Hello, ladies and gentlemen. Thank you for standing by for NEEO Incorporated'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 Way, Associate Vice President of Investor Relations of the company. Please go ahead, Jade.
Thank you, Alison. Good evening and good morning, everyone. Welcome to NIO's Q3 2019 earnings conference call. The company's financial and operating results were published in the press release early today and are 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. Stephen Feng, Chief Financial Officer and Mr. Stanley Chu, VP of Finance. Before we continue, please kindly be reminded that today's discussion 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 involve 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 NU'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, and thank you for joining our call today. In the Q3 2019, we delivered a total of 4,799 ES8 and ES6 vehicles, increasing 35% from the Q2 and exceeding the top end of our guidance range by 9%. We delivered 5,052 vehicles in October 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 twenty nineteen 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 Q4. The growth has been underpinned by 3 key factors: strong competitiveness of our ES6 in its quality, performance and the pricing strong support from our user community and our sales network expansion through the efficient new spaces. I will discuss these three factors separately next. In August, NIO ranked the highest in new vehicle quality among all brands in JD Power's 2019 New Energy Vehicle Experience Index study.
In December, our year 6 was selected by the most respected industry experts in the Chinese Automotive Industry to receive the Quan Yuan Award as part of the year for the achievements in innovation, mobility and industry contribution. This demonstrates the strong recognition of our brand, quality and performance by users and industry. 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's 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 the news development. Actually, the vibrancy and the 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 NIO.
In 2019, more than 1300 user volunteers have dedicated their time voluntarily in NIO House, new space, auto show and event to sharing their firsthand experience to make more people understand new. In terms of sales network expansion, by the end of this year, we will open 48 new spaces and 22 new houses in 52 cities. Through new spaces, we're 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 our vehicles and truly enjoy the superior driving experience of a year 8 and year 6 offer. Most importantly, potential users can compare firsthand the performance and the smart features of our vehicles with those of the new competitive models.
The favorable comparison result often leads to a new 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 new spaces to expand our coverage and improving the efficiency of new spaces with more data and experience gained through our operations. On December 28, we held the 3rd New Day under the same Believe in 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 as a rally power that echoes with the New's vision to be a user enterprise. During the new day, we also announced the 100 kilowatt hour battery pack and the 20 kilowatt DC power home. All new models can operate to 100 kilowatt hour battery pack, which will significantly increase the range performance of our product line. Since the launch of the 70 kilowatt hour battery pack in 2018, of the same size of our battery capacity has increased by 40%. Niu makes a continuous investment on power swap technology and owns more than 1200 patents on the vehicle battery pack, Power Swap and cloud.
This 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 NIO's unique and the competitive power swap system. Additionally, we unveiled NIO's 3rd 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 kilometers per hour in just 4.7 seconds and enjoys any degree range of up to 6 15 kilometers. We have also launched the all new ES8.
It boasts up to 188 improvements, 4.97zerotho100 kilometer per hour acceleration and significantly improved the NEDC range to up to 5 80 kilometers. We believe that all new ES8 will have a much stronger competitiveness in the market. New pallet, new advanced driver assistance system becomes full fledged. More than 20 features are now available on NIO Palette, including traffic chain pallet and highway pallet. It offers a more relaxing and safer driving experience.
To date, about half of our users have activated the new pallet. On November 4, we announced our 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 projects together. I would like to now give you an update on our cost control measures. During the Q3, we continued to implement comprehensive cost control measures across the organization to improve operational efficiency.
At the end of December, our global headcount will be less than 7,500 As a result of our cost reduction measures, our Q3 SG and A decreased 18.1% compared with the Q2, even as our sales team is now driving and realizing higher levels of sales. Additionally, our R and D expenses decreased 21.3 percent, meaning operations will continue to be over focused. Finally, I'd like to warmly welcome Mr. Steven Song 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 backgrounds will create greater value for the company and our shareholders.
With that, I will now turn the call over to Stephen to provide the financial details for the quarter. Stephen, 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 twenty nineteen were RMB1.8 billion, representing an increase of 21.8 percent from Q2 2019. Our total revenues are made of 2 parts, vehicle sales and other sales.
Vehicle sales in this quarter were RMB1.7 billion, representing an increase of 22.5 percent from Q2 2019. The increase in vehicle sales over last quarter was mainly due to the increase in ES6 sales volume, resulting from expansion of our self-service work as we continue adding new spaces and increase the referral rate by our existing users. Other sales in this quarter were RMB103.4 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 improvement of vehicle sales. Cost of sales in this quarter was RMB2.1 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, but included in Q2 accrued recall costs. In relation to the company's voluntary core of 4,000 803 new vehicles launched on June 27, 2019. Gross margin this quarter was negative 12.1% compared with negative 33.4% in last quarter. More frequently, vehicle margins in this quarter was active 6 point 8% compared with effective 24.1% in last quarter. The improved recall margin was mainly due to the required costs in last quarter as mentioned.
R and D expenses in this quarter were RMB1.0 billion, representing an increase of 21.3% from last quarter and relatively unchanged compared with Q3 2018. Excluding non GAAP share based compensation expenses, R and D expenses were RMB1.0 billion, representing a decrease of 31.7% from Q2 2019, an increase of 5.9% from Q3 2018. The decrease in R and D expenses over last quarter was primarily attributed to net testing expenses incurred in the Q3 after year fixed initial launch in June. SG and A expenses in this quarter were RMB1.2 billion, represent 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 and A expenses were RMB1.1 million, representing a decrease of 17.4% from Q2 2019 and a decrease of 15.6% from Q3 2018.
The decrease in SG and 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 RMB2.4 billion, representing a decrease of 75.3% from Q2 2019 and a decrease of 14.3% from Q3 twenty eighteen. Excluding share based compensation expenses, non GAAP adjusted loss for operations was RMB2.3 billion, representing a decrease of 25 point 4% from Q2 twenty nineteen and a decrease of 1.6% from Q3 twenty eighteen. Share based compensation expenses in this quarter were RMB70.4 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 leverage. Our net loss was RMB2.5 million in Q3 2019, which is then a decrease of 23.3 percent from Q2 2019 and a decrease of 10.3% from Q3 of 2019. Excluding share based compensation expenses, adjusted non GAAP net loss was RMB2.5 million in Q3 2019, representing a decrease of 23 point 2% from Q2 2019, an increase of 3.1% from Q3 2018. Net loss attributable to NIO's ordinary shareholders in Q3 2019 was RMB2.6 million, representing a decrease of 32.9% from Q2 twenty nineteen and a decrease of 72.8% from Q3 twenty eighteen.
Excluding short term debt compensation expenses and accretion on redeemable amount controlling interest to redemption value, adjusted net loss attributable to LEO's ordinary shareholders on a non GAAP basis was RMB2.5 billion. Basic and diluted net loss per ADS in Q3 2019 were both RMB2.48 or RMB0.35 Increased share based compensation expenses and accretion on redeemable non controlling interest to redemption value, non GAAP adjusted basic and diluted loss per ADS were both RMB2.38 or $0.33 Our balance of cash and cash equivalents, restricted cash and short term investment was RMB2.0 billion as of September 30, 2019. And now for all this outlook. As Bill mentioned, for the Q4 of 2019, the company expects deliveries to be over 8,000 vehicles, representing an increase of approximately 67% from Q3 2019. We also expect 4th quarter total revenues to be approximately RMB2.8 billion.
This will represent an increase of approximately 53% from Q3 2019. Before we start the Q and A session, we would like to give you an update of our financing projects. We have made significant positive progress in these financing projects. However, the projects are still ongoing and we are not at liberty to disclose any potential information at this point. Therefore, 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 with the projects reach a stage that was subject as to our disclosure obligation. I will now turn the call over to the operator to facilitate our Q and A session.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. 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 the CB? And do net money go through the number 3 quarter result or it's not just go to the number 4 quarter has been completely finished. My second question is about the sustainability, about SG and A and R and D cost going forward. Okay.
Thank you. First, I will start with the JP question. As everybody knows, Tencent and William has signed contract with Neil for US200 $1,000,000 CAB. In Q3, Tencent CAB has already been closed. So the US100 million dollars from Tencent is already in our Q3 report.
And also US90.5 million dollars were received from Williams. The rest US9.5 million dollars are being processed and the transaction will be closed soon. Perhaps as a reminder, the TCV terms, investor could find them an announcement on September 50 Let me move on to the second question of one is about the sustainability and our cost controlling efforts. Yes, you are right. We have done a lot of efforts to cost saving.
We are in the process of finalizing our 2020 budget. We expect the R and D efficiency to significantly improve and the R and D expenses to be further reduced in 2020. We will share more information in our Q4 earnings call.
So 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. But 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 7,000 than the 500.
We think that this is going to be very beneficial to our P and L for the next year. And at the beginning, I have also mentioned that lean operation is our focus and this will continue to be our focus in the future. I think it's not just about the headcount. It should be more about how we can optimize and improve the overall cost and expenses efficiency. So this can help us to improve the overall organization efficiency.
Your next question is from Tim Shao from Morgan Stanley. Please go ahead.
Hi. Thanks for taking time to your hosted call. Just two quick questions from my side. The first question is about the sales volume for next year. Although the second quarter is down, but now, yes, at the end of 2019.
So just want to get your thoughts about the volumes for next year because our year 6 registered solid sales since earlier this year because of the competitive spec and successful channel strategy. But if you're next year, what will drive the sort of evolving upside because I think competition in the market will get a bit more intensive. And in the meantime, I think we're going to launch EC6. I think the volume of CapEx in general will be smaller than that of 4 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 shared our volume target for NIO store in NIO space by end of this year. So if there is any target for our channels, the expansion for 2020 and what would be more reasonable headcount to support the client as a sales network?
I would like to take your question. Starting from September, although the market is still quite challenging and soft, but over order backlog for the year 8 and year 6 has been ramping up. In the past 2 months, the production orders every day can reach over 400 And this trend has been increasing. If you read the news, you can see that we have already sold all the show cards. So we believe this momentum is going to continue in the future.
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. But after the users compare other products together with their products, normally they will buy other products because other products is more competitive compared with those models, Especially in our specific market segment that is around the 300,000 to 400,000, That is the size segment for the year 6 and the year 8. We believe in this mid sized premium SUV market, we are quite competitive because we are ranking at the top 10. This is including the ICE and EV.
And we believe in the future, the users will think over year 6 and the SE are the right choices if they want to buy a car pricing around the $300,000 to $400,000 range. We've offered Power Swap Technologies and offer superior services and we can win the word-of-mouth in the market and the order situation is actually much better than our expectation. We think that this great sales resulted because of our project competitiveness and of a great service. This can help us to win the reputation in the market. For the next year, the sales, we're quite confident about the year to 6.
For example, in Beijing and Shanghai, if you want to buy a car that is mid size, it will be around R300000 to R400 1,000 range. Our year to 6 is already ranked at the top 5. So 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 that we will start the delivery around April next year. The all new ES8 has significantly improved the range and we have already booked up to 188 improvements on the all new X8.
So 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 ES8s and we have no inventory left. We believe starting for next year, the sales of the ES8s will also increase very good.
If we look at the specific market segment, for example, Q5 and GLE Model X, over performance, intelligence and the smart features as well as other service are more competitive compared with those brands. Right now, we have released our EC6 that is the new smart coupe SUV. The feedback is very good from the markets. And right now, I cannot share with you about the specific orders we have received. But the overall situation is actually quite good.
We will start the delivery of 86 in September next year. So the sales of 86 is not going to significantly impact the overall sales number for the next year. Overall speaking, we are quite confident about the EK6 upgrade and the EK6 in the specific market segment respectively. In terms of the sales strategy, we focus on 3 aspects. The first one is to continuously improve our product and service.
The second one is that we would like to make sure our users can be of the brand ambassadors and we can improve the sales number with the user referrals and the work that comes out. The third one is to continuously expand our sales network. In terms of the sales network, the news space will significantly help resolve the sales numbers for the future. Right now, we have been working with our new space partners to set up the new spaces and improve the coverage of our sales point. The model of the new space is quite efficient.
We believe by the end of the next year, we should be able to have around 200 new houses and new spaces altogether because at the end of this year, we have already got over 70 new houses and the new spaces combined. With the increased amount of the new spaces, we can cover the Tier 2 and Tier 3 cities and other remote places. We have already accumulated many experiences in terms of the new space operations. So we think that this is not going to significantly affect our headcount because we will heavily rely on the partners to work together with us, although we will have our own people on-site to support other partners in the new spaces. Right now, we have users in 296 cities.
With the channel expansions, we believe our sales for the next year is going to be very solid. Thank you.
Your next question is from Lei Wang from CICC. Please go ahead.
Good evening, Stephen, William and Andrew. This is Lee speaking from CICC. Congratulations on Stephen's new role. That's a really nice move. And the vehicle delivers in the 3rd quarter, that's a really new, they're actually high.
And Stephen
has actually answered a question
of my questions, and I have two follow ups. The first one will be that Steven just gave guidance of 2,000 unit deliveries in the Q1, another high quarter over quarter increase. And what's the impact factors on the OIBDA that drives the sales up and are the factors sustainable from your point of view? And would that be possible that
you could release
backlog order right now? And the second question will be about the Per Store deliveries. We just mentioned that we have now around 70 new spaces, right? And that would mean about 40 vehicles will be sold per store per month in the Q4. Is this consistent?
Does that mean that for the 200 new spaces next year, they'll be able to deliver 8,000 vehicles per month? Thank you. I'll translate my question.
Thanks for your question. At the beginning, I have already mentioned the starting from the September of the order and the delivery has been witnessing very strong momentum. This is mainly due to 3 factors. The first one is the competitiveness of other products and the 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 $300,000 to $500,000 price range. And you can see that the premium market players have already launched some products. For example, last year, Jack Wolf launched their I PACE and the last year you can see in Chong.
But after they released their products, we can see the price is around 600,000 to 700,000. After comparing their products together with other products, normally the users will think the other product is more competitive. That's why they choose the new product. I think that there's a very important trend we should pay attention to. Starting from the Q2 of this year, the EV sales has declined because of the subsidy reduction.
This happens to those commercial vehicles and the lower end EVs. But 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 ease and ICEs. And for those users, they prefer ease. That is why we believe we should have a reasonable share for the mid and the large size SUV segment that is around the 300,000 to 400,000 market segment, that segment should have around 1,000,000 unit volumes in terms of the sales.
And in the last month, I understand that there are many concerns about 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 that 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 Matrices and Tesla. Right now, people are now getting familiar with the Tesla Model 3 made in China.
And 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. Just now you mentioned about the sales per store or the sales for the new space and the new houses. We think we cannot simply evaluate the effect of the new spaces and new houses by saying how many sales we can achieve in one store. Because I have mentioned that 45% of the new orders are actually coming from our existing users.
The new space should be quite good for our sales improvement, especially for those places without the new houses. But we cannot simply evaluate the number of the cells in those new spaces by doing this kind of calculation because for most of the new spaces that we opened in the Q4. So it means that we need to accumulate more data to effectiveness of the new spaces. In terms of the China market, actually it's quite big. So for a lot of users, they may have never seen a new product or EVs in the past.
So that is why we think a new space should be quite good for us to promote other products in those places and people can actually touch and feel other products. But after we accumulate more data and experience in terms of the Neospace 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, William, thanks for the opportunity. In your 8,000 volume guidance, how many ES8 do we have for December? And also moving into 2020, how do we think about the normalized run rate for ES8? Second question is on average price and what's the outlook? And thirdly, if you can comment on the cash outflow, say, is there a quarterly outflow target that the CEO and CFO is trying to manage in the business towards the RMB 2,000,000,000 outflow per quarter of $3,000,000,000 beyond which you will think harder about cutting more cost?
Thank you.
In the Q4, the sales of the year 8 is estimated to be around $1300 and for year 6, it should be over 6,700. For the year 8, compared with the Q3, the sales in the Q4 has been picking up. And we are very happy to see that ES8 is gaining momentum in the market. Starting from April next year, we're going to deliver the all new ES8, and we believe ES8 is going to be well positioned in the market to win over users.
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 efforts to for cost savings of our base comm work. But if we move on, obviously, for any automaker, the best way to have a good cash flow is to sell more cars.
So although the cash is tight, but thanks to our strong order and delivery momentum, the cash flow from sales actually is very healthy. And this is very fundamental of our business. And of course, if we do have our balance sheet, we really additional capital, which is positive cash flow, we'll be up the market, as I just said, when we close the financing projects. In the end, I would say with the kind of support from those ongoing financing projects, positive sales trends and costing measures, we believe the company will have September development and operations. So in short, 1st savings second financing 3rd, very strong sales.
Thank you.
That's great. Thank you.
We have our next question from Paul Gong from UBS. Please go ahead.
Yes. Hi. Thanks for taking my question. I have two questions. The first one is based on the current pricing environment, at what quarterly delivery level do you expect to have a positive gross margin on vehicle sales?
And my second question is just to double check, does the partnership by end of September already reflected Tencent USD200 1,000,000 in it. Because I compared the balance sheet of Q2 and Q3, I didn't see really increase, significant increase of our long term liabilities or long term borrowings, but the cash levels still declined. I just want to double check, does the end of September balance sheet already reflected the issuance of the CNY 200,000,000
Thanks for the question. In terms of the gross margin, this has always been our important task for 2020. We need to consider this from 3 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 for the next year, we should be able to achieve a positive gross margin for the whole year. But if you ask about the specific quarter or the specific amount, we're not really sure at this moment because we need to consider this comprehensively regarding the sales and the battery cost reduction, the phone cost reduction and the efficiency improvement. Okay.
And Paul, I'm
sorry, question. In terms of the US100 $1,000,000 fee from Tencent, if you review our announcement on September 1, actually it has 2 tranches. First, US100 $1,000,000 for 3.60 days. So it's a short term borrowing. So we booked US50 million dollars in our short term borrowings.
And also the other $50,000,000 is up 3 years maybe. So we booked that US50 $1,000,000 in our long term borrowings.
Yes. Thanks, Al.
Thanks.
Thank you.
We don't have any other questions as of the moment. Presenters, please continue.
Okay. So I thank you, everyone, for attending our conference call this quarter, and we look forward to seeing you and hearing from you next quarter. And Happy New Year.
Happy New Year. Happy New Year. Happy New Year. Everyone.
Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.