Hello, ladies and gentlemen. Thank you for standing by for NIO Inc.'s Third Quarter 2019 Earnings Conference Call. At this time, all participants are in listen only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Jade Wei, Associate Vice President of Investor Relations of the company. Please go ahead, Jade.
Thank you, Edison. Good evening and good morning, everyone. Welcome to NIO's third quarter 2019 earnings conference call. The company's financial and operating results were published in a press release early today and posted on the company's IR website. On today's call, we have Mr. William Li, Founder, Chairman of the Board, and Chief Executive Officer, Mr. Steven Feng, Chief Financial Officer, and Mr. Danny Xu, VP of Finance. Before we continue, please kindly be reminded that today's discussions will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements invoke inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission.
The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that NIO's earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to NIO's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, William. William, please go ahead.
Hello, everyone. Thank you for joining our call today. In the third quarter 2019, we delivered a total of 4,799 ES8 and ES6 vehicles, increasing 35% from the second quarter and exceeding the top end of our guidance range by 9%. We delivered 5,054 vehicles in October and November. We estimate that the total delivery of Q4 will reach over 8,000.
The auto industry is still experiencing substantial softness, and the EV sector particularly dropped over 35% year-on-year in sales in the second half of 2019, after the EV subsidies were reduced significantly. Nevertheless, our order backlog growth has accelerated since September, and this strength in order flow continued in the fourth quarter. The growth has been underpinned by three key factors: strong competitiveness of our ES6 and its quality, performance, and pricing, strong support from our user community, and our sales network expansion through the efficient NIO Spaces. I will discuss these three factors separately next. In August, NIO ranked the highest in new vehicle quality among all brands in J.D. Power's 2019 New Energy Vehicle Experience Index study.
In December, our ES6 was selected by the most respected industry experts in the Chinese automotive industry to receive the Xuan Yuan Award as Car of the Year for its achievements in innovation, mobility, and industry contribution. This demonstrates the strong recognition of our brand, quality, and performance by users and industry.
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We would not have achieved our strong sales results without the support from our passionate user community. Our vision has always been to shape a joyful lifestyle by offering premium smart electric vehicles with the best user experience. Since inception, we have been working diligently to build a vibrant user enterprise. NIO user community is thriving and growing. We now have users in 296 cities across China, and 45% of new orders in 2019 were referred by existing users. It has become more than just a part of our unique brand identification, but is emerging as an instrumental part of NIO's development.
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Actually, the vibrancy and support of our user enterprise has been remarkable and reaches far beyond word of mouth referrals. As example, in the recent months, acting on their own accord, our users have launched promotional campaigns around China in support of NIO. In 2019, more than 1,300 user volunteers have dedicated their time voluntarily in NIO House, NIO Space, auto show, and event to sharing their first-hand experience to make more people understand NIO.
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In terms of sales network expansion, by the end of this year, we will open 48 NIO Spaces and 22 NIO Houses in 52 cities. Through NIO Spaces, we are able to cost effectively and meaningfully increase the number of sales points in the market, which in turn helps drive new orders. This important initiative allows more potential users to see, touch, and feel of our vehicles and truly enjoy the superior driving experience of ES8 and ES6 offer. Most importantly, potential users can compare firsthand the performance and the smart features of our vehicles with those of the NIO competitive models. The favorable comparison result often leads to a NIO purchase, and this has been a contributing force to the sales gains in recent months.
We will continue strengthening our sales network through adding more NIO Spaces to expand our coverage and improving the efficiency of NIO Spaces with more data and experience gained through our operations.
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On December 28th, we held the third NIO Day under the theme Believing Better in Shenzhen. Over 7,300 NIO users and guests attended. Also, tens of millions of people participated through 55 parallel sessions or online broadcast. NIO users were deeply involved in the planning, directing, and execution of NIO Day 2019, showing passion and the rally power that echoes with the NIO's vision to be a user enterprise.
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During the NIO Day, we also announced the 100 kWh battery pack and the 20 kW DC Power Home. All new models can operate to 100 kWh battery pack, which will significantly increase the range performance of our product line. Since the launch of the 70 kWh battery pack in 2018, of the same size of our battery capacity has increased by 40%. NIO makes a continuous investment on power swap technology and owns more than 1,200 patents on the vehicle, battery pack, power swap, and cloud. The power swap technology enables users to continuously upgrade the battery and empowers NIO to truly offer Battery as a Service. As the time goes on, more and more people will recognize the advantages of the NIO's unique and competitive power swap system.
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Additionally, we unveiled NIO's third production model, the EC6, a smart premium electric coupe SUV, which has a very sporty look and feel for young and trendy SUV fans. It goes from 0 to 100 km/h in just 4.7 seconds and enjoys a NEDC range of up to 615 km. We have also launched the all-new ES8. It boasts up to 188 improvements, 4.9 second 0 to 100 km per hour acceleration, and significantly improves the NEDC range to up to 580 km. We believe the all-new ES8 will have a much stronger competitiveness in the market.
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NIO Pilot, NIO's advanced driver assistance system, becomes fully fledged. More than 20 features are now available on NIO Pilot, including traffic jam pilot and highway pilot. It offers a more relaxing and safer driving experience. To date, about half of our users have activated the NIO Pilot. On November 4th, we announced of a strategic cooperation with Mobileye to develop Level 4 autonomous driving vehicles. Teams from both sides have already started working together to explore the best pathways to leverage our respective strengths to develop the future products together.
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I would like to now give you an update on our cost control measures. During the third quarter, we continued to implement comprehensive cost control measures across the organization to improve operational efficiency. At end of December, our global headcount will be less than 7,500. As a result of our cost reduction measures, our third quarter SG&A decreased 18.1% compared with the second quarter. Even as our sales team is now driving and realizing higher levels of sales. Additionally, our R&D expenses decreased to 21.3%. Lean operations will continue to be our focus.
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I'd like to warmly welcome Mr. Steven Feng, as our new Chief Financial Officer, effective November 18, 2019. We look forward to working with Steven and anticipate that his strong financial and operational experience, impressive track record in equity research, and rich automotive background will create greater value for the company and our shareholders. With that, I will now turn the call over to Steven to provide the financial details for the quarter. Steven, please go ahead.
Thank you, William. I will now go over some of our financial results for Q3 2019. To be mindful of the length of this call, I will address financial highlights here and encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in Q3 2019 were RMB 1.8 billion, representing an increase of 21.8% from Q2 2019. Our total revenues are made of two parts: vehicle sales and other sales. Vehicle sales in this quarter were RMB 1.7 billion, representing an increase of 22.5% from Q2 2019. The increase in vehicle sales over last quarter was mainly due to the increase in ES6 sales volume, resulting from the expansion of our sales network as we continue adding new NIO Spaces and increase referral rates by our existing users.
Other sales in this quarter were RMB 103.4 million, representing an increase of 9.9% from last quarter.
The increase in other sales was mainly attributed to the sales increase in charging piles, which was in line with the improvement of vehicle sales. Cost of sales in this quarter was RMB 2.1 million, representing an increase of 2.3% from last quarter. The increase in cost of sales was mainly due to the increase in sales and offset that included into accrued recall costs in relation to the company's voluntary recall of 4,803 new vehicles announced on June 27th, 2019. Gross margin this quarter was - 12.1%, compared with - 33.4% in last quarter. More specifically, vehicle margins in this quarter were - 6.8%, compared with - 24.1% in last quarter. The improved vehicle margin was mainly due to the recall cost in last quarter as mentioned.
R&D expenses in this quarter were RMB 1.0 billion, representing a decrease of 21.3% from last quarter and relatively unchanged compared with Q3 2018.
Excluding non-GAAP share-based compensation expenses, R&D expenses were RMB 1.0 billion, representing a decrease of 21.7% from Q2 2019, and an increase of 5.9% from Q3 2018. The decrease in R&D expenses over last quarter was primarily attributed to lab testing expenses incurred in the third quarter after ES6 initial launch in June. SG&A expenses in this quarter were RMB 1.2 billion, representing a decrease of 18.1% from Q2 2019, and a decrease of 30.3% from Q3 2018. Excluding non-GAAP share-based compensation expenses, SG&A expenses were RMB 1.1 billion, representing a decrease of 17.4% from Q2 2019, and a decrease of 15.6% from Q3 2018. The decrease in SG&A expenses over last quarter was primarily driven by the company's overall cost-saving measures in marketing and other supporting functions.
Loss from operations in this quarter was RMB 2.4 billion, representing a decrease of 25.3% from Q2 2019, and a decrease of 14.3% from Q3 2018.
Excluding share-based compensation expenses, non-GAAP adjusted loss from operations was RMB 2.3 billion, representing a decrease of 25.4% from Q2 2019, and a decrease of 1.6% from Q3 2018. Share-based compensation expenses in this quarter were RMB 7.4 million, representing a decrease of 23.6% from Q2 2019, and a decrease of 83.7% from Q3 2018. The decrease in share-based compensation expenses over last quarter was primarily due to the part of the share-based compensation expenses that are recognized using the accelerated method. Our net loss was RMB 2.5 billion in Q3 2019, representing a decrease of 23.3% from Q2 2019, and a decrease of 10.3% from Q3 2018. Excluding share-based compensation expenses, adjusted non-GAAP net loss was RMB 2.5 billion in Q3 2019, representing a decrease of 23.2% from Q2 2019, an increase of 3.1% from Q3 2018.
Net loss attributable to NIO's ordinary shareholders in Q3 2019 was RMB 2.6 billion, representing a decrease of 32.9% from Q2 2019, and a decrease of 73.8% from Q3 2018. Excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value, adjusted net loss attributable to NIO's ordinary shareholders on a non-GAAP basis was RMB 2.5 billion. Basic and diluted net loss per ADS in Q3 2019 were both RMB 2.48 or RMB 0.45. Excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB 2.48 or RMB 0.43. Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB 2.0 billion as of September 30, 2019. Now for our business outlook.
As William mentioned, for the fourth quarter of 2019, we expect deliveries to be over 8,000 vehicles, representing an increase of approximately 67% from Q3 2019. We also expect fourth quarter total revenues to be approximately RMB 2.8 billion. This would represent an increase of approximately 53% from Q3 2019. Before we start the Q&A session, we would like to give you an update of our financing projects. We have made significant positive progress in the financing projects. The projects are still ongoing, and we are not at liberty to disclose any confidential information at this point. During today's call, please understand that we will not be able to disclose any specific information or answer any questions regarding the financing projects. We will disclose further information when the projects reach a stage that would subject us to disclosure obligation.
I will now turn the call over to the operator to facilitate our Q&A session.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. For the benefit of all participants on today's call, please limit yourself to two questions, and if you have additional questions, please re-enter the queue. Your first question is from Bin Wang from Credit Suisse. Please go ahead.
The first question is about the CB issuing. What's the progress about CB, and do that money goes to the number three quarter result or it's not, just go to the number four quarter has been completely finished? My second question is about the sustainability, about SG&A and R&D cost going forward.
Okay, thank you. First I will start with the CB question. As everyone knows, Tencent and William has signed contract with NIO for $200 million CB. In third quarter, Tencent CB has already been closed, so the $100 million from Tencent is already in our Q3 report. $90.5 million were received from William. The rest $90.5 million are being processed and the transaction to report soon.
Perhaps at the remainder. The key CB terms, the investor could find them at announcement on September 5th. Let me move on to the second question of Bin Wang about the sustainability and our cost-controlling efforts. Yes, you are right. We have done a lot of efforts for cost saving. We are in the process of finalizing our 2020 budget. We expect the R&D efficiency to significantly improve and the R&D expenses to be further reduced in 2020. We will share more information in our Q4 earnings call.
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In terms of the headcount, starting from this year, we have already initiated many operation measures to make sure we can improve the efficiency. We did some layoffs and the restructuring of our organization. At the beginning of this year, we had around 9,900 people. By the end of this year, we believe we can control the headcount within 7,500. Some of them are now in the legal process, but we believe that by the end of this year, this number should be lower than the 7,500. We think this is going to be very beneficial to our P&L for the next year. At the beginning, I have also mentioned lean operation is our focus, and this will continue to be our focus in the future.
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I think it's not just about the headcount control, it should be more about how we can optimize and improve the overall cost and expenses efficiency. This can help us to improve the overall organization efficiency.
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Your next question is from Tim Hsiao from Morgan Stanley. Please go ahead.
Hi, thanks for taking time to host the call. Just two quick question from my side. The first question is about the sales volume for next year. We set a quarterly result, but now we are at the end of 2019. Just want to get your thoughts about the volume for next year, because our year register solid sales since early this year because of the competitive spec and successful channel strategy. For next year, what will drive the sort of volume upside? I think competition in the market will get more intensive. In the meantime, I think we are going to launch EC6. I think the volume of coupe in general will be smaller than that of four-door SUV and our ES8, despite the recent upgrade, I think the market is relatively niche.
My second question is about the channel strategy, because you just share our volume target for NIO Store and NIO Space by end of this year. If there's any target for our channels expansion for 2020, and what would be more reasonable headcount to support it, kind of a sales network?
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I'd like to take your question. Starting from September, although the market is still quite challenging and soft, order backlogs for the ES8 and ES6 have been ramping up. In the past two months, the production orders every day can reach over 100. This trend has been increasing. If you read the news, you can see that we have already sold all the show cars. We believe this momentum is going to continue in the future.
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Overall speaking, we believe our product positioning is quite right, although the market is quite dynamic. In the past quarter, we have seen some competitive models. For example, Audi e-tron, Mercedes EQC, they have released their price and they started to sell cars in the China market. After the users compare our products together with their products, normally they will buy our products, because our product is more competitive compared with those models, especially in our specific market segment that is around RMB 300,000-RMB 400,000. That is the segment for the ES6 and the ES8. We believe in this midsize premium SUV market, we are quite competitive because we are ranking at the top 10.
This is including the ICE and EV. We believe in the future, the users will think our ES6 and ES8 are the right choices if they want to buy a car priced around the RMB 300,000 -RMB 400,000 range. With our power swap technologies and our superior services, we can win the word of mouth in the market. The order situation is actually much better than our expectations. We think that this great sales result is because of our product competitiveness and our great service. This can help us to win the reputation in the market. For next year's results, we are quite confident about the ES6. For example, in Beijing and Shanghai, if you want to buy a car that is mid-sized SUV around the RMB 300,000 -RMB 400,000 range, our ES6 is already ranked at the top five.
That is why we're quite confident that this sales momentum is going to continue for the ES6. For the ES8, that is the all-new ES8, we will start the delivery around April next year. The all-new ES8 has significantly improved the range, and we have already boosted up to 188 improvements on the all-new ES8. The users' expectation for the all-new ES8 is actually quite high. That is why we believe that the new ES8 will also achieve a very good sales performance. Right now, our current ES8 is also doing very good in the market. I think you know that we have already sold all the current ES8 and we have no inventory left. We believe that starting from next year, the sales of the ES8 will also be very good.
If you look at the specific market segment, for example, Q5 and GLE, Model X, our performance, intelligence, and the smart features as well as our service are more competitive compared with those brands. Right now, we have released our EC6, that is the new smart coupé SUV. The feedback is very good from the market. Right now I cannot share with you about the specific orders we have received. The overall situation is actually quite good. We will start the delivery of the EC6 in September next year. The sales of EC6 is not going to significantly impact the overall sales number for the next year. Overall speaking, we are quite confident about the ES6, ES8, and the EC6 in their specific market segment respectively. In terms of the sales strategy, we focus on three aspects.
The first one is to continuously improve our product and the service. The second one is we would like to make sure our users can be our brand ambassadors, and we can improve the sales number with user referrals and the word of mouth. The third one is to continuously expand our sales network. In terms of the sales network, the NIO Space will significantly help with our sales numbers for the future. Right now, we have been working with our NIO Space partners to set up the NIO Spaces and improve the coverage of our sales points. The model of the NIO Space is quite efficient. We believe by the end of next year, we should be able to have around 200 NIO Houses and NIO Spaces altogether. At the end of this year, we have already got over 70 NIO Houses and NIO Spaces combined.
With the increased amount of the NIO Spaces, we can cover the Tier 2 and Tier 3 cities and other remote places. We have already accumulated much experiences in terms of the NIO Space operations. We think that this is not going to significantly affect our headcounts, because we will heavily rely on the partners to work together with us, although we will have our own people on-site to support our partners in the NIO Spaces. Right now, [audio distortion] . With the channel expansion, we believe our sales for the next year is going to be very solid.
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Thank you.
Your next question is from Lei Wang from CICC. Please go ahead.
Good evening, Steven and William and the team. This is Lei speaking from CICC. Congratulations on Steven's new role. That's a really nice move. The vehicle deliveries in the first quarter, that's a really new record high. William and Steven, actually answered most of my questions and I have two follow-ups. The first one will be that Steven just gave a guidance of 2,000 unit deliveries in the first quarter, another high quarter-over-quarter increase. What's the exact factors that drive the sales up? Are the factors sustainable from your point of view? Will that be possible that you can release the backlog order right now? The second question will be about the per store deliveries. William just mentioned that we have now around 70 NIO Spaces, right?
That would mean about 40 vehicles will be sold per store per month in the first quarter. Is this consistent? Does that mean that for the 200 new NIO Spaces next year, they'll be able to deliver 8,000 vehicles per month? Thank you.
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Thanks for your question. At the beginning, I have already mentioned that starting from September, the order and the delivery have been witnessing very strong momentum. This is mainly due to three factors. The first one is the competitiveness of our products and service. The second one is the word of mouth and the user referral. The third one is the sales network expansion. Among all these three factors, the product competitiveness is one of the most important factors. As you can see, NIO has already established the premium brand successfully in the mainstream premium market, that is around the RMB 300,000-RMB 500,000 price range. You can see that the premium market players have already launched some products.
For example, last year, Jaguar launched their I-PACE, and this year, you could see e-tron. After they released their products, we can see the price is around the RMB 600,000-RMB 700,000. After compare their products together with other products, normally the users will think the other product is more competitive. That's why they choose the NIO products.
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I think that there is a very important trend we should pay attention to. Starting from the second quarter of this year, the EV sales have declined because of the subsidy reduction. This happens to those commercial vehicles and the lower-end EVs. For the Tesla and NIO and other brands focusing on the consumer market, our sales momentum is actually quite good. We believe that the users are quite educated about the EVs and the ICEs, and for those users, they prefer EVs. That is why we believe we should have a reasonable share for the mid and the large size SUV segment that is around the RMB 300,000-RMB 400,000 market segment. That segment should have around 1 million unit volumes in terms of the sales.
In the last months, I understand that there are many concerns about the NIO's operation, but you can see NIO is developing in a very healthy way, and this is mainly because of our product competitiveness and the word of mouth from our users and the strong execution from our teams. That is why we are quite confident about our future sales, and we believe we can keep and even increase this momentum in the future. Next year, in terms of the competition landscape, I don't actually see any very competitive products from BMW, Audi, Mercedes and Tesla. Right now, people are now getting familiar with the Tesla Model 3 made in China. If you compare the Model 3 with other products, we believe our product is still very competitive, and we don't actually belong to the same segment with the Tesla Model 3.
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Just now you mentioned about the sales per store or the sales for the NIO Space and the NIO Houses. I have mentioned that 45% of the new orders actually coming from our existing users. The NIO Spaces should be quite good for our sales improvement, especially for those places without the NIO Houses. We cannot simply evaluate the number of the sales in those NIO Spaces by doing this kind of calculation, because for most of the NIO Spaces, we opened in the fourth quarter. It means that we need to accumulate more data to understand the effectiveness of the NIO Spaces. In terms of the China market, actually is quite big.
For a lot of users, they may have never seen a new product or EVs in the past. That is why we think a NIO Space should be quite good for us to promote our products in those places, and people can actually touch and feel our products. After we accumulate more data and experience in terms of the NIO Space operation, we can share more information with you.
Thank you.
Thank you.
Your next question is from Fei Fang from Goldman Sachs. Your line is open.
Hi, Fei Fang. Thanks for the opportunity. In your 8,000 volume guidance, how many ES8 do we have for December? Moving into 2020, how do we think about the normalized run rate for ES8? Second question is on average price, what's the outlook? Thirdly, if you can comment on the cash outflow. Is there a quarterly outflow target that the CEO and the CFO is trying to manage the business towards? The RMB 2 billion outflow for quarter of RMB 3 billion, beyond which we will think harder about cutting more costs. Thank you.
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In the Q4, the sales of the ES8 is estimated to be around 1,300. For ES6, it should be over 6,700. For the ES8, compared with the third quarter, the sales in the fourth quarter has been picking up. We are very happy to see that ES8 is gaining momentum in the market. Starting from April next year, we are going to deliver the all new ES8. We believe the ES8 is going to be well-positioned in the market to win over users.
Excellent.
Okay. Thank you for your question. Yes, I think a lot of investors have a very close look at our cash flow. First, of course, we need to take every effort for cost savings. That's our base groundwork. If we move on, I would say for any automaker, the best way to have good cash flow is to sell more cars. Although the cash is tight, but thanks to our strong order and delivery momentum, the cash flow from sales actually is very healthy. This is very fundamental of our business. Of course, if we look at our balance sheet, we raised additional capital, which is positive cash flow from the aftermarket, as I just said, from the closed financing projects.
In the end, I would say with the cash flow from those ongoing financing projects, positive sales trend and cost saving measures, we believe the company will have sustainable development and operations. In short, first, savings, second, financing, third, very strong sales. Thank you.
That's great. Thank you.
We have our next question from Paul Gong from UBS. Please go ahead.
Yeah. Hi. Thanks for taking my question. I have two questions. The first one is, based on the current price environment, at what quarterly delivery level do you expect to have a positive gross margin on vehicle sales? My second question is just to double-check, does the balance sheet by end of September already reflected the Tencent $200 million CB in it? I compared the balance sheet of Q2 and Q3. I didn't see really a significant increase of long-term liabilities or long-term borrowings, but the cash level still declines. I just want to double-check that the end of September balance sheet already reflected the issuance of the $200 million CB.
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Thanks for question. In terms of the gross margin, this has always been a very important task for 2020. We need to consider this from three aspects. The first one is sales and the pricing, the second one is about the BOM cost reduction, especially the battery cost, and the next one is about our product portfolio. By focusing on those three aspects, we can take some measures to improve the gross margin. We think that for the next year, we should be able to achieve the positive gross margin for the whole year. If you ask about the specific quarter or the specific amounts, we're not really sure at this moment, because we need to consider these comprehensively regarding the sales and the battery cost reduction, the BOM cost reduction, and the efficiency improvement.
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OK, part on your question. In terms of the $100 million CB from Tencent, if you review our announcement on September 5th, actually it has two tranches. First, $100 million for 360 days. It's a short-term borrowing. We put $50 million in our short-term borrowings. The other $50 million is a three-year CB. We put that $50 million in our long-term borrowings.
Yes, thanks all. Thanks.
Thank you.
We don't have any other questions as of the moment. Presenters, please continue.
Thank you everyone for attending our conference call this quarter. We look forward to see you and hearing from you next quarter. Happy New Year!
Happy New Year.
Happy New Year everyone. [Foreign language]
Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.