ECARX Holdings Inc. (ECX) Earnings Call Transcript & Summary

Thank you very much. We kick off the next session with ECARX. It's an absolute pleasure to be here with you today. My name is Jose Asumendi and I'm the head of the Auto Team at JPMorgan and based in London. And I think, yes, ECARX is always a company that have been following us for the last years. And one of the things that always strikes me is the -- how they have been developing the products, the portfolio the partnerships, broadening the technology expertise as well as the customer portfolio expanding in the last years. But I don't want to just go through all those topics now. We will let the gentleman speak about it. And let's make this also interactive, right? We've got about 30 minutes. So feel free to ask any questions if anything comes up to your mind and I'll kick it off. So you -- and first of, thanks very much for your time. Maybe you can do just a quick introduction. Role and how many years you've been at the firm, obviously, on funding the firm, and Peter same for you, and then we'll go through the Q&A.

Good. Good. Okay. So nice to meet you and good morning, everyone here. So my name is Ziyu Shen. So I'm Founder and CEO of ECARX. So ECARX, I found it in 2017 with Eric Li, [indiscernible], a very famous entrepreneur in China. So ECARX is an automotive intelligent technology provider. That's our position in the market. So we already spent 10 years in the industry. So very quickly start up in China market, we end right now scalable in worldwide. In 2022, we successfully listed in NASDAQ exchange. And also [indiscernible] headquarter in London. So all our [indiscernible] leadership right now in Europe for 5 years. So also we got a successful in Europe market with European OEMs in past 3 years. Last year, particularly, we announced two times with [ Volkswagen ] Group for our technology product partnership, yes. So that's quickly introduction myself and my company.

Good morning, everyone. My name is Peter Cirino. I'm the Chief Operating Officer of ECARX. Ziyu invited me to join the firm in 2022, about 4 or 5 months before we listed the company. I am also based in London, and I've been in the automotive industry and various technology firms for more than 25 years and then helping Ziyu scale the organization, grow with our European customer base and expand the organization to become a true global technology provider.

So with that, we look at many technology companies, and it's always, I think, not easy for investors to understand what are the key products you are producing how does the platform strategy work? And then we can get into how you differentiate versus peers. But if you think about your core IP, what are the core products you do? Why is ECARX different 2 peers?

Yes. So ECARX is providing full stack the computing system to the car. So including the [indiscernible], Silicon SoC and middleware and software, that's a very unique know-how. SDV is very long term discussion. So we are providing one-stop solution to accelerate and simplify OEM R&D on SDV. So that's all very, very important and critical task now.

Yes. And I would just add to that, I mean Ziyu has built a fantastic organization. I would say, over the last almost 10 years in, for sure, ECARX delivering systems into vehicles. We have more than 12 million cars on the road. So we have deep automotive vehicle knowledge, know exactly how to deliver these very complex systems into the automotive environment in 2018, Ziyu along with Arm China, founded a company focused on automotive silicon. So we have deep expertise on the silicon side. And then recently, we acquired a company that we had a strategic alignment with that's building FiOS. FiOS is an operating system, an ecosystem in China for both mobile devices and cars that company has more than 20 years working in that software system. So we brought together an ECARX, this company that has deep technology in silicon amazing software capability and then this automotive expertise to be able to deliver these systems in the vehicle.

Interesting. And who are your key customers? I mean we don't have the slides today here, but I think it's important to understand who are your key customers, how -- who were your first customers, how did the business develop a little bit to other customers? And then really interested in understanding, when you go to them and you focus your expertise and what you can do, why would they choose you? Why would they not choose someone else?

Okay. Yes. So as my introduction at the beginning, so we start up from China. So we had very big revenue in China still. So July, of course, is our very important and big customer and FAW Group is second. And also, we had some Power grams with [ Dongfeng, Cherry ] and most of other Chinese domestic OEMs. So also outside China, so we had a Volkswagen. We had 2 times announcement last year I just mentioned. So that's the global program called Global entry infotainment program. So we announced that last year. Also, we are developing this plan on for the vehicle platform will support SOP [indiscernible]. Also, we had a program with Renault and Volvo Car [indiscernible]. Also we had a program with Mercedes. So we already built a very strong European OEM customer network already. So we're still very confident ECARX is international global Tier 1 player in the industry.

Yes. Where do you have your R&D centers, your technology footprint? Where do you have your people across the world?

SP-10 Okay. So right now, so because in the past 10 years, we start from China, we had a still big team in China. We have 800, 900 people R&D in China, still mainly in East China. So also Europe, we already built 200 people in the past 4 years. because of [indiscernible] program, we successfully [indiscernible] SLP launch in 2023. That's the car of Europe, very successful. Also, we [indiscernible] with Google very closely. We announced the white paper and the Google sponsor last October for Google automotive ecosystem in the car. Also, in East and Southern Asia, we built [indiscernible] a joint venture with [indiscernible] in 2018, '19. We already had 100 people here. Also, every year, we are shipping like [ 200 ] units product to [ Port on ], the computer box also, we build R&D center in Venator Southern Asia total 150 people. Yes. So outside China, like 30% and inside China, 60%, 70% people. Yes.

And where are you based in Europe? Yes, I believe [indiscernible] but where were your centers in Europe, just to give a bit more flavor in terms of like -- I've visited [indiscernible] car, you have presence there, obviously. But as you expand the business and helping the car companies, how do you position yourself in each of the regions, just sort of the audience can understand that.

Yes, because in Europe, that's very important for our customer interface with European OEMs. So that's why I built Rosenberg in Sweden at the beginning, particularly with Volvo Car program. And also I buildout face for German OEM, Mercedes and Volkswagen, so of course, I said a corporate function and global headquarter in London. Yes.

Who do you think are your competitors? So we can also compare a bit and compare ultimately, valuation multiples, right? This is an investor conference, and we will get to it to revenues, multiples. But who do you think are your peers?

Yes. In China, in China market, it's a very tough competition market. So from a competitive point of view, Huawei is top the competitor with us. Yes because including Silicon and software system, even sensor. So they have a very strong portfolio, competition with us. Yes. External China, outside China, we still believe the Korea player is a strong competitor. [indiscernible] and Samsung, [indiscernible] already owned by [indiscernible] and Samsung, also LG for sure. So we believe Korea player is a strong competitor for us.

I mean, Jose I would add to that. You look at what we've built inside of ECARX and the capability that we have to deliver, there are very few -- there's a lot of automotive Tier 1s that are trying to deliver these complex systems in cars. I think there are very few that have the capabilities when you look at the deep silicon capabilities that we bring in the company, we're not -- we certainly have great partners in the silicon space that we work with. But we also have this deep technology inside our organization and our ecosystem, having founded since in the silicon company with ARM, and we bring together the consumer electronics capability and speed with Lyme, which is now -- we announced the intention to acquire that business and make it part of the company. And we have very few competitors that have that full technology stack. The reason -- one of the strong reasons why customers choose us and why we've been able to make some progress, especially with Volkswagen is having that terminus execution capability to deliver this product at scale on a consistent basis and at a super high quality level. It's very demanding in the automotive industry.

Interesting. So two follow-ups there. One, in New York, who are your U.S. peers, your key U.S. competitors. You mentioned the Korean, in China, and I fully agree, Huawei, it has an incredible product breath. Korea as well. In the U.S., who are your peers? Listed peers, maybe?

Yes. I mean, I think we don't -- it's tough to develop -- to look at a company that has the same capabilities that I was trying to explain, but for sure when you look at there are places that we're competing against the likes of Qualcomm. Qualcomm is a great partner of ours. We're very close to them. We deliver a large number of systems with Qualcomm tech in them. They have a fantastic product, but with our silicon, there's also times that we see them in the competition landscape. You look at some of the big Tier 1s that are in the same space, maybe an active or a Visteon, but there's a lot of places where they don't go in the depth of the technology space like we're able to do. They're more -- we see that more as kind of consolidators, non-innovators in the technical space.

My view, actually from this model [indiscernible] we are Tier 1, for ODM. OEM. So that's why I want to say like definitely all welcome. Yes. But because we strongly vertical integration, we have our in-house SoC. So that's why we can select Qualcomm media or in-house or SoC. So we are a partnershipin this area. That's my view, yes.

You mentioned reliability close to the customer execution. Notably, as we know, Volkswagen has had a -- not now, but in the past years, has had a few topics in terms of software integration, not just Volkswagen, all the car companies have also had this topic, which has created product launch delays, which impact cash flow and P&L. So finding the right partners to integrate software have silicon is key. Is there also an element around cost? Are you more cost competitive than your peers? Is there a reason why they also choose you. And I'm very intrigued because you have orders with Volkswagen or you can comment where they have the orders with Volkswagen? And two, is there a price element there as well where you win on price. You convince them on quality on technology, but also on prices.

Understood. So usually, because my back on an engineer. So usually, the cost, not only the simple question, cost always from design. So because you have good designs, then you have good cost. So that's what I always tell my team. So for our product, we're quite fully into vertical integration. Also, we want to centralize the feature as much as possible. So that's why our [ Antora ] product, our [ Hero ] product right now, I want to introduce here that's quite centralized the feature platform. For example, we can integrate here like [indiscernible] camera and also parking system and front-view system and high file audio into one box back. Even a gateway and diagnostic service in the car as well. So comparing other solutions from third-party SoC, they have a lot of limited because the -- so quite a standard in January. They need to support a lot of different requirements, not vertical integration. So that's why our solution and design quite automotive focused and very centralized. So, we definitely have very good cost efficiency, effective possible.

Yes. I mean, I would add to that, the software-defined vehicle is a very common term in the automotive industry, right? It just fundamentally means in the car, there's less computers. Cars over the past have hundreds of electronic control units in it that range from a very complex computer that may be driving the engine driving the transmission controlling the body to a simple electronic control unit, that's your seat controller or your door controller, as we bring solutions to the market, we're helping the carmakers simplify that network in the car doing more from a software perspective that brings complexity but it also brings cost efficiency to the carmaker. And the other place that we really differentiate ourselves having been born very successful in the China market the cine market operates at a speed that I would say is unmatched in the rest of the world, and we thrive in that environment. And that speed, of course, in first cost. If we simply can do things faster and quicker and maintain the quality, we then can deliver on more cost SP-20 Solution as well.

Got it. Can you speak about -- you touched on the speed of the China market, the product development in the China market. Can you give us a bit of an overview like what has been happening in the Chinese market in the last 2, maybe 2, 3 years, what are you seeing in terms of product development, software development? And how do you thrive in that environment, how do you improve in that environment? I mean I know we met in Shanghai, we made at the Beijing Auto so. And so just help us understand a bit better how you're navigating the Chinese market and then you can bring that know-how back into those regions.

Okay, so well. That's why I say at the beginning, we started from China. So Chinese speed means really a lot of investment on the R&D area. So they want to depart very different. So from an OEM perspective, so our Chinese customer, they want to win the market, you always put a lot of effort and investment, very incredible in the R&D area. So that's why innovation in China is crazy. So you have to, as our company, you have to keep competition, continue to invest very huge R&D then you can keep the position. So that's very important. So in the past 2 and 3 years, we had this plan and we had a success because we take our SoC, we software successful and also with good platform volume and revenue, et cetera, et cetera. No problem. But for the long term, so we need to look at the global market because total 90 million costs every year in the world. Right now, China is probably like 20 million to 30 million cars. Still, we have 50 -- more than 50 million cars in the world. And of course, I think we have the opportunity because we start from China, we had a relationship with them and had a signature with them. We are supporting Chinese domestic brand export to the world because we already had our footprint in worldwide already. strongly supported. So that's how comparing Chinese Tier 1. We had significant advantage on this. Also, meanwhile, like German OEMs and European OEMs, particularly they are facing Chinese competition in China. Also, they are faced competition from Chinese OEM in Eastern Southern Asia, Latin America and Europe as well. So that's why we're really wanting to work with us to catch up the computation. So that's why we had a great partnership with Volkswagen we announced. Also we had a partnership with Mercedes, Renault and forward. So that's why we're quite successful confidence in these areas. Then we can provide our R&D life cycle much longer than other Chinese local player, a competitor because we have global market already. and footprint already. That's very important.

Can you give us a bit of an overview what were the revenues 3, 4 years ago? I had a list of questions and skipping complete the script, by the way. And the may have noticed already that we're just going completely off each here. But what were the revenues 3, 4 years ago? Where do you see the revenues this year? Okay. So -- and what are you excited about in terms of growth about the company? And then we'll touch on cash and then the necessary investment to generate growth, right? But just a bit perspective on where we are on revenues 3 years ago, where we're heading?

Actually 3 years ago, 4 ago, actually at to our revenue just like 1/4 of this year. So we got 4x increase after IPO, I think it's [indiscernible]. So very strong growth, not only in China, but also the outside China market as well yes. So also for this year, so we just updated our new guidance. The revenue were up to $1.1 billion, $1.2 billion, also gross margin, 20% the quarter 2, we already announced yesterday. So we are already 4 quarters adjusted EBITDA level profitable. So we are going very good level from financial and R&D situation, I believe.

Yes. And when it comes to investments, how do you think about the investments required to ramp up the business in the next years? Because you mentioned orders with Renault with Mercedes with [indiscernible] I think you mentioned as well, I mean, there's a lot of car companies. What are the requirements? You need more people? Can you -- is it people investment? Is it capacity investment? Like what are the requirements for this?

Yes. I think the current investment point of view for the next 2, 3 years, we want to consider two areas. One area is our global expansion footprint. Although we will have SOP launch in Latin America next quarter 3, quarter 4, we will have a European launch the year after also probably India launch, [indiscernible] Asia, we invested for like 0.5 million units. So plan. So that's one area, there's global expansion. So we need localization, we need to build the structure, we need the region facilitate some investment like that. So another area, of course, we need to keep investment for future technology. So because China market is still a very important market. We have to keep future technology investment and to catch even keep our competition position. That's very important. So that's why future technology, including future AI stuff because AI is changing the world we have to accept that. So that's why AI silicon and AI software and AI too, we need to invest for the future of course.

How do we fund that growth balance sheet? Is it cash?

Good question. So in balance sheet, we have confidence because our year-to-year growth is very significant right? So 30% year-to-year growth and a very sustainable 20%, 25% gross margin, that's quite attractive. So we will have enough every year and more budget R&D. That's for sure, right? Because we can keep our budget, R&D OpEx at like 7% to 10% for 3 and 5 years and the gross revenue career to contribute more cash for R&D OpEx. That's for sure. Also, we are looking for a strategic investor from the market as well. Yes. So we need fundraising for strategic only strategic to support our region or support our technology to working together. Yes. That's my personal plan.

The question will come at some point, but there's a lot of discussion around silicon hardware, software, China, Europe, U.S. Can you give us a bit like your thinking of how do you think the world is going to come together in the next years? Will you see car companies developing China for China solutions for Europe for Europe, U.S. for U.S.? How do you balance also? How do you health care companies in China, in Europe, in the U.S. as well? And what could be the restrictions and how do you just work in the ecosystem to work with all the car companies. So ultimately, car companies want to have the most amount of economies of scale. They don't want to have too many solutions in too many countries.

So actually, we have to respect two areas. One area is the product still is a priority for the market and use is most important, right? The right products, the good product, always top priority. So you have to bring right technology for the top product. So that's why I said we want to invest continued R&D area, right? But also, we have to respect another area that the regional compliance regulatory and the trade policy [indiscernible]. So in maybe 20 years ago, the globalization make every economy can running very freely. But right now, probably deglobalization is trained. So region have region policy and also regulatory. We have to respect that. So that's why we need to be very careful on our investment on R&D area to support a different regional requirement. So that's my view.

Yes. And I would just add, I mean, as Ziyu talked about the engineering locations we built up, a lot of that is making sure we're close to our customers. So as we've engaged with, let's say, the Sweden customers we have a center in Sweden, we're close to them. We can work very, very in their environment in developing in their solution similarly with our German customers. We have an office in Germany. Our launches next year with Volkswagen will be in South America. So we've opened a team in South America to be close to that -- close to the Volkswagen team there, so we can deliver the local product. Especially the big pieces of the core of our business, while we're a compute supplier and a software supplier, a big piece of the solutions we provide are digital cockpits. And those are very regional specific. We have to know the region requirements and be able to deliver solutions in regions that meet that marketplace. It's important we're close to our customers to do that.

There any questions? Feel free to raise your hand. Happy to take questions as well. Go for it.