Hesai Group - Q1 2023

Transcript

Operator (participant)

Hello, ladies and gentlemen. Thank you for standing by for Hesai Group first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. Please note that today's conference call is being recorded. I would now like to turn the call over to our first speaker today, Yuanting Shi, the company's investor relations Director. Please go ahead.

Yuanting Shi (Director of Investor Relations)

Thank you, operator. Hello, everyone, and thank you for joining Hesai Group's first quarter 2023 earnings conference call. Our earnings release is now available on our IR website, .investor.hesaitech.com, as well as via Newswire services. Today, you'll hear from our CEO, Dr. David Li, who will start the call with an overview of our recent updates. Next, our Global CFO, Mr. Louis Tee, will address our financial results before we open the call for questions. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. Please also note that the company will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures recorded on the GAAP in our earnings release and its SEC filings.

With that, I'm pleased to turn over the call to our CEO, Dr. David Li. David, please go ahead.

David Li (Co-Founder and CEO)

Thank you, Yuanting. Thank you everyone for joining our call today. Let's start with the big picture. We're pleased to deliver the strongest quarterly financial performance in our history. In the first quarter, our net revenues were up 73% year-over-year to a new record high, and our industry-leading growth margins increased quarter-over-quarter to 38%, up from 30% last quarter. Expense-wise, excluding share-based compensation, R&D remains steady, and our product lines and organizational structure are approaching maturity. As a result, and most excitingly, we achieved non-GAAP profitability and the positive operating cash flow in the first quarter, demonstrating our tremendous future profitability process. No validation is more encouraging than the recognition from our customers.

Having delivered more than 135,000 lidar units to date, Hesai has become the most commercially successful lidar manufacturer in terms of shipment in both robotaxi and ADAS market. We stand out from others for two reasons. First, our proven automotive-grade product quality built upon our methodology of having in-house manufacturing as a crucial part of the R&D to enable rapid iteration of our product. Second, in addition to taking advantage of economics of scale, we have committed to continued innovation on our proprietary ASIC platform, allowing more affordable solutions via highly integrated components. Since 2017, we've gone through four generations of our proprietary ASIC development, with contributions from more than 150 dedicated semiconductor staff. We're proud to be uniquely positioned to offer lidar solutions with the best combination of high performance, high quality, and affordability.

Now I'd like to share some exciting first quarter business updates. First, we're thrilled to have the privilege of collaborating with 11 pioneering OEMs in the industry on multi-year ADAS contracts, including Li Auto, a leading Chinese EV maker, as well as another top-selling EV maker in China. We're also working with a leading consumer electronics maker in China on their planned EV debut, and two of the largest automakers in China, including Changan and many other leading auto OEMs. In the first quarter, we continued to gain momentum in signing more contracts in the domestic market. We were selected by Li Auto for its new fully battery electric vehicle platform, and by JIDU, a joint venture between Baidu and Geely Group, for its new EV model.

we also initiated a partnership with a new customer, Seres, a leading EV maker in China, whose new car models will be shipped with our AT128 lidar. We already advanced in eight RFIs and RFQs with five leading global OEMs who are expecting a new round of sourcing decisions to materialize in the next coming 12 months. In the autonomous mobility market, we continue to lead as the best-in-class player. We recently signed the largest robotaxi contract in our company's history.

According to an independent third-party report, we are the primary lidar provider for 12 out of the world's top 15 autonomous driving companies with nearly 60% global market share. We're dedicated to in-house manufacturing as we see this as the only way to meet automotive-grade standards at this early stage of development in ADAS market. During the first quarter, we completed the first successful production sample from our Hertz, a dedicated manufacturing center in Hangzhou, which takes automation to the next level. Featuring over 90% automation, Hertz produces one lidar every 45 seconds. With an optimized design, the AT Series produced at Hertz would improve our ADAS growth margin as it reaches economy of scale in manufacturing and the utilization.

Our advanced R&D and intelligent manufacturing center in Shanghai, Maxwell, is a true innovation center for new products to be designed, tested, calibrated under one roof before they are handed over to mass production. Its construction is scheduled to be completed in Q3 of this year. Leveraging the development of our latest ASIC Gen 4.0, we're able to continue releasing state-of-the-art products that meet the ever-increasing needs of both performance and design aesthetics while keeping them affordable. ET25 is groundbreaking in-cabin lidar featuring an extremely slim profile of only 25 mm in height with extended range and enhanced resolution, was recently released at the Shanghai Auto Show. ET25's revolutionary concept is attracting interest from OEMs globally who are demanding extremely miniaturized lidars behind the windshield to achieve both an aesthetically pleasing exterior vehicle design and optimal aerodynamics.

To conquer the great challenges of putting lidars behind the windshield, we team up with the global automotive glass leader, Fuyao Group, to create a specialized windshield to enhance the laser transmittance efficiency by up to 3x. Finally, before I hand it over to Louis for a deeper look at the financial numbers, I wanted to congratulate the whole team from operations to product innovation on exceptional quarter. With non-GAAP profitability and a positive operating cash flow in the first quarter, we showcase our potential for continued growth momentum. We remain confident in our ability to see development opportunities in both ADAS and the AM markets, bringing a higher level of safety to the future of intelligence driving systems. Now, I'll turn over the call to Louis to share more details on our financial performance and outlook. Louis, please go ahead.

Louis T. Hsieh (Global CFO)

Thank you, David. Hello, everyone. We further demonstrated our commercial success with a stellar set of financial and operational numbers in the first quarter. Be mindful of the length of our earnings call today. I encourage listeners to refer to the first quarter earnings press release for further details. We achieved record net revenues of RMB 429.9 million, $62.6 million, up 73% year-over-year, 5.1% quarter-over-quarter. Product revenues grew even faster, increasing 77.7% year-over-year to RMB 424.1 million, $61.8 million during the quarter.

Gross margins was 37.8% for the first quarter, compared with 50.9% for the same period of 2022, and 30.0% for the fourth quarter of 2022, as our revenue continues to shift from higher margin autonomous mobility products to higher volume ADAS sales. Although we were pleased with this quarter's gross margin, we do, however, anticipate a lower gross margin for Q2 and Q3 due to a large volume but low margin order from a leading robotaxi OEM. We anticipate gross margins will rebound in Q4 as the Hertz Center production line kicks in with anticipated higher gross margins with updated ADAS products shipping in volume.

At this early stage, we are willing to sacrifice some gross margin in the short term in exchange for market share gains in the long term in ADAS and to a some degree in autonomous mobility as well. The ADAS and AM lidar markets are at a nascent stage of development. At this critical point, we are prioritizing market share expansion. We are still targeting blended gross margins to stabilize in between 30%-35% in the long term. First quarter deliveries totaled close to 35,000 units, an increase of over 400% year-over-year, but a slight decline from Q4 due to seasonal factors. We strategically pulled forward some volume in December to mitigate production constraints and manufacturing slowdown in Q1 due to the Chinese New Year holidays.

AT deliveries accelerated in March and April, we anticipate a record second quarter of ADAS and AM deliveries to reach almost 50,000 units, an increase of 40% quarter-over-quarter, and a tenfold volume increase year-over-year, which would represent a record high quarterly lidar volume for Hesai. In the first quarter, we achieved non-GAAP net income of RMB 1.6 million, $0.2 million, excluding share-based compensation expense of RMB 120.5 million, $17.5 million. This increase in share-based compensation expense was mostly attributable to the recognition of one-off expense of RMB 90.9 million, $13.2 million, upon the completion of our successful IPO in the quarter in relation to the stock option granted with an IPO trigger condition.

Before discussing Hesai's 2023 outlook, we would like to reiterate the statement in our April 17th, 2023 press release responding to Ouster's IP infringement lawsuits against Hesai. We believe Ouster's claims are deeply flawed and lack merit. Hesai's independently developed lidar technology is the result of years of investment in research, development, and engineering. Hesai disputes Ouster's allegations of patent infringement and will vigorously defend ourselves against such allegations. Since the lawsuits are pending, upon the advice of counsel, we will not comment further or take any questions on this matter. Now, moving to the financial outlook.

For the second quarter of 2023, the company expects our net revenue to be between RMB 410 million, $59.7 million, and RMB 430 million, $62.6 million, a year-over-year increase of approximately 94.3% to 103.8%. This represents an expected doubling in Q2 2023 revenues year-over-year, and an expected tenfold increase year-over-year in lidar shipments to almost 50,000 units. Demonstrating our continued optimization in operational execution and strong market demand for our products. It should be noted, however, that last year's Q2 was negatively impacted by the COVID lockdowns in Shanghai. The above outlook is based on the current market conditions and reflects the company's preliminary estimate of market and operational conditions and customer demand, which are also subject to change.

In closing, it should be clear to you investors by now that Hesai is the undisputed global leader in the ADAS and autonomous mobility lidar markets. In fact, we continue to easily outpace the competition, easily delivering higher annual and quarterly revenues and lidar shipments than our six other US-listed lidar peers combined. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator (participant)

Thank you. If you'd like to ask your question via the phone, you only need to press the star key followed by the number 1 on your telephone keypad. If you'd like to ask a question via the webcast, you'll need to type your question into the Ask a Question box. For the benefit of all participants on today's call, if you'd like to ask your question to management in Chinese, please immediately repeat your question in English. For the sake of clarity and order, please ask one question at a time. Management will respond, then feel free to follow up with your next question. Your first question today comes from Tim from Morgan Stanley. Please go ahead.

Tim Hsiao (VP and Equity research Analyst)

Hi, David and Louis. Thanks for taking my questions, and congratulations on the strong first quarter results. I have two questions. The first question is about our gross margin guidance, because during the presentation, I think Louis mentioned second quarter, third quarter margin would be lower, despite a record volume sales due to the product mix. Could we have the rough breakdown between the autonomous driving, the mechanical lidar, and the ADAS solid state ones in first quarter, in the second quarter? And separately, when are we going to see the inflection point of more meaningful gross margin improvement, as Louis mentioned, back to like 35% or above? That's my first question. Thank you.

Louis T. Hsieh (Global CFO)

Thank you, Tim. I'll take this one. For the gross margin for Q1 on AM versus ADAS, we are no longer disclosing the individual breakdowns for competitive reasons. You can imagine that our customers see the same information and use it against us in negotiations. We are now disclosing a blended gross margin for our company. As we noted earlier, that's 37.8%, up 180 basis points from the prior quarter. We will no longer be breaking down each individual product line, the gross margins. For the trend, Q2, as you know, we have disclosed, and Q3 will be slightly lower because of the largest order in our history for robotaxi lidar. It's, and so that one, we conceded a lower price to get the volume.

The total contract is approximately $200 million. It's a huge contract, it's worth it to us to do that. We do believe the inflection point, is on your last question, relates to probably Q4 when the Hertz facility is up and running and producing AT units in volume. At that point, we expect the gross margin to rebound. Our total gross margin guidance for the year remains at 25%-30%, our long-term gross margin target still remains at 30%-35%. Thank you, Tim.

Tim Hsiao (VP and Equity research Analyst)

Got it. Thank you very much for a detailed answer. My second question is about the new product. Could the management team elaborate a bit more about Hesai's new product, ET25, the in-cabin LiDAR, regarding the project wins, potential shipment revenue contribution this year, and how does the margin of this product look like? Separately, without the change to the car body design or the roofline, would ET25 be actually be easier for OEM to install this product in their cars or by any chance to accelerate the process of lidar adoption? That's my second question. Thank you.

David Li (Co-Founder and CEO)

Thank you, Tim. The two questions, right? One, you wanted to know. Oh, by the way, this is CEO David Li. You wanted to know the expected gross margin compared to AT, right?

We don't have this number yet because we don't have signed contract to disclose on the number on the selling price yet. I could comment is that I think any lidar or any, in general, hardware product, if you are unique, you irreplaceable for some of the technical features that competitors don't have, usually a product like this enjoys a better margin. We tend to think ET is a unique product in a sense that it solves quite a few extremely technically challenging aspects of lidar. One is that ET stands for extremely thin. It's of 25 millimeter height, which makes it possible to install behind the windshield in the cabin.

If you didn't have that, if you're very thick, then the problem is that it will be too bulky, and it will take up a good part of your windshield as entire system. That's impossible. Second is that if you install something behind the windshield, you can imagine the windshield doesn't really help with the long-distance detection. It actually hurts it because it absorbs the light on the way out and on the way back in. It does that twice. You need to have very special process, especially highly integrated process with both the OEM and especially the glass maker to do that. We disclosed that one of our partner is Fuyao Group, one of the biggest auto glass maker in the world. It takes a long time to develop processes like this to make sure the seamless integration.

For those reasons, and also, of course, on top of it, you need to be very quiet, the NVH needs to be very good. For all those reasons, ET is a very unique product that make it more unique, and we expect them to have higher margins if we do this right with the right partner. Then your second question is how hard it is to integrate it with the OEM. Was that right?

Tim Hsiao (VP and Equity research Analyst)

Yes, correct.

David Li (Co-Founder and CEO)

Okay. Yeah, it's gonna be a little more challenging than AT itself. AT is extremely standardized, right? Everyone pretty much gets the same hardware. For ET, the platform is the same, but there is integration work. That's why we are starting to engage with quite a few domestic and the global OEMs in starting to try to integrate that into their vehicles before they give us official nomination, because it's well understood that it is a interactive process with the customer. I actually consider this is a good thing because this makes it further unique as a product, especially if you use our ET, it'd be more challenging for somebody else to come in and try to replace us just because they have the performance. Integration is also very challenging. Okay. That's me.

Tim Hsiao (VP and Equity research Analyst)

Got it. Thank you very much for all the feature sharing, David and Louis. Thank you.

David Li (Co-Founder and CEO)

Thank you.

Operator (participant)

Thank you. Your next question comes from Bin from Credit Suisse. Please go ahead.

Bin Wang (Managing Director)

Thank you, everyone. I also got a question about our gross margin, because it's a guide full year will be 25%-30%. If I want to decouple by quarter, I have an easy calculation show that the second and third quarter may be... This 15% gross margin in the last quarter may be 30% gross margin can achieve this full year 25%-30% guidance. Can you correct me if my calculation is wrong about the margin, especially in the number four quarter? Always on the margin recover in the number four quarter. Thank you. Firstly, can you give me the number four quarter margin guidance? Thank you.

Louis T. Hsieh (Global CFO)

Thank you. Thank you, Bin Wang. It's Louis. As I said earlier, we won't give you quarter by quarter analysis on the gross margin. Based on your calculation, it's, you know, it makes sense what you said. 37.8% for Q1. Q2 will be slightly lower, as we already indicated. Q3 will be lower as well, and Q4 will rebound. Our target is 25%-30% for the year is still intact.

David Li (Co-Founder and CEO)

Wanbing, I wanted to give you a little more insight on the what's happening as we transition. Yeah, we talk about that it's gonna be a V shape on gross margin this year, and Q2, Q3 are relatively lower compared to Q1, and Q4 will be better on all the products and also on the blended. Let's look at them in two sectors separately, right? Robotaxi, we had the biggest order in our history, but that order is a big order that's spanning over a couple years. You can imagine for a big order like that, it's a negotiated price of all the lifetime. The truth is that for this year, as we're starting to ship in small volume, the margin is low.

That's why Q2, Q3 have some impact, limited impact, but some impact on the margin. Starting next year, we will have upgraded product on the Pandar Series that will bring the robotaxi margin to a reasonable level for robotaxi, which is historically higher than ADAS. Similar phenomena happen for our ADAS growth margin. The fact that we were starting a small volume last year and start to ramp up this year. As part of the negotiation with the customer, we have slightly lower ASP compared to last year. We also try to address this by upgrading our technology on the semiconductor side on the product. Also as we ramp up in volume, we will be further able to take advantage of the economy of scale. That's why we expect by Q4, the ADAS margin go back to a healthy number.

That's why we're taking this V shape. We already see on the technical side and on the economic side that this will happen.

Louis T. Hsieh (Global CFO)

The final point there, Bin Wang, is that the Hertz center will be open in Q4, and that has lower manufacturing costs for you. Okay.

Bin Wang (Managing Director)

Thank you. My second question about the volume. Can you provide a full year volume guidance again, especially in the second quarter, because it seems that the ASP will decline because your revenue guidance similar as the first quarter, but volume has been 40% increase. Can I assume that second quarter, the ADAS have a much higher growth than the 40% Q and Q, but AM, Pandar will be stable? Is that the right assumption for the mix for the second quarter in volume? Thank you.

Louis T. Hsieh (Global CFO)

Yeah, certainly ADAS is growing in Q2 because in Q1, as we mentioned, Chinese New Year holiday, the deliveries were pulled forward into December of last year. I think the year-over-year guidance is about 240,000-260,000 total units, of which 220,000-230,000 are still expected to be ADAS. There's no change in the annual guidance, which means that Q3 and Q4 obviously will be a higher ramp in ADAS. Remember, by Q3, late Q3, six OEMs will be shipping. By Q4, we have 11 OEMs for next year. Many of them will be taking some significant delivery numbers in Q4 as they ramp up for their model release in 2024.

Q4, we expect the largest, volume for ADAS in Q4, which has traditionally been the case for us. You know, I know this is only in two years, but we expect a larger volume of ADAS in Q4. With the Hertz center up, the margin should go up.

Bin Wang (Managing Director)

How about the second quarter mix? Thank you.

Louis T. Hsieh (Global CFO)

Second quarter mix. Well, I think we're targeting over 40,000 ADAS units, and then the remainder will be the autonomous mobility, Pandar, QT, and XT. It, it should be slightly over 40,000 units for ADAS, is what we're targeting. It's not done yet. There's still a lot of work to do. We said almost 50,000 is our, is our target.

Bin Wang (Managing Director)

Thank you so much. That's all my question. Thank you.

Operator (participant)

Thank you. Next question comes from Olivia from Goldman Sachs. Please go ahead.

Olivia Xu (Global Investment Research Analyst)

Thank you, David and Louis. There are two questions from my side. The first question is about the pricing cut in the EV industry. Has the general pricing cut in the first quarter been passed to the upstream lidar yet? What's the expectation of the EV pricing trending in the next few quarters? If there's another round of pricing cut, how would that impact the price and the margin for Hesai ADAS lidar products?

David Li (Co-Founder and CEO)

Thank you, Olivia. This is David. We anticipated limited impact for a few reasons. The first reason is that the type of price first, right? The nature of those multi-year contracts is that we negotiate this price at the earliest stage of this contract. Essentially, they're locked in. They have a projection on the volume. Yes, of course, it's depending on their actual volume shipment. But when there is a price cut on the customer side, the contract we have with them on the nomination still holds. Of course, more importantly, it's the volume. We're very fortunate that our biggest SOP customer, Li Auto, is going very strong.

That's one of the bigger reasons that we still are very optimistic on the guidance we gave, especially given the fact that earlier this year when we had the original guidance, we already knew there was going to be a price war, and because we usually OEMs knew that way before the rest of the market, and that was also part of negotiation we had prior to this. We're actually now seeing that our customers, especially the top ones, are going very strong. If we put money aside, if we purely talk about technology, if you think about a lidar, it's not your leather seat because it provides a very strong active function on the safety side.

Most of the OEMs are using lidars as one of their top selling points to help them sell vehicles as opposed to be just purely a cost. That's why a lot of people, even for the cheaper models, they're still considering using lidars to help them differentiate from the rest of the peers who offer a slightly inferior product just because they didn't have lidar-equipped driving systems. That's why we're also seeing a lot of interest, even though some of the prices have gone down. Lidar hasn't been the configuration that they turn off.

The last point I want to make at the end is that I feel like if you treat lidar as a pure hardware, it's kind of unfair because traditionally when you buy a car, the value of the car depreciates over time as a pure hardware. An intelligent driving ADAS system with lidar, the moment you buy it, the value actually goes up over time as they keep developing more software on it, and they push to the customer. Essentially, you know, after buying a car, in 6 months or 12 months, your car could be more valuable to you because it provides more functions via the software. One of the interesting example we started to see on the market is, for example, for the Li Auto L9 with our lidars, right?

Their AEB function with lidar became much strong, and there was verifiable evidence that this became a much safer feature. L9 also scored 5 stars in the C-NCAP crash safety test. I think it's to be fair to say that lidar was a creative part of it. That is all the value the lidar is providing to the customer. That's also the reason we believe, and the market will start to adopt that actually in an increasing manner.

Olivia Xu (Global Investment Research Analyst)

Thank you. That's very clear. My second question is about the 4D millimeter wave radar. What's your view on that? Would that be a supplement or the substitute to lidar?

David Li (Co-Founder and CEO)

Yeah. Great question. Yes, we do believe they're complementary at this stage. Well, it's kind of a bigger question because we probably won't be able to comment it without mentioning, you know, one of the companies who hasn't used the lidar, Tesla, right? At least from my opinion, it's great that Tesla is considering using 4D radars, because for me, from a technical standpoint, this is a strong message that Tesla agrees that vision-only system isn't sufficient. At least they used to say that all I need is a camera because, you know, human don't need other than our eyes to drive.

Now they're voting to incorporate more sensors because it really makes perfect sense for technology to complement each other, for sensor fusion to function in a much safer way than one sensor alone, and they see different part of the world, right? If we agree with that, I think the natural question is that we do agree you need multi-sensor modality, multi-sensor fusion. There's radar, there's lidar, and there's camera. How do people make the decision in the end? I feel like in the end, now it's not a technical decision. More sensor is always better. It's a commercial decision on how affordable we can make it. Today, 4D radar isn't cheap. 4D radar is still a fraction of lidar, but not by a huge factor, probably two, three, roughly. We're seeing the lidar being more affordable.

If you see the history of lidars, were being much more affordable, and this trend is going, right? The last thing is you wanna compare the performance. 4D radar, due to its nature of the wavelength that are roughly 1,000 times longer than the lidar, it sees limited set of objects. For example, it would be much more challenging for 4D radars to see stuff like lost cargo. It would be hard to see a tire because the conductivity of those objects are difficult. Even for humans, it's much more difficult for radar to see compared to lidars. It doesn't cover the full set. Lastly, but very importantly, the resolution. Resolution for 4D radar is very limited. Used to be even worse for 3D radar.

Today, 4D radar is about roughly 1% of the resolution of lidar, like 100 times of difference. A good analogy would be when the resolution is so low, it's like you have short-sighted eyes without glass, and you're driving like that because you only have 1% of the resolution. Is it better than not having your eyes? Yes, I would agree, but that might not be very good argument if you want to replace lidar. In the end, if you look at it, really, lidar is much better in performance, becoming cheaper and cheaper over time, and this is a verified sensor to be the critical part of the driving system. Everyone agrees that sensor fusion is critical.

That's why we're still very optimistic, actually more excited that more companies are looking into the fact that vision only isn't going to be sufficient.

Olivia Xu (Global Investment Research Analyst)

Thank you very much. That's all my questions.

Operator (participant)

Thank you. Your next question comes from Paul, from UBS. Please go ahead.

Paul Gong (Analyst)

Yeah. Thanks, guys, for taking my questions. I have only 1 question regarding the innovation in terms of the direction and the pace. When you are sitting today and imagine the lidar products, let's say two years later, what would be the key areas to improve? Is that going to be resolution? Is that going to be range? Is that going to be durability? Is that going to be cost structure or just the size and the shape of the lidar? The reason I'm asking this question is, if the innovation pace is too slow, of course, that would limit the adoption of lidar. If it's too quick for anyone who buy the auto airline today, driving for the next 10 years, for the first two years, he is happy, the state of art lidar.

For the remaining eight years, his high-end, expensive, large SUV would bear Backwards lidar compared to the latest products by then in the market. How shall we think about this balance in terms of the innovation, in terms of both the pace as well as the direction on the products, let's say two years later, if it's better than today, where it would be better? Thank you.

David Li (Co-Founder and CEO)

Thank you. Thank you, Paul. This is David. I totally agree that you don't wanna be too fast, and you definitely don't wanna be too slow in pushing forward the pace of the innovation. Let's divide that into a few technical aspects, right? I will talk about what we think we've done and what remains as a potential and a path moving forward. First is distance, right? Today, it's roughly 200 meters, and some of the competing technology has 250 meters. We're also moving in that direction. I think it's roughly meeting the expectation. Second is form factor. Form factor is interesting because it's not about how big it is, it's about how you install that.

I think we made a major progress in being able to install that, make it so small and install that behind the windshield. I feel like that part, the market is extremely excited about, and we definitely see a lot of potential for doing so. That part is done. Then I wanna talk about what hasn't been fully done and remains as the opportunity and the challenges. One is resolution. Let me give an apple-to-apple example. If you think about it, the typical good camera for cars today, it's 8 megapixels per frame. 8 million pixels, right? LiDARs, what we have today is only 1.5 per second, which means that it's a tenth of it per frame, which is 150K per frame.

150K versus 8 million. That's like a 60 sometimes room of improvement for lidar resolution to meet camera, which is a natural thing people would want. We have 60 more times to innovate. Of course, our next generation will significantly shorten this, close this gap, That's one of the opportunities we need, we were looking at. The other one is price. I won't be able to give you specific numbers, but we definitely see for some of the lower end cars, they probably don't wanna pay the close to $1,000 level price, They want some cheaper version that will have limited function. Still, lidar is like, your invisible airbag. You definitely want it for added safety. We're also seeing that.

Hesai as a company is very determined to be able to take advantage of our in-house manufacturing and our strong semiconductor platform to be able to drive down the cost. If anybody, I feel like we have the best chance to do that. That remains a challenge and the biggest opportunity moving forward. Those are the things that on my mind to move forward.

Paul Gong (Analyst)

Thank you so much. Very helpful.

David Li (Co-Founder and CEO)

Thank you.

Operator (participant)

Thank you. Your next question comes from Tony Chen from Huatai Securities. Please go ahead.

Junqi Chen (Equity Research Analyst)

Hi, David and Louis and management. Thank you for taking my questions. As we saw the intense EV competition in China and some defects trend from the product, many functions will be chopped in the low-end model and become optional in the high-end product. As Tesla, I think, you just mentioned, they choose to use pure vision, and they use only camera to be their platform for autonomous driving. Did you see China EV brand will follow this trend from your perspective? Will these two trends slow down the adoption rate of the lidar from your perspective? That's my first question.

David Li (Co-Founder and CEO)

Sure. Thank you. Let me make it very clear. The reason I mentioned Tesla is a friend, not an enemy, in the sense that they're actually acknowledging that camera alone isn't sufficient, right? They're introducing 4D radars. Again, my argument is that Tesla used to claim very confidently that vision only is sufficient. Now by introducing 4D radar, at least we know they now agree that multimodality sensor fusion is going to be very, very helpful for increased safety. That's what I see. That's the reason I'm more excited for this, because I feel like if lidars we keep going in the direction, make it better and cheaper, there's a very good chance that people would agree that this is.

this should be part of their system. Now back to your question on the China EV. I think I also talked about it already. We are seeing even for the cheaper models, they want this to be a differentiator. For smart EVs, lidar is one of the iconical thing. Yes, today, for very low-end models, it's relatively expensive. We're also making the effort to hopefully to drive down the cost. We're already seeing wide range of adoptions this year and the next. By next year, we'll be shipping with 11 OEMs, but some of them are on the more affordable models, but they still use it.

Some of them even use that as a standard configuration for all the cars they ship because they see that as a strong safety features that they cannot live without.

Junqi Chen (Equity Research Analyst)

Okay, that's great. My second question is, could you give us more color about the R&D progress in ASIC solution in your lidar you just mentioned in opening remarks? What's your strategy and how important will this technology will be to win competitive advantages? Thanks.

David Li (Co-Founder and CEO)

Sorry, can you say it again, the question?

Junqi Chen (Equity Research Analyst)

Yes. Can you give us more color about the R&D progress in ASIC solution, just like chips or-

David Li (Co-Founder and CEO)

ASIC. Oh, ASIC.

Junqi Chen (Equity Research Analyst)

Yeah. Yeah.

David Li (Co-Founder and CEO)

Sure. We're at the development of the fourth generation. Each generation is a major step forward in more highly integrated components to further reduce the cost while having exponentially higher performance. When we talk about performance, we're talking about few things. One is the range. Today, we're about a 180-200 meter range, and then our next generation is gonna go way beyond that. The reason we're able to do that is we made a lot of progress on the component, the laser and the receiver side, to be able to drive that part of the efficiency up in the way, for lack of analogies, like your cell phone camera, right? 20 years ago, if you take a photo at night, you barely see anything.

Now it's super clear. You see more things than your eyes. Now we're driving our components in that direction to be able to detect further, right? ASICs also allow us to handle way more data as we send out the light pulses and receive them, because we used to... Our current AT is 1.5 million points. Our next generation will be many times more than that. The reason for that is our ASIC handles way more laser pulses, and we can just multiply a big factor on what we do many points per second-wise. Resolution-wise is a huge leap of faith.

Also, if you are familiar with Moore's Law, we're also seeing that trend in a sense that for every unit, the ASP isn't declining as very fast, but the performance per point is declining a lot because we're having many X of increase on the resolution. This is what ASIC is allowing us to do. On top of it gave us better security chain management ability because we used to source a lot from different vendors for some of the semiconductors. Now we just own the design and just ask the foundries to do that for us, and we're using very mature process node, so it's very much safer for us to work with foundries than having to manage a global supply chain system.

Junqi Chen (Equity Research Analyst)

Okay. Very clear. Thanks. That's all my questions. Thank you.

David Li (Co-Founder and CEO)

Yeah. Thank you.

Operator (participant)

Thank you. The next question comes from Joel from Nomura. Please go ahead.

Joel Ying (VP of Auto & parts and Technology)

Thank you, management, for taking my questions. I'm asking for when management mentioned about the annual cost cut from OEM side, I want to, you know, can we share generally the situation here in terms of the, you know, annual cost cut level? If we cannot talk about the detailed numbers, can we say that's, you know, it's low single digit or maybe high single digit? Can we talk about that? In terms of the OEM attitude toward lidar, we're talking about, you know, low-end car makers also, low-end car brands also thinking about the lidar adoption.

In terms of the current situation, I would say because of the price competition in OEM market, do we see any, you know, further pressures or OEMs be more cautious in cost efficiency in this year and maybe impact the lidar market in short term? Do you see any impact or any concerns from OEM side? Thank you.

Louis T. Hsieh (Global CFO)

On your first question, Joel, this is Louis. Regarding the price decline, we would estimate about 5%-10% a year-over-year, decline in the ASP side. As David mentioned earlier, our contract is signed for the whole year. They're kind of locked in, and sometimes it's multiple years where the price is locked in. As far as the OEM adoption of, you know, lower priced lidar in the competition, like I said, it's a long, uphill process because they've already integrated with our lidar into their new models. It takes time to change. There is severe price competition and we faced that the last two or three years, and that's why the price has come down.

A lot of companies used to pick just based on price and then they've regretted it since because the performance is quite poor or the quality. I think is that we're hoping that and expecting that price competition evades compared to the performance as the best lidar providers come out and able to show that they can produce auto-grade lidar at affordable prices. I think the price competition is beginning to wane a little bit. It's more about your product and a price that's affordable. You had a second question? Sorry, I didn't catch that correctly.

Joel Ying (VP of Auto & parts and Technology)

Oh, okay. Thank you. actually I want to follow up. In terms of the because of the current market situation, so in terms of the short-term target, I mean, the, or the task for the companies, so what's the key? It's about the cost down or it's about the new technology innovation? In terms of short term, I mean, within 2023. I guess that should be the cost down would be the first task.

Louis T. Hsieh (Global CFO)

Short term is not as big a factor for us because the prices were locked in last year or at this point, and those models are coming out. And most of them are actually going to be delivered in 2024. Other than Li Auto, you know Lotus, JIDU, uncertain in our universe, the ones that we sell to, there aren't a lot of new companies releasing cars this year for the short term. And then they're gearing up for 2024. Because lidar is a competitive advantage differentiator in the market, as competition increases, you want to have it. In the short term, to answer your question, is probably very, very little impact since not that many models are shipping yet. Longer term, we'll have to see.

Joel Ying (VP of Auto & parts and Technology)

Okay, Carter. Thanks.

Operator (participant)

Thank you. Your next question comes from Olivia from Haitong International Securities. Please go ahead.

Olivia Zhang (Equity Research Analyst)

Hi, David. Okay, hi, David and Louis. Thanks for taking my question. Could you provide an update on your new factories in Shanghai and Hangzhou? If I'm not wrong, I remember you said both will be put in operation by Q3. I also wonder if those factories are compatible for ET25 or other new products beyond. Thanks.

David Li (Co-Founder and CEO)

Thank you. Let me try to clarify a few things, right? Moving forward, we have two major factories. One is called Maxwell, we talk a lot about. It's a R&D and a manufacturing center in a sense that the main goal for Maxwell is to be able to fast integrate product development and the manufacturing under one roof. That's why the name is Maxwell. It's the name of the scientist who came up with the important equation. Right? The other factory's name is Hertz. Hertz is like cycle time, how many units you produce per second, that type of nature. You can see it's for mass production only.

The Hertz factory, it's extremely highly automated, with 90% plus automation, and the cycle time from used to be more than 1 minute, now Hertz is 45 seconds per lidar. Also because Hertz is built for high automation, and in Hangzhou is a relatively cheaper place, it's actually the labor cost and manufacturing cost is also lower. Having said that, with the two functions, there's another important concept I want to make it clear. Building a factory or retrofitting a factory is one thing, populating a factory with all its full production capabilities is another. Those are completely different things. Sometimes people are confused by those. Building a factory like Maxwell, it's like buying a big land. When you do that, and you wanted to have a lot of space, right?

You can buy a couple acres of land that technically can host hundreds of people to live if you build a hotel, right? We're not stupid. What we do is actually we populate the production line based on actual needs projected down the road. We can build it very quickly. Within less than six months, we can populate those production lines. Then we definitely don't want to build more than we will be able to ship. That's why even for Hertz factory, each line today we have is about 300,000-500,000 units per line. Currently, we only have one line because we already see this will be and together with Maxwell, we will be able to meet our needs.

It's like you have a big land, you buy it because the land itself is cheap, then you start to build those houses as you grow on the people. You don't want to build all those houses on the land yet because it only takes six months to do that. There's really no point of doing that. That's why moving forward, we will only slowly expand Hertz and some part of the Maxwell to keep it very, very lean because we know with the visibility we have, it takes less than six months to do so. Even for each line, it isn't extremely expensive, right? Louis, do you want to comment on the cost down the line?

Louis T. Hsieh (Global CFO)

Yeah. I think, Yeah, I mean, David makes a very good point. The thing that is confusing the investors is we're not building $200 million-$300 million plants where the CapEx will eat up our cash. We've already guided CapEx this year, and probably next year will be about $50 million, and that's all for mostly plant equipment. It's about, you know, $10 million-$15 million per line for the AT fully 90% automated line, and much less for the anticipated lines for the autonomous mobility because that requires more manual labor. It'll be even much less for that. Don't get confused that we're building these plants that cost hundreds of million dollars that are eating up our cash. That's not the case.

That's why even today, we have $457 million of cash at the end of quarter. That's much higher than any of our competitors. We're not spending a lot of money on CapEx other than for equipment and, you know, and for the assembly line. Okay?

David Li (Co-Founder and CEO)

I hope I answered. Oh, the other quick question is, do you think those lines can be used from one product to another? Well, that's a no. Every time you need to For a different product, you need to redesign the full automation line to do that. That's also another reason we have the new AT product built in Hertz factory.

Olivia Zhang (Equity Research Analyst)

Okay. Got you. Thanks.

David Li (Co-Founder and CEO)

Right. Even though the production lines are redesigned, some of the equipment can be reused as we are ramping down on some of the legacy products. Because of the automation process are shared in great similarity, the majority of those equipment can be used, but the line needs to be redesigned.

Operator (participant)

Thank you. Your next question comes from Jessie, from Bank of America Securities. Please go ahead.

Jessie Lo (Director of Equity Research)

Hi, David. Hi, Louis. Thank you for taking my question. First of all, as I know that you mentioned ET25 hasn't received a firm order yet, we cannot disclose on ASP and margin, but just wanted to understand from an OEM standpoint. When they need to purchase an upgraded windshield to go with this ET25, how does this cost going in the future for them? Is it more expensive compared to the traditional solution or could be cheaper for them?

David Li (Co-Founder and CEO)

Thank you. First of all, we are in different processes for a lot of the sourcing decisions. I think in the script we explain, we're in eight RFI and RFQ processes for five major global OEMs. I wouldn't say that we don't have progress, it's that we don't have the final nomination we could announce. That's the status. Your next question is about when they make decisions, like, do you expect them to be cheaper or more expensive? The biggest reason that this will be cheaper is that it's a product that's later, a few years later than AT Series, right? AT Series is we started to ship in 2022, right?

ET is a few years later, then it will be able to leverage our new development on the semiconductor side. As we move forward, even though the performance is going up and we always try to have better integration on the semiconductor side to control the total bond cost.

Louis T. Hsieh (Global CFO)

David, she's asking for the total cost for the-

Jessie Lo (Director of Equity Research)

Sure. Thanks.

Louis T. Hsieh (Global CFO)

Under the windshield.

David Li (Co-Founder and CEO)

Oh, got it.

Louis T. Hsieh (Global CFO)

On the top.

David Li (Co-Founder and CEO)

You mean like, how much more money will be added on the glass side?

Louis T. Hsieh (Global CFO)

Something like that.

David Li (Co-Founder and CEO)

Okay. well, that part is specific to OEMs. I don't expect that to be a major part of it because for the special processes, as a sample phase is expensive, but at a large production phase, it's just one of the relatively simple process people do. It's no significant price increase.

Louis T. Hsieh (Global CFO)

Jesse, it just looks so much better. Aesthetically, it's going to be a big factor, right? As OEMs make decisions.

David Li (Co-Founder and CEO)

of course, OEMs always want things that are better, more beautiful and they're cheaper, and that's reasonable.

Jessie Lo (Director of Equity Research)

Yes. Yes. Totally makes sense. Another question would be, another peer also states that the software that goes with the lidar would be the key to win the long-term process. What's our view on this? Thank you.

David Li (Co-Founder and CEO)

I agree. I think today a lot of the customers are already seeing that they may or may not be the most experienced user for the lidar. That's why we provide the reference software system to the customer. Essentially that we know how to use them. We already have a package that will help them jump-start. We don't fully take over their development because most of the customers, they prefer still to own a process, but we provide the reference software to help them from anything from perception, to tracing the targets, to calibration and to some of the algorithms in calibrating and, essentially helping them to get things up and running. That part is very important because without that, it's a piece of dumb hardware that no one can take advantage of.

Jessie Lo (Director of Equity Research)

Gotcha.

David Li (Co-Founder and CEO)

Does that answer your question?

Operator (participant)

Thank you. Unfortunately, that does conclude our time for questions today. I'd now like to turn the call back over to the company for any closing remarks.

Yuanting Shi (Director of Investor Relations)

Thank you once again for joining us today. If you have any further questions, please feel free to contact our IR team. This concludes today's call, and we look forward to speaking to you again next quarter. Thank you and goodbye.

Operator (participant)

This concludes today's conference call. You may now disconnect your lines.