our focus on driving growth momentum in our premium products and balancing sales across our portfolio. We are also reducing costs through supply chain optimization, improving our overall cost structure and manufacturing strategy, and optimizing operating expenses and capital investment. OpEx during the quarter increased 12% year-over-year.

This was primarily driven by an increase in share-based compensation. Excluding share-based compensation, OpEx increased 3% year-over-year due to continued R&D investment in core products and future technologies. This was partially offset by decreases in SG&A expenses, which decreased 21% during the quarter as a result of improved operational efficiencies. Loss per share was CNY 0.84, flat sequentially. Adjusted EBITDA loss was CNY 210 million, up from a loss of CNY 156 million during the same period last year, primarily attributable to equity investment loss. Compared to the prior quarter, adjusted EBITDA improved by CNY 14 million, or 6%.

Moving on to our balance sheet, as of the end of the second quarter, we had CNY 788 million of cash and restricted cash, which gives us the required resources to invest in our future key initiatives, business expansion, and accelerate growth, while we are continuing to improve our working capital and profitability enhancement. In summary, we continue to drive growth momentum inside and outside the Geely ecosystem, further expand our customer base, and push sales of our premium products in the second half of 2024. We will also continue to optimize our cost structure, operational and fulfillment efficiencies, and operating expenses investments.

Our global expansion strategy, including R&D, will provide us with the flexibility to mitigate ongoing and potentially newly emerging geopolitical challenges. I'm highly confident we are on track to gain profitability and let our businesses in a more sustainable position for the longer term. That concludes our prepared remarks today. I would now like to hand the call back to the operator to begin a Q&A session.

Operator (participant)

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. For our first question, Jiaxi Zhang from CICC, please go ahead.

Jiaxi Zhang (Analyst)

Thank you, the management team. My name is Jiaxi Zhang from CICC. I'm very happy to see there's a sustainable growth in the revenue and profits. So, great congratulations for that. The first question, I have two small questions regarding the financial results. The first one is regarding the service revenues. We have seen there's a huge increase of service revenue compared to the first quarter. Could you explain what has been contributed to the increase? And the second question is regarding the gross margin. We have seen there's a decrease in the gross margin of the sales of goods and revenues around about 3.2 ppt, so ppt. So could you explain as well what has actually contributed to the decrease? Yeah, that's my first question. Thank you.

Phil Zhou (CFO)

Thank you, Jiaxi. This is Phil. Thank you for your question. So let me address your first question regarding our service revenue growth. So in Q2, our service revenue was CNY 257 million. That is a pretty decent in terms of year-over-year growth. It's 45%. And from the dollar amount, RMB amount is CNY 80 million. So that is primarily due to the launch of the new Antora series vehicle programs we introduced last time. We support Volvo to launch EX30, and we further expand the penetration, and the market also expanding into a global scale as well. And that is related to the online revenue growth. So EX30 is about CNY 75 million more in the current quarter. We also support a Lynk & Co 07 to launch, and LEVC, there's a new model called L380. All these contributed to our online revenue growth.

Meanwhile, in Q2, we also generate overseas TSP business, and that is also part of our service revenue growth. So in conclusion, we see a very strong service growth driven by our dedicated focus on the online generation for those new vehicle programs launch. Okay. So your second question is about our gross margin performance. So if we look at our gross margin percentage, it's 23%. It's a 1% improvement sequentially versus Q1 reported. And yes, from the year-over-year perspective, it's declining, and we mentioned that it's due to the pricing erosion or pricing pressure from the industry. So starting from the second half of last year, the entire industry got a pricing challenge, and all OEM customers, they would like to maximize their shipment and use pricing as a weapon to do the trade-off.

So the entire industry got impacted as well, including ECARX as a tier one player in the industry. But in order to maintain our gross margin performance at 20, we actually delivered pretty strong in our supply chain management. We optimized our cost structure. At the same time, we drove IT or software service business, as I mentioned, and all those contributed to our overall gross margin performance improvement. So we are able to stabilize our gross margin performance in the midterm and the longer term. Okay. So hopefully, we addressed your question regarding profitability. Yeah.

Jiaxi Zhang (Analyst)

Yeah, that's very clear. Thank you. So my second question is that we have seen there's a very rich variety of vehicles launched with Geely Group, including Lynk & Co, Smart, and the LEVC, etc. So my question is regarding to the strategy of competing for the orders from Geely Group. What is the strategy of ECARX to lend the projects with Geely, whether it's for the higher products or for lower-priced ones? So what is the strategy for that? Yeah, how do you choose which project to go with Geely? Yeah. I hope that's clear.

Peter Cirino (COO)

Hey, Jiaxi. This is Peter. I'll grab that question. Thank you very much for joining the call today. You look at ECARX, obviously, we have a great history with Geely, and we know the organization very well. Recently, a lot of our launches have been on their global products. We talk about the Smart launches. There are other products in their portfolio that are launching on a global scale, and we've built out that capability in our organization very successfully. The Volvo EX30 launch was an important launch for us last year. That vehicle is doing very well, especially in Europe, and it continues to expand globally, also with the Polestar brands as well. But we're also well-positioned and continue to grow with the brands, the core brands, such as the Geely brand and the Lynk & Co brand.

So I think we're continuing to have a fantastic relationship with the Geely Group. Additionally, the company is very focused on continuing to diversify our customer base. We talked about launches coming later this year with FAW. FAW will continue to be a very important customer for us, and those critical vehicles are working well throughout our pipeline, throughout our development process. And I would expect that we will continue to deepen our relationship across the FAW Group, as we've done with other customers in our space. And then I mentioned in my remarks earlier, we have a strong effort to grow the business globally. So we're participating in a significant number of RFQs globally. We're working closely with a number of different OEMs across Europe to show our capabilities and build out strong technical solutions that are off of our base tech.

So we're quite excited about the progress we're making, both with the Geely Group, with our broader customer set in the China market, as well as continue to expand the company's position and relationships on a global scale as well.

Jiaxi Zhang (Analyst)

Right. Thank you. Thank you for the answer. So for my last question, it's regarding the product portfolios. We have seen a very rich product portfolios as I'm going through the slides you provided. So I have counted there are 10 domain controllers for, I think, for the cockpit, and there are 3 central computers for the central domain. So my question is, could you give us guidance regarding to what are the targeting vehicle prices for each of these individual platforms? As I guess, there are some of these platforms that are pretty overlapped in their performance, etc. So could you give us more guidance on this? Thank you.

Peter Cirino (COO)

Yeah. I would hope that you look at our product portfolio. I think we're very effective at scaling across a broad set of vehicles that all have different price points in the market. So if you look at the historical products that we've delivered, we've delivered very high-end products into vehicles like the Lotus vehicles. That launch that happened in 2022 was a very high-end launch with significant capabilities in 3D. You see a similar price point and performance level in the Makalu product that we're launching that's based on the AMD technology. And that brings very unique capabilities into the Z10 and the Smart vehicles that we're launching first with that platform. But I expect that will. I know that will continue to launch across a broader set of vehicles as well. And then we're very strong in delivering extremely cost-effective solutions to the market into more higher volume solutions.

So some of our older E02 Venucia solutions are very cost-effective, as well as our single Antora solutions that we're recently launching. They include a lot of integration of systems inside the vehicle and provide a very cost-effective solution to the OEM. I think you look across, especially our Digital Cockpit Solutions are very mature, and I think we are effectively able to serve a broad set of solutions from very, very high-end performance to very cost-effective solutions as well.

Jiaxi Zhang (Analyst)

Right. Thank you for the answer. Yeah. That will conclude. Thank you.

Operator (participant)

Megan Jin with Macquarie. Please go ahead.

Megan Jin (Industrials Equity Analyst)

Hi. Good evening. Thanks for taking my questions. I have two questions. One is that, first of course, congratulations on very good Q2 results. The first question is on the hardware part. What do you think that is the driver on this very robust 40% group sales growth? Is it more from a growth in the per car value, or is it more from the volume? And what is the largest segment under this hardware? I mean, which product exactly is the most major product in this segment that's driving the sales? And also congratulations on fulfilling the target of adding around 1,000,000 more vehicles that carry over product ahead of schedule. So maybe I was wondering, do you have a new target in terms of the overall number of vehicles that carry over products?

That actually, I'm curious, how should we think about the second half since we already fulfilled this target ahead of schedule? Thanks. That's my first long question.

Phil Zhou (CFO)

Hey. Thank you, Megan. This is Phil. Yeah, I'm happy to address your question. And Peter, you also can chime in for additional information. Okay. So Megan, so actually, we are in very good progress of developing and delivering lots of vehicle programs. And I would say that all fine, it's on track. For example, we already made huge success by launching Lynk & Co 08, Volvo EX30, and the Polestar 4 since last Q3. And when we moved into the first half of 2024, we also got Lynk & Co 07, LEVC L380, and the Galaxy E5. Right? Galaxy E5 just launched, and we are making good traction as well. There's no delay. And all those programs are widely accepted, appraised by our customers. So as you can see, the Lynk & Co Z10 with our Makalu solution is also going to launch very soon.

We foresee that new vehicle programs are coming from FAW as well, and we expect the SOP by the end of the year. So in summary, I think we have a very good start, and we will continue to increase our business expansion in those vehicle programs, including non-Geely business. And in terms of your question regarding the breakdown, solution breakdown for our computing platform hardware, right? What is the biggest contributor in terms of the computing hardware platform? So ECARX, well, we are an open system. So we have a Qualcomm solution. We have an Antora series solution. We have a Makalu solution as well. So in Q2, Qualcomm solution still occupies nearly 80% of our computing hardware business. Our Antora series, nearly 20%. And Makalu business just got SOP, and we foresee that REMPUP will be coming, and REMMIX will increase as well.

Regarding the price or ASP or quantum vehicle follows solutions, I would say we keep improving our quantum vehicles through our diversified solution offering. For example, our Antora series, the module, the pricing will be a range from RMB 400-RMB 1,200. For traditional IHU, it's RMB 1,200-RMB 1,800. For our major product line, DCU business, the ASP will be a range from RMB 3,000- RMB 13,500. It's a lot. We will keep our focus and shift to those high-price premium products to improve our revenue and profitability. Okay. I think that concludes my answer to your question. Peter, if you have any new information, yeah, please.

Peter Cirino (COO)

Yeah. No, Phil, I think you did a great job in covering it. I would just echo that as we look across our customer segments, we see the vast majority of our customers. We have significant growth with both the Geely brands we mentioned and then Geely and Lynk & Co. But significant growth with our shipments with Volvo and Polestar on a global scale. They show a significant year-on-year performance in our second quarter results. So I think the global expansion and servicing new customers is making a significant impact on the top line for the company.

Megan Jin (Industrials Equity Analyst)

Thanks so much, Phil and Peter. That was very helpful and very clear. Okay. Then my second question is on our overseas business. In terms of the expansion, I'm wondering how to assess the market size as far as to estimate the market size in order to think about how we repeat the success of our software platform services to Volvo EX30 on other clients. How should we think about what exactly is the thing that we are doing to them and how competitive it is and how large a market that we look for and who are the major competitors? And a very further away, strategic question is actually on the recent news on Biden proposing to ban the autonomous driving software in the U.S. I know it's really far away from us as we're doing business in Europe, and then it's not really in the autonomous space yet.

But I'm wondering when the U.S. is starting to ban this Chinese software in the autos out of this reason of national security, will its allies follow suit and also use the same reason to kind of ban this Chinese auto software? How do we address or think about this geopolitical risk potentially in the future? Yeah, that's my second long, long question. Thank you.

Peter Cirino (COO)

Okay. Yeah. Let me take the question just in two parts here. So in terms of international growth and how we assess the market, the Volvo EX30 that we launched towards the end of last year has been a great proof point for us. We built that, the system in that vehicle by using our global capabilities to service that opportunity. So I think we've been clear that we started our international growth as early as late 2000 in setting up our team. So it could be close to four years ago that we started to make those investments. We built a strong software team in our European location. In addition, we have made recent expansions by two years ago, opening our international headquarters in London and then opening earlier this year a site in Germany to continue to cement our position in the global market.

We're approaching the very large OEM customers here in the European market. We're showing the proof point, certainly, that we've developed and built our system and software stack from our core technology in China. But we've already shown the capabilities to transition that to global IP and have it as a global offering in the market. We see ECARX in a very strong position relative to the ownership of the full software stack and the full stack solutions that we bring to the market, the capability I mentioned earlier to service both the very, very high-end with great capabilities, unique features into the digital cockpit space, as well as a very cost-competitive solution. And as we're attacking and having further discussions with customers in the European market, we're talking about both capabilities that we have inside the organization.

The breadth of vehicles that we have serviced in our core business, I think, is strongly helping our expansion. I think we'll continue to expand with the major customers throughout the European market. I hope that we can, over the next six months to a year, really start to talk about the successes that we're having in the market here. I'm going to transition somewhat to the geopolitical environment. I think very much building on similar themes. We built a great business in China with more than 1,500 employees that have incredible capabilities. We've already shown the capability to take the core technology and to expand it globally and to serve the global market from that capability as well as with local investments.

And I think you'll continue to see ECARX doing that in further building our capabilities in the European market and being able to service each customer locally in a very effective way. And that's how we see ourselves continuing to develop. And I think that will start to address the geopolitical concerns of the total market. I think we know that we've got to build local relationships with the various customers in their home countries. And we've done that effectively in Europe already and will continue to grow that capability as we build deeper relationships with the customer set. So we recognize that there are geopolitical challenges in the world, but I think we've got an effective solution and strategy to address them.

Megan Jin (Industrials Equity Analyst)

Sure. Thanks very much, Peter. It's very clear. That's all of my questions. Thanks again and congratulations.

Peter Cirino (COO)

Thank you.

Phil Zhou (CFO)

Thank you, Megan.

Operator (participant)

Tony Shen from SPDBI, please go ahead.

Tony Shen (Analyst)

Thanks, Management, for taking my questions. This is Tony Shen from SPDBI. I think I've got two questions here. I think the first question is also going back to the gross margin for the hardware business and also the pricing side. So as we mentioned in the preparatory remarks, we still have pricing pressure and pricing erosion from the automakers. And could you, the management, give us some color and outlook into the second half of this year and into the next year? How do we see the price trend and how do we see the gross margin, especially for the hardware segment?

Phil Zhou (CFO)

Thank you, Tony. This is Phil. Yes. We observe that the pricing competition is widely observed in the industry. As I mentioned, most OEMs leverage pricing as a tool to maximize their shipment and market share and that results in margin pressure in the overall supply chain, including ECARX and many other tier-one solution providers. We foresee that such kind of a trend will continue in the second half of the year. Even when moving into the next year, the challenge in Chinese domestic OEM market will remain unchanged. That is our observation. But ECARX, as a solution player in the market, we have our strategic plan. First of all, in terms of the operation, we will continue to optimize our cost structure in both hardware and software. We will further enhance our service performance in our portfolio.

Like what I mentioned, in quarter two, we have a pretty decent performance from the service revenue. We will continue to do that. As long as we have more, we can generate more demand from the new vehicle customers, the vehicle programs, then we are able to generate or grow our service revenue. So that can help us partially offset the hardware pricing challenge. And at the same time, ECARX, we also shift our strategy into smart manufacturing side. And that purpose is all about how to manage our cost component level, I mean, the cost improvement. And at the same time, how to ensure quality and our delivery capability. And I think through that investment, we should be able to generate more opportunity in terms of the hardware cost opportunity. And we also expand our business into the globe.

As Mr. Shen and Peter mentioned our strategy is to become a global tier-one technology player in the industry. That means we need to serve not only top 10 global OEM customers, even top five OEM customers as a trusted solution provider. I think that play can significantly shift our focus from China only to the global business. That can help us enhance our margin pool through a diversified customer base. Those multi-different programs, as long as the shipment volume is guaranteed, we should be able to generate an economy of scale. That is our proactive strategy from China and from globalization to mitigate the margin challenge in the China market. The forecast, I think our margin performance momentum will continue. We will keep current 20%-ish gross margin through our proactive action, as I mentioned. That momentum will continue. Tony.

Tony Shen (Analyst)

Okay. Okay. Perfect. That's very clear. My second question is about our in-house chipset like Antora and Makalu. How these projects will be expanded into the overseas customers? We also mentioned that we have five new design wins in the quarter. How much of them are from our own design solutions, including Antora and Makalu? How should we look into the year of 2025?

Peter Cirino (COO)

Yeah. I'll grab that question. So certainly, our Antora and Makalu solutions, and specifically Antora, if we start there. Antora was launched in 2023, with the first major vehicle being the Lynk & Co 08. And we're continuing to grow that product set and building out our capabilities on that product line across additional OEMs. We have design wins today in our core market in China that will be launched both, let's say, across the various brands that we serve that are both brands that serve China as well as the Chinese market as well as brands that serve the global market.

So I think we're really happy about the progress we're making with that product line. Additionally, we believe that product line has potential to work beyond our core market and to service some of the global opportunities. And I mentioned some of the global RFQs that we are pursuing.

We're using the platform that we've built with a broader software stack to service some of those potential opportunities. So I think that product line, we will, in the long term, see both design wins in our core market as well as throughout our global expansion activities. So we're quite excited about it. The Makalu product is a very unique offering with a tremendous capability and compute platform. It performs at a different price point where OEMs, those customers, want to be able to invest in the capabilities there. So I think we'll see less volume on that product line, but it does give us a tremendous opportunity, and it builds out our software stack and enables us to even transition to the future extremely high-performance products that we see coming in all of our markets across the global landscape.

That product line will continue to service very well. We're also able to effectively platform our software capabilities that we will see elements of our software stack used on the Makalu product that will be used far into the future in even more advanced applications that we see coming in the pipeline.

Tony Shen (Analyst)

Okay. Great. Thanks for the color. Thanks.

Operator (participant)

Our next question comes from Xiaoyi Lei from Jefferies. Please go ahead.

Xiaoyi Lei (Senior Research Analyst)

Yep. Thanks for taking my question and congratulations on getting the overseas order. So my first question, maybe just a follow-up question on the progress of overseas expansion. So do we have any expectations for the proportion of overseas revenue in the next two to three years? I think management already touched up a bit on how to deal with the possible risks of how to deal with geopolitical risks. So I'm just wondering, do we have any plan to add more local capacities in the U.S. and Southeast Asia? Yeah.

Peter Cirino (COO)

Yeah. Maybe I'll take that question to start with and talk a little bit about our strategy. And Phil can certainly follow up with some of the metrics and detailed financial numbers as needed. So ECARX, as I mentioned, we started our global journey as long as four years ago and continue to expand our capabilities globally. We're certainly in a lot of discussions about how we strategies that we use to continue to grow our engineering capability to service the European market, as well as maybe a little longer term, but also to expand our supply chain capabilities so that we have effective manufacturing to support our growth on a global scale. So we definitely have all those activities in our pipeline and are continuing to work through those strategies to support the growth activities.

When you look at the vehicle development cycles, they often can be between two and four years. So as we win programs, move through our development activities, and start to launch those, you'll start to see significant revenues along that time horizon. That's somewhat just the industry cycles. They're certainly getting faster. One of our capabilities as a business is to be able to use our technology stack, our platforming capabilities to be very effective in short horizon programs. Our China market business is extremely dynamic with very aggressive timelines. We're able to operate with great quality and great technology in that horizon. We're bringing that capability to the global market. But there is somewhat of a different operating model between many of the customers that we serve in the China market and customers that we're having deep partnership discussions with at a global level.

I think that it will take some time for the revenues to begin showing up in our performance as our China business continues to grow. But we already have vehicles that are launched globally that will continue to grow. We're working very closely with a number of different partners and customers in Europe to continue to expand our business there. It will definitely yield great progress for us in the future.

Xiaoyi Lei (Senior Research Analyst)

Thank you. So do we have any guidance or expectation for the proportion of overseas sales based on our current order backlog?

Phil Zhou (CFO)

Xiaoyi Lei, this is Phil. So as Peter mentioned, we make good traction in global vehicle programs. The revenue is coming. Although by end of 2024, we might not see too much, but the momentum is there. We have full confidence to grow the business aggressively in the next couple of years. Our goal doesn't change. That is by 2026 to 2027 timeframe, the business from the international or the global OEM customers will be 40% at least. That is our goal. We are ready. We are ready to invest into the global R&D, global smart manufacturing, global delivery aggressively in the next one or two years. That can build our momentum and build on the foundation to generate growth in the future.

Xiaoyi Lei (Senior Research Analyst)

Understood. Very clear. My next question is regarding the chip procurement strategy. We noticed that the government sort of encourages the domestic OEM to increase the procurement ratio from local chip suppliers. I'm just wondering if we will adjust our product line, adjust our strategy in terms of the chip sourcing strategy in response to this policy.

Peter Cirino (COO)

Sure. I'll grab that question. Great question. I think if you look at our strategy, we have a fantastic solution to that need in the market. We have had a deep relationship with the global technology suppliers. We were very early to develop platforms off of the Qualcomm technology. We have been talking. We have been developing this Makalu platform off of the AMD technology for more than two years now. We've certainly been discussing that partnership. We're now starting to see products from that partnership come to the market and be launched inside of vehicles. Also, ECARX as a business established the joint venture SiEngine with AMD in 2018. The first product from that joint venture is the base of the Antora platform.

That product was developed in China, a 7 nm solution, and is a fantastic product set that we're continuing to grow, both in a very platform solution in the Antora 1000 and the Antora 1000 Pro, be able to serve a number of different price points in the market. We see great progress on that platform as we have multiple OEM projects in our pipeline that are built off of that platform. As I mentioned earlier, I think we will see that both serve markets very effectively, serve markets inside of China and satisfy that need for local SoC performance. But also, we see potential for that product set on a global scale as well. I think we're extremely well positioned to manage some of those challenges that we see in the market with the very effective solutions that we have inside of our product portfolio already.

Xiaoyi Lei (Senior Research Analyst)

Understood. Thank you. And my last question is regarding our cooperation with FAW. Yeah. Could you please shed more light on the progress?

Peter Cirino (COO)

Yeah. Sure.

Phil Zhou (CFO)

I mean, I mentioned. Xiaoyi Lei.

Peter Cirino (COO)

Oh, go ahead, Phil.

Phil Zhou (CFO)

Yeah. Yeah. So yeah. So given the NDA with the customer, we might not be able to disclose too much of the details. But Xiaoyi Lei, I think the program is proceeding very smoothly as planned. And I can share some information with you regarding the FAW cooperation. So let's recap the strategic imperative of the cooperation between ECARX and FAW. FAW, basically, they want to build the advanced digital cockpit capability, especially the software operating system, so as to improve the compatibility and the in-car user experience. And from the other angle, FAW really wants to improve the adoption rate of Chinese domestic key components so as to guarantee a controllable supply chain. And ECARX, we would like to diversify our customer base. We want to increase our revenue and profit return from new customers.

At the same time, we want to scale out our common and standard business and solution platform. And through the engagement, I would say ECARX will have a huge opportunity to serve nearly more than 10 vehicle programs, car models in the next two years in the FAW Group. And we also target penetration rates in Hongqi brands like beyond 50% by 2028 and 2029 timeframe. Right? And then we open up the opportunity for other brands under FAW, for example, like Bestune and maybe JV between FAW and international OEM brands. So there are two programs right now under our development, and we are going to launch the vehicle programs by the end of the year. That is our plan. So that is the engagement model. And yeah.

As long as the progress could be announced, then we will announce to the market regarding the cooperation and the results. And Peter, do you have any more to add?

Peter Cirino (COO)

No, Phil. I think you did a great job covering it. We have a number of vehicles in our pipeline, and I think we'll continue to make announcements in the future about how we're deepening the relationship across a broader set of their brands.

Xiaoyi Lei (Senior Research Analyst)

Okay.

Operator (participant)

That concludes our Q&A session. I will now turn the conference back over to Phil. Peter, sorry enough for closing remarks.

Peter Cirino (COO)

Okay. Well, thank you, everyone. Thank you for the time today and joining our call. We're, as we mentioned a number of times during the discussion today, quite excited about the results: 31% year-on-year revenue growth and expanding our total product in vehicles to almost 7-6.9 million vehicles as of the end of June. So I think we've made great progress as a company, both in the metrics as well as deepening our strategic relationships, our strategic partners, and growing our capabilities with new product sets, as well as the discussion around the launch of our newest manufacturing site in Fuyang. So we're very pleased with the progress of the organization and anticipate we'll continue to have a very solid year as we go forward through the balance of 2024. So thank you again for your time today.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.